6 pages

RECENT DEVELOPMENTS IN PROPERTY

INSURANCE COVERAGE LITIGATION

Jay M. Levin, William R. Lewis, Heidi Hudson Raschke, Christina M. Phillips, Dennis C. Anderson, Sarah R. Burke, Brian M. Collins, Anthony B. Crawford, Meghan K. Finnerty, Matthew P. Fortin, John V. Garaffa, Christine Davis Graves, Erin D. Guyton, Craig A. Jacobson, Miranda A. Jannuzzi, Alissa A. Kranz, Viktoriya Kruglyak, Jonathan R. MacBride, Sean F. McAloon, Kateri T. Persinger, William H. Pillsbury, and Stacey Stracener

Jay M. Levin ([email protected]) is Chair of Offit Kurman, P.A.’s Insurance Recovery Group in Philadelphia. Christina M. Phillips ([email protected]) is an attorney with Merlin Law Group in Chicago. William R. Lewis (wlewis@ butlerpappas.com) and John V. Garaffa ([email protected]) are partners, Sarah R. Burke ([email protected]) is a senior associate, and Alissa A. Kranz ([email protected]) is an associate of Butler Weihmuller Katz Craig in Tampa. Heidi Hudson Raschke ([email protected]) and Christine Davis Graves ([email protected]) are shareholders of Carlton Fields in Tampa and Tallahassee, re- spectively. Anthony B. Crawford ([email protected]) is an associate of Reed Smith in New York, Miranda A. Jannuzzi ([email protected]) is an associate of Reed Smith in Philadelphia, and Kateri T. Persinger ([email protected]) is an associ- ate of Reed Smith in Pittsburgh. Meghan K. Finnerty ([email protected]) and William H. Pillsbury ([email protected]) are partners of, and Brian M. Collins ([email protected]) is an associate, with Offit Kurman, P.A. in Philadel- phia. Craig A. Jacobson ([email protected]) is a partner of Gordon & Rees Scully Mansukhani in Chicago. Jonathan R. MacBride ([email protected]) is a part- ner of Zelle, LLP in Philadelphia and Dennis C. Anderson ([email protected]) is an associate in Zelle LLP’s Minneapolis office. Sean F. McAloon ([email protected]) is a partner and Viktoriya Kruglyak ([email protected]) is an associate of Rivkin Radler, LLP, in Uniondale, New York. Stacey Stracener (sstracener@cwplaw. com) is a member of Carroll Warren & Parker, PLLC, in the firm’s Jackson, Mississippi office, and Erin D. Guyton ([email protected]) is an associate in the same office. Messrs. Levin and Lewis and Ms. Raschke and Ms. Phillips are past chairs of the Property Insurance Law Committee. Ms. Stracener and Messrs. Fortin, Garaffa, MacBride, and McAloon are Vice-Chairs.

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I. Introduction.............................................................................. 624 II. Business Interruption/Civil Authority..................................... 625 III. Collapse .................................................................................... 626 IV. Covered Property..................................................................... 627

A. Structures........................................................................... 627 B. Insurable Interest .............................................................. 627 C. Newly Acquired................................................................. 628

V. Exclusions ................................................................................. 628 A. Causation........................................................................... 628

1. Generally ...................................................................... 628 2. Anti-Concurrent/Anti-Sequential Causation .............. 629

B. Earth Movement ............................................................... 630 C. Vacancy.............................................................................. 631 D. Dishonest Acts................................................................... 632 E. Faulty Workmanship ........................................................ 634 F. Mold and Water Damage................................................. 636 G. Ensuing Loss ..................................................................... 636

VI. Damages ................................................................................... 639 A. ACV/RCV/Holdback........................................................ 639 B. Overhead and Profit.......................................................... 640 C. Other Insurance................................................................. 641

VII. Obligations and Rights of the Parties..................................... 642 A. Misrepresentation.............................................................. 642 B. Duties................................................................................. 645

1. Examinations Under Oath........................................... 645 2. Proof of Loss................................................................ 646

C. Appraisal ............................................................................ 647 1. Scope of Appraisal........................................................ 647 2. Timeliness of Demand or Refusal to Appraise .......... 649 3. Enforcing and Modifying Appraisal Awards............... 649 4. Appraiser Qualifications............................................... 651

D. Who Can Sue on the Policy and Collect Proceeds? ...... 652 E. Suit Limitations................................................................. 652 F. Bad Faith ........................................................................... 654

i. introduction

During this past year, the pace of cases involving large-scale disasters ground almost to a halt. However, in light of this year’s major hurricanes, there will undoubtedly be a significant uptick this coming year and there- after. The principles of property insurance law, however, remain the same. Issues addressed below will be relevant to hurricane claims and lit-

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igation, including causation, anti-concurrent causation language in exclu- sions, mold coverage, time element coverages, and the scope of appraisal. Of course, while the principles remain the same, their application to the unique facts of every claim is usually the source of the disputes.

ii. business interruption/civil authority

In Philadelphia Indemnity Insurance Co. v. 24 West 57 APF, LLC,1 a tenant’s insurer filed a subrogation action against a property manager seeking property damage and business interruption resulting from a water leak.2

The insurer argued that the building manager failed to properly maintain equipment, resulting in a leak.3 The lease had a waiver of subrogation pro- vision, but the insurer argued that waiver of subrogation did not apply to business interruption losses because “under New York law, ‘a waiver of sub- rogation clause does not preclude a suit to recover losses for which [a tenant] has not purchased and was not required by the lease to purchase, insurance coverage.’”4 The Appellate Division of the New York Supreme Court re- jected this argument and concluded that “plaintiff waived its ability to assert a claim for business interruption losses when it executed the Lease[.]”5

In Ahmadpoor v. Truck Insurance Exchange,6 the owner of an automobile repair business made a burglary claim that included business interrup- tion.7 The insurer denied coverage, asserting that the policyholder vio- lated the “Concealment, Misrepresentation or Fraud” clause of the policy by submitting a claim for lost profits that, in part, relied on tax forms that the policyholder’s son admitted “did not accurately reflect the business’s income.”8 The plaintiff argued that the misrepresentations to the Internal Revenue Service (IRS) could not have materially influenced the insurer because they were made to a third party and the policyholder admitted to the insurer the tax forms were inaccurate.9 The California Court of Ap- peal concluded that “[p]laintiff’s misrepresentations about the level of the business’s income during relevant time periods were, as a matter of law, material, because they were reasonably related to the claims being made for business interruption amounts.”10

1. 2017 WL 4180169 (N.Y. App. Div. Sept. 7, 2017). 2. Id. at *1. 3. Id. 4. Id. at *5 (quoting Reade v. Reva Holding Corp., 30 A.D.3d 229, 232 (N.Y. App. Div.

