Tenth Circuit Rules Against Insurer and Decides That Appraisers Can Decide Causation

Karl Schulz | Cozen O’Connor

In the continuing saga of what can and cannot be appraised in a property insurance appraisal, the Tenth Circuit, in contrast to many other courts, has ruled appraisers can determine coverage issues.

In Bonbeck Parker, LLC v. Travelers Indem. Co. of Am., 2021 U.S. App. LEXIS 29607 (10th Cir. October 1, 2021), a hailstorm damaged three buildings covered under a commercial property insurance policy.  A dispute between the insured and insurer arose over whether the hailstorm caused all of the damage claimed.  The insurer paid some of the claimed damage, but denied coverage for other claimed damage, asserting that it was caused by non-covered causes such as wear and tear.  The insured invoked appraisal. 

The insurer asserted that it would only participate in appraisal under certain conditions.  The insurer wanted to limit the appraisal only to undisputed hail damages.  Thus, the appraisal panel would be limited to deciding how much repairs would cost but not what caused the roofs to require repairs in the first place.  The insured objected. 

The insurer filed a declaratory judgment action.  On summary judgment, the district court sided with the insured and agreed that the appraisal clause allows appraiser to determine causation.  The parties had other disputes, but this blog entry focuses on the causation issue within appraisal.

The Tenth Circuit made an “Erie Guess” as to how the Colorado Supreme Court would rule on the issue.  The district court and Tenth Circuit focused on the appraisal clause’s statement that, if there is a disagreement as to the “amount of loss,” either party can demand appraisal of the loss.  The Tenth Circuit observed that “amount of loss” was not defined in the policy and consulted dictionary definitions.  The Tenth Circuit cited various definitions of “loss,” such as “the amount of an insured’s financial detriment by… damage that the insurer is liable for.”  The Tenth Circuit concluded that all of the definitions included a causation component.  Further, the Tenth Circuit surveyed case law from Minnesota, Iowa, and Delaware.  Perhaps the most emphatic citation was from an Iowa intermediate appellate court that held: “causation is an integral part of the definition of loss, without consideration of which appraisers cannot perform their assigned function.”

The Tenth Circuit rejected various arguments by the insurer.  For example, the insurer noted that the appraisal clause gives the insurer the right to deny coverage even after the appraisal is complete.  The insurer argued that denial could be based on any ground available in the policy, including that the damage resulted from an excluded cause of loss.  The insurer argued that the court could not give effect to the plain meaning of the sentence if the appraisal panel determines causation. 

The Tenth Circuit reasoned that the insurer’s argument could not be reconciled with the plain meaning of “amount of loss.”  The Tenth Circuit opined that “amount of loss” explained subjects on which the parties may request appraisal, while the “right to deny” concerns the insurer’s options after an appraisal on one of those subjects. 

Also for example, the Tenth Circuit rejected an argument by the insurer that the term “appraiser” reflected an intent to limit that person to making monetary determinations, thus precluding causation determinations.  The Tenth Circuit opined that determining the value of something includes a causation element because that “something” is the “amount of loss.”     

In conclusion, the Tenth Circuit cited the leading case from the Texas Supreme Court, State Farm Lloyds v. Johnson, 290 S.W.3d 886, 892 (Tex. 2009):

As the Texas Supreme Court observed, that kind of causation issue arises “in every case,” and if “appraisers can never allocate damages between covered and excluded perils, then [they] can never assess hail damage unless a roof is brand new.” Id. at 892-93. Such a result “would render appraisal clauses largely inoperative, a construction we must avoid.” Id. at 893. Other district-court decisions have recognized as much, and we find their reasoning persuasive. See, e.g., Auto-Owners Ins. Co. v. Summit Park Townhome Ass’n, 100 F. Supp. 3d 1099, 1103 (D. Colo. 2015).

