Insurer Must Pay for Matching Siding of Insured’s Buildings

Tred R. Eyerly | Insurance Law Hawaii | September 11, 2019

    The Seventh Circuit found that the insurer was obligated to pay for siding of a building that was not damaged by hail so that it matched the replaced damaged portions of the siding. Windridge of Naperville Condominium Association v. Philadelphia Indem. Ins. Co., 2019 U.S. App. 23607 (7th Cir. Aug. 7, 2019). 

    A hail and wind storm damaged buildings owned by Windridge. The storm physically damaged the aluminum siding on the buildings’ sought and west sides. Philadelphia Indemnity, Windridge’s insurer, contended that it was only required to replace the siding on those sides. Windridge argued that replacement siding that matched the undamaged north and east elevations was no longer available, so Philadelphia had to replace the siding on all four sides of the buildings to that all of the siding matched. 

    Windridge sued and moved for summary judgment. The district court ruled that matching was required. The only sensible result was to treat the damage as having occurred to the building’s siding as a whole. 

    The policy was a replacement-cost policy. Philadelphia promised to “pay for direct physical ‘loss’ to ‘Covered Property’ caused by or resulting from” the storm, with the amount of loss being “the cost to replace the lost or damaged property with other property . . . of comparable material and quality . . . and . . . used for the same purpose.” The loss payment provision offered four different measures for loss, leaving Philadelphia free to choose the least expensive: (1) pay the value of the lost or damaged property; (2) pay the cost of repairing or replacing the lost or damaged property; (3) take all or any part of the property at an agreed or appraised value; or (4) repair, rebuild or replace the property with other property of like kind and quality. 

    The Seventh Circuit noted that the district court’s conclusion that the buildings as a whole were damaged – and that all of the siding must be replaced to ensure matching – was a sensible construction of the policy language as applied to the facts. Philadelphia’s interpretation – pay to replace only the specific panels of siding that were directly hit by hail, leading to two-tone buildings – was less reasonable. Regardless, the unit of covered property consider under the policy (each panel of siding vs. each side vs. the buildings as a whole) was ambiguous as applied to the facts, so the interpretation that led to coverage was favored. 

    Here, each building as a whole suffered direct physical loss as a result of the storm. The storm altered the appearance of the buildings such that they were damaged. Due to the extent of the damage and the lack of matching siding available on the market, the better construction of the ambiguous policy was to require Philadelphia to replace the siding on all four elevations of the buildings. The district court’s judgment in favor of Windridge was affirmed. 

Does An Insurer Act In “Bad Faith” If It Denies Coverage For A Hail Loss Based On Its Retained Engineer Defining Hail Damage As Functional Damage?

Edward Eshoo | Property Insurance Coverage Law Blog | September 9, 2019

In my last blog post, I wrote about the Seventh Circuit Court of Appeal’s recent decision in Windridge of Naperville Condominium Association v. Philadelphia Indemnity Insurance Company.1

There, the Seventh Circuit rejected Philadelphia’s argument that because only the south and the west elevations of siding on townhome buildings suffered “direct physical loss to covered property” within the meaning of the policy’s coverage grant, it need only replace the siding on those elevations. With respect to the phrase “direct physical loss,” the Seventh Circuit applied a common sense meaning, i.e., physical damage to tangible property causing an alteration in appearance, shape, color, or in other material dimension, which is what occurred to the siding. The Seventh Circuit also cited to its previous ruling in Advance Cable Company v. Cincinnati Insurance Company,2 where it concluded that “physical loss or damage” within the meaning of a property insurance policy’s coverage grant includes “cosmetic” denting from hail that physically alters the insured property (visible hail indentations to a metal roof). The Seventh Circuit in that case reasoned that “physical loss or damage” is not limited to damage that affects the functional integrity or diminishes the value of building components.3

As the Windridge and Advance Cable decisions establish, the Seventh Circuit has rejected a “functional damage” definition as the only definition of hail damage, which definition insurer-retained engineers consistently and routinely follow. Indeed, as the Seventh Circuit stated in Advance Cable, if an insurance company wishes to exclude cosmetic damage from coverage or if it wishes to limit hail damage to functional damage (reduction of water-shedding capability or reduction in the expected long-term service life of material), then it should write its policy that way.4

So, does an insurer act in “bad faith” if it denies coverage for a hail loss based on its retained engineer defining hail damage as limited to functional damage when the policy does not contain such a limitation? According to an Indiana federal district court in North Shore Co-Owners’Ass’n, Inc. v. Nationwide Mutual Insurance Company,5 the answer is yes. There, the insured alleged that Nationwide breached the insurance policy and acted in bad faith by failing to pay for cosmetic shingle damage. Nationwide retained Nederveld, Inc., a forensic engineering investigation and fire investigation consulting firm, to inspect the buildings’ roofs. Nederveld concluded that there was no hail damage because the shingles did not sustain functional damage; it only sustained cosmetic damage.

