Monthly Archives: July 2015

Review of the Farmers “Next Generation” Homeowner’s Policy, Part 2: Appraisal

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Robert Trautman | Property Insurance Coverage Law Blog | July 22, 2015

In Part 1 of my review of the Farmers “Next Generation” Homeowner’s Policy, I explored Farmers; new definition of Actual Cash Value. In this post, we are going to explore the new appraisal clause offered by Farmers.

The standard appraisal clause in an HO-3 policy generally reads as follows:

Appraisal.: If you and we fail to agree on the amount of loss, either one can demand that the amount of the1oss be set by appraisal: If either makes a written demand for appraisal, each shall select a competent, disinterested appraiser. Each shall notify the other of the appraiser’s identity within 20 days of receipt of the written demand,, The two appraisers shall then select a competent, impartial umpire. If the two appraisers are unable to agree upon an umpire within 15 days, you or we-can ask a judge of a court of record in the state where the residence premises is located .to select an umpire. The appraisers shall then set the amount of the loss. If the appraisers submit a written report of an agreement to us, the amount agreed upon shall be the amount of the loss. If the appraisers fail to agree within a reasonable time, they shall submit their differences to the umpire: Written agreement signed by any two of these three shall set the’ amount of the loss. Each appraiser shall be paid by the party selecting that appraiser. Other expenses of the appraisal and the compensation of the umpire shall be paid equally by you and us.

As in the ACV context, Farmers has gotten much more verbose. The “Next Gen” Policy provides:

10. Appraisal.

If you and we fail to agree on the amount of loss or damage, or the actual cash value or the costs of repair or replacement of covered loss or damage, either one may make a written demand for appraisal. Each will then select a competent and disinterested, independent appraiser and notify the other of the appraiser’s name within 20 days after the written demand is received. If the appraisers cannot agree on the amount of loss or damage, the actual cash value or the costs of repair or replacement, the appraisers will then choose a competent, independent and disinterested umpire. If the appraisers cannot agree upon an umpire within 15 days, you or we can ask a judge of a court of record in the judicial district where the residence premises is located to choose an umpire. Any person or entity which has performed any function or service for either party, whether for remuneration or not, as respects the particular loss or damage claimed under this policy may not serve as an appraiser or the umpire.

The appraisers will then determine the amount of loss or damage. With specificity the written appraisal agreement will:

a. describe each item or category of property being appraised;

b. describe the type(s) of damage to each item or category of property;

c. describe the extent of the damage to each item or category of property;

d. estimate the costs of repair or replacement of each item or category of property;

e. estimate the amount of depreciation and/ or obsolescence of each item or category of property; and

f. state the actual cash value each item or category of property

If the appraisers submit a written appraisal agreement to you and us made in accord with this Condition, the agreed amount will be the amount of loss or damage and actual cash value. If the appraisers cannot agree, they will submit their differences to the umpire. A written appraisal agreement made in accord with this Condition signed by any two will set the amount of loss or damage and actual cash value. Each party will pay the appraiser it chooses. The umpire and all other expenses of the appraisal will be paid equally by you and us. Interpretations of this policy may not be determined under this provision, including by way of example but not limited to:

a. whether any particular loss or damage to covered property is in fact insured under this policy;

b. whether any amount is payable for overhead and profit or building ordinance or law coverage; or

c. the cause(s) of the loss or damage to the covered property.

Appraisal has been around forever, and usually works well to settle claims. Farmers is looking to change the game here. First, this clause requires the appraisal panel to list each item they have considered, including type of damage and the extent to which it was damaged. I find it very interesting that they are requiring this to be stated by the panel considering the last line of the appraisal clauses states that the panel cannot state “c. the cause(s) of the loss or damage to the covered property.” I would argue this portion of the policy is ambiguous, if not plainly inconsistent.

Perhaps the worst part of this new clause, is the second to last sentence which states that the appraisal panel cannot determine “whether any amount is payable for overhead and profit or building ordinance or law coverage.” On a claim with major damage, how can the appraisal panel set the amount of the loss without determining appropriate payments to the repairing contractors for overhead and profit or if the current building code would require repairs to be done in a certain manner? By limiting what appraisers can do, Farmers is essentially writing appraisal out of their policies—especially for larger claims.

This reminds me of this cartoon I saw some time ago.

via Review of the Farmers “Next Generation” Homeowner’s Policy, Part 2: Appraisal : Property Insurance Coverage Law Blog.

Review of the Farmers “Next Generation” Homeowner’s Policy, Part 1: Actual Cash Value

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Robert Trautman | Property Insurance Coverage Law Blog | July 17, 2015

Anyone who has made their living in the insurance claims business over the last few years has heard of the Farmers “Next Gen” policy. I thought it would be a good idea to look at this policy and compare it to the standard HO 3 policy. The first stop on this tour is a natural place to begin, the Definitions section. The first definition in the “Next Gen” policy is actually not found in the standard HO 3 policy and that is Actual Cash Value (ACV). Because it is not generally defined in policies, there are tons of cases on the subject. My colleague, Shane Smith, has been writing a great series on calculating ACV in different states.