Notably, the Texas Supreme Court in Johnson also opined as follows in what has become an oft-cited headnote:

Indeed, appraisers must always consider causation, at least as an initial matter. An appraisal is for damages caused by a specific occurrence, not every repair a home might need. When asked to assess hail damage, appraisers look only at damage caused by hail; they do not consider leaky faucets or remodeling the kitchen. When asked to assess damage from a fender-bender, they include dents caused by the collision but not by something else. Any appraisal necessarily includes some causation element, because setting the “amount of loss” requires appraisers to decide between damages for which coverage is claimed from damages caused by everything else.

This of course does not mean appraisers can rewrite the policy. No matter what the appraisers say, State Farm does not have to pay for repairs due to wear and tear or any other excluded peril because those perils are excluded.

Johnson, 290 S.W.3d at 893. 

In a footnote, the Tenth Circuit cited authorities from the Supreme Courts of Alabama and Mississippi holding that appraisers cannot resolve causation issues.  The Tenth Circuit did not get into the rationales of those other courts, but stated that its decision was based on a conclusion of how the Colorado Supreme Court would resolve the issues.

The Tenth Circuit held that the district court properly granted summary judgment for the insured on its claim that the insurer breached the policy when it refused to allow the appraisal to proceed. 

Under Bonbeck, although appraisers may consider causation, the insurer was not wrong to be concerned that the appraisal process would be abused to sweep everything that was wrong with the insured’s buildings into the appraisal, resulting in an award that the insurer would be pressured to pay in full regardless of coverage.  It will be interesting to see how Bonbeck is applied and if a Colorado state court adopts the reasoning and its holding. 

The Retroactive Date – When Timing is Everything

Mary Frances Lindquist Rasamond | Phelps Dunbar

Most architects, engineers and contractors’ professional liability policies are written on a claims-made basis, requiring a claim to be first made against the insured and reported to the insurer during the policy period. Claims-made policies typically contain a retroactive date limitation, which must be satisfied for the policy to provide coverage. What is a retroactive date, and how does it impact potential coverage?

What Is a Retroactive Date?

  • A retroactive date dictates when an insured’s error or omission giving rise to a claim can take place – on or after the retroactive date, which is typically listed in the policy’s declarations. Some policies also may contain language prohibiting coverage of claims arising from continuous acts or a series of related acts if those acts first commenced prior to the retroactive date.
  • The retroactive date limitation (the provision precluding coverage for claims arising out of acts, errors or omissions prior to the retroactive date) can be found in a policy’s insuring agreement or in an exclusion or endorsement to a claims-made policy.
  • The retroactive date is typically based on the date from which the insured has had (uninterrupted) professional liability coverage.
  • Retroactive dates often pre-date the policy’s inception, potentially providing coverage for claims that arise from acts or omissions taking place prior to the policy’s inception date. A retroactive date that’s the same as the policy’s inception requires that the act or omission giving rise to the claim take place during the policy period (in addition to the claim being first made against the insured and reported to the insurer during the policy period). Claims-made policies with no retroactive date provide full prior acts coverage – the timing of the act or omission is not relevant for coverage purposes.

How Does a Retroactive Date Impact Potential Coverage?

  • Professional liability claims may not be asserted until years after the insured’s alleged error or omission. The retroactive date provides some limitation on how far back the insurer will provide coverage for the insured’s errors. For example, a claim arising from design errors allegedly made by an architect prior to the retroactive date would not be covered under a claims-made policy even if the claim was first made and reported during the policy period.
  • Courts in the majority of jurisdictions find that a claims-made policy’s retroactive date limitation is unambiguous and enforceable as written. However, New Jersey’s highest court has held that a claims-made policy providing no “prior acts” coverage (that is, the retroactive date is the policy’s inception date) violates public policy if there is an objectively reasonable expectation of coverage under the circumstances.
  • Retroactive dates may create a gap in coverage unless renewal policies and policies placed with a new insurer provide the same retroactive date. A gap in coverage also may arise if an insured shifts from a claims-made policy to an occurrence-based policy (which requires that the injury or damage take place during the policy period). Under these circumstances, an insured should consider purchasing tail coverage or an Extended Reporting Period under its expiring claims-made policy, which may close any coverage gap.
  • An insured should fully understand the significance of the retroactive date when purchasing claims-made coverage. Insurers should clearly communicate to the insured the basis for the retroactive date (and its ramifications).

