Some Insurers Dismissed, Others Are Not in Claims for Faulty Workmanship

Tred R. Eyerly | Insurance Law Hawaii

    The insured Developer survived a motion to dismiss by one of several carriers who were asked to defend against claims for faulty workmanship. East 111 Assoc. LLC v. RLI Ins. Co., 2019 N.Y. Misc. LEXIS 5331 (Oct. 4, 2019).

    Developers sponsored a residential condominium project and sold all units. The owners subsequently sought damages for $881,450 for alleged design and construction defects, and asserting causes of action for, among other things, breach of contract, specific performance and negligence. The underlying action settled for $350,000. Developers sought coverage from its insurers. 

    The Developers sued the carriers for a declaratory judgment that they were entitled to a defense. Developers had a CGL policy issued by Mt. Hawley. Developers were also additional insureds in policies issued to subcontractors by James River, Admiral and Selective. The insurers moved to dismiss. 

    The insurers’ breach of contract exclusion precluded coverage for “property damage . . . arising directly or indirectly out of . . . (a) Breach of express or implied contract; (b) Breach of express or implied warranty . . .” Developers argued that the owners’ cause of action for negligence did not fall within this exclusion. However, the negligence cause of action alleged – as did the breach of contract – that Developers constructed the building with design and construction defects and not in accordance with the offering plan. Since all of the alleged “property damage arose directly or indirectly” from Developers’ alleged breach of express or implied contract by their failure to deliver a building free of defects, the underlying action fell within the breach of contract exclusions. Therefore, motions to dismiss by James River, Admiral, and Mt. Hawley were granted.

    The Developers were additional insureds under the Selective policy issued to Walsh, a subcontractor. The underlying complaint carried the possibility that Walsh’s allegedly fault workmanship damaged other parts of the building – which was not, as a whole, Walsh’s work – an “occurrence” giving rise to “property damage” could exist under the Selective policy. Accordingly, the alleged water damage triggered Selective’s duty to defend Developers. 

Montana Supreme Court: Insurer Not Bound by Insured’s Settlement

K. Alexandra Byrd | SDV Insights | October 24, 2019

In Draggin’ Y Cattle Co., Inc. v. Junkermier, et al.1 the Montana Supreme Court held that where an insurer defends its insured and the insured subsequently settles the claims without an insurer’s participation, a court may approve the settlement as between the underlying plaintiff and underlying defendant, but the settlement will not be presumed reasonable as to the insurer. Therefore, an insurer who defends its insured cannot be bound by a stipulated settlement that the insurer did not expressly consent to.

The case involved Draggin’ Y Cattle Company (the “Cattle Company”), a ranching and cattle business that utilized the services of an accounting firm, Junkermier, Clark, Campanella, Stevens, P.C. (“Junkermier”), to structure the sale of real property to take advantage of favorable tax treatment. It was discovered that Junkermier’s employee misinformed the Cattle Company’s owners of the tax consequences of the sale. The Cattle Company’s owners subsequently filed suit against Junkermier and its employee and alleged nearly $12,000,000 in damages due to the error. Junkermier’s insurer, New York Marine, provided a defense for Junkermier and its employee.

The Cattle Company’s owners offered to settle the claims against Junkermier and its employee for $2,000,000, the policy limit of the New York Marine policy. New York Marine refused to give its consent or tender the policy’s limit. Subsequently, Junkermier, its employee, and the Cattle Company entered into their own settlement agreement for $10,000,000. The settlement was contingent upon a reasonableness hearing to approve the stipulated agreement.

New York Marine moved to intervene and challenged the stipulated settlement. The trial court, relying on Tidyman’s Mgmt. Svs. Inc. v. Davis, 330 P.3d 1139 (Mont. 2014), held that New York Marine had effectively abandoned its insured when it had refused to settle the claim in good faith and therefore it was “as if it had breached the duty to defend.” The trial court concluded that the settlement was reasonable and entered judgment against Junkermier.

On appeal to the Montana Supreme Court, New York Marine argued that a stipulated judgment, entered into without the insurer’s consent or participation, is only reasonable when the insurer has refused to provide a defense, effectively abandoning the insured. New York Marine noted that it provided its insureds with a defense throughout the relevant proceedings.

The Montana Supreme Court agreed with New York Marine and held that if parties decide to settle without the insurer’s participation, a court may approve the stipulated judgment as between the underlying plaintiff and the underlying defendant, but it will not be presumed reasonable as to the insurer. The judgment against Junkermier and the proceedings were reversed and remanded to the lower court for further proceedings.

This case underscores the importance of involving coverage counsel in settlement negotiations when a defending insurer refuses to agree to a reasonable settlement. Montana policyholders should also consider whether a declaratory judgment action is necessary if their insurer has reserved its rights as to any indemnity owed.

Policyholders and Contractors Unite Against Wrongful Insurance Company Claims Practices

Chip Merlin | Property Insurance Coverage Law Blog | December 5, 2019

While working on and researching for answers to questions posed by Professor Feinman regarding the growing insurance coverage gaps crisis, I came across a very pointed article published about how modern insurance company claims practices are destroying the construction restoration industry.