2006). 5. Id. 6. 2017 WL 1230462 (Cal. Ct. App. Apr. 4, 2017). 7. Id. at *1. 8. Id. at *2, *7. 9. Id. at *7.

10. Id. at *8.

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iii. collapse

In Conlon v. Allstate Vehicle & Property Insurance Co.,11 the policy covered col- lapse of “building structures,” defined as having walls and a roof, because of the weight of ice and snow. In Conlon, the insured suffered a collapse of a structure attached to his house that consisted of a roof and posts; there were no walls. The court held that the loss was not covered because the aw- ning was not a “building structure,” as defined in the policy, because the awning did not have walls.12

There have been a number of recent cases out of Connecticut construing collapse provisions.13 The policies in these cases generally defined “col- lapse” as “an abrupt falling down or caving in of a building or any part of a building[.]”14 Courts have ruled in favor of insurers in cases “where in- surance policies require ‘sudden and accidental’ losses, or otherwise contain language requiring that the loss be temporally abrupt.”15

In Suter v. State Farm Fire & Casualty Co.,16 the Superior Court of Del- aware held that a homeowner’s claim for damage to his basement was not covered.17 The policyholder noticed a crack in his basement wall that got progressively larger over a two-week period.18 Fearing that the wall would collapse, the policyholder paid to have the wall fixed and filed an insur- ance claim, which State Farm denied.19 The policy stated that collapse “means actually fallen down or fallen into pieces. It does not include set-

11. 152 A.D.3d 488 (N.Y. App. Div. 2017). 12. Id. at 491. 13. See, e.g., Jemiola v. Hartford Cas. Ins. Co., No. CV-15-6008837-S, 2017 WL

1258778, at *1 (Conn. Super. Ct. Mar. 2, 2017). 14. Id. at *8. 15. Manseau v. Allstate Ins. Co., No. 3:16-CV-1231 (MPS), 2017 WL 3821791, at *4

(D. Conn. Aug. 31, 2017); see also England v. Amica Mut. Ins. Co., No. 3:16-CV-1951 (MPS), 2017 WL 3996394, at *6 (D. Conn. Sept. 11, 2017) (denying coverage where “col- lapse coverage does not apply where a building is standing but shows evidence of cracking”); Metsack v. Liberty Mut. Fire Ins. Co., No. 3:14-CV-01150 (VLB), 2017 WL 706599, at *7 (D. Conn. Feb. 21, 2017) (granting motion for summary judgment where policy required “a sud- den and accidental direct physical loss”); Toomey v. Cent. Mut. Ins. Co., No. CV156009841S, 2017 WL 4159820, at *7 (Conn. Super. Ct. Aug. 3, 2017) (granting summary judgment where policy defined collapse as “an abrupt falling down or caving in”); Jemiola, 2017 WL 1258778, at *1 (granting summary judgment where policy defined collapse as “an abrupt falling down or cav- ing in”). In cases where the policy did not define “collapse,” courts have followed Beach v. Mid- dlesex Mutual Assurance Co., 532 A.2d 1297 (Conn. 1987), where “the Connecticut Supreme Court held that the term ‘collapse’ in a homeowners’ insurance policy, when otherwise unde- fined, was ‘sufficiently ambiguous to include coverage for any substantial impairment of the structural integrity of a building.’” Roberts v. Liberty Mut. Fire Ins. Co., No. 3:13-CV-00435 (SRU), 2017 WL 3710062, at *6 (D. Conn. Aug. 28, 2017) (quoting Beach, 532 A.2d at 1300). 16. No. CV S15C-06-025ESB, 2016 WL 5867435, at *3 (Del. Super. Ct. Oct. 6, 2016). 17. Id. at *3. 18. Id. at *1. 19. Id.

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tling, cracking, shrinking, bulging, expansion, sagging or bowing.”20 The court found that the evidence showed that the policyholder’s “basement wall did not collapse. It only cracked and bowed.”21

iv. covered property

A. Structures

In Nassar v. Liberty Mutual Fire Insurance Co.,22 the insured’s 4,000 foot fenc- ing system included cross fences, garden fences, pens, gates, and numerous different fencing materials.23 The insured contended that the entire system constituted “a structure attached to the dwelling” under the higher limit be- cause the system was interconnected and attached to the house at four points.24 The insurer countered that the fencing system was an “other struc- ture,” which included structures connected “by only a fence.”25 The Su- preme Court of Texas held that the insured’s interpretation was reasonable and reversed summary judgment in favor of the insurer,26 but noted that, on remand, a fact finder may determine that only damage to the fencing orig- inally bolted to the dwelling falls under the dwelling limit, since the policy language may require treating fencing as both “dwelling” and “other struc- tures,” depending on the circumstances.27

B. Insurable Interest

In Hensley v. State Farm Fire & Casualty Co.,28 a buyer of real estate by contract for deed was not named in a homeowners’ policy bought by seller, but the contract for deed required buyer to make monthly pay- ments to seller for the cost of policy’s premiums.29 The buyer sued the insurer, which claimed that buyer was a stranger to the insurance contract and did not have standing.30 The buyer argued that the parties intended for buyer to be insured and pointed to the fact that the insurer was noti- fied of the contract for deed before the loss, and that policy limits were for the full value of the property, not just the seller’s insurable interest of re- maining principal.31 The court held that, while the buyer’s equitable title

20. Id. at *2. 21. Id. 22. 508 S.W.3d 254 (Tex. 2017). 23. Id. at 256. 24. Id. at 256–57. 25. Id. at 257. 26. Id. at 260. 27. Id. at 261. 28. 398 P.3d 11 (Okla. 2017). 29. Id. at 14. 30. Id. at 15. 31. Id. at 16–17, 25.

