Claims Handling Requirements by State – California

Robert Trautmann | Property Insurance Coverage Law Blog | February 21, 2018

As I am writing this blog, most of the country is in the middle of a deep freeze. Here in New Jersey, the forecast doesn’t show any signs of warming up:

So naturally, my mind turned to more temperate climates and so today we are going to chat about the claims handling guidelines in California.

California property insurers must follow the Fair Claims Settlement Practices Regulations. The regulations define their purpose as being “[t]o delineate certain minimum standards for the settlement of claims” and to “promote the good faith, prompt, efficient and equitable settlement of claims on a cost-effective basis.”1

A California insurance carrier must acknowledge the notice of claim, provide all necessary claim forms and instructions and begin the investigation of the claim within 15 calendar days of receipt of the notice of claim.2 The investigation must be thorough, fair and objective and the carrier must not request information not relating to the claim.3 The carrier must appropriately reply to all communications from a claimant regarding the claim where a reasonable person would expect a response.4 They must immediately (but no later than 30 calendar days) pay the portion of the claim not in dispute.5 The carrier must advise as to the acceptance or rejection of the claim in whole or in part within 40 days of their receipt of the notice of the claim.6 They must give the insured updates as to the status of the claim every 30 days that it remains open.7 Any denial must be in writing detailing the factual and legal basis therefore.8

No California insurance carrier make an offer to settle a claim that is unreasonably low.9Needless to say, the insurance carriers must not discriminate against their insured based on, among other things, age, race, religion, or sexual orientation.10 Finally, the insurance carrier must advise unrepresented first party claimants that a statute of limitations or other time limit is going to expire no less than 60 days before the expiration of the time limit.11

California has additional standards for first-party residential and commercial property insurance policies:12

(1) When a loss requires repair or replacement of an item or part, any consequential physical damage incurred in making the repair or replacement not otherwise excluded by the policy shall be included in the loss. The insured shall not have to pay for depreciation nor any other cost except for the applicable deductible.

(2) When a loss requires replacement of items and the replaced items do not match in quality, color or size, the insurer shall replace all items in the damaged area so as to conform to a reasonably uniform appearance.

(b) No insurer shall require that the insured have the property repaired by a specific individual or entity.

(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.

(d) If losses are settled on the basis of a written scope and/or estimate prepared by or for the insurer, the insurer shall supply the claimant with a copy of each document upon which the settlement is based. The estimate prepared by or for the insurer shall be in accordance with applicable policy provisions, of an amount which will restore the damaged property to no less than its condition prior to the loss and which will allow for repairs to be made in a manner which meets accepted trade standards for good and workmanlike construction. The insurer shall take reasonable steps to verify that the repair or rebuilding costs utilized by the insurer or its claims agents are accurate and representative of costs in the local market area. If the claimant subsequently contends, based upon a written estimate which he or she obtains, that necessary repairs will exceed the written estimate prepared by or for the insurer, the insurer shall:

(1) pay the difference between its written estimate and a higher estimate obtained by the claimant; or,

(2) if requested by the claimant, promptly provide the claimant with the name of at least one repair individual or entity that will make the repairs for the amount of the written estimate. The insurer shall cause the damaged property to be restored to no less than its condition prior to the loss and which will allow for repairs 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; or,

(3) reasonably adjust any written estimates prepared by the repair individual or entity of the insured’s choice and provide a copy of the adjusted estimate to the claimant.

(e) Once the appraisal provision under an insurance policy is invoked, the appraisal process shall not include any legal proceeding or procedure not specified under California Insurance Code Section 2071. Nothing herein is intended to preclude separate legal proceedings on issues unrelated to the appraisal process.

(f) When the amount claimed is adjusted because of betterment, depreciation, or salvage, all justification for the adjustment shall be contained in the claim file. Any adjustments shall be discernable, measurable, itemized, and specified as to dollar amount, and shall accurately reflect the value of the betterment, depreciation, or salvage. Any adjustments for betterment or depreciation shall reflect a measurable difference in market value attributable to the condition and age of the property and apply only to property normally subject to repair and replacement during the useful life of the property. The basis for any adjustment shall be fully explained to the claimant in writing.