Wyoming Supreme Court Allows Insured to Seek Bad Faith Damages

Lee-Ann Brown | Bradley Arant Boult Cummings

In May of this year, the Supreme Court of Wyoming held that a subsidiary of Sinclair Oil could invoke statutory bad faith damages after prevailing in a coverage dispute with its insurer, Infrassure. The court rejected the district court’s analysis that accepted the insurer’s narrow interpretation of Wyoming’s insurance code. On certification from the 10th Circuit, the court found that a policy was “delivered” in Wyoming—and therefore, Wyoming insurance code applied—because the policyholder and the covered risk were in Wyoming. Per the court’s decision, proof of physical delivery beyond the stated headquarters’ address, to a Wyoming address, was not required.

After a 2013 fire and explosion at its petroleum refinery in Sinclair, Wyoming, Sinclair sought business interruption insurance recovery from Infrassure and other insurers. Infrassure rejected a settlement among Sinclair and the market of quota share participants and instead sought to litigate the loss. Subsequently, a panel of appraisers affirmed that the loss value was higher than the settlement that Infrassure rejected, and Sinclair sought to recover its attorney’s fees and enhanced interest at 10% under Wyoming Insurance Code. The policy insured a Wyoming company as additional insured and covered refining facilities located in Wyoming. Yet, Infrassure argued that Sinclair could not invoke Wyoming insurance code’s bad faith remedies because the code excludes policies not “issued for delivery” or “delivered” in Wyoming. The Wyoming federal district court agreed with Infrassure’s contention that because there was no proof of physical delivery to the insured in Wyoming, Wyoming law did not apply. On appeal, the 10th Circuit accepted the suggestion from Sinclair’s appellate counsel (Marc James Ayers, with Bradley’s Appellate Practice Group), that the court certify the unsettled and novel question to Wyoming’s highest court to determine the applicability of the statute.

The Wyoming Supreme Court rejected the insurer’s strict interpretation, finding that the purpose of Wyoming’s insurance laws was to “protect public welfare and Wyoming residents…” and that achieving this purpose mandated a liberal interpretation of the law’s application to Wyoming interests. The court adopted a rule articulated by the New York courts, holding that a policy is “delivered or issued for delivery” in a state when it “covers both insureds and risks” located in that state. Thus, because the Sinclair subsidiary and the insured refinery were in Wyoming, Sinclair was entitled to the protections mandated by the insurance law.

Bad faith disputes arise in the context of construction as well. When negotiating first party insurance coverage—such as builders risk policies—insureds should pay close attention to the choice of law provisions in the policy to ensure the applicable jurisdiction recognizes first party bad faith claims.

Court in Montana Applies Anti-Concurrent Causation Clause to Earth Movement Exclusion

Alycen A. Moss and Elliot Kerzner | Property Insurance Law Observer

A district court in Montana recently applied an anti-concurrent clause in a property insurance policy to preclude coverage based on an earth movement exclusion. In Ward v. Safeco Ins. Co. of Amer., No. 1:19-CV-0133-SPW, 2021 WL 3492294 (D. Mont. Aug. 9, 2021), the insured’s tenant reported that water was leaking from a main pipe serving the insured’s property, and the leak caused some soft spots to form in the floor of the kitchen. The insurer and agent’s subsequent inquiries led to the understanding that a leak under a slab affected the soil, which caused the house to settle, which then caused damage to the house.

The insurer then retained an engineering firm to investigate the insured’s claim. Following an inspection of the property, the engineering firm reported that a portion of the cracks in the concrete perimeter were not new and were caused by the shape of the structure on which the house sat. As to the newer cracks in the foundation, the firm concluded that the settlement could have been caused by a lack of care taken to make sure the foundation was supported by consolidated soil during the excavation of the new water line.