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to property was insufficient by itself to confer insured status, whether the buyer was an intended third party beneficiary was a fact issue.32

C. Newly Acquired

In Revived Alive, Inc. v. Valley Forge Insurance Co.,33 a wedding dress re- tailer argued that it had coverage under its policy’s “newly acquired” property endorsement for 549 dresses that it purchased before the incep- tion of the policy, but within 180 days of its loss.34 The policy stated that the newly acquired property limit ends when: (1) the policy as a whole ex- pires; (2) the newly acquired property is more specifically insured; (3) the insured reports the property’s value to insurer; or (4) 180 days expire after the property was acquired.35 The insured argued that, since none of those events had occurred, the newly acquired property limit applied.36 The in- surer countered that only property purchased after the inception of an in- surance policy can be “newly acquired,” since the value of dresses had al- ready been assessed and taken into consideration when the policy was issued.37 The U.S. District Court for the Western District of Washington agreed with the insurer, holding one must look at not only when coverage under the endorsement terminates, but also when it begins, and that the ordinary consumer understands that insurance coverage begins when a policy begins and is not retroactive.38

v. exclusions

A. Causation

1. Generally

In Sebo v. American Home Assurance Co., Inc.,39 the insured sought coverage under his homeowners’ policy after suffering losses caused by defective con- struction, rain, and wind.40 The policy expressly excluded loss caused by de- fective construction.41 The parties disputed whether the concurrent cause or efficient proximate cause doctrine applied.42

32. Id. at 25. 33. Revived Alive, Inc. v. Valley Forge Ins. Co., No. C16-5882-RBL, 2017 WL 3781907

(W.D. Wash. Aug. 31, 2017). 34. Id. at *1. 35. Id. at *2. 36. Id. 37. Id. at *3. 38. Id. 39. 208 So. 3d 694 (Fla. 2016). 40. Id. at 695–96. 41. Id. at 699–700. 42. Id. at 699.

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The Supreme Court of Florida held that, “when independent perils converge and no single cause can be considered the sole or proximate cause,” the concurrent cause doctrine applied.43 It was not feasible to use the efficient proximate cause doctrine because there was no reasonable way to determine the proximate cause of the loss.44 The court held that “[w]here weather perils combine with human negligence to cause a loss, it seems logical and reasonable to find the loss covered by an all-risk pol- icy even if one of the causes is excluded from coverage.”45 The court also disagreed with the lower court that the concurrent cause doctrine would nullify all exclusions, because the insurer had explicitly written other sec- tions of the policy to avoid that doctrine.46

2. Anti-Concurrent/Anti-Sequential Causation

In Southern Insurance Co. v. CJG Enterprises, Inc.,47 the parties disputed whether the policies contained an applicable anti-concurrent cause provi- sion.48 The policyholders sustained roof damage to their barns after a windstorm.49 The insurer paid the losses because windstorm was not an excluded peril.50 The carrier then filed a subrogation action against the companies that manufactured and assembled the barns, alleging that de- fective design and construction were contributing causes of the losses.51

The barn manufacturer argued that the carrier could not subrogate because the policies did not cover the damage to the barns since: (1) the policies ex- cluded coverage for defective design and construction (the “Defects Exclu- sion”), which were allegedly contributing causes of the losses; and (2) an anti-concurrent-cause provision precluded coverage for losses caused by a combination of covered and excluded perils.52

The U.S. District Court for the Southern District of Iowa noted that the policies divided exclusions into two sections, and the Defects Exclu- sion was in the second.53 The first section was preceded by unmistakable anti-concurrent-cause language, but it applied only to the exclusions in that section.54 The second section contained the following prefatory lan- guage: “We cover risks of direct physical loss to covered property unless

43. Id. at 697. 44. Id. at 700. 45. Id. (quoting Wallach v. Rosenberg, 527 So. 2d 1386, 1388 (Fla. Dist. Ct. App. 1988)

(internal quotation marks omitted)). 46. Id. 47. No. 3:15-cv-00131-RGE-SBJ, 2017 WL 3453369 (S.D. Iowa Feb. 10, 2017). 48. Id. at *1, *7. 49. Id. at *2. 50. Id. 51. Id. at *2, *6. 52. Id. at *6. 53. Id. at *8. 54. Id.

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the loss is limited or caused by a peril that is excluded.”55 The manufacturer ar- gued that this clause (the “Perils Covered Clause”) was an anti-concurrent cause provision.56

The court reasoned that this language did not reference concurrent causes in any way and stated that it would not supply a new meaning to un- ambiguous language.57 The court also found it instructive that there was a clear anti-concurrent cause provision in the first exclusions section, but not in the second.58 The difference demonstrated that the drafters knew how to contract out of coverage for multiple causes through an anti-concurrent cause provision and chose to do so only for certain perils.59

B. Earth Movement

Three courts considered issues of first impression in their states relating to earth movement exclusions. In Erie Insurance Property & Casualty Co. v. Cha- ber,60 the insureds’ property was damaged when soil and rock slid down a hill behind the property.61 The policy excluded coverage for earth move- ment regardless of whether it was “caused by an act of nature or is otherwise caused.”62 The Supreme Court of Appeals of West Virginia held that the exclusion was “not ambiguous and excludes coverage for the loss whether it is caused by a man-made or a naturally-occurring event.”63

In Elwell v. Selective Insurance Co. of America,64 the insured, under a Stan- dard Flood Insurance Policy, sought coverage for a Hurricane Sandy loss.65

The policy excluded coverage for losses caused by earth movement, unless the earth movement results from a mudslide or flood-related erosion.66 The court held that a plaintiff must establish four elements to demonstrate flood-related erosion not subject to the earth movement exclusion:

(1) [C]ollapse or subsidence of land; (2) the land is along the shore of a lake or similar body of water; (3) the collapse or subsidence resulted from erosion or undermining caused by waves or currents of water exceeding anticipated cyclical levels; and (4) the waves or currents resulted in a flood as defined in Article II(A)(1)(a) [of the National Flood Insurance Act of 1968].67

55. Id. at *7, *8 (emphasis added). 56. Id. at *7. 57. Id. 58. Id. at *9. 59. Id. 60. 801 S.E.2d 207 (W.Va. 2017). 61. Id. at 209. 62. Id. 63. Id. at 212–13. 64. No. 14-2590 (RBK/KMW), 2016 WL 5928682 (D.N.J. Oct. 11, 2016). 65. Id. at *1. 66. Id. at *2. 67. Id. at *3.

