California Regulations Require That an Insurer’s Preferred Vendor Return Property to Its Pre-Loss Condition – A Quick Guide to What You Need to Know

Victor Jacobellis | Property Insurance Coverage Law Blog | August 21, 2019

It is becoming more and more common that insurance companies are recommending and suggesting that their “preferred vendors” perform loss repairs. California offers insureds protection if they opt to use a preferred vendor. Under the Fairs Claims Settlement Practices Regulations, if an insurer recommends a vendor, the insurer is essentially required to guaranty that vendor’s work.

There is a lot of incentive for an insurer to have a preferred vendor perform claim repairs. The vendors will typically perform the work for less than an independent vendor. This is because an insurer’s preferred vendor program will usually require that the carrier is given a discount on labor or materials. Vendors will offer such discounts to get the insurer’s business. Preferred vendors are often water and smoke remediators but can also include flooring contractors and contractors for other particular trades.

An insurer’s use of preferred vendors keeps claim costs down. The preferred vendor’s estimate usually will operate as the insurer’s claim valuation. Once a preferred vendor is suggested and prepares a repair estimate, the insured is often faced with the decision of either: (1) having the preferred vendor make the repairs or (2) taking a cash payment and then having to find a contractor who can do the repairs at the discounted amount offered by the preferred vendor. As you can probably guess, insureds often opt to let the preferred vendor perform the repairs.

California provides protection when a preferred vendor is chosen for loss repairs. The Fair Claims Settlement Practices Regulations require that when an insurer either recommends or suggests a vendor to make property repairs and the insured opts to have that vendor make the loss repairs, the insurer is required to ensure that the damaged property is returned to its pre-loss condition. The insurer is required to do this at no additional costs to the insured. The insurer is also required to ensure the property is repaired in a manner that meets accepted trade standards for good and workmanlike construction. Cal. Cod. Reg. § 2695.9(c)(2).

The Fair Claims Settlement Practices Regulations also imposes additional restrictions on insurers when it comes to suggesting vendors who can perform repairs. An insurer can only recommend a vendor if either: (1) the insured specifically requests a referral or (2) the insurer informs the insured in writing of the right to select any vendor to make the repairs.

For reference, Cal. Cod. Reg. § 2695.9(c) in its entirety provides as follows:

(c) No insurer shall suggest or recommend that the insured have the property repaired by a specific individual or entity unless:

(1) the referral is expressly requested by the claimant; or

(2) the claimant has been informed in writing of the right to select a repair individual or entity and, if the claimant accepts the suggestion or recommendation, the insurer shall cause the damaged property to be restored to no less than its condition prior to the loss and repaired in a manner which meets accepted trade standards for good and workmanlike construction at no additional cost to the claimant other than as stated in the policy or as otherwise allowed by these regulations.

Digital Transformation in Insurance: Pull Ahead of the Pack

Christian Grandy | Introhive | July 9, 2019

Are you a leader or are you a follower? Over the past few years, insurance giants have pulled ahead in their digital transformation efforts, rolling out new features that improve the customer experience, optimize back-end efficiencies, and create a framework for ongoing innovation.

The stakes around digital transformation are high and choosing to hold may affect a company’s long-term solvency. In fact, 44 percent of insurance leaders think that, in the future, “most existing insurers will not survive, at least in their current form.”

Even if you’re lagging behind, it’s not too late for your firm to break away from the pack and embrace digital transformation and disruptive technology. However, being a leader, or even a fast follower, is not for the faint of heart. It requires a top-level commitment—and resources—to become a digital-first and data-driven organization.

If you want to move away from the pack, try these three digital transformation strategies first.

BUILD A FUTURE-PROOF DIGITAL EXPERIENCE

Insurers are actively expanding their digital infrastructure and contemplating what the ideal insurance experience will be in the future. According to a survey conducted by FRISS, 69 percent of insurers currently work with an online distribution channel and nearly 70 percent have adopted mobile apps. But true digital transformation extends far beyond isolated forays into the digital space.

For real, lasting success, you need to focus on an overall digital framework that meets anticipated needs and also accounts for unexpected changes in the future. To this end, carriers are prioritizing emerging technology and partnering with technical platform providers, like Introhive, for support.

The growing push for a “digital first” mindset among carriers, with customers at the center, has led to an emergence off-the-shelf technology that meets the most pressing digital technology needs. However, this leads to a new challenge for organizations, particularly larger, global, teams: disparate, unconnected pools of marketing, business development and sales data. Enter enterprise relationship management.

Digital Transformation Journey

Commonly referred to as ERMs, enterprise relationship management platforms analyze prospect and customer contact data (and automate it, in Introhive’s case) to give organizations a better understanding of their business relationships.

