Insurance Lobbyist Describes His Personal Story of Insurance Company Bad Faith

Chip Merlin | Property Insurance Coverage Law Blog | December 14, 2018

Insurance lobbyist Scott Johnson is a bulldog advocate for the insurance industry. He usually is trying to make policyholders, their attorneys or anybody other than the insurance claims executives and adjusters look bad to support the insurance industry’s legislative efforts. I fell out of my chair when he described his own personal claim and why the insurance industry needs strong oversight and civil penalties to keep it in line.

Here is his November 11, 2018 blog post:

I may have been in the insurance industry for 40 years, but…when it comes to Florida’s mediation statute, I’ve been a lay person. I had no idea how useful and easy (and free) state sponsored mediation could be. That’s until December 2010 when, late one holiday evening, our cozy fireplace popped a small flaming ember onto the rug immediately in front of the hearth.

In the seconds it took to find the TV remote and pause our movie, locate the appropriate fireside tool and flick the menacing cinder back from whence it came, a silver-dollar sized hole was seared into our high-end, deep pile carpet.

Anticipating our annual Christmas party my wife and I covered the scorch with a small foot stool. Later, I would patch it, hide it or, maybe, just ignore it.

My wife did not agree. Despite its small size, she was not content with a black spot in the middle of our main living space.

And so this instructive story begins.

I called my insurance agent and soon my insurance company dispatched a local claim representative accompanied by a local carpet expert to examine the damage. The carrier’s expert said…”It’s for sure this carpet can’t be patched. It’ll never match. You’ll have to replace the whole thing.”

My wife was giddy.

Small samples of the carpet cut from the back of our coat closet were sent to a laboratory in Indiana which confirmed the price per square foot. Unfortunately the insurer was only going to pay for the carpet in the room where the damage occurred and not in the two adjoining rooms.

I received a check for $2,200 ($3,200 minus a deductible of $1,000). It was a precise and accurate computation based on the value of the carpet and the square footage in the room where the damage occurred.

That did not satisfy my wife, an interior decorator who was no longer giddy.

So we got two estimates on our own that included carpet replacement in the two adjoining rooms. Both estimates exceeded $7,000. The lowest was $7200. I told the adjuster I needed $7,200 otherwise I would have two different colored carpets and an angry wife. I explained it’s an open concept with a great room and two adjoining rooms that flow into it, all of which can be seen from the front door. I said, the value of the home will suffer if the carpet doesn’t match.

At this point I should say that I had been very careful not to let the company know who I was. I didn’t want preferential treatment. I just wanted what I had paid for and what the contract said I was entitled to.

The adjuster said, “Sir, we have a line-of-sight rule”. I said, “Show me where it says that in the policy.” He said. “Sir, we don’t cover cosmetic damage”. I said, “Show me where it says that in the policy.”

Finally, I referenced Florida’s “Pair and Sets” statute with language that’s been used to require replacement of undamaged carpet in adjoining rooms. (See NOTE #1 below)

Also helpful was that, along with all the other policyholders of this carrier, I received an unrelated notice that when/if my policy renews it would be amended to limit coverage for “cosmetic damages” to $10,000.

I called the adjuster. Obviously cosmetic damages were covered, I explained, “why would you ever apply a limit to something if it isn’t even covered?” He was getting irritated.

Finally, totally frustrated, he told me that if I wanted any more money, I would have to seek state sponsored mediation, which I immediately did with just a phone call to the toll-free number provided in the envelope that transmitted the $2,200 claim check, which I never cashed. (See Note #2 below)

It’s been eight years since this happened but, my recollection is that the day before mediation the carrier’s attorney called and offered a higher settlement. “In grey area’s such as this” she said, “we see no need for the expense and hassle of mediation if we can reach an acceptable payment number with you.”