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The court held there was a question of fact as to whether the loss was caused by earth movement or erosion because “flood-related erosion as contemplated by [the policy] may very well involve some movement of the earth; Congress simply made the decision to nonetheless include cov- erage of earth movement from flood-related erosion within the [policy].”68

Finally, in Home-Owners Insurance Co. v. Andriacchi,69 the insured sought coverage for damage to his building that occurred after a major street re- pair.70 The Court of Appeals of Michigan held that an “any earth move- ment” exclusion precluded coverage.71 The court rejected the insured’s ar- gument that this exclusion applied only to losses from natural causes, holding instead that the phrase “any earth movement” means “every” and “all” movement of the earth without regard to whether the earth movement resulted from natural or man-made causes.72

C. Vacancy

In Farm Bureau Mutual Insurance Co. of Arkansas v. Future Davenport,73 the plaintiff owned a home in Arkansas.74 The policy insured against loss caused by fire, vandalism, or malicious mischief.75 The policy contained a “Vacancy or Unoccupancy” condition, establishing that if the plaintiff vacated or failed to occupy the home for thirty days, the insurer would not “cover loss to property caused by” vandalism or malicious mischief; if the plaintiff vacated or failed to occupy the home for sixty days, the insurer would “not be liable for any property loss.”76

In September 2010, while the plaintiff and her husband were in their Michigan home, burglars broke into the Arkansas home, “stole some items, and set the house on fire. At the time of the fire, the [Arkansas] house was fully furnished, was equipped with fully functioning utilities, and food was stocked in the refrigerator and the freezer.”77 While the plaintiff and her hus- band had not been in the Arkansas home since April 2010, their adult son was at the Arkansas home a few days before the fire.78 The insurer denied the claim because the plaintiff had not occupied the Arkansas home for more than sixty days at the time of the fire.79

68. Id. at *4. 69. 903 N.W.2d 197 (Mich. Ct. App. 2017). 70. Id. at 200. 71. Id. at 202. 72. Id. at 203. 73. 519 S.W.3d 702 (Ark. Ct. App. 2017). 74. Id. at 704. 75. Id. at 705. 76. Id. 77. Id. at 708. 78. Id. 79. Id. at 705.

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The jury found that the Arkansas house had been occupied. The trial court entered judgment for the plaintiff.80 The insurer appealed, claiming there was inadequate evidence of occupancy by the insured because “two overnight stays were insufficient to render the home ‘occupied.’”81 Be- cause whether a building is vacant or unoccupied at the time a loss occurs is a question of fact for the jury,” the Court of Appeals of Arkansas af- firmed the judgment.82

In Jarvis v. Geovera Specialty Insurance Co.,83 the policy excluded damage caused by vandalism or malicious mischief if the home was vacant or unoc- cupied for thirty days before the loss, with the exception of a “dwelling being constructed.”84 In October 2016, vandals intentionally started a fire at the property.85 It was undisputed that the house was unoccupied for more than thirty days before the fire while the plaintiff was renovating and repair- ing the house and that the arson constituted malicious mischief or vandal- ism.86 The issue was “whether the ‘dwelling being constructed’ language in- cluded a dwelling being renovated, repaired and/or refurbished.”87 The policy did not define the terms “construct” or “being constructed.”88 The court used Webster’s Third New International Dictionary definitions and con- cluded that the policy language “dwelling being constructed” was not ambig- uous and held that the language meant bringing a dwelling into existence from the ground up, i.e., creating a complete dwelling that did not previously exist.89 The phrase did not include renovations, repairs, or refurbishments to an already-existing dwelling.90 Therefore, the U.S. District Court for the Middle District of Florida held that the vacancy exclusion applied, the excep- tion to the exclusion did not, and entered judgment for the insurer.91

D. Dishonest Acts

In Maldonado Investments, LLC v. State Farm Fire & Casualty Co.,92 the in- sured operated a restaurant that was destroyed by a fire set by an em- ployee.93 The employee pleaded guilty to criminal arson.94 The insurer

80. Id. 705–06. 81. Id. at 708. 82. Id. at 708, 710. 83. No. 8:17-cv-296-T-24-JSS, 2017 WL 2869706 (M.D. Fla. July 5, 2017). 84. Id. at *1. 85. Id. 86. Id. at *1–2. 87. Id. at *3. 88. Id. at *1. 89. Id. at *4. 90. Id. 91. Id. at *4–5. 92. 2016 WL 8135411 (W.D. La. Nov. 4, 2016). 93. Id. at *1. 94. Id. at *2.

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denied the claim, and the insured sued.95 The insurer moved for summary judgment based on the dishonesty exclusion.96 The trial court found that the dishonesty exclusion applied, but analyzed whether there was coverage under an employee dishonesty endorsement.97 That endorsement provided coverage for direct physical loss to business personal property resulting from the dishonest acts of one or more of the insured’s employee(s), but required that the employee have the intent to cause the insured to sustain loss and to obtain a financial benefit for any employee or other individual or organization.98 The U.S. District Court for the Western District of Loui- siana found that the endorsement did not apply because the insured did not show that the employee started the fire with the intent to obtain a financial benefit.99

In J&A Freight Systems, Inc. v. Travelers Property Casualty Co. of Amer- ica,100 the U.S. District Court for the Northern District of Illinois ex- plained that certain endorsements that deal generally with theft do not nec- essarily override pre-existing endorsements that address specific types of theft and that the modification of coverage does not necessarily affect de- ductibles.101 The court analyzed whether an endorsement that increased the general limit for Coleman Cable shipments from $100,000 to $150,000 changed the policy’s Freight Charges, Loading and Unloading “Carrier” Dishonesty Endorsement (Carrier Dishonesty Endorsement).102

The Carrier Dishonesty Endorsement modified the policy’s contract’s cat- egorical carrier dishonesty exclusion by providing coverage for up to $50,000 for loss to covered property caused by or resulting from any fraud- ulent, dishonest, or criminal act committed by a carrier, and excluded losses in excess of $50,000 by restating word for word the categorical carrier dis- honesty exclusion.103

The insured transportation broker arranged for transport of its client’s load of copper wire with an individual who held himself out as a represen- tative of a legitimate carrier.104 Unbeknown to the insured, the individual was an imposter who picked up the copper wire, but never delivered it.105

Following discovery of the subterfuge, the insured submitted a claim for

95. Id. at *1–2. 96. Id. at *1, *3. 97. Id. at *3–5. 98. Id. at *4. 99. Id. at *4–5.

100. 2017 WL 4274170 (N.D. Ill. Sept. 26, 2017). 101. Id. at *1–2, *4–8. 102. Id. at *6–8. 103. Id. at *5. 104. Id. at *1. 105. Id.

