Recent Developments in Property Insurance Coverage Litigation
The below article appeared originally in the ABA Tips Fall 2012 Issue (48:1) of the Tort Trial & Insurance Practice Law Journal.
Authors: William A. Schreiner, Jr., Heidi H. Raschke, William R. Lewis,
Craig A. Jacobson, Christina M. Phillips, James P. Bobotek,
Jay M. Levin, Lisa A. Szymanski, Anthony B. Crawford,
and Christine T. Phan
–William A. Schreiner, Jr. is counsel in the Washington, D.C., office of Zuckerman
Spaeder LLP. Heidi H. Raschke is of counsel and William R. Lewis is a partner in the
Tampa office of Butler Pappas. Craig A. Jacobson is a partner in the Chicago office of Gordon
Rees LLP. Christina M. Phillips is an associate in the Chicago office of Childress
Duffy. James P. Bobotek is counsel in the Washington, D.C., office of Pillsbury Winthrop
Shaw Pittman LLP. Jay M. Levin is counsel and Lisa A. Szymanski and Anthony B.
Crawford are associates of Reed Smith LLP, resident in the firm’s Philadelphia office.
All are members of the firm’s Insurance Recovery Group. Christine T. Phan was an associate
in the Boston office of Zelle Hoffman Voelbel & Mason LLP at the time of this writing
and is currently assistant litigation counsel at Jenzabar, Inc. Mesdames Raschke and
Phillips are vice chairs of TIPS Property Insurance Law Committee. The authors wish to
thank Lisa Gehlbach of Zuckerman Spaeder LLP for her valuable assistance in preparing
the final document.
Recent Developments in Property Insurance Coverage Litigation:
I. Introduction
II. Business Interruption/Civil Authority
III. Collapse
IV. Covered Property
V. Exclusions
A. Earth Movement
B. Dishonest Acts
C. Faulty Workmanship
D. Mold and Water Damage
1. No Direct Physical Loss
2. Anti-Concurrent Causation
E. Ensuing Loss
VI. Damages
A. Hold Back
B. Other Insurance
VII. Obligations and Rights of the Parties
A. Representations and the Application for Insurance
B. Examinations Under Oath
C. Proof of Loss
VIII. Appraisal
A. Scope of Appraisal
B. Timeliness of Demand or Refusal to Appraise
C. Enforcing and Modifying Appraisal Awards
D. Miscellaneous Appraisal Issues
IX. Miscellaneous Issues
A. Who Can Sue on the Policy and Collect Proceeds?
B. Suit Limitations
C. Bad Faith
I. Introduction
For the first time in several years, this year’s survey of developments in
property insurance law is not dominated by cases arising out of any one
particular substantive area. We discuss notable cases in many areas, but
there is no discernible overall trend or dominance by any singular substantive
event, like Hurricane Katrina or Chinese-manufactured drywall,
giving rise to one large set of claims. For example, we discuss the Seventh
Circuit’s rather unique application of a continuous trigger theory, more
often applied to a liability policy, to a property policy. We also look at
interesting cases involving the insurers’ reliance on, and some policyholders’
reluctance to participate in, examinations under oath.
II. Business Interruption / Civil Authority
The recent decision of Millennium Inorganic Chemicals Ltd. v. National
Union Fire Insurance Co. of Pittsburgh, PA1 adds to the relatively small
number of cases that have interpreted contingent business interruption
(CBI) coverage. In Millennium, the insured, a global producer of titanium
dioxide, claimed for business interruption losses it sustained due to the
loss of the natural gas supply at its plant in Western Australia. At issue
was whether the natural gas production facility was a “direct contributing
property” under the insured’s contingent business interruption coverage
even though the insured purchased the gas from an intermediary, which in
turn bought the gas from natural gas producers for resale. Millennium’s
policies provided coverage for loss resulting from the interruption of business
caused by damage to or destruction of any of the real or personal property
described below and referred to as CONTRIBUTING PROPERTY(IES)
and which is not operated by the Insured, by the peril(s) insured against during
the term of this Policy, which wholly or partially prevents delivery of
materials to the Insured or to others for the account of the Insured and results
directly in a necessary interruption of the Insured’s business.2
The policies did not identify specific contributing property or define
“direct supplier” and “contributing property.” Neither the insurer nor
the insured argued that the language was ambiguous, but each offered
a contrary application of the CBI coverage. The court noted that the gas
company was a “supplier” of gas to Millennium, notwithstanding the
intermediary from which Millennium contracted to receive the gas. It held
that although the parties intended for CBI coverage to apply only to direct
contributing properties, there was no extrinsic evidence reflecting the
specific meaning of “direct” or how the coverage would apply in the context
of the insured’s natural gas supply. Therefore, the court relied on contra
proferentem and resolved any ambiguity in favor of the insured. The court
concluded that the “natural gas production facility was a ‘direct contributing
property’ to Millennium’s [o]perations, so as to come within the CBI coverage”
of the policies, because the gas facility physically provided a direct supply of
natural gas to Millennium’s premises despite the fact that the gas facility and
Millennium did not have a direct contractual relationship.3
III. Collapse
The question of whether coverage for “collapse” requires a building to
actually collapse or merely be structurally damaged and in danger of collapse,
albeit standing, continues to generate interesting case law. In Kappa
Ethanol, LLC v. Affiliated FM Insurance Co.,4 the Eighth Circuit affirmed a
trial court’s ruling that a property policy covered a collapse of ethanol
tanks where the tanks had shifted but remained standing, although it remanded
the case for a new trial on the issue of how imminent the collapse
of the tanks needed to be to trigger coverage.
The ethanol tanks in Kappa Ethanol were stainless steel tanks that began
to shift off of their concrete foundation rings soon after construction. The
ethanol plant owner reset the tanks on their foundations and replaced
the fill underlying them, but its property insurer declined to cover its
claim, citing the policy’s exclusions for faulty workmanship and settling.