Ultimately, they agreed to give me $6,000 minus the $1,000 deductible for a total of $5000. If I had hired a public adjuster, it would’ve cost me up to 20% of $6200 ($7,200 minus $1000 deductible) a maximum yield of only $4800 minus the PA’s 20%. So I saved $200 by making one phone call.

While this case might be too small for most attorneys, it would have been better to hire one rather than a public adjuster as attorney fees are usually paid by the insurer.

Here’s the ironic conclusion.

I was lazy, and though I intended to, I didn’t replace the carpet. We just covered it with a small area rug and pledged to fix it someday. Someday never came, but…one day a carpet repair man came to the house and I showed him the scorch in the living room and explained how an expert from the insurance company said it couldn’t be repaired.

He exclaimed, “I can fix it and no one will ever know it’s there! I do it all the time.”

“How much?” I asked incredulously. “I wouldn’t charge anything for a job that easy”, he said. Then, he went to the closet, cut a small piece of carpet from the back corner, patched it over the scorch and within ten minutes… Voila’ …it was repaired.

Eight years later, I still have the same carpet and neither me nor my wife, “eagle-eye”, can even find the patch job.

I did not send the $5,000 back to the insurance company. (see Note #3 below).

Scott Johnson gets the same treatment that many policyholders receive every day from some insurance companies. Trained adjusters know they have to pay for cosmetic damage and they know the insurance laws regarding matching. Johnson just exposed the intentional scams so many policyholders face every day by the same insurance industry he is paid to represent. He was a potential victim trying to be duped by an insurance adjuster that knew better. Fortunately, Scott Johnson’s tenacity, self-education and experience helped him overcome this wrongful claims practice my clients and Merlin Law Group attorneys face every day.

Johnson should be congratulated for exposing another example of insurance company wrongdoing which can be shown to legislators and insurance commissioners.

Bad Faith May Arise Out Of Wrongful Misrepresentation in Application Denial

Chip Merlin | Property Insurance Coverage Law Blog | November 28, 2018

Suspicion runs rampant with some insurance companies when it comes to alleged arson. Even if they cannot prove the policyholder had anything to do with a fire, some adjusters cannot help to look for other ways to deny an insurance claim. In Hayes vs. Metropolitan Property and Casualty Insurance Company,1 an insurer was held liable for bad faith denial of an insurance claim even though the policyholder did not win the breach of contract action because the policyholder failed to file his lawsuit within the one-year statute of limitations.

Since it is a misrepresentation in the application case, let’s start with the application facts:

Hayes’s home at 480 South 6 Street, Springfield, Nebraska, was insured…under a homeowner’s insurance policy. Hayes used the detached garage of the residence as part of a home base for his plumbing business, and in addition to living there himself with his children, he also rented out the second and third levels of the residence to a tenant and her two children.

When Hayes insured the residence in 2007, Met argues that he indicated on his application that the premises were not used to conduct business, and were not used as rental property. However, the application, a five-page document, was not a model of clarity on either of these two points. It was apparent that the form was not filled out by hand because pre-printed “x’s” were used in the checked boxes. Hayes testified that he did not recall personally completing the application in 2007; that he worked with an independent insurance agent when it was filled out, and it was also likely filled out with information from his sister, because his signature “stamp” was used in the signature line instead of his actual handwritten signature, and she had his authorization to use the stamp.

With regard to tenants, the form asked whether “the residence [was] held exclusively for rental?” and a pre- printed “x” was marked next to the letter “N” in answer to that question. The form also asked for number of “families” and the number “1” was printed in that box. With regard to the business, the form asked whether “[a]ny farming or other business [was] conducted on premises?” and again, a box indicating “no” was marked with a preprinted x. Hayes testified at trial that while he did maintain some plumbing supplies at the property, very little of the plumbing equipment was located in the detached garage due to limited space. He also testified that he definitely did not “run” the plumbing business out of the premises, although customers would on occasion contact him there about doing a plumbing job. Further, Hayes had a separate commercial business insurance policy to cover the plumbing business in the detached garage, (although the address for this business was inadvertently and incorrectly listed on the insurance form as 680 South 6 Street, Springfield, Nebraska, rather than 480), and Hayes testified that he believed the commercial policy adequately covered his business. Hayes did not make a claim with regard to the shop or business as a result of the fire.