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$116,163.60.106 Because of the Carrier Dishonesty Endorsement, the in- sured determined that coverage was limited to $50,000 and paid that amount to the insured.107 The insured sued.108

The insurer moved for summary judgment, arguing that the policy pro- vided only $50,000 coverage for the claim.109 The insured argued that the policy was ambiguous as to whether the $50,000 or $150,000 limit applied to the loss, which created a question of fact precluding summary judg- ment.110 The court found that the carrier dishonesty exclusion precluded coverage for losses caused by acts of carrier dishonesty and the Carrier Dis- honesty Endorsement gave back coverage of only $50,000.111 The court further found that the endorsement that changed the limit for Coleman Cable shipments from $100,000 to $150,000 and provided for a $2,500 de- ductible for theft did not change the effect of the Carrier Dishonesty En- dorsement or make it ambiguous.112 The court explained that the Coleman Cable Endorsement’s reference to the $2,500 deductible for theft did not show the $150,000 limit applied to theft covered by the Carrier Dishonesty Endorsement because the deductible and exclusions are described in differ- ent portions of the policy, can be modified separately, and address different concepts.113

E. Faulty Workmanship

In James McHugh Construction Co. v. Travelers Property Casualty Co. of Amer- ica,114 the insured made a claim for windows scratched by a contractor while attempting to clean construction debris off the windows.115 The in- surer denied the claim under the faulty workmanship exclusion.116 The insured argued that “faulty workmanship” was ambiguous because it did not specify whether it applied to processes or final products.117 The U.S. District Court for the District of Maryland found the term was unambig- uous and enforceable and that the term “faulty workmanship” applies to both processes and final products.118 The court held that faulty workman- ship damaged the windows.119

106. Id. at *2. 107. Id. 108. Id. 109. Id. at *4. 110. Id. 111. Id. at *5–6. 112. Id. at *6–8. 113. Id. at *6–7. 114. 223 F. Supp. 3d 462 (D. Md. 2016). 115. Id. at 465. 116. Id. at 465–66. 117. Id. at 467. 118. Id. at 469–71. 119. Id. at 473.

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In Leep v. Trinity Universal Insurance Co.,120 the insured hired a contrac- tor to replace roofing to remedy hail damage.121 After the roof replacement, the insured discovered water damage in his attic due to water vapor from disconnected furnace vent piping.122 The insurer denied the claim under the faulty workmanship exclusion, claiming that the damage occurred be- cause the contractor disconnected the furnace vent during the roof replace- ment.123 The insured argued that the disconnected furnace vent piping was not faulty workmanship because work on vent piping was not within the scope of the roofing contract.124 The U.S. District Court for the District of Montana denied both parties’ motions for summary judgment, rejecting the insured’s claim that the faulty workmanship exclusion does not apply based on the scope of the contract, but also finding an issue of fact as to whether the contractor’s workmanship was faulty.125

In National Manufacturing Co., Inc. v. Citizens Insurance Co. of Amer- ica,126 the insured made a claim for damage for metal casing stock that was damaged due to pitting caused by a faulty chemical component.127

The insurer denied the claim, claiming that coverage was barred under a faulty workmanship exclusion.128 The insurer argued that the faulty workmanship exclusion applied because the finished product was defec- tive, the exclusion applied to both flawed product and process, the policy did not require the insured’s own workmanship be faulty, and applying the exclusion would preclude the insured from obtaining coverage for its own faulty products.129 The insured contended that the cases cited by the insurer applied only to real property, that the loss was not caused by its manufacturing process, and the exclusion was ambiguous because it contained an exception for damage from covered causes of loss.130 The U.S. District Court for the District of New Jersey held that the faulty workmanship exclusion applied to both flawed product and process, but also held that an exception in the exclusion providing coverage for dam- ages resulting from a covered cause of loss was contradictory, making the exclusion ambiguous and unenforceable.131

120. No. CV 16-57-BLG-TJC, 2017 WL 2457882 (D. Mont. June 6, 2017). 121. Id. at *1. 122. Id. at *2. 123. Id. at *3. 124. Id. 125. Id. at *9. 126. 2016 WL 7491805 (D.N.J. Dec. 30, 2016). 127. Id. at *1. 128. Id. at *9. 129. Id. 130. Id. 131. Id. at *10–11.

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F. Mold and Water Damage

In Morrow v. Allstate Indemnity Co.,132 the plaintiffs reported “two claims for direct physical loss to their home—one involving water damage and the other involving foundation and/or structural support damage.”133

The insurer adjusted the claim, authorized repairs to the house, and paid certain repair costs.134 In the subsequent lawsuit, the insureds argued that “Defendants breached their insurance contract with Plaintiffs by (1) failing to assess [Plaintiffs’] property for diminution in value resulting [from] the damage giving rise to the covered claims and (2) failing to pay Plaintiffs for such diminution in value.”135

The insurer asserted that the policy covered only “sudden and accidental direct physical loss to property.”136 Thus, the policy did not cover dimin- ished value because diminished value is neither a “sudden” or “accidental” loss, nor a “physical” loss.137 The insurer also asserted that the Building Structure Reimbursement provision precluded diminished value liability.138

The insurer noted that, under that provision, liability is strictly tied to re- pair and replacement cost.139

The U.S. District Court for the Middle District of Georgia rejected the insurer’s position on the basis of two earlier Georgia Supreme Court deci- sions, State Farm Mutual Automobile Insurance Co. v. Mabry140 and Royal Cap- ital Development, LLC v. Maryland Casualty Co.141 The court also rejected the insurer’s claim that the language that required the insurer to pay for actual repair costs negated the insurer’s obligation to pay for diminished value re- sulting from stigma.142 The court found the provision served only to abate, not eliminate, the insurer’s liability for the difference between pre-loss value and post-loss value as, under Georgia law, “repair” means “restoration of the property to substantially the same condition and value as existed before the damage occurred.”143

G. Ensuing Loss

In Leep v. Trinity Universal Insurance Co.,144 in response to the insurer’s reliance on the faulty workmanship exclusion, the insured argued that

132. 2017 WL 1196441 (M.D. Ga. Mar. 29, 2017). 133. Id. at *1. 134. Id. 135. Id. 136. Id. at *4. 137. Id. 138. Id. 139. Id. 140. 556 S.E.2d 114 (Ga. 2001). 141. 728 S.E.2d 234 (Ga. 2012). 142. Morrow, 2017 WL 1196441, at *4. 143. Id. (emphasis in original) (quoting Mabry, 556 S.E.2d at 121). 144. No. CV 16-57-BLG-TJC, 2017 WL 2457882 (D. Mont. June 6, 2017).