The “Next Gen” policy defines ACV as follows:

Actual Cash Value – means the reasonable replacement cost at time of loss less deduction for depreciation and both economic and functional obsolescence.

We mat depreciate all replacement costs, including by way of example but not limited to the costs of material and labor. The “Actual Cash Value” of the lost or damaged property may be significantly less than its replacement cost.”

Go ahead and give that definition a second read. I know it took me a few readings to let that sink in. This is a complete redefinition of ACV that will drastically reduce what Farmers policyholders will receive for a covered loss. First, deprecation is traditionally as a result of physical changes to an item brought about by use and the passage of time. Farmers new definition changes the game completely. While depreciation has always been a subjective analysis, this definition adds new components to that subjective analysis. Now the carrier can depreciate an item, if is economically obsolete? If an insured has older items that cannot be replaced but are of little economic value(think family heirlooms that are not true antiques), Farmers can depreciate them to the point were the insured will receive no compensation for the items.

Even with these issues, perhaps the most offensive part of this definition is the depreciation of labor. As I mentioned above, traditionally depreciation was used by insurance carriers to recognize the physical change brought about to items by time and use. How then does labor depreciate? The labor used to paint a wall does not change or lessen in value over time the way the actual paint does. Likewise, the labor of a carpet layer in installing carpet does not lessen in value when children walk across it with muddy shoes. The point is, the labor used to build or repair a home does not change over time the way the materials do and Farmers stating that they will depreciate labor seems to simply be a way to pay less for claims.

Ultimately, I would assume Farmers added in the definition to lessen arguments with insureds over depreciation issues. However, adding to the subjective factors that adjusters can consider will increase litigation between Farmers and their insureds.

via Review of the Farmers “Next Generation” Homeowner’s Policy, Part 1: Actual Cash Value : Property Insurance Coverage Law Blog.

California Bill would Require Construction Companies to Disclose Defects & Settlements

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Yvette Sung | Uncover California | July 16, 2015

Two Northern California state lawmakers have introduced a new bill that would require construction companies to disclose building defects like the one that could have contributed to Berkeley’s deadly balcony collapse.

All construction companies in the state would be required under SB465 to disclose any felony convictions, civil suits, fraud, negligence, incompetence and settlements to state regulators over defects in their construction projects.

The authors of the SB465, viz. Democratic Sens. Jerry Hill of San Mateo and Loni Hancock of Oakland, said licenses of careless contractors should be revoked.

Introducing the bill, Hill said, “Contractors who do shoddy work that imperils life should have their licenses revoked.”

The Berkeley balcony collapse last month left six people dead and seven others injured. The victims had gathered for a birthday party.

City officials concluded that the balcony collapsed because its wooden support beams were badly rotted by water damage. However, they could not determine how the damage occurred. An investigation into the collapse is pending.

In a separate construction defect-related incident, a man in Folsom lost his life earlier this month when a staircase scheduled for repairs collapsed in his apartment building.

Segue Construction Inc., the company that constructed the Berkeley apartment, has paid nearly $27 million to settle lawsuits related to balcony failures in the past three years.

via California bill would require construction companies to disclose defects & settlements | Uncover California.

Litigation does not End the Continuing Duty of Good Faith

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Brandee B. Bower | Property Insurance Coverage Law Blog | June 10, 2015

In a recent case in Tennessee, homeowners suffered a fire loss and filed a claim with their insurance company, Anpac.1 The insurance company investigated the loss and found that the homeowners intentionally set the fire and denied coverage. It then filed a declaratory judgment action. The homeowners filed counterclaims for breach of contract, unfair claims practices and bad faith. They alleged that the insurance company ignored evidence that showed they did not set the fire. In Tennessee, a statute allows insureds to seek a penalty of up to 25% of the total liability where a claim is denied in bad faith.2 When an insurance company refuses to pay a claim within 60 days of a demand, it must pay an additional 25% if the refusal was not in good faith and caused the insureds additional damages.

Insurers have a duty to act in good faith and no law or statute indicates this is severed by litigation. The trial court looked to rulings from appellate courts in other states: Kentucky Supreme Court (holding that duties of fair dealing did not end after litigation commenced,3 and an insurer’s refusal to settle after liability became clear is basis of bad faith4); Supreme Court of California (litigation did not terminate the duty of good faith because it did not end the contractual relationship5); Montana Supreme Court (insurers duty of fair dealing and not to withhold payment of valid claims does not end when a Complaint is filed6); Arizona Court of Appeals (failure of insurer to investigate while declaratory judgment action was pending could be basis of breach of good faith7); and the Georgia Court of Appeals (litigation does not end duty to reasonably investigate8).

After reviewing holdings in these jurisdictions, the court found that the insurance company had a good faith duty to consider evidence that came to light during the litigation, and if that evidence made clear that the homeowner did not destroy their home and that they were due payment under the policy, it should have paid their claims.

The insurance company argued that the refusal per the statute is one that occurs during the sixty day window. However, the sixty days is meant to allow insurers a grace period to evaluate a claim and avoid litigation after a demand is made. The court found that the purpose of the legislature in prescribing the sixty-day period was not to set a hard cut off for investigation, but a deadline by which insurers must make a decision on whether to deny a claim, thereby prohibiting them from dragging their feet at the expense of their insureds. The Court found nothing in the statute that limits the bad faith penalty to pre-denial or pre-litigation events.