(Emphasis added).

Of course, there was no problem with Metropolitan accepting the premiums for six years until a fire happened in January 2013. The insurance company kept rejecting the policyholder’s proofs of loss, made numerous requests for documents and information and took numerous examinations so that by the time the insurance company got around to deny the claim for a misrepresentation in the application, approximately 18 months had passed.

The problem for the policyholder was that he did not file his lawsuit until after the denial and long after the 12-month suit limitation under the policy. The problem for Metropolitan was that the judge who dismissed the contract action because it was late-filed also found that Metropolitan had no reasonable basis to deny the claim and found bad faith on the part of Metropolitan.

The Circuit Court of Appeals noted:

While Met is correct that there must have been a contract at some point in time in order for there to be a bad faith claim, Met cannot insulate itself from a bad faith claim by creating the fiction that a contract never existed by voiding or rescinding it “ab initio.” The cases Met cites do not stand for the proposition that an insurer can do what it did here–discover there is liability after eighteen months of “investigating” and rescind based upon misrepresentation evidence that was within its knowledge five days after the fire….

There are a number of lessons from this case. Insurance companies must investigate claims promptly. Second, when insurance companies deny claims, they must have a reasonable basis to do so, and a reasonable basis cannot be based on an ambiguous application with ambiguous answers which do not indicate an intent to deceive the insurance company.

Insurance Joke For The Day

What’s the difference between an actuary and an accountant?

An actuary looks at his shoes when he talks to you. An accountant looks at your shoes.
1 Hayes v. Metropolitan Prop. & Cas. Ins. Co., No. 17-3005, 2018 WL 5852740 (8th Cir. (Neb.) Nov. 9, 2018).

Ambiguous Insurance Application Language Leads to Bad Faith Award

Marle Laur | Property Insurance Coverage Law Blog | November 25, 2018

A Nebraska court recently ruled that an insured was entitled to bad faith damages after the court found that an insurance application was ambiguous in its language.

In the case at hand, Eric Hayes (“Hayes”), the plaintiff and insured, owned a home in Nebraska. He used the detached garage of the home for his plumbing business, and he rented out the second and third stories of his home to a tenant. The home suffered a fire loss, and Hayes filed a claim with his homeowner’s insurer, Metropolitan Property and Casualty Insurance Company (“Metropolitan”). Metropolitan subsequently learned that Hayes was doing business out of his garage and was leasing out part of his home. However, Hayes had previously indicated on his insurance application that his residence was not used to conduct business and was not used as a rental property.

After its investigation, Metropolitan determined that Hayes had made material misrepresentations on his insurance application. As a result, Metropolitan denied Hayes’ claim and cancelled his policy. Metropolitan sent Hayes correspondence enclosing a check for all premiums Hayes had paid. Metropolitan also sent a check to Hayes’ bank to satisfy the mortgage on the home. The bank accepted the check.

Hayes’ brought suit against Metropolitan for breach of contract and bad faith practices. The U.S. District Court for the District of Nebraska ruled in favor of Hayes.

The Eighth Circuit affirmed the district court’s decision, finding that the application contained unclear language. Hayes also testified that he did not operate his business out of the garage, even though some business activities were conducted there. Additionally, the insurance form asked whether the residence was held exclusively for rental, which it was not. The case is Hayes v. Metropolitan Prop. and Cas. Ins. Co., Nos. 17-3005, 17-3064 (8th Cir. Nov. 9, 2018).

Colorado Supreme Court Clarifies Bad Faith Standard

Ashley Harris | Property Insurance Coverage Law Blog | November 7, 2018

A recent Colorado Supreme Court opinion in Schultz v. GEICO Casualty Company, clarifies the standard for bad faith in Colorado. In the opinion, the court discusses both claims for common law bad faith and statutory unreasonable delay or denial of benefits.