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the ensuing loss exception to the exclusion restored coverage for its loss.145 The U.S. District Court for the District of Montana noted that there are two lines of cases addressing ensuing loss provisions.146 One in- terprets the language broadly “to provide coverage for losses to property that occur as a consequence of an excluded event, as long as the ensuing loss is otherwise covered by the policy.”147 The second interprets the lan- guage narrowly, holding that ensuing loss exceptions do not restore cov- erage “for losses that result directly and proximately from the excluded peril,” instead requiring “a separate and independent cause of the loss” in order to allow coverage.148 The court chose the broad approach and held that “the faulty workmanship exclusion would exclude from coverage damage to property caused by faulty workmanship. But . . . the ensuing loss provision [would] provide coverage for any otherwise covered loss that took place after or as a consequence or result of the faulty workman- ship.”149 Thus, the cost to repair or replace the furnace vent was excluded, but damage caused by the water vapor was a covered ensuing loss.150

In Erie Insurance Property & Casualty Co. v. Chaber,151 a rockslide dam- aged the insureds’ properties.152 The policy excluded loss or damage caused by earth movement, but contained an ensuing loss exception that restored coverage for loss or damage when earth movement “results in fire, explosion, sprinkler leakage, volcanic action, or building glass breakage.”153 The insurer decided that only the cost of replacing broken windows in the buildings was a covered ensuing loss.154 The insureds ar- gued that the ensuing loss exception should be construed as restoring “coverage for the entire loss rather than the limited portion of the loss caused by glass breakage.”155 The circuit court agreed.156

The Supreme Court of Appeals of West Virginia reversed, holding that “[t]he circuit court’s interpretation of the ensuing loss provision is unjus- tifiable, based upon the purpose and express language of the ensuing loss provision.”157 The court, recognizing that an ensuing loss provision “pro- vides a narrow exception to the exclusion but does not revive or reinstate coverage for losses otherwise unambiguously excluded by the policy,”

145. Id. at *9. 146. Id. 147. Id. 148. Id. 149. Id. at *10. 150. Id. at *12. 151. 801 S.E. 2d 207 (W.Va. 2017). 152. Id. at 209. 153. Id. 154. Id. at 209–10. 155. Id. at 214. 156. Id. 157. Id.

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held that the glass breakage caused by the earth movement was covered, but that all other damage caused by the rockslide was excluded.158

In James McHugh Construction Co. v. Travelers Property Casualty Co. of America,159 the U.S. District Court for the District of Maryland, recog- nizing that “an ensuing loss clause like the one [in this policy] ‘operates to ensure coverage for damage from a covered cause of loss that results from an excluded cause of loss,’”160 held that “the damage—scratched glass—was directly the result of faulty workmanship” and determined that the ensuing loss exception did not apply.161

In Travelers Property Casualty Co. of America v. Brookwood, LLC,162 rain entered through openings in the EPDM (synthetic rubber) membrane of the insured’s roof, damaging the building and a tenant’s property.163 Ex- pert testimony differed on whether the openings in the membrane were caused by wind or from thermal shock.164 Regardless of the cause of the openings, the U.S. District Court for the Northern District of Ala- bama held that “the ‘ensuing loss’ exception to the faulty workmanship and maintenance exclusions . . . does not apply.”165 The court reasoned that “neither faulty workmanship nor inadequate maintenance could have caused either thermal shock or wind.”166 The court further stated “that covered causes of loss occurred after any alleged improper workman- ship, repair, construction, or maintenance . . . is insufficient to trigger the application of the [ensuing loss] exception.”167

In Homeowners Choice Property & Casualty v. Maspons,168 the insureds’ sanitary drain line—located in a poured concrete slab foundation—was broken.169 The policy excluded damage caused by wear and tear or dete- rioration, but included an ensuing loss provision which provided that, if

158. Id. at 215. 159. 223 F. Supp. 3d 462 (D. Md. 2016). 160. Id. at 473 (quoting Selective Ways Ins. Co. v. Nat’l Fire Ins. Co. of Hartford, 988

F. Supp. 2d 530, 538 (D. Md. 2013)). 161. James McHugh Constr. Co., 223 F. Supp. 3d at 473. In a non-precedential decision

from Pennsylvania, Ridgewood Group, LLC v. Millers Capital Insurance Co., No. 1138 EDA 2016, 2017 WL 781620 (Pa. Super. Ct. Feb. 28, 2017), the Pennsylvania Superior Court adopted a similar approach, holding that “[f]oreseeability is the lynchpin of the analysis. Thus, in this case, [the insured’s] loss is excluded from coverage if it was a natural, foresee- able loss arising from deficient maintenance. On the other hand, it is covered, pursuant to the ensuing loss exception, if it was non-foreseeable.” Ridgewood Group, LLC, 2017 WL 781620, at *5. 162. No. 2:15-CV-01016-KOB, 2017 WL 3896692 (N.D. Ala. Sept. 6, 2017). 163. Id. at *1. 164. Id. at *2–3. 165. Id. at *7. 166. Id. (emphasis in original). 167. Id. (emphasis in original) (internal quotations omitted). 168. 211 So. 3d 1067 (Fla. Dist. Ct. App. 2017). 169. Id. at 1068.

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wear and tear or deterioration “cause water damage, not otherwise ex- cluded, from a plumbing . . . system . . . , we cover loss caused by the water including the cost of tearing out and replacing any part of the build- ing necessary to repair the system[.]”170 There was no claim that the bro- ken pipe caused any water damage to the interior of the home because the slab had not been opened.171 However, the District Court of Appeal of Florida noted as follows:

While the exclusion for “wear and tear” or “deterioration” might mean . . . that Homeowners Choice is not obligated to compensate the Maspons for their corroded drain pipe, if the Maspons suffered consequential loss as a result of the corroded pipe and that . . . ensuing loss is not [otherwise] excluded . . . , [that] loss is covered.172

vi. damages

A. ACV/RCV/Holdback

When calculating property damage, policies often do not provide for re- placement cost coverage until the damaged property is actually repaired or replaced. Until that time, the insured is entitled to actual cash value (ACV), which is typically calculated as replacement cost less depreciation. Disputes often arise regarding what can be depreciated when calculating ACV.

In In re State Farm Fire and Casualty Co.,173 the U.S. Court of Appeals for the Eighth Circuit held that “actual cash value” has an unambiguous meaning under Missouri law—the difference between the fair market value of damaged property immediately before and after a loss.174 This amount must be estimated, and the court held that State Farm’s method of depreciating replacement cost was a practical and reasonable method for estimating the fair market value of the property, or ACV, at the time of loss.175 The court also held that whether the insurer’s use of Xac- timate estimating software produced an unreasonable ACV estimate would have to be determined on a case-by-case basis, precluding common facts that would warrant class certification.176

In Henn v. American Family Mutual Insurance Co.,177 an insured filed a putative class action alleging that the insurer wrongfully depreciated labor

170. Id. at 1069. 171. Id. at 1070. 172. Id. at 1069. 173. 872 F.3d 567 (8th Cir. 2017). 174. Id. at 574. 175. Id. at 576. 176. Id. at 577. 177. 894 N.W.2d 179 (Neb. 2017).