Nationwide moved to dismiss the bad faith claim, arguing it had a rational basis for its coverage position.6 The district court accepted as true for purpose of the motion the following allegations: Nationwide hired Nederveld, a preferred vendor, who defined hail damage to only include functional damage when the policy covered cosmetic damage; Nederveld reported to Nationwide that the roofs had no damage, even though the damage was open and obvious; and, in the course of denying the claim for cosmetic damage, Nationwide misrepresented its policy and conspired with Nederveld to deceive the insured. The district court concluded that these allegations raised an inference that Nationwide knew there was no legitimate basis for defining damage to only include functional damage and in denying coverage for the hail loss. The district court reasoned that if Nationwide conspired with Nederveld to conceal facts and to mislead the insured about the nature and the extent of the damage, then it is reasonable to infer that Nationwide’s actions were not the result of poor judgment, negligence, or a good-faith dispute; but, rather bad faith.

The district court’s ruling in North Shore Co-Owners’Ass’n, Inc. should serve as a warning to insurers to stop denying hail and wind damage claims based on an engineering definition of hail or wind damage not supported by the policy or be subjected to a bad faith claim. But nothing will surprise me, as insurers’ repeated failures to do the right thing is what has kept me in business for the past 34 years.
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1 Windridge of Naperville Condominium Association v. Philadelphia Indem. Ins. Co., 2019 WL 3720876 (7th Cir. August 7, 2019).
2 Advance Cable Co., LLC v. Cincinnati Ins. Co., 788 F.3d 743 (7th Cir. 2015).
3 See also Great Plains Ventures, Inc. v. Liberty Mut. Fire Ins. Co., 161 F.Supp.3d 970 (D. Kan. 2016) (“direct physical loss or damage” includes hail indentations on a metal seam roof regardless whether the indentations caused functional damage or merely cosmetic damage).
4 The two organizations that standardize forms and policies for property insurers, AAIS and ISO, have drafted cosmetic damage endorsements excluding coverage for exterior surfacing of walls, roofs, doors and windows if wind and/or hail damage simply affects the appearance of these surfaces, and not their ability to keep weather-related or other elements from entering the property.
5 North Shore Co-Owners’Ass’n, Inc. v. Nationwide Mut. Ins. Co., 2019 WL 3306212 (S.D. Ind. July 22, 2019).
6 Under Indiana law, bad faith arises when an insurance claim is wrongfully denied and the insurer knows there is “no rational, principled basis” for denying the claim. Erie Ins. Co. v. Hickman, 622 N.E.2d 515, 519 (Ind. 1993).

Remand From Federal Court After Passage of the “Hail Bill:” Section 542A.006 and the Election of Legal Responsibility

Kay Morgan | Property Insurance Coverage Law Blog | July 28, 2019

The infamous “Hail Bill” will be celebrating its second birthday this September 1, 2019. Whether there will be any celebrations is another question. The “Hail Bill” – the Chapter 542A amendment to the Texas Insurance Code—covers first-party claims arising from “forces of nature.”1 Within that chapter, one notably section is 542A.006, which allows an insurer to elect to assume its agent’s civil liability for the agent’s conduct related to the handling of a claim. This section has been seeing a lot of litigation of late.

On February 18, 2019, I authored a piece entitled, It’s a Brand-New Ballgame, which discusses the first four decisions out of the Texas federal courts regarding remand after insurers had taken Texas Insurance Code Section 542A.006 elections of responsibility for their agents. At that time, the score was tied–two wins for insureds who were remanded to state court, and two wins for insurers in which remands were denied allowing insurers to stay in federal court. Since February there have been more than a dozen decisions—the number increases weekly. Although, the Texas federal district courts remain in conflict, at the moment, remands appear to be in the majority. It does not take a crystal ball to perceive that the Fifth Circuit may weigh in at some point.

The statute allows an insurer to make an election to accept liability after a policyholder files a damage claim and before a policyholder files a suit (pre-suit) on that claim or after a policyholder files a lawsuit in state court (post-suit). If an election is taken pre-suit, insurers have a straight path to federal court when suit is filed, because, as a result of the election, there is diversity of the parties (plaintiffs from a different state than defendants) which makes federal court jurisdiction proper and a remand unavailable.