Based on the engineering report, the insurer determined that coverage for the damage was precluded by the policy’s earth movement and water damage exclusions, and denied the claim. The insured then filed a claim with the Montana Commissioner of Securities and Insurance, which provided the insurer with a report from a structural engineer stating that the water line break was the cause of the soil settlement resulting in the floor slab settlement. The insurer stood by its position that the damage was not covered, and the insured sued for coverage in a Montana district court.

In her lawsuit, the insured argued that the exclusions relied on by the insurer were ambiguous. In particular, she contended that the earth movement exclusion was limited to large earth events. However, the court rejected the insured’s arguments, holding that the policy’s earth movement exclusion was unambiguous and applied to any earth movement, no matter how small. The court further held that the term “earth” was clearly intended to include all natural materials that comprise the surface of the earth, including rocks and soil.

The insured further argued that the loss should be covered pursuant to Montana’s proximate cause doctrine, which mandates coverage for excluded events when those events are caused by a covered peril. Even if there was earth movement, the insured contended that the proximate cause of the damage was the breaking of the water main, a covered peril.

The court rejected this argument based on the policy’s anti-concurrent clause, which stated that the insurer would not cover “loss caused directly or indirectly by any of the following [exclusions] . . . regardless of any other cause or event contributing concurrently or in any sequence to the loss.” Because the consolidation and shifting of the soil – an excluded peril – caused the claimed damage, coverage was precluded by the earth movement exclusion even if the damage was also caused by a covered peril. Accordingly, the court granted summary judgment to the insurer.

Under Ward, insurers in Montana can now rely on anti-concurrent causation clauses to deny coverage for property damage caused by an excluded peril, such as earth movement, even when the excluded peril is caused by a covered peril, such as a broken water pipe. Although Montana generally follows the proximate cause doctrine, parties may contract around this doctrine by including an anti-concurrent causation clause in their policies. As Ward demonstrates, a properly worded anti-concurrent causation clause serves to preclude coverage for excluded perils even when a covered peril may be the proximate cause of the loss.

Bad Faith Suit Dismissed for Insufficient Civil Remedy Notice

Krista Elsasser, Samantha Epstein and Hope Zelinger | Bressler, Amery & Ross

On September 13, 2021, Judge Nicholas Lopane in Broward County dismissed a bad faith suit filed by McDonald and Barnhill against United Property and Casualty Insurance Company (“United”), finding that the Civil Remedy Notice (“CRN”) on which it was purportedly based to be legally insufficient to support such a claim. This is a huge victory for United and hopefully signals that courts will be diligent in reviewing CRNs before allowing insureds to proceed with these intrusive and expensive suits.

The case, Yuval Lugassy and Susan Lugassy v. United Property and Casualty Insurance Company, CACE-21-002746, arose out of a shower pan failure at the insured property. United investigated the claimed loss and issued a partial coverage letter. When the Insureds demanded additional amounts through a public adjuster, United re-investigated and issued additional payments. However, a large amount remained in dispute and the Insureds filed a CRN on March 6, 2020. The Insureds then demanded appraisal, pursuant to a unilateral provision in the policy. United cooperated with the appraisal, even though it could not be completed within the 60-day cure period for the CRN, and paid the appraisal award outside the cure period. The lawsuit for bad faith was filed shortly thereafter, alleging that the filing of the CRN had preserved the claim and that the payment of the appraisal award ripened the suit, based on Cammarata v. State Farm Fla. Ins. Co., 152 So. 3d 606 (Fla. 4th DCA 2014).

Background on Florida Law re: Civil Remedy Notices and Appraisal

Cammarata held that there are three conditions precedent for filing a bad faith suit: (1) coverage, (2) amount of damages, and (3) a CRN. See id. at 612. However, the Court in that case made a crucial determination that has plagued insurers ever since: “the parties’ settlement via the appraisal process, which determined the existence of liability and the extent of the insured’s damages, established the first two conditions precedent of a bad faith action.” Id. In other words, the Court handed insureds the very tool they needed to set a trap for any carrier who sought to amicably resolve a claim within the terms of the policy by demanding appraisal, because an insured need only file a CRN in response and hold the appraisal process hostage during the 60-day cure period. Following Cammarata, carriers were forced to negotiate unfavorable settlements in order to avoid ripening a bad faith suit by paying an appraisal award outside of the cure period and being exposed to invasive discovery.