The policy provided coverage for a collapse, but only as an exception
to the exclusion for loss caused by settling. In the ensuing coverage
case, the insurer did not object to a jury instruction that allowed the jury
to find a “collapse” without finding that the tanks were “in imminent danger
of falling down.”5 The jury found that $4 million of Kappa’s damages
were caused by a collapse.6
On appeal, the Eighth Circuit held that the insurer had waived its
argument that the loss was caused by a collapse because it had not objected
to the jury instruction.7 It held, however, that Nebraska law may
require the collapse to be “imminent,” and it remanded the case for a
jury finding on whether the collapse of the tanks was imminent.8
The Florida District Court of Appeal also confronted this issue in
Kings Ridge Community Ass’n, Inc. v. Sagamore Insurance Co.,9 where the
roof trusses of the insured’s clubhouse “deflected twelve inches” downward
and a drop ceiling similarly lurched downward. The policy defined
“collapse” as “an abrupt falling down or caving in of a building or part of a
building”; it also provided that a building “in danger of falling down or
caving in” or that is “standing . . . even if it shows evidence of cracking,
bulging [or] bending, leaning . . .” would not be considered to have collapsed.
10 The insured sued after the insurer denied the claim, and the
trial court granted the insurer’s motion for summary judgment, holding
that the clubhouse was not in a state of collapse that would trigger
coverage.11
The appellate court disagreed. It held that the downward movement of
the roof trusses and the drop ceiling constituted a “falling down” of those
elements of the building sufficient to trigger coverage; moreover, those
parts were not “standing” when a dictionary definition of that word,
meaning “upright on the feet or base,” was applied to the policy.12
IV. Covered Property
In Tracy v. USAA Casualty Insurance Co.,13 the District of Hawaii had to
decide whether plaintiff could bring a breach of contract claim against
her insurer for failing to pay a claim for stolen property under her homeowners
policy. Her policy provided “coverage for loss to trees, shrubs, and
other plants.”14 She filed a claim for the theft of twelve marijuana plants
that she “lawfully possessed, grew, nurtured and cultivated . . . consistent
with the laws of the State of Hawaii,” which allows individuals “to possess
and grow marijuana for medical purposes.”15 USAA agreed to pay the
claim and issued a check, but when the insured complained that it was
not enough, USAA refused to make any further payments because it believed
plaintiff did not have an insurable interest in the plants.16 Relying
on the Hawaii Legislature’s intent that users of medical marijuana not
face criminal penalties,17 the court predicted “the Hawai’i Supreme
Court would hold that a qualifying patient who is in strict compliance
with the Hawai’i medical marijuana laws has a lawful interest [and thus
insurable interest] in her marijuana supply.”18 Despite this prediction,
the court granted the insurer’s motion for summary judgment, holding
that “[p]laintiff ’s possession and cultivation of marijuana, even for State authorized
medical use, clearly violates federal law. To require the insurer
to pay insurance proceeds for the replacement of medical marijuana plants
would be contrary to federal law and public policy.”19
In Gilbert v. Allstate Insurance Co.,20 plaintiff owned a building as a tenant
in common that he insured solely in his name.21 After a fire destroyed
the building, plaintiff filed a claim and defendant paid him for one-half of
the value of the property.22 The court held that “[w]hen two co-tenants
own real property which is damaged by a fire and insurance is procured
in the name of only one co-tenant, recovery under the policy is limited
to the insured co-tenant’s one-half interest in the real property.”23
V. Exclusions
A. Earth Movement
The Supreme Court of New Hampshire held that an earth movement
exclusion did not bar coverage for damage caused when a cellar chamber
holding the insured’s septic pump gave way under the pressure of heavy
groundwater, allowing water to ruin the pump. In Barking Dog, Ltd. v.
Citizens Insurance Co. of America,24 the insured’s septic system failed during
a period of heavy rain and melting snow. Although its expert opined that
the underground septic box failed due to water pressure and the pressure
of water-swollen earth, the insurer declined coverage based on the earth
movement exclusion.25 In its declaratory judgment action, the insured argued
the earth movement exclusion gave way to the “Broad Form Water
Damage” endorsement it had purchased, which covered damage caused
by “water under the ground surface pressing on . . . foundations, wall,
floors [or] basements.”26 After the trial court held that the endorsement
trumped the earth movement exclusion, the insurer appealed. The New
Hampshire Supreme Court, affirming, rejected the insurer’s argument
that a subterranean septic chamber did not have a “wall,” “ceiling,” or
“floor” as those terms are commonly used.27 It also held that to the extent
the two conflicting provisions of the policy, the earth movement exclusion
and the water damage endorsement, were in conflict, the resulting ambiguity
was to be read in favor of coverage: “a reasonable layperson would
not understand that the additional coverage he paid for does not provide
such coverage.”28
Also during the survey period, a Massachusetts appellate court affirmed
a trial court’s holding that the earth movement exclusion barred coverage
for damage to a condominium unit where the insured’s expert opined that
the damage resulted from “hydro-compaction related to a leak in a water
pipe.”29 The insured in Audubon Hill South Condominium Association v.
Community Association Underwriters of America, Inc.30 argued that another
portion of the expert’s opinion, i.e., that the damage to the unit occurred
suddenly, made the loss a covered collapse despite the earth movement
exclusion, but the court held that anti-concurrent causation language in
the earth movement exclusion barred coverage.31
B. Dishonest Acts
In 2315 St. Paul Street v. Hartford Fire Insurance Co.,32 an insured sought
coverage under a builder’s risk policy for a demolition contractor’s theft
of fixtures, construction equipment, and other items. The demolition
contractor was given unsupervised access to the property and had removed
the items without the owner’s permission while the property’s
supervisor was away on vacation.33 Upon learning of the items’ removal,
the property supervisor contacted the demolition contractor and entered
into a second contract under which the demolition contractor agreed to
“fulfill the terms of his original contract” and “correct and repair any damage
and replace any stolen or destroyed items at his expense.”34 When the
demolition contractor failed to honor the second contact, the insured contacted
law enforcement and filed an insurance claim for the theft.35 The
insurer denied the claim, contending the policy’s entrustment exclusion
precluded coverage because “the loss in question was caused exclusively
by dishonest and criminal acts of a contractor to whom you entrust[ed]
the property.”36 The trial court granted the insurer’s motion for summary
judgment, finding that the demolition contractor was responsible for the
theft and that the entrustment exclusion applied because the insured had
entrusted the property to the demolition contractor by providing the contractor
with “unfettered access to the property . . . and with the confidence
that he would complete the demolition work and secure the building.”37
C. Faulty Workmanship
In 1765 First Associates, LLC v. Continental Casualty Co.,38 a tower crane
collapsed on a construction site. The insurer agreed to pay for certain
costs arising from damage to and cleanup of the construction site and
building stemming from the crane collapse.39 Relying on the faulty workmanship
exclusion in the builder’s risk policy, the insurer refused to reimburse
the insured for costs associated with construction delays resulting
from the collapse.40 In entering declaratory judgment for the insured,
the court held that
the Faulty Workmanship Exclusion, as it is most naturally read, does not
apply to losses related to accidents or equipment malfunctions during con-struction. . . .