A good ERM platform also works in tandem with your existing, and potentially far flung, tech stack. So it’s not only a balm for global business growing pains, it also supports growth, cost reduction, and risk management.R

IMPROVE BACKEND PROCESS EFFICIENCY WITH AI

Most carriers have updated legacy systems to incorporate basic digital communications, paperless documents, online data entry, and mobile applications. However, optimization of back-end processes needs to remain central to long-term digital transformation.

Through improved efficiency, carriers will be able to shift human and financial resources to more meaningful activities. To this end, carriers are looking to artificial intelligence (AI) and machine learning, with 77 percent of insurers saying they believe AI will transform their role in the future.

One way AI can help is by automating routine, repetitive and rule-driven tasks such as CRM data entry with CRM data automation, which can save employees about 5.5 hours of data entry per week. (Request a demo to see how it works).

Another area of focus is predictive modeling, which carriers are increasingly using for pricing (48 percent), underwriting (45 percent), fraud detection (32 percent) and risk mitigation (28 percent).

PRIORITIZE THE CUSTOMER EXPERIENCE

The digital revolution has forever changed the business landscape. This is decidedly evident when it comes to the customer experience. As soon as next year, the customer experience is expected to officially overtake product and price as the key brand differentiator.

More than ever before, customers are demanding a consistent experience across channels. In fact, 98 percent of companies believe that personalization has a profound impact on success but over half of companies indicate that data quality remains an issue.

To improve the end-to-end customer experience, insurance carriers are embracing data transformation and big data technologies to translate data into insights. Relationship intelligence automation is also playing a critical role, expanding and correcting contact information and, at the same time, alerting carriers to concerning relationship trends with valuable customers.

Carriers are also looking to new technologies to transform the customer experience. The Internet of Things (IoT) is being evaluated as a possible area for digital transformation and 60 percent of insurers believe IoT can drive changes in consumer behavior. However, data and a clear strategy for IoT implementation remain obstacles for many companies.R

TAKE THE LEAD IN DIGITAL TRANSFORMATION AND RELATIONSHIPS

Digital transformation will continue to be a defining trend for insurance carriers over the next decade. Being a leader or a fast follower can set your firm up for long-term success. But the key will be creating a flexible framework that allows your firm to shift focus onto revenue-generating partnerships, invest in technologies to improve the customer experience, and build-out the backend for long-term scalability.

Relationship intelligence automation improves the efficiency of backend processes while providing insurance carriers improved relationship data, which allows you to better serve your current and future customers.

The Best Insurance Lawyers Study Insurance Practices and Not Just Insurance Law

Chip Merlin | Property Insurance Coverage Law Blog | June 21, 2019

The best insurance lawyers are students of the insurance industry rather than just students of insurance law. I learned this truth from insurance claims expert Gary Fye and the late Eugene Anderson. Let me paraphrase what Anderson used to tell me, ‘for the same reason doctors don’t learn medicine by reading medical malpractice case law, judges and lawyers wanting to understand insurance should not expect to learn insurance by reading insurance case law.’Amen.

So, why do so many lawyers profess to be alleged specialists in insurance law after a few years of law practice or doing some cases in a particular field of insurance? Probably because their potential clients do not know that the best insurance lawyers study at least as much about insurance operations, claims practices and what the insurance companies are teaching their own insurance adjusters as they do insurance case law.

Most newer law firms no longer have a law firm library because all the case law is available on the internet. The best insurance law firms have an extensive repository of insurance industry reference materials and books so their attorneys can access and use those in cases. At the Merlin Law Group, we not only have that library, but a law librarian whose job it is to help us track down reference materials to help us destroy the creative but clearly wrong arguments that the insurance defense attorneys make to win their cases.

I do not want to be one of those leaders in my law firm and a speaker to others that “do as I say, not as I do.” I gave a unique speech at the Florida Association of Public Insurance Adjusters Spring Conference about “the why” being a public adjuster is so important to policyholders and the public. One topic I mentioned was the inherent requirement to be the best you can be for the people you are serving. I stressed the importance of learning and obtaining certificates showing the world the credentials of one’s depth of knowledge as a commitment to one’s self, clients, and the public.

So, I am signed up with The Institutes (link) to obtain an Associate in Claims Designation with a Property Insurance Track. After I finish that, I will start on another designation through The Institutes and hopefully end up with a CPCU Designation. Here is what the first of numerous courses to get the AIC Designation—the AIC 30—teaches:

AIC 30 Segment A Topics:

  • The claim function and professional ethics
  • The claim handling process
  • Setting case reserves and investigating claims

AIC 30 Segment B Topics:

  • Documenting claims
  • Communicating effectively
  • Dealing with fraud

AIC 30 Segment C Topics:

  • Negotiating claims
  • Litigating claims
  • Good faith claim handling

Policyholders wanting to hire the best insurance lawyers should look for lawyers dedicated to knowing not just insurance law, but insurance lore and practice which can actually change insurance law and win cases otherwise unwinnable. For me, I owe it to my clients, other lawyers in my firm, and to anybody else I am trying to teach, to be the best insurance law attorney I can and that is why I try to improve everyday—and God knows it is not easy for an old dog like me to learn new tricks!