In Cleaning & Restoration (Quarter 1, 2019) an article, “Our Greatest Need—The Case For, And Path To, Industry Advocacy For The Restoration Industry,” by the Restoration Industry Association (RIA) Board member Mark Springer, stated the following:

In a previous C&R article…. I described a situation where an insurance carrier refused any payment on a water mitigation claim due to a technicality in document upload. It is not my intent to relitigate that argument but rather to expand on some of the issues that restoration contractors face. In that article, I stated a thesis that poses a somewhat grim outlook for the restoration industry. However, with each passing month, I continue to see challenges emerge that reinforce this position. The thesis is this:

‘If restoration companies are unwilling to unite, advocate for sustainable claims practices and take a proactive approach with insurance carrier claims policies, then the restoration industry as we know it will cease to exist within a decade.’

I agree. The significance is that leadership from the largest and most longstanding restoration construction association is promoting this “call to arms” in its own battle with the property insurance claims handlers. It is not only policyholders suffering from catastrophic physical damage to their businesses and homes, the insurance claims industry has focused its claims techniques on those contractors repairing and rebuilding those structures.

Springer made his point further:

‘Claims policies’ go much deeper than the specific policies that a carrier dictates to issue payment. The issues we face are many, and they all impact the entire claims process that a property restoration company must navigate in the course of their day-to-day operations. What follows are some examples of the challenges and threats we face. Realistically, each of these areas, or sectors of concern, are not only necessary but essential in the claims environment. However, there are some key questions that each restorer, and the industry at large, should be examining if we are going be able to operate our businesses sustainably. These questions are not rhetorical; they are not intended to be presented sarcastically or with bias. This isn’t a time for conspiracy theories, but we would be exceptionally naive if we were to think that the largest fiduciaries in the world, who incidentally are the repositories of the largest quantities of data in the world, were looking out for any interest other than their own and that of their shareholders.

Springer provided several examples of methods the insurance claims Industry is leveraging lower claims payments through wrongful claims practices, which are often involving partners of the insurance companies.

  1. Pricing and Scoping platforms found in Xactware, which is operated by Verisk—a company owned primarily by insurance companies until it went public.
  2. Non-adjuster insurance company construction consultants who often delay and raise roadblocks to payment without legitimate reason. The RIA named JS Held as an insurance industry partner consultant that RIA leaders need to have “talks” with.
  3. Third-Party Administrators Growing Influence and Expanded Role in claims adjustment.
  4. Government regulations and rules not under insurance carrier claims rules. Indeed, Springer notes that the result is that less affluent contractors breaking the law will get paid by insurers for the illegal construction, which is performed, but not caught by, government regulators.

Certainly, the insurance company will claim that many contractors overprice materials and labor. They will also point to those that over-scope the damage and method of repair so that Xactware performs a very valuable function in the claims process. They will also point out that expert consultants can help prevent contractors from “gaming” the claims payment system and prevent unreasonable overpayments payments. These are two legitimate concerns. Still, two wrongs never make a right.

I am not certain how insurers get away from the refusal to pay government safety laws for construction workers. Of course, insurance claims managers just saying “no” and then conspiring with financial support for those that break the law is one way to do it, as Springer noted. I am certain that the audit committees checking on governmental compliance for the publicly traded insurers would not like to read these accusations by Springer.

I would suggest that contractors and those concerned about what they can do to help stop the growing trends of wrongful claims practices of the insurance claims industry read the various articles archived by the RIA and support many of their efforts. The RIA has over 1,200 member firms and has been in existence for over 70 years advocating for restoration contractors.

Policyholder interests for high standards of ethical construction practices and fair and ethical claims practices are aligned with the RIA—so should the insurance industry.

Insurance Companies Cannot Deduct The Cost Of Land From Your Replacement Home Purchase in California

Daniel Veroff | Property Insurance Coverage Law Blog | June 4, 2019

Many insurance policyholders who have lost homes in the devastating California wildfires call our firm and ask, “Can my insurance company really deduct the value of the land under the replacement home I purchased from my claim payment?” This is a great question because this is now an unlawful tactic by the insurance companies that has unfortunately pervaded this state recently. Finally, last week the California Department of Insurance officially agreed and issued a bulletin explaining why.1 The bulletin is not legally binding, so insurers can still refuse to comply, requiring litigation.

Insurance companies support their deductions of land value by misconstruing a law already unfavorable to insureds. Under California law, the insurance company cannot refuse to provide coverage if an insured replaces their home by buying a new one elsewhere instead of rebuilding at the loss site. However, the insurance company never has to pay more than the amount it would have cost to rebuild the home at the loss site, even if buying a replacement home elsewhere would cost the insured hundreds of thousands of dollars more.2

Unfortunately, this cap on the insurance company’s liability almost always results in policyholders getting loss home than they started with. That is because when an insured rebuilds, they are only paying for the cost of the structure. When an insured buys a new home, they pay for the land and the structure. And it is not always a choice for the insured. For example, the entire town of Paradise was destroyed in the recent Camp Fire, and the water sources are now tainted. Obviously, rebuilding at the loss site is not a realistic option for the vast majority.