The cases that are in conflict presently concern post-suit elections. Two theories have evolved thus far which have resulted in the split of authorities in Texas federal district courts regarding the granting or denying of remands. One approach holds that as an insurer’s election under Section 542A.006 and the accompanying dismissal of the Texas defendant agent, results in improper joinder. This boot-strapping argument reasons that because the Texas defendant was improperly joined (as a result of the election), the plaintiff would not be able to recover against him/her in state court, so the suit should remain in federal court. Remand is denied.

The second approach focuses on the propriety of the “joinder” when the suit was filed in state court. These courts have remanded cases and concluded that when an insurer makes an election post-suit, joinder is not improper at that point even if the plaintiff can no longer recover against the Texas defendant. In following this second approach, one court explained its reasoning:

The Court cannot accept this argument [the first approach described above] as reasonable under the law or logic. Whether a non-diverse defendant is improperly joined is a binary question; the defendant is either a proper party when joined to suit or the defendant is an improper party when joined to the suit…. It does not follow that a non-diverse defendant [a Texas defendant in Texas state court] that is initially properly joined may become initially improperly joined. Again, the focus must be on the joinder.2

In another recent order, River of Life Assembly of God v. Church Mutual Insurance Company,3Judge Pitman ruled that the improperly joined argument based solely on a Section 542A.006 election “misunderstands the doctrine of improper joinder, which is fundamentally about joinder.” Judge Pitman wrote that it would not deny remand based on the Defendant’s Section 542A.006 election alone, noting that the election was made was over two months after the Texas defendant was joined initially. The trial court reasoned that the Defendant’s “election of responsibility therefore did not render Harris’ [the Texas Defendant] joinder improper because it did not preclude recovery against Harris until months after his joinder. If Harris is improperly joined, it must be for a reason that predated his joinder.”.

One of the most interesting parts of this River of Life order is in a footnote following the last statement above in which Judge Pitman writes:

Had the Court taken this approach in Jiang, it would not have denied remand solely based on the insurer’s election, which was made after the plaintiff joined the adjuster in her original petition. The Court now rejects the approach taken in Jiang in favor of the approach taken in this decision.4

This admission by a federal judge is telling.
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1 Tex. Ins. Code §542A.001(2) includes earthquakes, earth tremors, a wildfire, a tornado, lightning, a hurricane, hail, wind, snowstorms or rainstorms.
2 See Stephens v. Safeco Ins. Co., of Indiana, No. 18-595, 2019 WL 109395 (E.D. Tex. Jan. 4, 2019).
3 River of Life Assembly of God v. Church Mutual Ins. Co., 2019 WL 1767339, at *3 (W.D. Tex. April 22, 2019).
4 Id. at fn 2 (citation omitted, emphasis added). See Jiang v. The Travelers Home and Marine Ins. Co., No. 18-758, 2018 WL 6201954 (W.D. Tex. Nov. 11, 2018).

Nobody Seems to Know Why Hail Storm Losses Suddenly Began Rising in 2008

Brian K. Sullivan | Insurance Journal | June 17, 2019

In 2008, the year the stock market crashed and Barack Obama won the presidency, the U.S. was hit with a weather phenomenon little noted by anyone beyond the insurance industry.

The country’s losses from hail breached $19 billion in inflation-adjusted dollars that year, far exceeding the $8 billion to $12 billion norm seen previously.

By itself, that was a curiosity. But consider this: Damage from hail then continued to sit near $19 billion or higher in each of the next 10 years, according to Steve Bowen, a meteorologist for Aon, a risk assessment firm. It’s a surprising run of events that has spurred an ice-encased mystery among weather watchers: Why then, and why since?

“There are a number of scientific and socioeconomic reasons that can explain why U.S. thunderstorm losses have increased over time,” Bowen said by phone. “But it remains a bit of a headscratcher as to why 2008 seems to be the magic year that started this trend.”

Frozen Rain

Hail forms in thunderstorms when updrafts blow rain so high it freezes, according to the U.S. National Severe Storms Laboratory in Norman, Oklahoma. Those pellets grow as they collide with super-cold water drops that freeze on contact, adding more ice until gravity wins the battle with the wind and the pellets comes crashing out of the sky.

Hail stones come in all sizes. In 2010, for instance, an 8-inch (20 centimeters) Vivian, South Dakota weighing in at just under 2 pounds (0.9 kilograms) and setting a new U.S. record. However, it remains unclear whether the size of hail has anything to do with the rising costs.

Just one year, 2011, saw a dramatic increase in the number of hailstorms following 2008. With a La Nina holding sway in the Pacific, 2011 was marked by nine large outbreaks of severe thunderstorms and tornadoes from the Rocky Mountains through the Midwest and into the U.S. South, according to the National Centers for Environmental Information in Asheville, North Carolina.