Insurance Policies: Where Is the Proper Balance Between Limitation of Liability and Adherence to Public Policy

Cheryl Shoun | Nexsen Pruet | June 11, 2019

It is well established that policies of insurance are contracts, subject to basic contract law. While parties are generally permitted to contract as they wish, such privilege is not absolute in the context of insurance; required coverage may not be omitted. Rather, statutory obligations relating to insurance contracts become part of an insurance agreement. Thus, while insurers may generally limit their liability and impose conditions on their coverage obligations, they may not contravene public policy or statutory inhibition. Not surprisingly, legitimate questions abound from the efforts to balance contractual freedom and adherence to public policy. Where are the boundaries? The South Carolina Court of Appeals recently examined an insurer’s limitation of liability against the backdrop of public policy, while contrasting an earlier and somewhat similar limitation. Nationwide Mutual Fire Insurance Company v. Sharmin Christine Walls, et al, 2019 WL 2363539 (June 5, 2019).

Sharmin Walls (Walls), along with two others were passengers in a vehicle she owned that was being driven by Korey Mayfield. A state trooper attempted to stop the vehicle for speeding. Despite the requests of Walls and the other passengers to stop the car, Mayfield instead led the police on a high speed chase, ultimately leaving the highway and heading down a residential road. The officer abandoned the pursuit, following which Mayfield lost control of the car and crashed, killing one passenger and catastrophically injuring the other two, including Walls. Mayfield was charged with and pled guilty to reckless homicide, which is a felony.

Walls was a named insured in a policy issued by Nationwide that provided liability coverage of $100,000 per person and $300.000 per accident. The policy contained an exclusion, providing that the coverage did not apply to any amount above minimum limits required by the South Carolina Motor Vehicle Financial Responsibility Act to bodily injury or properly damage caused by the insured, the insured’s relative or anyone else operating the insured auto while committing a felony or while fleeing a law enforcement officer. 

Nationwide instituted a declaratory judgment action seeking the court’s determination that because Mayfield was fleeing law enforcement at the time of the loss, and pled guilty to a felony, its liability was limited to the statutory limits, to the exclusion of the additional, optional coverage. The trial court concluded that while Mayfield’s conduct fell squarely within the policy’s exclusions, the exclusions were unenforceable because Nationwide failed to inform Walls of the exclusions or conspicuously place them on the policy, the exclusions were ambiguous and they violated the public policy of protecting innocent insureds, specifically the three passengers. The case came before the court on Nationwide’s appeal. In its review of Walls, the court examined and contrasted it to Williams v. Gov’t Emp. Ins. Co.[1] wherein a family “step-down” provision was found violative of South Carolina law.      

In Williams, a husband and wife were riding in a car insured under both their names at the time of a fatal accident. A dispute arose when the estates argued the proper coverage was $100,000, as shown on the policy declaration page, but GEICO asserted its liability was limited to the statutory minimum based upon a family “step-down” provision. The “step-down” policy provided, in part, GEICO’s responsibility under the policy would be reduced to the statutory minimum when an injured party was a family member of the insured. The trial court found the step-down was enforceable as it provided at least the statutory minimum coverage. Upon appeal by the estates, the South Carolina Supreme Court reversed. Noting SC Code §§38-77-142(A) and (B) require a policy insure the named insureds and permissive users against liability for negligence incurred ‘within the coverage of the policy,’ the court found that phrase to equate to the face amount of coverage shown on the policy – not the minimum statutory coverage. The court went on to find the GEICO policy also violated SC Code Section 38-77-142(C), as it appeared on its face to provide $100,000 in coverage to its insureds, including the named insured and family members, but reduced that to the minimum limits under the family step-down provision. Because the family step-down conflicted with the amount of coverage shown on the declarations page, the provision was found invalid.

In contrast, Nationwide’s exclusions were only triggered when an insured sought coverage for injuries sustained in the context of certain acts, such as fleeing law enforcement. The exclusions were based on the conduct of the driver, not the injured party’s relationship to the insured. In short, Nationwide’s coverage remained intact if the injury did not result from foreseeably dangerous conduct the insured could reasonably avoid. The court concluded that an insurer may impose reasonable limitations on coverage above the statutory minimum as long as the mandatory coverage limits are satisfied. In other words, an insurer may exclude coverage above the minimum limit against conduct inherently more dangerous than what is anticipated in the regular operation of a vehicle. 