(1) Under a policy, subject to California Insurance Code Section 2071, where the insurer is required to pay the expense of repairing, rebuilding or replacing the property destroyed or damaged with other of like kind and quality, the measure of recovery is determined by the actual cash value of the damaged or destroyed property, as set forth in California Insurance Code Section 2051. Except for the intrinsic labor costs that are included in the cost of manufactured materials or goods, the expense of labor necessary to repair, rebuild or replace covered property is not a component of physical depreciation and shall not be subject to depreciation or betterment.

1 Cal. Code Regs. Tit 10 § 2695.1.
2 Cal. Code Regs. Tit 10 § 2695.5(e).
3 Cal. Code Regs. Tit 10 § 2695.7(d).
4 Cal. Code Regs. Tit 10 § 2695.5(b).
5 Cal. Code Regs. Tit 10 § 2695.7(h).
6 Cal. Code Regs. Tit 10 § 2695.7(b)(1).
7 Cal. Code Regs. Tit 10 § 2695.7(c)(1).
8 Cal. Code Regs. Tit 10 § 2695.7(b)(1).
9 Cal. Code Regs. Tit 10 § 2695.7(g).
10 Cal. Code Regs. Tit 10 § 2695.7(a).
11 Cal. Code Regs. Tit 10 § 2695.7(f).
12 Cal. Code Regs. Tit 10 § 2695.9.

Contractors Beware: Your Subcontractor Provided Additional Insured Coverage may have Gaps

David S. Lynch | Kilpatrick Townsend | February 14, 2018

Construction contracts generally require subcontractors to extend additional insured status on the subcontractor’s policies for the benefit of the contractor who relies on this coverage to protect it from claims arising out of the subcontractor’s work on the project. The intent is to place the risk of loss for the subcontractor’s work on the subcontractor’s liability policies. In order to assure that the subcontractor has complied with these contract requirements, contractors generally require the subcontractor to provide a certificate of insurance. However, even though a subcontractor has technically provided the required insurance, the insurance may not meet the expectations of the contractor that the risks to the contractor associated with the subcontractor’s work be covered under the subcontractor’s policy.

One such circumstance occurred to a general contractor in Illinois, who required a subcontractor to name it as an additional insured on the subcontractor’s general liability policy. Vivify Constr., LLC v. Nautilus Ins. Co., 2017 Ill.App.(1st) (2018). The subcontractor complied and had the contractor added to its policy as an additional insured. However, the subcontractor’s policy also contained an endorsement which effectively narrowed coverage under the policy. While liability policies contain employee exclusions which remove from coverage claims made by employees of the insured seeking coverage, this endorsement broadened the exclusion to remove from coverage claims made by any employee of any insured, whether the employer was the party seeking coverage or not.

An employee of the subcontractor was injured on the job and filed a lawsuit against the contractor. The contractor sought coverage for the claim under the subcontractor’s policy as an additional insured. The subcontractor’s carrier denied coverage relying on the broadened employee exclusion. This denial was upheld.

Another circumstance occurred in connection with the construction of a house. D.R. Horton Ltd. v. Markel Int’l Ins. Co., 300 S.W.3d 740 (Tex. 2009). The homebuilder required the foundation subcontractor to include the homebuilder as an additional insured under its liability policy. The subcontractor obtained the required endorsements, but they limited additional insured coverage to losses arising out of the negligence of the subcontractor. When the homebuilder was sued by the homeowners for defects in the foundation of the house, the homebuilder sought coverage under the foundation subcontractor’s general liability policy as an additional insured. Since the pleading filed against the homebuilder did not include any allegations against the subcontractor, the court determined that the additional insured endorsement was not triggered and that the insurance company did not owe the homebuilder a defense to the lawsuit.

The lessons to be learned are first to specify what types of coverage subcontractors are required to carry, to specify any limitations on coverage that are not acceptable, and to specify the exact additional insured endorsements the subcontractors are required to obtain. If possible, it is recommended that the subcontractor’s policies be reviewed in advance to determine whether there are any limitations on coverage which would inhibit the intended transfer of the risk of loss for the subcontractor’s operations to the subcontractor’s insurance coverage. If a review of the policies is not possible, it is recommended that the subcontractor be required to produce a copy of any endorsements to the policy.