The Florida Legislature recognized the fallout from Cammarata and made changes to Florida Statute § 624.155 in an attempt to protect carriers from bad faith suits where the carrier resolved the claim pursuant to the policy’s appraisal provision. Specifically, in 2019, the statute was changed to include subsection (2)(f), which stated: “A notice required under this subsection may not be filed within 60 days after appraisal is invoked by any party in a residential property insurance claim.” Unfortunately, this only solved half of the problem; insureds could no longer file a CRN in response to a carrier’s appraisal demand, but nothing prevented an insured from demanding appraisal and immediately filing a CRN to take advantage of Cammarata.

That is exactly the situation that took place in Lugassy. The CRN in this case was filed by the Insureds’ attorneys, who certainly knew of the consequences of paying an appraisal award outside the CRN cure period and the prohibition on filing a CRN after demanding appraisal. It is no coincidence that the CRN in this case was filed first. Certainly, the Insureds and their attorneys thought that they would have no challenge to pursuing a bad faith claim against United, even though United conducted the claim investigation and participated in appraisal according to the policy language and its duties under Florida law.

What Makes a Valid CRN?

Unfortunately for the Insureds, they still had to overcome the hurdle of having a legally sufficient CRN to support their bad faith claim. Over time, some favorable case law has developed that carriers can use to protect themselves by moving to dismiss a bad faith suit based on a legally insufficient CRN. For example, because Florida Statute § 624.155 creates a cause of action that does not exist at common law, it must be strictly construed. Talat Enters., Inc. v. Aetna Cas. and Sur. Co., 753 So. 2d 1278 (Fla. 2000). The requirements for a valid CRN are set forth in Florida Statute § 624.155(3), which states in pertinent part:

(3)(a) As a condition precedent to bringing an action under this section, the department and the authorized insurer must have been given 60 days’ written notice of the violation.

(b) The notice shall be on a form provided by the department and shall state with specificity the following information, and such other information as the department may require:

  1. The statutory provision, including the specific language of the statute, which the authorized insurer allegedly violated.
  2. The facts and circumstances giving rise to the violation.
  3. The name of any individual involved in the violation.
  4. Reference to specific policy language that is relevant to the violation, if any. If the person bringing the civil action is a third party claimant, she or he shall not be required to reference the specific policy language if the authorized insurer has not provided a copy of the policy to the third party claimant pursuant to written request.
  5. A statement that the notice is given in order to perfect the right to pursue the civil remedy authorized by this section.

Id. at (3)(a)-(b).

The statute also provides that “[n]o action shall lie,” absent a valid CRN and compliance with the 60-day safe harbor requirements. See § 624.155(3)(d), Fla. Stat. “The purpose of the civil remedy notice is to provide insurers one last opportunity to settle a claim with the insured to avoid unnecessary bad faith litigation. . . . However, the civil remedy notice must be specific enough to provide insurers notice of the wrongdoing so the insurer can cure the same within sixty days.” Valenti v. Unum Life Ins. Co. of America, 2006 WL 1627276, *2 (M.D. Fla. 2006) (citing Lane v. Westfield Ins. Co., 862 So. 2d 774, 779 (Fla. 5th DCA 2003)) (emphasis added). Thus, courts have held that if a CRN lacks sufficient specificity, it will be held invalid and cannot form the basis of a bad faith action against the carrier. See, e.g., Fenderson v. United Auto. Ins. Co., 31 So. 3d 915 (Fla. 4th DCA 2010). The Court in Lugassy, when faced with evaluating the CRN on which the Complaint was based, ultimately determined that the CRN was insufficient to provide notice to the carrier of what the alleged bad faith violations were and how to cure them, so that the CRN could not support the Insureds’ cause of action.