Most notably, the court concluded that the insurance company’s conduct must be evaluated based on the evidence before it when it made its coverage decision, and that the insurance company may not create new evidence to try to support its earlier coverage decision.

This means that when defending against a bad faith claim by attempting to show it acted reasonably, the insurance company can only present the information it considered at the time it made the decision to delay or deny the claim.

The opinion also restates the standard for common law bad faith, which requires the insured to “establish that the insurer acted unreasonably and with knowledge of or reckless disregard for the fact that no reasonable basis existed for denying the claim.” Travelers Ins. Co. v. Savio, 706 P.2d 1258, 1274 (Colo. 1985).

With regard to a statutory claim, Section 10-3-1115, C.R.S. (2018) provides, in part:

(1)(a) A person engaged in the business of insurance shall not unreasonably delay or deny payment of a claim for benefits owed to or on behalf of ay first-party claimant.

. . . .

(2)…for the purposes of an action brought pursuant to this section and section 10-3-1116, an insurer’s delay or denial was unreasonable if the insurer delayed or denied authorizing payment of a covered benefit without a reasonable basis for that action.

The court confirmed what both the Colorado Court of Appeals and federal courts interpreting Colorado law have consistently recognized, which is that the proof of a statutory claim differs from the proof required in a common law bad faith claim:

[W]hereas a common law claim requires proof that the insurer acted unreasonably and that it knew or recklessly disregarded the fact that its conduct was unreasonable, ‘the only element at issue in the statutory claim is whether an insurer denied benefits without a reasonable basis.’ (Citations omitted).

This opinion is great for Colorado policyholders, because it limits insurance companies to the information they had at the time they delayed or denied the claim, prohibiting them from hiring “litigation experts” to bolster an unreasonable delay or denial of the claim.

Timely Paying Appraisal Award Exempted Insurer from Breach of Contract and Bad Faith Claim

Marle Laur | Property Insurance Coverage Law Blog | November 3, 2018

In the case Biasatti v. GuideOne National Ins. Co., No. 07-17-00044-CV (Tex. Ct.App. Aug. 16, 2018), Steven Biasatti and Paul Gross, d/b/a TopDog Properties, brought suit against its insurance company, GuideOne National Insurance Company for breach of contract.

TopDog Properties (“TopDog”) was insured through a commercial insurance policy issued by GuideOne National Insurance Company (“GuideOne”). The property suffered a loss as a result of wind and hail damage, and TopDog put GuideOne on notice of the loss. The insurer inspected the property and determined that the damage totaled $1,896.88. GuideOne did not issue payment to the insured since the damage was less than the $5,000.00 deductible. When GuideOne did not change its coverage determination after a second inspection, TopDog requested appraisal of the claim. GuideOne responded that under the policy, only the insurer could invoke appraisal, and it declined to do so. The insured filed suit.

Months after TopDog filed suit, GuideOne invoked appraisal. The insured resisted, and the trial court refused to compel the appraisal. On appeal, the trial court was directed to grant GuideOne’s motion to compel appraisal.

The appraisers and umpire set the amount of loss at $168,808.00. GuideOne sent TopDog a check for $146,927.30, which reflected the amount awarded less the deductible and depreciation.

TopDog then filed a motion for partial summary judgment against the insurer for breach of contract and failure to timely pay the insured’s claim. The insurer argued, in its own motion for summary judgment, that since it had promptly paid the appraisal award, the insured’s claims against GuideOne could no longer stand. The trial court ruled in favor of GuideOne’s motion. TopDog appealed.

The appellate court affirmed the trial court’s ruling, holding that since GuideOne invoked the appraisal clause following the benefits dispute, as permitted by the policy, then timely tendered the appraisal award, TopDog received the benefits it was entitled to under the policy and did not demonstrate that any policy benefits were withheld.

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