[T]he Faulty Workmanship Exclusion applies only to losses attributable to the quality
of the constructed property and arising from defects in the materials or process used
by the insured or its agents to construct the property, that provision does not exclude
losses incurred during construction associated with the crane collapse.41
D. Mold and Water Damage
- No Direct Physical Loss
In Miller v. Safeco Insurance Co. of America,42 the Seventh Circuit affirmed
the somewhat unique application of a continuous trigger to a first-party
insurance loss. The case presented the question of whether the insureds
experienced an “accidental direct physical loss to property” during the
policy period.43 After purchasing a home, the insureds discovered extensive
water and mold damage. Their insurer denied the claim on the basis that
the claimed damage did not occur during the policy period.44 With respect
to the question of when the loss occurred, the court observed thatWisconsin
law applies the “continuous trigger theory to determine the date of
injury in cases where the exact date of harm is uncertain and potentially occurring
over several policy periods.”45 The court was not persuaded that
this trigger theory is only applicable to liability insurance cases but also
found that the loss manifested during the policy period.46 Safeco argued
that “because the district court found that the property was a total loss
when the [insureds] discovered the problem, the water leakage and mold
growth [could not] have caused any direct physical loss to the property during
the policy period.”47 The court disagreed, stating, “That the degree of
damage put the home beyond repair doesn’t mean water leakage wasn’t still
causing further direct physical loss to the property during the policy
period.”48 The court also held that Safeco could not rely on any policy exclusions
because the insureds did not receive the policy until after they discovered
the loss. “Wisconsin law provides that an insurer cannot rely on a
policy’s exclusions when it fails to inform the insured of those terms.”49
In Universal Image Productions, Inc. v. Federal Insurance Co.,50 the court
affirmed summary judgment in favor of the insurer after finding that mold and
bacteria contamination did not constitute “direct physical loss or damage.”51
The insured was a tenant in a building where a “significant microbial
contamination” was identified in the heating, ventilation, and air conditioning
system, which required the system to be shut down (during 100 degree heat)
and the insured to relocate from the first floor to the third floor during remediation.52
The insured made a claim for lost leasehold improvements, cleaning and
moving expenses, and lost business income.53 The insurer denied the claim, arguing
that the insured had not suffered a “direct physical loss.”54 The policy did not
define “direct physical loss or damage,” but the insurer argued that mold and bacterial
contamination did not qualify because no property of the insured was
“structurally damaged.”55
The court held that although the insured had suffered an inconvenience,
it had not demonstrated that it had experienced any “tangible
damage” to its property.56 The court held the claimed cleaning and moving
expenses were economic, not tangible, losses.57
2. Anti-Concurrent Causation
During the survey period, three cases dealt with the application of anticoncurrent
causation issues in water damage claims. This issue often
comes up when determining whether wind, which is often covered, or
water, which is frequently excluded or limited, caused the loss in question.
In Robichaux v. Nationwide Mutual Fire Insurance Co.,58 the insurer denied
coverage for an insured’s claim for property damage following Hurricane
Katrina. The trial court granted summary judgment for Nationwide, finding
that the insureds failed to create an issue of fact as to whether their
home was damaged by wind or destroyed by flood.59 Although the fact
that the home was ultimately destroyed by flood was not disputed, the
Supreme Court of Mississippi held that it was error for the trial court
to have concluded that there was no issue of fact as to whether the
home was damaged by wind prior to the storm surge.60 Not all the damage,
the court found, was caused by a simultaneous convergence of wind
and water. Therefore, the anti-concurrent causation clause would not
apply to damage caused by wind prior to the storm surge.
Two Massachusetts cases addressed anti-concurrent causation clauses
in the context of surface water exclusions. In Boazova v. Safety Insurance
Co.,61 the insured brought a claim for water damage to her home,
which was built against the side of a hill with a full basement and garage
below the house. A concrete patio was added at the rear of the house at a
grade higher than the foundation. There was no waterproofing barrier or
membrane between the patio and the rear wall of the house to prevent
water from entering the home’s wooden frame. Extensive interior wall
damage was found during kitchen renovations.62 The insured informed
the insurer that ground water, surface water, or both entered the home
through the sill and rear wall where the patio was added.63 The insurance
company denied the insured’s claim because the damage was “caused by a
combination of surface water, deterioration, settling, and improper construction
of the concrete patio. . . .”64 The court agreed with the insurer,
unconvinced by the insured’s argument in favor of coverage built on a distinction
between “hidden seepage” and “surface water.”65 Because the
surface water exclusion included anti-concurrent causation language,
the court held that it barred coverage where the loss was caused by a combination
of covered and excluded perils.66
The same court reached the same conclusion in Surabian Realty Co. v.