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when calculating ACV.178 The Supreme Court of Nebraska rejected the insured’s argument that labor cannot be depreciated, noting that ACV “is ‘not a substantive measure of damages,’ but, rather, a representation of the depreciated value of the property immediately prior to the dam- ages.”179 Because ACV requires “depreciation of the whole,” the court held that “the insured is not underindemnified by receiving the depreci- ated amount of both materials and labor.”180

The U.S. District Court for the Northern District of California reached a different result in Johnson v. Hartford Casualty Insurance Co.181

The insured sought class certification on whether the insurer could de- preciate certain building components when calculating ACV of a partial loss.182 California Insurance Code Section 2051 states: “In case of a par- tial loss to the structure, a deduction for physical depreciation shall apply only to components of a structure that are normally subject to repair and replacement during the useful life of the structure.”183 The insured as- serted that, when calculating ACV, the insurer wrongfully depreciated items like trim, cement, doors, drywall, and wiring, which are not nor- mally subject to repair and replacement during the useful life of a struc- ture.184 The court granted the motion for class certification.185 The court found the insured’s injury to be the insurer’s “failure to calculate his ACV claim in accordance with Section 2051,” and that a question common to the class is “whether Hartford depreciates certain building components in violation of Section 2051 when making ACV payments for partial losses[.]”186 This order has been appealed.

B. Overhead and Profit

In Prepared Insurance Co. v. Gal,187 the insured filed suit against his home- owners’ insurer to recover full replacement cost of cabinets damaged by a sink leak, as well as amounts for general contractor’s overhead and profit.188 The Florida District Court of Appeal observed that a replace- ment cost policy “is designed to cover the difference between what prop- erty is actually worth and what it would cost to rebuild or repair that prop-

178. Id. at 189. 179. Id. (quoting Olson v. Le Mars Mut. Ins. Co. of Iowa, 696 N.W.2d 453, 458 (Neb.

2005)). 180. Id. at 190. 181. No. 15-cv-04138-WHO, 2017 WL 2224828 (N.D. Cal. May 22, 2017). 182. Id. at *1. 183. CAL. INS. CODE § 2051(b)(2). 184. Johnson, 2017 WL 2224828, at *6. 185. Id. at *12. 186. Id. at *1. 187. 209 So. 3d 14 (Fla. Dist. Ct. App. 2016). 188. Id. at 15.

640 Tort Trial & Insurance Practice Law Journal, Winter 2018 (53:2)

erty.”189 The court held that “an insurer is required to pay overhead and profit only if the insured is ‘reasonably likely to need a general contrac- tor.’”190 Because whether a general contractor was necessary to repair the cabinets was a disputed issue of fact, the insured was not entitled to summary judgment for the insured.191 This case has been appealed.192

C. Other Insurance

A common question in the context of a loss with more than one insurer is how much each insurer should pay. In Philadelphia Indemnity Insurance Co. v. Lexington Insurance Co.,193 a dispute arose between the insurers of a les- see and owner of a building.194 A charter school, TSAS, leased a building from the school district, which owned more than 100 facilities.195 The lease agreement required TSAS to procure property insurance, and TSAS obtained coverage with Philadelphia, naming the district as a loss payee.196 The building was also insured under the district’s policy with Lexington.197 After the building suffered fire damage, there was a dispute between the insurers.198 The district court ordered Philadelphia to pay 54 percent and Lexington to pay 46 percent of the $6,014,359.06 loss.199

The U.S. Court of Appeals for the Tenth Circuit affirmed.200

The policies had identical excess “Other Insurance” clauses.201 The court determined that these clauses canceled each other and the policies applied on a pro rata basis.202 The court rejected Lexington’s argument that the loss should not be shared since the policies insure different enti- ties because the district was protected under both policies—under its own as an insured, and under TSAS’s as a loss payee.203

The Philadelphia policy had a $7 million limit, and the Lexington pol- icy had a $100 million limit.204 The Lexington policy, however, also had an endorsement stating that its liability would be limited to the least of the

189. Id. at 17 (emphasis in original) (quoting Trinidad v. Fla. Peninsula Ins. Co., 121 So. 3d 433, 438 (Fla. 2013). 190. Id. (quoting Trinidad, 121 So. 3d at 440). 191. Id. at 17–18. 192. See Gal v. Prepared Ins. Co., No. SC16–2190, 2017 WL 3484284 (Fla. Apr. 26,

2017). 193. 845 F.3d 1330 (10th Cir. 2017). 194. Id. at 1332–33. 195. Id. at 1332. 196. Id. 197. Id. 198. Id. at 1333. 199. Id. at 1332. 200. Id. 201. Id. 202. Id. at 1333–34. 203. Id. at 1333. 204. Id. at 1334.

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adjusted amount of loss or any limit or sublimit of the policy.205 The dis- trict court applied the endorsement and calculated each insurer’s pro rata share based on a total of $13,014,359.06 in coverage.206 Philadelphia ar- gued that the pro rata shares should be based on Lexington’s full limit, but the Tenth Circuit held that using $100 million would disregard the plain language of the endorsement.207

vii. obligations and rights of the parties

A. Misrepresentation

In H.J. Heinz Co. v. Starr Surplus Lines Insurance Co.,208 Heinz sought a product contamination insurance policy.209 Heinz engaged a large insur- ance broker to assist in procuring the coverage, and its new “global insur- ance director” was responsible for preparing and confirming the insurance application.210 In June 2014, the broker emailed the Heinz application to the insurer and included Heinz’s loss history and a certification signed by its insurance director.211 One question asked if Heinz had experienced any recall or withdrawal of any products or been responsible for a third party’s recall or withdrawal of a product, whether insurable or not, during the previous ten years.212 Heinz did not answer, but attached the company’s loss history from 1998 to 2013.213 The loss history contained only one loss during that period in an amount over the requested $5 million self-insured retention.214 The insurer issued the policy with a $5 million SIR, effective July 1, 2014.215

Two weeks later, Chinese authorities notified Heinz that baby food Heinz manufactured in China was contaminated with lead.216 In August 2014, Heinz made a claim for the lead contamination loss.217 While in- vestigating the claim, the insurer learned that, in 2014, before the policy was issued, Heinz had a loss in excess of $10 million involving excessive

205. Id. at 1345. 206. Id. at 1345–46. 207. Id. at 1334. 208. 675 F. App’x 122 (3d Cir. Jan. 11, 2017). 209. Id. at 124. 210. Id. at 124–25. 211. Id. at 125. 212. Id. 213. Id. 214. Id. “Similar to a deductible, a [self-insured retention] is the amount of a loss the in-

sured must bear before the insurance coverage begins to respond.” Id. at 124. 215. Id. at 125. 216. Id. 217. Id.

