Insurance Coverage Denied or Approved…Letter Unclear

Advise & Consult, Inc. | August 20, 2015

When your property is damaged in a storm your first thought is making sure everyone safe is, followed by how bad is the damage?  After emotions and the chaos subside, you are able to start dealing with insurance companies and pray that everything is covered and will be able to be replaced, repaired and return to normalcy.

Except when it doesn’t.  Insurance coverage obviously varies policy to policy and is always a factor when your insurance policy covers the damage that occurred.  Water intrusion issues are one of the main culprits of when a policy is approved or denied – depending on the water source.  But at least you have a clear cut answer from your insurance carrier.  Not always.

In a claim resulting from the Superstorm Sandy a judge has now ruled that a denial letter was written and delivered to the insured, but the communication was unclear and ambiguous.  From a blog post by Dick Bennett of Cozen O’Connor it is explained as such:

the carrier was “pleased to inform you” that wind damage was covered while flood was “expressly excluded” and concluding with what he called an “open-ended statement that the letter could be amended should new information become available” simply did not pass muster as a formal denial.

The property was inspected by an engineer, who found that while wind played a role in the structure damage, the majority of the damage was caused by a storm surge and flooding.  Continuing from Mr. Bennett’s post:

            On February 25, 2013, the insurer sent a letter to the policyholders reciting as follows:

We are pleased to inform you damages resulting from wind are covered under your Property Insurance Policy.  Our inspection revealed damages to your property.  We enclose our estimate of repair which totals $___.  After the recoverable depreciation in the amount of $___ and your wind deductible of $___ has been applied, this renders a net claim of $___.  Under separate cover a check of $___ will be forwarded to the policy address.

The letter also informed the insureds that any damage by flooding was “expressly excluded,” however, and it concluded by noting that the carrier “reserves the right to amend, alter or supplement this letter should information become known in the future that would affect the content of this letter.”

There was apparently little additional adjustment activity thereafter, and the policyholders eventually filed suit on August 21, 2014.  The insurer responded by filing a motion for summary judgment because the contract of insurance required that suit be brought within one year of the loss.  Under New Jersey case law, this one-year statute of limitations is tolled from the date of notice until the date when the carrier “formally denies coverage,” but the insureds’ lawsuit was filed 19 months after the February 25th letter.

The issue before Judge Robert Kugler was whether the carrier’s letter was an unambiguous formal denial that ended the tolling period.  On July 17th, he announced that it was not and denied the motion.

First, the court noted that the letter began by informing the policyholders that the contract of insurance covered wind damage.

Dollar amounts of the estimates of the total damages Plaintiffs would receive were left blank but the letter did state that Defendant’s inspection revealed wind damage to Plaintiffs’ property.  Based on a reasonable reading of the language, it would appear that Plaintiffs were to receive some money for the wind damage to their property.  From Defendant’s perspective, this paragraph is at best ambiguous and is at worst an agreement to pay Plaintiffs’ wind damage claim.  In other words, the Court cannot find that there was unequivocal “denial language” in the February 25 letter with regard to any wind damage covered under Plaintiffs’ policy.

In addition, the court looked at the fact that the carrier had reserved the right to amend or supplement its position if new information warranted such a step.  As Judge Kugler explained, the insureds “might reasonably wonder why new information could become relevant in the future if the denial was final” on December 25th.  The court found that this was further evidence that the letter was ambiguous in nature.

Lessons to be learned are many, here are a few: one, avoid the use of the form letter without modifying it to meet the needs of that particular claim.  Two, denying part of the claim while clearly stating that there is covered damage without specifically identifying what is covered, that activities are going to occur to determine that level of coverage and then to pay out for that damage.  Lastly, the opened ended concluding paragraph needs to be changed and use of more conclusive language should be used.  Examples could include a quote from the policy expressing any limitations, that the insurer reserves its rights pursuant to any terms and conditions of the policy, and an invitation to the insured to submit any further data or information believed to have an impact on the decision.

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