NGM Insurance Co.67 The insured made a claim for damage caused when a
parking lot drain, which backed up during a heavy rainstorm, caused
flooding in the building. The insured argued that the loss was covered
as a result of “water that backs up or overflows from a sewer, drain or
sump.”68 The court found that although the loss did result in part due
to a backup, it was also caused by the accumulation of surface water.69
As a result, the policy’s anti-concurrent causation provision excluded coverage
for damage caused by surface water “regardless of any other cause or
event that contributes concurrently or in any sequence to the loss.”70
E. Ensuing Loss
In Vision One, LLC v. Philadelphia Indemnity Insurance Co.,71 the insured
was developing a condominium project.72 Temporary shoring, which was installed
during construction to support the pouring of a concrete slab, failed; as a result,
the framing, rebar, and newly poured concrete crashed onto a lower level.73
The carrier denied coverage, contending that the builder’s risk policy excluded
faulty workmanship and defective design.74 The insured contended that the
resulting loss due to the faulty workmanship was the collapse of the concrete
and thus coverage should be extended.75 The court found that ensuing loss
clauses limit the scope of what is otherwise excluded under the policy because
they ensure that any ensuing loss that is otherwise covered remains covered
even if the original event is never covered.76 Applying this reasoning, the court
held that the collapse resulting from the faulty workmanship was covered due to
the ensuing loss clause.77
In Sprague v. Safeco Insurance Co.,78 the insured discovered that the supports
of a deck were improperly constructed and made a claim to its
insurer.79 The insurer denied coverage based on the defective construction
exclusion.80 The insured contended that the deck was in a state of
imminent collapse due to the rot and resulting damage from the defective
construction.81 The court found that the damage to the deck was excluded
by the policy because the rot and imminent collapse was only to the deck
itself.82 There was no damage to any other property that would have triggered
coverage under the ensuing loss provision.83
In Friedberg v. Chubb & Son, Inc.,84 the insureds discovered extensive
water damage to their home and requested coverage from their insurer.85
After an investigation, the insurer denied coverage, contending that the
water damage was a loss caused by faulty construction and therefore
was excluded from the policy.86 The insureds argued that the water damage
was an ensuing loss and thus an exception to the exclusion.87 Examining
Minnesota law, the court determined that an ensuing loss provision
applies only to “distinct, separable, ensuing losses.”88 The damage due to
faulty construction and resulting water intrusion were not “separable and
distinct perils.”89 The interpretation advocated by the insureds, it held,
would “nearly destroy the exclusion.”90 In the court’s view, “[t]o define
a loss that is contributed to, made worse by, or in any way results from
faulty construction as only the cost of remedying the construction defect
itself would be an unnatural reading of the language.”91
VI. Damages
A. Hold Back
In Florida Insurance Guaranty Association v. Somerset Homeowners Association,
Inc.,92 the Florida District Court of Appeal reversed a trial court ruling
and held that plaintiff properly withheld depreciation.93 After suffering
hurricane damage to its condominiums, defendant filed claims with its
insurer; when a dispute arose about the amount of loss, it was submitted
to appraisal.94 The umpire issued an award for both the replacement cost
value (RCV) and the actual cost value (ACV) of the loss.95 The insurer
neither timely paid the award nor contested it, and the insured obtained
a final judgment of $6,262,339 from the trial court as the ACV.96 The
insurer appealed on the grounds that the appraisal award included
$951,262 attributed to depreciation.97 The policyholder countered that
it should receive “the depreciation under the doctrine of prevention of
performance because [the insurer] failed to timely pay the appraisal
award.”98 Under the language of the policy, “an insured must actually
repair or replace the damage as a condition precedent to payment of
replacement costs.”99 The court found this policy language to be unambiguous
and remanded the case to the trial court to deduct the
depreciation.100
B. Other Insurance
In Tyler v. Pacific Indemnity Co.,101 two parties entered into a land contract
for the purchase and sale of real property. Although the seller had existing
property insurance on the property, the land contract required the purchaser
to obtain property insurance on the property.102 Thus, two property
insurance policies were in effect at the same time on the property.103
After a fire occurred, the purchaser made a claim under his property policy.
The insurer denied the claim and, as a result, the purchaser filed suit
against the insurer.104 One issue on summary judgment was the insurer’s
reliance on the policy’s “other insurance” clause, which required a pro
rata allocation in the event that other property insurance applied to a covered
loss. The Eastern District of Michigan, applying Michigan law in
connection with “other insurance” clauses, held that those clauses “only
apply [when] the applicable insurance policies cover the same interests
in the same property.”105 In entering summary judgment in favor of the
purchaser, the court stated that “the policies were on the same property
and against the same risks[,] but on different interests and payable to different
parties. . . . As such, the other insurance clause does not apply.”106
VII. Obligations and Rights of the Parties
A. Representations and the Application for Insurance
In Sexton-Walker v. Allstate Insurance Co.,107 the insurer, investigating a
claim for water damage, learned the insured had made several misrepresentations
on her insurance application. The insured answered “yes” in
the application when asked whether “the dwelling . . . [was] on a solid
and continuous foundation,” but the insurer discovered “the property
was a mobile home and therefore not on a solid and continuous foundation.”
108 The insured also stated in the application that the property was
regularly occupied in the days and evenings, but she conceded in her
examination under oath that she “mostly live[d] in [another state].”109
Finally, the insured had made nine property claims in the last five
years, despite answering “none” when asked to describe her five-year
loss history at the residence.110 On appeal, the Fifth Circuit affirmed
the district court’s grant of summary judgment, finding the misrepresentations
were material and that there were no genuine issues of fact for
trial.111
In Landmark American Insurance Co. v. Moulton Properties, Inc.,112 the
insured made a claim for damage related to Hurricane Dennis. During
the claim adjustment, the insurers discovered that the “damage at issue
was not from Hurricane Dennis, but instead was unrepaired or partially
repaired damage from Hurricane Ivan.”113 The insured’s insurance broker
had previously submitted a property summary to the insurers during
the policy application process representing that the repairs of prior storm
damage from Hurricane Ivan were complete.114 The insurers rescinded
coverage and filed suit for declaratory judgment based upon the misrepresentations
made by the broker about the status of repairs for damage
related to Ivan.115 The district court rejected all of the insurers’ arguments
for rescission, and the insurers appealed.116 On appeal, the Eleventh
Circuit considered whether the insurance broker was acting as an
agent of the insured when it submitted the alleged misrepresentations
regarding the status of repairs.117 The court found that the broker was
in fact the agent of the insured and held that, based on Florida law and
the language of the brokerage contracts, all representations made by the
broker were attributable to the insured.118 The case was remanded to the
district court for a finding of whether the representations were material.119
In Landmark American Insurance Co. v. Moulton Properties, Inc.,112 the
insured made a claim for damage related to Hurricane Dennis. During
the claim adjustment, the insurers discovered that the “damage at issue
was not from Hurricane Dennis, but instead was unrepaired or partially
repaired damage from Hurricane Ivan.”113 The insured’s insurance broker
had previously submitted a property summary to the insurers during
the policy application process representing that the repairs of prior storm
damage from Hurricane Ivan were complete.114 The insurers rescinded
coverage and filed suit for declaratory judgment based upon the misrepresentations
made by the broker about the status of repairs for damage
related to Ivan.115 The district court rejected all of the insurers’ arguments
for rescission, and the insurers appealed.116 On appeal, the Eleventh
Circuit considered whether the insurance broker was acting as an
agent of the insured when it submitted the alleged misrepresentations
regarding the status of repairs.117 The court found that the broker was
in fact the agent of the insured and held that, based on Florida law and
the language of the brokerage contracts, all representations made by the
broker were attributable to the insured.118 The case was remanded to the
district court for a finding of whether the representations were material.119
B. Examinations Under Oath
An increasing number of cases are holding that policyholders must submit
to an examination under oath (EUO) and answer questions as a condition
precedent to coverage; failure to comply can bar recovery under the insurance
policy. Occasionally, these cases have held that an insurer has the
right to examine an insured that no longer has an interest in the property.