The court also disagreed that a refusal is a singular event. Good faith obligations continue through litigation. Insurers are not absolved of their duties of fairness when a lawsuit is filed and they may not ignore exculpatory evidence. In this case, if the insurance company breached its obligations in initially denying coverage, and continued to deny coverage, then the failure to pay continues and the insurance company is subject to bad faith penalties. Further, if evidence arose after litigation began, the insurer had a duty to consider it and refusal to do so can be the basis of a bad faith finding.

via Litigation does not end the continuing duty of good faith – Lexology.

Sixth Circuit: A Michigan Collapse Extension Overrides Exclusions for Cracking and Defective Design

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Dick Bennett | Cozen O’Connor’s Property Insurance Law Observer | July 15, 2015

In Joy Tabernacle — The New Testament Church v. State Farm Fire & Cas. Co., 2015 WL 3824733, 2015 U.S. App. LEXIS 10707 (6th Cir., Jun. 22, 2015), a unanimous panel of the federal Court of Appeals recently held that a collapse extension of coverage negates a policy’s exclusions for cracking and faulty workmanship and design because more specific provisions of a contract of insurance are controlling over general ones.  The court noted that any collapse necessarily entails “the cracking of beams and walls” and that giving effect to the exclusion under those circumstances would render the extension nugatory.  In addition, the defective design exclusion was ineffective because the collapse extension specifically recited that collapse caused at least in part by one of its enumerated perils was covered even if faulty workmanship and design was a contributory factor.

The insured was a Presbyterian church in Flint, Michigan.  On December 15, 2012, the plaster ceiling of the sanctuary of the congregation’s 85-year-old building collapsed.  The insurer made initial payments for clean-up costs, but after a series of inspections were conducted, it elected to deny the claim, and litigation ensued.  The district court granted summary judgment to the carrier, and that led to an appeal.

The contract of insurance afforded coverage for “accidental direct physical loss,” but it contained exclusions for both losses resulting from “[s]ettling, cracking, shrinking or expansion” and losses resulting from “faulty, inadequate or defective . . . [d]esign, specifications, workmanship, repair, [or] construction[.]”  There was an extension of coverage for collapse, however, which recited that the insurer would pay for collapses occasioned by six enumerated perils, including “[d]ecay that is hidden from view, unless the presence of such decay is known to an insured prior to the collapse.”  This provision also recited that “if the collapse occurs after construction . . . is complete and is caused in part by [one of the enumerated perils], we will pay for the loss even if the use of defective material or methods in construction . . . contributes to the collapse.”

The inspections indicated that poor construction definitely played a causative role; the manner in which the church’s roof trusses were fabricated weakened the building’s load-bearing capacity and led to long-term deterioration and cracking and splitting of the wood.  This was unknown to the policyholder, however.  The pastor testified that he knew of no problems with the roof and observed no distress during his rare visits to the attic space where the trusses were located.

The district court held that the exclusions for cracking and defective design both operated to bar coverage, and it also found that the insured had failed to produce evidence of hidden decay, which the trial judge interpreted narrowly to denote only “organic rot.”  On appeal, the Sixth Circuit reversed both of these determinations, holding that the exclusions were inapplicable and remanding for a trial on the issue of whether the collapse was occasioned by the enumerated peril of decay.

Judge Jane Stranch’s opinion began by addressing the meaning of decay.  The panel noted that dictionary definitions encompassed “a general decline or deterioration over time,” “a progressive decline,” and “the slow loss of strength . . . of a building.”  The court also found a recent decision by Michigan’s intermediate level appellate court — which construed the term as “a gradual and progressive decline” — to be persuasive authority.  It therefore rejected the trial court’s narrow reading of the word.

With respect to the exclusions, Judge Stranch held that “the general exclusions for defective design and cracking do not foreclose coverage if the collapse extension is triggered.”  In her words:

A specific contract provision generally controls over a related but more general contract provision.  . . . [W]hile the extensions of coverage are [subject to the exclusions] of the policy, . . . where the plain language of the collapse extension clearly negates aspects of those general exclusions, the court must interpret the specific provisions of the policy both as controlling and so as to avoid rendering any of its words or phrases surplusage or nugatory.

The panel observed that the collapse extension explicitly provided “that where an enumerated ‘cause of loss’ — such as ‘decay’ — has ‘caused in part’ a collapse after construction is complete, the policy extends coverage even if ‘use of defective material or methods in construction’ also ‘contributes to the collapse.’ ”  In addition, it stated that:

the parties do not dispute that the church ceiling partially collapsed.  To find a general exclusion for “cracking” precludes coverage where collapse actually occurred renders the entire collapse extension nugatory, as the collapse of a structure often involves the cracking of beams and walls.

via Sixth Circuit: A Michigan Collapse Extension Overrides Exclusions for Cracking and Defective Design | Cozen O’Connor’s Property Insurance Law Observer.