In Washington, an Insurer Cannot Refuse to Defend, Change Its Mind, and Still Expect to Control the Defense or Avoid Bad Faith

Kevin Mapes | The Policyholder Report | February 20, 2018

A recent decision from the U.S. District Court for the Western District of Washington again demonstrates the decidedly pro-policyholder nature of insurance-coverage law in the state of Washington. Like so many coverage cases, 2FL Enterprises, LLC v. Houston Specialty Insurance Co., arose from underlying construction-defect litigation.

The insured, 2FL Enterprises, first notified its insurer, Houston Specialty, when a dispute arose between 2FL and the owner of an apartment building that 2FL had worked on. The next month, the owner filed suit, and 2FL promptly tendered the lawsuit to Houston Specialty. Five months later, Houston Specialty issued a letter denying any coverage for the lawsuit. After a default judgment was entered against 2FL, Houston Specialty reconsidered and offered to retain counsel on behalf of its insured. 2FL rejected Houston Specialty’s offer of a defense.

Photo by GotCredit

In the ensuing coverage litigation, the court initially set out the broad nature of the duty to defend under Washington law, finding that “all that is required to trigger the duty to defend is the ‘potential’ for liability,” asking “whether allegations in the complaint could conceivably impose liability on the insured,” and concluding that “if there is any reasonable interpretation of the law that could result in coverage, the insurer must defend.” Applying these standards, the court found that Houston Specialty had breached its duty to defend and acted in bad faith. The court was particularly bothered by the Houston Specialty’s attempt to rely on extrinsic evidence to support its denial. Under Washington law, extrinsic evidence may be used in support of coverage, but an insurer can never rely on documents beyond the complaint and the policy in denying coverage.

Significantly, the court was unimpressed by Houston Specialty’s belated change of heart and attempt to provide a defense. Houston Specialty argued that any breach was “cured” when it belatedly offered to participate in 2FL’s defense, and that 2FL had breached its duty to cooperate when it rejected the offered defense. The court disagreed, finding that Houston Specialty “had already breached the contract by the point in time it argues that Plaintiff was required to cooperate. ‘An insured … should no longer be bound by contractual obligations if the insurer breaches its duty to defend the insured.’” Releasing the insured from its duty to cooperate was not the only consequence of Houston Specialty’s denial of coverage. The Court went on to conclude that by breaching its contractual obligation to defend, the insurer lost the right to control the insured’s defense, despite its later offer to defend.

Finally, the Court found that Houston Specialty had acted in bad faith, and its later offer to defend did not change the court’s position:

The fact that both the delay and the denial were unfounded and unreasonable dictate a finding of bad faith which is unmitigated by the insurer’s later change of heart.

For insurers, this decision reinforces the general state of Washington law: deny the insured a defense at your own peril. The decision also adds a new wrinkle: an insurer that denies a defense cannot simply change its mind and still expect to control the defense of the insured in order to guard against bad-faith exposure. For policyholders, that same wrinkle presents a potential opportunity. Once an insurer has denied coverage, the policyholder should be free to retain counsel of its choosing and to control the defense going forward, even if the insurer later agrees to defend. At a minimum, the decision gives the policyholder a good argument that the insurer should agree to fund the defense through the insured’s choice of counsel, rather than insisting on the insurer’s own panel counsel.

Additional Insured Status: Playing The Speak-Out Game On A Construction Project

Matthew DeVries | Best Practices Construction Law | February 21, 2018

Last weekend we played Speak-Out: Kids versus Parents, a game where you use a plastic thingy to obstruct your speech capabilities.  The winning team is the one that guesses the most phrases.  Reading and understanding an insurance policy on a construction project can be a lot like understanding my kids playing Speak Out.

Proper insurance coverage is an important risk management tool for contractors, subcontractors, project owners/developers and design professionals. Whether you are required by contract or law, purchase and maintaining the appropriate coverage can help you avoid catastrophe on your project.  Since there are so many types available, it is important to understand what is being covered…and what is not.