Finally, the court found no support for the position that the exclusions of the Nationwide policy were arbitrary and capricious, as they were based upon the conduct of the driver. Because the exclusions act to discourage dangerous behavior all the while preserving coverage for innocent victims they are not violative of public policy. The interest in protecting innocent passengers of a vehicle evading law enforcement is balanced by the mandatory insurance coverage. 

It is not difficult to draw a distinction between the exclusions at issue, e.g. those in Williamsare based only upon a family relationship while in Walls the exclusions are based upon dangerous conduct of the driver. Nonetheless, this case raises interesting issues. In Williamsand Walls, the policies set forth conditions pursuant to which the required coverages differed from those shown in the declarations page. Such difference was determined to be dispositive in Williams, but not in Walls. Additionally, Walls may, in fact, act to violate the public policy of protecting the innocent. The three passengers in Walls were clearly innocent; they were placed in the path of deadly harm at the hand of a driver who made the unilateral decision to flee law enforcement and thereby commit a felony. As the recitation of facts establishes, the passengers, including Walls, instructed Mayfield to pull over and he instead accelerated.

Literal application of Nationwide’s exclusions to a more overarching scenario suggests the result would be the same if Mayfield had taken and used Walls’ vehicle without her permission or knowledge and injured others. Such situation would result in harm to those injured as well as to Walls who would face personal exposure for Mayfield’s act. Again, the exclusions affect harm to the innocent. 

It seems the freedom of parties to contract within statutory requirements is not an impossible accomplishment, but the exclusions of the Nationwide policy at issue appear to lack necessary refinement.


[1] 762 S.E.2d 705 (2014).

Property Owner’s Defense Goes Up in Smoke in Careless Smoking Case

Michael Ciamaichelo | White and Williams LLP | June 11, 2019

Property owners owe a duty of reasonable care to avoid causing harm to neighboring properties. When a property owner knows or should know about a condition that poses a risk of danger to neighboring properties, the property owner must exercise reasonable care to make the condition safe. The Court of Special Appeals of Maryland recently held that, where hundreds of discarded cigarette butts had accumulated in a bed of mulch over an extended period of time prior to the fire at issue, the owner of the property with the mulch beds owed a duty of care to its neighbors to prevent a foreseeable fire.

In Steamfitters Local Union No. 602 v. Erie Insurance Exchange, 2019 Md. App. LEXIS 430 (May 30, 2019), a fire originated in a strip of mulch at property owned by the Steamfitters Local Union No. 602 (Union) and caused damage to neighboring properties. The fire occurred when an unknown person discarded a cigarette butt into the mulch. Following the fire, investigators found “hundreds, if not thousands of cigarettes” in the mulch where the fire originated. A representative for the Union acknowledged that there were more butts in the mulch “than there should have been” and that, “[i]n the right situation,” a carelessly discarded cigarette could cause a fire. The Union, however, had no rules or signs to prohibit or regulate smoking at the property, where apprentices would often gather prior to class.

The insurance companies for the damaged neighbors filed subrogation actions alleging that the Union, as the property owner, failed to use reasonable care to prevent a foreseeable fire. A jury found in favor of the subrogating insurers and against the Union.

On appeal, the court held that, under the circumstances of the case, a reasonable jury could conclude that the Union knew or should have known that cigarettes were regularly being discarded in the mulch, which created a foreseeable risk of a fire that could damage neighboring properties. Although the use of mulch, by itself, did not create the Union’s duty to protect its neighbors from a careless smoking fire, the court held that the Union owed a duty of care to its neighbors because it knew that a large number of cigarette butts were discarded in the mulch over a period of time prior to the fire. Because it was foreseeable that the dangerous condition created by the practice of throwing cigarette butts into the mulch would damage neighboring properties, the court held that the Union owed its neighboring property owners a duty of care.

In addition to discussing the duty the Union owed to neighboring property owners, the court considered, among other things, whether the subrogating insurers needed expert testimony to prove their case. The court held that, because habitually discarding cigarettes in a combustible substance is a matter of common knowledge, the plaintiffs did not need expert testimony to establish the standard of care associated with maintaining the Union’s property.

As this case establishes, a defendant can, in some situations, be held liable for a careless smoking fire even if the defendant does not have a duty to control the actions of third parties and is not vicariously liable for the third party’s actions. Thus, when subrogation professionals deal with a careless smoking case, they should consider whether the defendant, such as a landowner, can be held liable because it owed a duty of care – such as the duty owed by a landowner – to the injured plaintiff that does arise from controlling the smoker’s actions or being vicariously liable for his or her activities.