For example, in Citizens Property Insurance Corp. v. Ifergane,120 the insureds
submitted a claim under a wind-only dwelling policy for damage from
Hurricane Wilma. The insurer made an initial payment and then requested
the EUOs of both insureds when it became concerned the property
had suffered damage not covered under the policy.121 The insureds
filed for divorce shortly after the claim was submitted, and as part of the
divorce Alexandra Ifergane “executed a quit claim deed to Haim Ifergane
granting him ‘all right, title, interest, claim and demand’ in the subject property.”122
Haim Ifergane submitted a proof of loss and sat twice for his EUO.123
However, Alexandra refused to appear, “asserting that she was not
obligated to do so because she had assigned [to her ex-husband] all of her
rights and interest in the property.”124 The insurer filed suit, seeking a
declaratory judgment that, among other things, the “assignment did not
relieve [Alexandra] of her obligations under the policy.”125
The trial court found that Haim was entitled to coverage as a resident
spouse co-insured who complied with the policy’s post-loss requirements,
and that Alexandra’s “alleged failure to comply could not be imputed to
him as an innocent co-insured.”126 It also granted Alexandra’s motion
to dismiss based on the fact she transferred her rights and never made a
claim for the insurance proceeds.127 The appellate court reversed, finding
that the insurer was entitled to an EUO from Alexandra as a named
insured and resident spouse with potentially material information, regardless
of the assignment.128 The appellate court further held that Alexandra’s
refusal to submit to an EUO precluded any recovery under the policy,
even for her ex-husband, because submitting to an EUO was a condition
precedent to coverage.129
In Portside Investors, LP v. Northern Insurance Co. of New York,130 the
owner of a pier on the Delaware River filed an insurance claim after the
pier collapsed. Shortly thereafter, the insured’s principal was indicted for
“involuntary manslaughter and other offenses related to ignoring warnings
by engineers and others that the pier was unsafe and in danger of imminent
collapse.”131 The insurer requested the EUO of the indicted principal to
investigate his knowledge of the pier’s decay before its collapse and refused
to further adjust the claim without his EUO.132 On appeal, the insured
claimed this position was a “bad faith delay tactic, as there was no reason
to believe [the principal] could do anything at that point except exercise
his Fifth Amendment rights throughout the course of his criminal
case.”133 The appellate court affirmed the trial court’s denial of the insured’s
statutory bad faith claim related to the EUO request, noting that,
under the insurance policy, “coverage was unavailable for the . . . loss
caused by ‘decay’ unless the decay was ‘hidden decay,’ ” and that the “indictment
gave reason to believe [the pier’s] collapse resulted from something
other than hidden decay.”134 Thus, the EUO request sought information
material to the coverage analysis and was a reasonable part of the
investigation into whether the pier decay was actually hidden decay
unknown to the insured before the collapse.135
C. Proof of Loss
In Telerico v. Nationwide Mutual Fire Insurance Co.,136 the insureds submitted
a notice of claim after their home was damaged when its roof sagged
and leaked. The insurer began an investigation of the loss but closed its file
after the insured failed to submit a completed proof of loss as requested.137
The insureds filed suit several years later, and the insurer moved for summary
judgment claiming the insureds could not recover under the policy
for six reasons, including their failure to timely return their proof of loss
as required under the terms of the policy.138 The policy stated that the
insured was required to submit a sworn proof of loss within sixty days
after requested by the insurer.139 In their depositions, the insureds both testified
that they had “no memory” of sending the proof of loss to the
insurer.140 However, one of the insureds submitted an affidavit after his
deposition asserting that he had properly mailed the requested information
to the insurer.141 The district court granted summary judgment to the
insurer because the insured had not established that the proof of loss was
properly mailed and timely received, which was a condition precedent to
recovery under the policy.142 Regarding the affidavit, the court followed
the Sixth Circuit’s instruction that a factual issue is not created when a
party files an affidavit that contradicts his earlier deposition testimony
after a motion for summary judgment has been made.143
VIII. Appraisal
A. Scope of Appraisal
In Auto-Owners Insurance Co. v. Second Chance Investments, LLC,144 the
issue was whether the district court erred by denying the insurer’s motion
to compel appraisal to determine whether the fire resulted in a total loss
to the insured’s property. In this case, the property caught fire and certain
areas of the residence were charred and burned, while other areas were
completely destroyed.145 The insured filed a proof of loss with the insurer
claiming that it was a “total loss” and asserted it was entitled to payment
of the policy limits.146 The insurer demanded appraisal to resolve both
the scope of the damage and the amount of the loss.147 The insured,
which contended an appraisal was inappropriate, insisted that it would
proceed only if the appraisal panel’s determination would be binding as
to whether a total loss occurred.148 The insurer then filed suit, seeking
a declaration that all issues be submitted to appraisal, including the determination
as to whether the property suffered a total loss.149 The district
court denied the motion, holding that there were genuine issues of material
fact and ordering that the issue of whether the property suffered a
total loss be submitted to a jury.150
The appellate court affirmed, holding that the determination as to
whether fire damage caused a total loss is beyond the scope of an appraisal
panel’s authority.151 Noting that questions of law are outside the scope of
an appraiser’s powers, the court held that appraisers do not have the
authority to determine liability under an insurance policy.152 Therefore,
the district court did not err in concluding that a jury must make the
determination.