This was a hard lesson learned by a contractor recently in Vivify Construction v. Nautilus Insurance Co., a recent decision issued by the Appellate Court of Illinois.  In that case, the contractor and subcontractor (and their insurance carriers) were pointing the finger at each other for injuries sustained by an employee of the subcontractor.

The subcontract agreement required the subcontractor to indemnify and hold harmless the contractor against claims of bodily injury resulting from the subcontractor’s work.  The subcontract also required the subcontractor to include the contractor as an “Additional Insured” on its policy.

The insurance policy provided “Additional Insured” coverage for the contractor.  But it also contained an endorsement that included an “employee exclusion,” which stated that the policy did not apply to bodily injury to the subcontractor’s own employees.

The Court was required to parse through the applicable contract and insurance provisions.  In the end, the Court found that—despite the “Additional Insured” status of the contractor—the subcontractor’s insurance policy contained the broadened employee exclusion provisions.  This ultimately negated coverage.

Vivify Construction addresses such a small portion of insurance coverage disputes on construction projects, but the lesson is far more impactful.  Despite the difficulty in reading and understanding insurance coverages on a project, you are advised to specify in your contracts what types, amounts, and limitations are acceptable for a project. While cumbersome, don’t just rely on a certificate of insurance provided by a party, but ask them to get you a copy of the actual policy to review.  Don’t try to figure out what was said after the dispute arises.

Pay-if-Paid Enforced Opening Door to Subcontractor Claim Against Owner

Katharine E. Kohm | The Dispute Resolver | February 24, 2018

In Superior Steel, Inc. v. Ascent at Roebling’s Bridge, LLC, No. 2015-SC-000204-DG, 2017 WL 6380218 (Ky. Dec. 14, 2017), a subcontractor and a sub-subcontractor sued the general contractor and owner for the failure to pay for extra work. The general contractor and owner cross-claimed against the other for, inter alia, indemnification.  At the jury trial, the subcontractors recovered under theories of implied contract and unjust enrichment.  All parties appealed, in particular, as to the pay-if-paid jury instruction. The Court of Appeals vacated the judgment and remanded.  In turn, all parties petitioned to the Supreme Court of Kentucky.
The key questions in the petition were whether the pay-if-paid provision was enforceable as between the general contractor and subcontractors and, if so, whether the subcontractors could pursue the owner directly for payment notwithstanding the lack of privity between owner and subcontractors.
The Supreme Court concluded that, as a result of the pay-if-paid clause, the general contractor had not breached subcontract for the failure to pay for the subcontractor’s extra work.  The relevant subcontract provisions stated:
  • “no compensation . . . for any claim arising out of the performance of this Subcontract, unless the Contractor has collected corresponding additional compensation from the owner, or other party involved”
  • And more directly – “payment [to] the Contractor from the Owner for the Subcontractor Work is a condition precedent to payment by the Contractor to Subcontractor. The Subcontractor hereby acknowledges that it relied on the credit of the Owner, not the Contractor for payment of the Subcontract Work.”
Reading these together, the Supreme Court agreed that the general contractor’s receipt of payment from owner was a condition precedent to its obligation to pay the subcontractors.  Because the general contractor did not receive payment from the owner, there could be no breach. The Court did note that “pay-if-paid clauses have fallen out of favor in some states, [but] the prohibition against their use has come from the legislature rather than the courts.” In Kentucky, no such statutory prohibition existed.
However, because the subcontractors were left with no useful contract remedy against general contractor, the Court held that the subcontractors were not barred from bringing unjust enrichment claims against the owner.  The Court acknowledged that typically “unjust enrichment is unavailable when the terms of an express contract control.”  But noted that, here, the “adequacy” of a “legal remedy” (or the “actual realization of that contractual remedy”) was absent due to the “contractual gridlock” caused by the owner.  Indeed, if the contract was the only avenue for the subcontractors to obtain relief, that result would allow the owner to take advantage of its own failure to pay after receiving “a substantial benefit” from the subcontractors’ work.