Court’s Considerations re: the Motion to Dismiss in Lugassy

One of the key issues in this particular case is that the Insureds attached not only their CRN, but the carrier’s response to their Complaint. This means that the Court could consider United’s version of the facts as well as the allegations made by the Insureds. Generally, in considering a motion to dismiss, all factual allegations are accepted as true, but “[i]f an exhibit facially negates a cause of action asserted, the document attached as an exhibit controls and must be considered in determining a motion to dismiss.” Fladell v. Palm Bch. Cty. Canvassing Bd., 772 So. 2d 1240, 1242 (Fla. 2000). Moreover, “conclusions of law are not deemed admitted[.]” Mills v. Mills, 339 So. 2d 681, 684 (Fla. 1st DCA 1976); See also Barrett v. City of Margate, 743 So. 2d 1160, 1163 (Fla. 4th DCA 1999). United pointed out to the Court that, while the Complaint and CRN did contain “ultimate facts,” they mostly concerned what the Insureds and their representatives did, rather than what United did or did not do. The few facts regarding United indicated that they were not exhaustive and expressly asserted that there may be other facts that were not included. For example, the CRN alleged that United’s estimate “failed to include the floors at all, and otherwise underscoped such items as drywall repairs and paint.” Therefore, at best, the CRN provided only partial specificity, which is contrary to the requirements under Florida Statute § 624.155.

Additionally, the CRN contained citations to various statutory provisions, such as Florida Statute § 626.9541(1)(i)(3)(b), regarding misrepresentation of pertinent facts and policy provisions, but included no allegations to indicate to United what facts or policy provisions may have been misrepresented at any time prior to the filing of the CRN. This was exacerbated by the Insureds’ failure to state the policy language at issue with the requisite specificity. See Julien v. United Prop. & Cas. Ins. Co., 311 So. 3d 875, 879 (Fla. 4th DCA 2021). Instead, the CRN included references to the Loss Settlement and Loss Payment provisions, and specifically stated that “[t]here may be additional policy language relevant to this violation that may be discovered.” United argued, and the Court agreed, that the Insureds were essentially reserving the right to ambush United later on with additional information, which is contrary to the obligations that they have under Florida Statute § 624.155 to provide specifics in support of their bad faith claim.

As if that were not enough, the CRN contained an insufficient cure demand, meaning that it did not provide an actual opportunity for the carrier to cure the alleged violations. Rousso v. Liberty Surplus Ins. Corp., 2010 WL 7367059, *3 (S.D. Fla. 2010). In this case, the proposed cure on the face of the CRN was insufficient for several reasons. First, although the CRN purports to set forth that the amount of loss exceeded $50,000, the CRN Response indicates that the Plaintiffs’ representatives actually demanded $277,800.28. This alone required speculation as to what amount could be paid within the 60-day cure period to satisfy the Insureds’ so-called claims of bad faith. See Rousso, 2010 WL 7367059 at *5. Further, because the appraisal was demanded after the CRN was filed and because of the contradictions between the amount in the CRN and the amounts demanded by the Insureds’ representatives, it was impossible for United to determine what was actually being sought by the Insureds in connection with their appraisal demand. Finally, the supposed cure included undefined actions, such as “[a]ct[ing] fairly and honestly towards the Insureds . . . [and] [c]eas[ing] and desist[ing] all present and future bad faith actions with regard to the Insureds’ claim . . . .” Given that the CRN did not put United on notice of specifically what it did or did not do that was problematic, any further action taken or omitted by United would have been entirely based on speculation.

“The civil remedy notice must reflect a good-faith effort to inform the insurer of how it has fallen short of its obligations under the policy and what it can do to fix its shortcomings. The civil remedy notice is not the place for posturing or advocacy, and an effort to overstate a claim in a civil remedy notice may end up undermining it.” Rousso, 2010 WL 7367059 at *5. Thus, the Court in this case correctly determined that the CRN was insufficient as a matter of law and dismissed the case with prejudice. We are hopeful in the future that we can continue to use these arguments to benefit all carriers by helping them avoid unnecessary bad faith litigation.