In Quade v. Secura Insurance,153 the insured submitted a claim for storm
damage to several buildings. The insurer paid for some of the damages
but determined that the roofs of the buildings were not covered and
informed the insured that it should initiate an appraisal if it disagreed.154
Instead, the insured filed suit, arguing that the appraisal clause did not
apply to its claim for damage to the roofs because the policy covered roof
damage.155
The district court concluded that determining the amount of loss
under the appraisal clause included a causation element and ordered the
parties to appraisal.156 The appellate court reversed the decision, conclud-
ing that resolution of the claim required determination of legal questions.
157 It held that appraisers have the authority to decide the “amount
of loss” but may not construe the policy or decide whether the insurer
should pay.158 Thus, the appraisers must necessarily determine the cause
of the loss as well as the amount necessary to repair the loss, but cannot
go beyond that scope and interpret policy exclusions.159
B. Timeliness of Demand or Refusal to Appraise
In Amerex Group, Inc. v. Lexington Insurance Co.,160 the Second Circuit
held that an insurer’s appraisal demand made six years after the loss was
still timely in a case where the insured contributed to the delay. In Amerex,
a 2001 flooding loss resulted from an equipment collapse that set off sprinklers.
Two years later, the insured submitted its proof of loss to its primary
and excess property carriers. The primary insurer paid its policy limits, and
the insured sought to collect the remaining $6.3 million from its excess insurers.
Those insurers ultimately denied the claim in 2006 based on the
insured’s failure to document the claimed loss of its business income.
The parties then proceeded to mediation, in which the insurers made a settlement
offer.161 The insured rejected the offer and filed suit in 2007.162
In response, the excess insurers moved to compel appraisal.163 The
insured objected, arguing the demand was untimely and was made only
to preclude the insured from prosecuting its claims and obtaining discovery.
164 The district court granted the excess insurers’ motion.165 On appeal,
the insured claimed that the excess insurers’ appraisal rights were waived
because they had failed to invoke them within a reasonable time.166
The Second Circuit affirmed the appraisal demand. The court found
that the insurers did not waive their appraisal rights by asserting them
after the insured initiated litigation because much of the delay was due
to the insured’s inaction, i.e., specifically, its failure to promptly produce
necessary documents.167 Furthermore, the parties engaged in good faith
negotiations prior to the appraisal demand.168
C. Enforcing and Modifying Appraisal Awards
In First Protective Insurance Co. v. Hess,169 First Protective challenged an
appraisal award because the trial court affirmed the award without reducing
it based on certain limits in the insured homeowner’s policy. The policy
contained a $1,000 deductible for all perils except for those caused by
hurricanes.170 Furthermore, the policy also provided “Special Limits of
Liability” for certain items of personal property like money, gold, and
jewelry.171 The insured made a claim for losses after her home was burglarized.
The appraisal panel issued an award to the insured for $130,011.172
The appraisal award was not itemized.
First Protective issued a check for $28,994 based on its own calculation
of the applicable deductibles and limits.173 The insured sued, seeking confirmation
of the original appraisal award amount. The trial court affirmed
the original award, finding that it could not make the insurer’s adjustments
to the award because, in order to do so, it would need to take testimony
from the appraisal panel, which was neither contemplated by the
policy nor permitted by Florida law.174 The Florida District Court of
Appeal affirmed.175
D. Miscellaneous Appraisal Issues
To encourage insurers and insureds to resolve disputes without resort to
litigation or appraisal, Florida Statutes § 627.7015 requires insurers to
notify insureds of their right to participate in mediation when a firstparty
claim is made. If the insurer fails to do so, the insured is not required
to submit to appraisal as a precondition for a suit for breach of
contract for the insurer’s failure to pay the claim. In Gassman v. State
Farm Florida Insurance Co.,176 the Florida District Court of Appeal enforced
the statute in favor of the insured, finding that Gassman was not
required to submit to appraisal because of the insurer’s failure to comply
with the statute.
However, the insured unsuccessfully attempted to invoke the statute in
another Florida case.177 In American Integrity Insurance Co. of Florida. v.