As if the law was not already bad enough for insureds, insurance companies have been finding a way to add insult to injury lately: they are allocating a portion of the new home’s purchase price to the land and refusing to pay that amount. Thus, not only are insureds ending up with less house than they originally had, they are not being fully reimbursed for the amount they are spending to purchase the lesser house. In other words, the insured gets less house and must go out of pocket for the land.

This practice is, in our view, flat out unlawful. As bad as the law is, it does not permit that the insurance company to deduct the value of land from its payment. It says instead that the insurance company must pay the insured the cost to purchase the new home, up to the amount it would have cost to rebuild the old home. Purchasing a home necessarily involves purchasing land. That should be the end of the story, right? Leave it to insurance companies to find even more ways to pay less.

Finally, the California Department of Insurance has taken a position on this. Thanks in big part to the efforts of pro-policyholder non-profit United Policyholders (of which Chip and I are board members), the Insurance Commissioner recently issued a bulletin opining that deducting the value of land from the claim payment is improper. According to the bulletin:

Policyholders should not be penalized for exercising their right to replace their destroyed home by purchasing an existing home at a new location. Accordingly, in the case of a total loss to an insured’s home, I am requesting all residential property insurers not apply a deduction for the value of the land from the purchase price of a replacement home.

The Insurance Commissioner’s bulletin is unfortunately not binding law, so it is up to insurance companies to decide whether to comply. But our opinion is steadfast that his bulletin is consistent with the law as written and land deductions remain unlawful and subject to lawsuits.

The Commissioner’s bulletin makes a few practical points to help convince insurance companies to adopt his approach. The primary reason is this gives insureds greater incentive to replace by buying a new home, which can be done more quickly, saving the insurance company from having to pay extended loss of use or additional living expense benefits during a rebuild. The Commissioner also emphasized the ongoing problem that many insureds do not have enough coverage, so they will never be able to fully rebuild.

This is just one of the many unfortunate tactics insurance companies are employing in California. While the Insurance Commissioner’s bulletin is a step in the right direction, we have seen insurance companies refuse to honor the commissioner’s suggestions before. If your insurance company is insisting on deducting the value of land from your replacement home purchase, or if you feel you are being treated unfairly in any other sense, call us for a free consultation. We have attorneys across Northern and Southern California.
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1 http://www.insurance.ca.gov/0250-insurers/0300-insurers/0200-bulletins/bulletin-notices-commiss-opinion/upload/WFLandValueDeduction-Notice.pdf
2 Insurance Code section 2051.5

Claim Denied? Why Picking the Wrong Expert Can Cost You

Ian Dankelman | Property Insurance Coverage Law Blog | June 2, 2019

Picking the right expert has never been more important when fighting an insurance company that has wrongfully denied an insurance claim. The rule for expert admissibility has just changed in Florida and the same concerns about experts apply everywhere.

Under the Frye test, a party seeking to introduce expert evidence had to prove the general acceptance of the underlying scientific principles and methodology that the expert employed when advancing new or novel scientific testimony. Now, Florida has adopted the Daubert  standard, which requires the trial judge to ensure that “any and all scientific testimony or evidence admitted is not only relevant, but reliable.”1 In reaching this decision, the Supreme Court emphasized that the amendments would reduce forum shopping and harmonize Florida’s standard with the standard employed by federal courts.

However, in dissent, Justice Labarga cautioned that “Daubert and its progeny drastically expand[] the type of expert testimony subject to challenge.”2 One concern over the amendment the dissent highlighted was that the new standard would undermine the constitutional right to a jury trial by authorizing judges “to exclude from consideration the legitimate but competing opinion testimony of experts.”3 Another was that the new expert testimony standard would overburden the courts, impede the ability of parties to prove their cases on the merits, and increase litigation costs.

So what does this mean for policyholders? On one hand, Daubert is the well-established standard in federal court, and there is clear direction in federal case law that state judges can follow to reach reasoned rulings. It is likewise conceivable that the number of cases removed from state court to federal court will be reduced based on the amendments to the evidence code. The new standard will also give policyholders a new ability to challenge the insurers’ experts when their work does not meet the requirements demanded by the Daubert standard. On the other, policyholders’ cases may be delayed while Florida courts deal with increasing numbers of challenges to expert opinion testimony. Policyholders will likely face additional hearings on the admissibility of expert testimony that will require intense preparation.

It remains to be seen how judges will tackle the increase in challenges to expert testimony in Florida’s courts. Only one thing is certain: the amendment to the evidence code will have important ramifications on all litigation in Florida.
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1 In re: Amendments to the Florida Evidence Code, No. SC19-107 (Fla. May 23, 2019).
2 Id. at 13 (Labarga, J., dissenting).
2 Id. at 15-16.