“Hail is a bit challenging for us to confidently quantify because it is all based on eyewitness reports,” said Robert Jeffrey Trapp, head of the Atmospheric Sciences department at the University of Illinois. “It only gets reported if someone reports it. People are pretty bad at estimating size.”

While no one seems able to pinpoint why costs expanded starting in 2008, there are clues that suggest why they’re generally higher. There’s probably more things to hit, and they may be more valuable, the experts say.

“People are moving from the urban areas to the suburbs, and from the suburbs to the exurbs,” said Patrick Marsh, a warning coordination meteorologist at the prediction center. “And so cities are getting bigger. And as cities expand, that is more area for severe storms to impact. Ten years ago, the storm was outside the city limits. It may be in the city limits by now.”

More Expensive Things

While it’s logical to say there are more people with more expensive things that can be broken, that answer doesn’t completely answer what’s happening, said Ernst Rauch, head of Climate and Public Sector Business Development for Munich Re, a Germany-based reinsurer.

His company raises premiums as property values increase, he said, but the costs from hail are overwhelming the numbers in both the U.S. Midwest and Europe changing the probabilities.

The worst U.S. losses are in an area that starts midway through North Dakota and then follows the Great Plains into Texas, according to FM Global, a Rhode Island-based industrial insurer. Damaged roofs are among the biggest ticket items for FM Global’s clients.

From 1997 to 2006, FM Global’s clients lost about $32 million per year on average. From 2009 to 2018, however, those costs jumped to $130 million a year, according to data supplied by the insurer.

At the same time, forecasters say the increased losses have nothing to do with storm frequency. “It has more to do with what gets hit,” Marsh said. “One hail storm in Denver would take you 10% of the way to a $10 billion loss.”

While no one can say for sure what is driving the losses, the odds are they’ll continue to rise in a time of climate change, Trapp said.

Why 2008, and why since?

“It is an open research question,” said Andreas Prein, a researcher at the National Center for Atmospheric Research in Boulder, Colorado. “And as far as I know, nobody has an answer to that. It might be maybe just luck that in the last 11 years, hail storms just hit the big cities randomly.”

Insurance Appraisers May Determine the Cause of Loss

Mollie Pawlosky | Dickinson Law | November 1, 2018

In a case of first impression, Walnut Creek Townhome Association v. Depositors Insurance Company, the Iowa Supreme Court has held that insurance appraisers may determine the cause of loss in addition to the amount of damage.

Walnut Creek Townhome Association submitted a claim to Depositors Insurance Company for hail damage to the Association’s roofs.  Depositors felt that damage had been caused not by hail, but rather by defective shingles.  As part of the dispute, Walnut Creek exercised its right to an appraisal under the insurance policy.  Each party picked an appraiser, and an umpire was picked.  The three individuals then examined the roofs and prepared a report.

Two of the three on the panel opined that damage in the amount of approximately $1.4 million resulted from hail damage.  After a bench trial, the court found in favor of Depositors.  The trial court held that Walnut Creek had not proved that the storm was the only cause for damage.  The trial court also ruled that the appraisal award was not binding on the parties.

The Iowa Court of Appeals reversed, finding that the trial court was bound by the appraisal.  The Iowa Supreme Court granted further review, for the first time addressing whether parties are bound not only by appraisers’ decisions of valuation, but also by the appraisers’ causation decision.

The Court recognized the historical importance of insurance appraisal provisions, which can resolve insurance disputes without a formal lawsuit.  Since the 1940s, the Iowa Code has contained an approved appraisal provision for property insurance policies.  Iowa’s provision is similar to provisions adopted by 45 other states.  Courts are only allowed to set aside appraisal awards if the record demonstrates fraud, mistake, or misfeasance of the appraiser or umpire.  Depositors did not raise such arguments, so the appraisal award was binding.  The question was: Was the appraisal binding as to the amount of damage alone, or was the appraisal also binding as to what caused the damage?

Courts across the country are divided as to whether appraisers determine the cause-in-fact of damage.  The Iowa Supreme Court ultimately found that the “better-reasoned cases” hold that appraisers necessarily recognize causation when determining the amount of loss.  For example, if an appraiser is determining the amount of “storm damage,” the appraiser is not just assessing damage, but the appraiser is also stating that the damage is from a storm.

Without fraud, mistake or misfeasance, the district court was not free to make its own factual determination as to whether there was hail damage, even if the court disagreed.  The appraisers’ findings remained subject to coverage exclusions and limitations, which the trial court decides.  Thus, the Court remanded the case, with directions for the trial court to accept the appraisal award and then determine if any coverage defenses applied.