Gainey, the insured claimed damage, which the insurer paid in part, to
her home from a water leak.178 The insured responded that the payment
was “significantly inadequate” to cover the losses and subsequently filed a
breach of contract suit against the insurer.179 The parties engaged in
mediation at the insured’s request, but once mediation proved unsuccessful,
the insurer requested appraisal.180 The insured moved to enjoin
appraisal, arguing that the insurer had waived its right by failing to provide
notice of mediation pursuant to the statute.181 On appeal, the
court noted the statute was meant to encourage insurers and insureds to
“use the mediation process to encourage an inexpensive and speedy resolution
of insurance claims prior to commencing the appraisal process,
or commencing litigation.”182 The court found that the insured could
not rely on the statute because she had rendered it inapplicable by filing
suit.183
IX. Miscellaneous Issues
A. Who Can Sue on the Policy and Collect Proceeds?
In Stone Flood & Fire Restoration, Inc. v. Safeco Insurance Co. of America,184
the Supreme Court of Utah held that simply by signing a nonwaiver
agreement as the “named insured” and the “spouse,” the shareholders
of a closely held corporation did not gain standing to sue for breach of
a property insurance policy issued to the corporation.185 In rejecting
the shareholders’ argument that identifying themselves as “named insured”
and “spouse” on the nonwaiver converted them into “de facto insureds,”
the court reasoned that “[a] contrary conclusion would lead to
the absurd result that Safeco insured the Stones’ personal property when
they paid no premiums to gain that coverage.”186 The court also held
that the shareholders lacked standing to pursue their claim for intentional
infliction of emotional distress against the insurance company on the
grounds that their alleged injuries were derivative of injuries to the insured
corporation.187
In Peters v. Lexington Insurance Co.,188 the Hawaii District Court held
that condominium owners did not have standing to sue under a property
insurance policy issued to the condominium’s homeowners association.189 \
The court also rejected the owners’ assertion that a state statute requiring
insurance policies covering buildings with attached units to cover individual
units and common spaces conferred on unit owners standing to sue
under such policies.190 Interestingly, the court noted that although the
owners did not have standing to sue under the association policy, they
nonetheless had the legal remedy of suing their own association for failing
to vigorously seek coverage from its insurer.191
B. Suit Limitations
Two cases decided under Georgia law during the survey period grappled
with the consequences of a state statute that required contractual limitations
periods in all multiline property policies to be as favorable as the two-year
limitations period in the state’s standard fire policy. In White v. State Farm
Fire & Casualty Co.,192 the Supreme Court of Georgia answered a question
certified to it by the Eleventh Circuit, asking whether the Georgia Commissioner
of Insurance acted within its legal authority in enacting the statute.
The court held that the commissioner had authority only to require that
the two-year limitations period be incorporated into the fire coverage portion
of a multiple-lines policy.193 As such, the court held that a policyholder’s
claim for personal property loss resulting from a burglary was subject to
the one-year limitations clause in his multiline policy.194
In Jenkins v. Allstate Property & Casualty Insurance Co.,195 the Eleventh
Circuit rejected the policyholder’s argument that because the one-year
limitations period in her property insurance policy did not conform to
the two-year limitations period in the standard fire policy, Georgia’s
six-year statute of limitations for contract causes of action should apply
to her suit against the carrier.196 Instead, the court applied the two-year
limitations period prescribed in the standard fire policy on the grounds
that the “at least as favorable” language in the policy’s conformity provision
made it clear that “the parties intended . . . to substitute the closest
limitations period permitted by the relevant state law.”197
Other cases have addressed waiver of a policy’s suit limitations clause.
For instance, in Jackson v. State Farm Fire & Casualty Co.,198 the Sixth Circuit
held that the insurance company did not waive its right to enforce a
policy’s one-year limitations period where the policyholder presented no
evidence that:
(1) the carrier indicated that it was liable under the policy,
or
(2) that the carrier’s actions caused the policyholder to delay filing
suit.199
Conversely, in Portside Investors, L.P. v. Northern Insurance Co. of
New York,200 Pennsylvania’s Superior Court held that the insurance company
was estopped from enforcing the two-year limitations period in its
policy where the insurer indicated it would defer the issue of appraisal
until after one of the policyholders, who was then a criminal defendant
in a case relating to the collapse of the insured property, could be examined
under oath.201 In reaching its holding, the court reasoned that the
insurance company’s “statement is reasonably read as a willingness to
resume action of the claim after [the policyholder]’s criminal trial, regardless
of the policy time-bar.”202
C. Bad Faith
Several cases during the survey period examined the general principle that
coverage must exist before an insured can bring a bad faith action against
an insurer. In Trafalgar at Greenacres, Ltd. v. Zurich American Insurance
Co.,203 the Florida District Court of Appeal held that an appraisal
award constituted a “favorable resolution” of coverage necessary to sustain
the policyholder’s bad faith claim.204 Citing the Florida requirement
that coverage be resolved favorably for the policyholder before a bad faith
claim can accrue, the trial court dismissed the policyholder’s bad faith
claim on the grounds that its breach of contract claim had been dismissed
on summary judgment.205 On appeal, the court noted that the contract
claim was dismissed only because the carrier had invoked the appraisal
provision in its policy, which had resulted in a multimillion dollar
award for the policyholder.206 Noting that “[a] judgment on a breach of
contract action is not the only way of obtaining a favorable resolution,”
the court ruled that the appraisal award satisfied the bad faith prerequisite.
207 In Miller v. Safeco Insurance Co. of America,208 the Seventh Circuit
rejected the homeowner insurer’s contention that the district court erred
in granting summary judgment to the policyholder on its bad faith claim
because coverage was excluded under the policy.209 In reaching its deci-
sion, the court noted that although the policy form excluded coverage,
the insurer’s failure to timely provide the policy to the homeowners rendered
the exclusions ineffective.210 Specifically, the court reasoned that
the insurer “cannot now avoid a bad faith finding based on exclusions
that were not part of the policy when the [homeowners] discovered the
damage.”211
1. 2012 WL 4480708 (D. Md. Sept. 28, 2012).
2. Id. at *3.
3. Id. at *19.
4. 660 F.3d 299 (8th Cir. 2011).
5. Id. at 303.
6. Id.
7. Id. at 304.
8. Id. at 306.
9. 98 So. 3d 74 (Fla. Dist. Ct. App. 2012).
10. Id. at 75–76.
11. Id. at 75.
12. Id. at 78 (quoting MERRIAM-WEBSTER’S COLLEGIATE DICTIONARY 1216 (11th ed.
2008)).
13. 2012 WL 928186 (D. Haw. Mar. 6, 2012).
14. Id. at *1 (internal quotation marks omitted).
15. Id.
16. Id. USAA made the argument that “in order to have an insurable interest, the insured’s
interest in the property must be ‘lawful’ property.” Id. at *2 (citing HAW. REV. STAT.
§ 431:10E-101).
17. See 2000 Haw. Sess. Laws Act 228, § 1, at 595–96 (“Therefore, the purpose of this Act
is to ensure that seriously ill people are not penalized by the State for the use of marijuana for
strictly medical purposes when the patient’s treating physician provides a professional opinion
that the benefits of medical use of marijuana would likely outweigh the health risks for
the qualifying patient.”).
18. Tracy, 2012 WL 928186, at *10.
19. Id. at *13.
20. 95 A.D.3d 1072 (N.Y. App. Div. 2012).
21. Id. at 1073.
22. Id.
23. Id. (citations omitted).
24. 53 A.3d 554 (N.H. 2012).
25. Id. at 557.
26. Id.
27. Id. at 558.
28. Id. at 559.
29. Audubon Hill S. Condo. Ass’n v. Cmty. Ass’n Underwriters of Am., Inc., 975 N.E.2d
458, 462 (Mass. App. Ct. 2012).
30. Id.
31. Id. at 469.
32. 2012 WL 2450167 (D. Md. June 25, 2012).
33. Id. at *1–2.
34. Id. at *2.
35. Id. at *5–6.
36. Id.
37. Id. at *6–8.
38. 817 F. Supp. 2d 374 (S.D.N.Y. 2011).
39. Id. at 375.
40. Id.
41. Id. at 376 (internal citations omitted).
42. 683 F.3d 805 (7th Cir. 2012).
43. Id. at 809.
44. Id.
45. Id. at 810 (citing Soc’y Ins. v. Town of Franklin, 607 N.W.2d 342, 346 (Wis. Ct. App.
2000)).
46. Id. at 810–11.
47. Id. at 811.
48. Id.
49. Id. (citing Kozlik v. Gulf Ins. Co., 673 N.W.2d 343, 348 (Wis. Ct. App. 2003)).
50. 475 F. App’x 569 (6th Cir. 2012).
51. Id. at 569–70.
52. Id. at 570.
53. Id. at 571.
54. Id. at 572–73.
55. Id.
56. Id. at 575.
57. Id.
58. 81 So. 3d 1030 (Miss. 2011).
59. Id. at 1037.
60. Id.
61. 968 N.E.2d 385 (Mass. 2012).
62. Id. at 388.
63. Id. at 388–89.
64. Id.
65. Id. at 393.
66. Id. at 394.
67. 971 N.E.2d 268 (Mass. 2012).
68. Id. at 273.
69. Id. at 274.
70. Id. at 271.
71. 276 P.3d 300 (Wash. 2012).
72. Id. at 302.
73. Id. at 303.
74. Id. at 303–04.
75. Id. at 304.
76. Id. at 307.
77. Id. at 310.
78. 276 P.3d 1270 (Wash. 2012).
79. Id. at 1271.
80. Id.
81. Id.
82. Id. at 1272.
83. Id.
84. 691 F.3d 948 (8th Cir. 2012).
85. Id. at 950.
86. Id.
87. Id.
88. Id. at 953.
89. Id.
90. Id. at 954.
91. Id.
92. 83 So. 3d 850 (Fla. Dist. Ct. App. 2011).
93. Id. at 853.
94. Id. at 851.
95. Id.
96. Id.
97. Id.
98. Id.
99. Id. at 852.
100. Id. at 853.
101. 2012 WL 300883 (E.D. Mich. Feb. 1, 2012).
102. Id.
103. Id. at *1–2.
104. Id. at *2.
105. Id. at *4 (citing Lubetsky v. Standard Fire Ins. Co., 187 N.W. 260, 260 (Mich. 1922)).
106. Id. at *5.
107. 2012 WL 3139567 (5th Cir. Aug. 2, 2012).
108. Id. at *2.
109. Id. at *5.
110. Id.
111. Id.
112. 440 F. App’x 788 (11th Cir. 2011).
113. Id. at 791.
114. Id.
115. Id.
116. Id.
117. Id. at 792–93.
118. Id.
119. Id. at 795.
120. 2012 WL 4010964 (Fla. Dist. Ct. App. Sept. 12, 2012).
121. Id.
122. Id.
123. Id.
124. Id.
125. Id. at *2.
126. Id.
127. Id.
128. Id. at *5.
129. Id. at *17.
130. 41 A.3d 1 (Pa. Super. Ct. 2011).
131. Id. at 5.
132. Id. at 7.
133. Id.
134. Id. at 8.
135. Id. at 14.
136. No. 11-10702, 2012 WL 3609882 (E.D. Mich. Aug. 22, 2012).
137. Id. at *4.
138. Id. at *6.
139. Id. at *1.
140. Id. at *9.
141. Id.
142. Id.
143. Id. at *10.
144. 812 N.W.2d 194 (Minn. Ct. App. 2012).
145. Id. at 196.
146. Id.
147. Id.
148. Id.
149. Id.
150. Id.
151. Id. at 201.
152. Id. at 199.
153. 814 N.W.2d 703 (Minn. 2012).
154. Id.
155. Id. at 705.
156. Id.
157. Id.
158. Id.
159. Id. at 708.
160. 678 F. 3d 193 (2d Cir. 2012).
161. Id. at 198.
162. Id.
163. Id.
164. Id.
165. Id.
166. Id. at 199.
167. Id.
168. Id.
169. 81 So. 3d 482 (Fla. Dist. Ct. App. 2011).
170. Id. at 483.
171. Id.
172. Id.
173. Id. at 484.
174. Id. at 485–86.
175. Id. at 485.
176. 77 So. 3d 210 (Fla. Dist. Ct. App. 2011).
177. Am. Integrity Ins. Co. of Fla. v. Gainey, 100 So. 3d 720 (Fla. Dist. Ct. App. 2012).
178. Id. at 721.
179. Id.
180. Id.
181. Id.
182. Id. at 722 (citation emphasis and internal quotation marks omitted).
183. Id.
184. 268 P. 3d 170 (Utah 2011).
185. Id. at 177.
186. Id.
187. Id. at 179.
188. 836 F. Supp. 2d 1117 (D. Haw. 2011).
189. Id. at 1123.
190. Id. at 1124–26.
191. Id. at 1126.
192. 728 S.E.2d 685 (Ga. 2012).
193. Id. at 687.
194. Id. at 688.
195. 448 F. App’x 977 (11th Cir. 2011).
196. Id. at 979.
197. Id.
198. 461 F. App’x 422 (6th Cir. 2012).
199. Id. at 426.
200. 41 A.3d 1, 14 (Pa. Super. Ct. 2011).
201. Id.
202. Id.
203. 2012 WL 3822215 (Fla. Dist. Ct. App. Sept. 5, 2012).
204. Id. at *2–3.
205. Id. at *2.
206. Id.
207. Id. at *2–3.
208. 683 F.3d 805 (7th Cir. 2012).
209. Id. at 812.
210. Id.
211. Id.
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