642 Tort Trial & Insurance Practice Law Journal, Winter 2018 (53:2)

nitrite levels in baby food manufactured in China.218 That loss was not disclosed in Heinz’s application.219

Applying New York law, the trial court found that Heinz had inten- tionally made misrepresentations in its application.220 The trial court concluded that the insurer would not have issued the policy with a $5 mil- lion retention if it had known about the undisclosed losses.221 The Third Circuit affirmed, finding that the record contained “overwhelming evi- dence” that the insurer relied on the misrepresentations in offering a pol- icy with a $5 million SIR.222

In Freeze v. Tennessee Farmers Mutual Insurance Co.,223 a husband and wife applied for a property insurance policy.224 The application asked the applicant to list any “pending legal action,” whether the applicant had “[e]ver been charged with, convicted of, or pled guilty to a felony crime of any type,” and whether the applicant had “[e]ver been charged with, con- victed of, or pled guilty to arson, fraud, theft, or drug related crime of any type.”225 The plaintiffs’ answered “No” to each of these questions, and both plaintiffs signed and submitted the application.226

A few days later, the plaintiffs’ house was destroyed by fire.227 The in- surer refused to pay the loss, asserting that the plaintiffs made material mis- representations about the husband’s prior arrests and charges for felony DUI and other drug-related charges.228 At the time of the application, the husband was under indictment on twelve criminal charges, including felony DUI.229 The plaintiffs sued, and the insurer moved for summary judgment.230 The plaintiffs claimed that the insurance agent asked them: “Neither one of you are felons are you?”231 As the husband had not been convicted of the pending charges, the plaintiffs claimed that they responded truthfully to the agent.232

Applying Tennessee’s statutory requirements for voiding an insurance policy, the trial court found that the plaintiffs had provided false informa-

218. Id. 219. Id. 220. Id. at 128. 221. Id. 222. Id. at 129. 223. 527 S.W.3d 227 (Tenn. Ct. App. 2017). 224. Id. at 228. 225. Id. 226. Id. at 229. 227. Id. at 228. 228. Id. at 230. 229. Id. at 230–31. 230. Id. at 228. 231. Id. at 230. 232. Id. at 234.

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tion in the application about the husband’s criminal history.233 The Court of Appeals of Tennessee held that the “questions on the Application clearly asked if the applicants had any pending legal action and also clearly asked if the applicants ever had been charged with a felony or a drug related crime. The questions did not ask solely about convictions.”234 The court held that the husband’s pending drug related and felony charges increased the risk to insurers under the statute and affirmed judgment for the insurer.235

In State Farm Fire & Casualty Co. v. Flowers,236 after buying a property in 2008, the plaintiffs were unable to obtain financing to build a house and entered into an agreement to deed the property to their building contrac- tors, who obtained a construction loan.237 The agreement was that the property would be deeded back to the plaintiffs after construction. How- ever, a dispute arose between the plaintiffs and the building contractors about the scope and costs of construction. The plaintiffs lived in the un- finished house.238 The plaintiffs never received title to the property from the contractors, who had defaulted on the construction loan.239 When the husband applied for homeowner’s insurance in April 2012, he represented that that he owned the property.240 Three months later, the house and its contents were damaged by fire.241 The insurer sued for a declaration that the policy was void ab initio because of material misrepresentations in the application.242 It was undisputed that the plaintiffs did not own the prop- erty and that whether the plaintiffs owned the property was material to the risk.243 The plaintiffs argued that they did not knowingly or willfully misrepresent ownership of the property because the husband “reasonably, and in good faith, believed he was the owner of the property.”244 Applying Mississippi law, the trial court found that “whether the misrepresentation ‘was intentional, negligent, or the result of mistake or oversight is of no consequence.’”245 The U.S. Court of Appeals for the Fifth Circuit noted that, under Mississippi law, the applicant’s belief that the statement

233. Id. at 230–31 (applying TENN. CODE ANN. § 56-7-103 (2016)). 234. Id. at 233–34 (emphasis in original). 235. Id. at 234 (applying TENN. CODE ANN. § 56-7-103 (2016)). 236. 854 F.3d 842 (5th Cir. 2017). 237. Id. at 843. The building contractors were also the plaintiffs’ relatives. 238. Id. 239. Id. 240. Id. 241. Id. 242. Id. 243. Id. at 845. 244. Id. 245. Id. (quoting Republic Fire & Casualty Ins. Co. v. Azlin, No. 4:10–CV–037–SA–JMV,

2012 WL 4482355, at *6–7 (N.D. Miss. Sept. 26, 2012)).

644 Tort Trial & Insurance Practice Law Journal, Winter 2018 (53:2)

is true is not sufficient, and if the statement is false and material, the in- surer is entitled to void or rescind the policy.246

B. Duties

1. Examinations Under Oath

Generally, in the absence of a reasonable excuse, an insured’s failure to sub- mit to an examination under oath (EUO) and to submit documents usually results in the insurer being relieved of its duty to pay. In Ruggerio v. Har- leysville Preferred Insurance Co,247 the EUO was adjourned with the express understanding that Harleysville could continue the examination and that the insured needed to produce the requested records.248 The insured was reluctant to continue the EUO when she learned that there was an out- standing warrant for her arrest on charges of attempted larceny, insurance fraud, and making a false statement.249 The U.S. District Court for the District of Connecticut noted that the insured could assert her Fifth Amendment privilege regarding specific questions, but she could not refuse to continue her EUO.250 The court also concluded that she had not satis- fied the EUO requirement by appearing for one session.251

In Nationwide Property & Casualty Insurance Co. v. Brown,252 the U.S. Dis- trict Court for the Eastern District of Michigan confirmed that an insured’s repeated false statements about, and concealment of, a co-insured’s where- abouts entitled the insurer to judgment.253 In this case, Tamara Brown re- ported a water damage claim.254 Nationwide asked both Tamara and James Brown to appear for an EUO.255 Tamara appeared and provided testimony regarding James’s location and mental health conditions.256 Nationwide de- termined that Tamara misled Nationwide about James’s availability and mental health.257 James’s EUO was delayed by seven months.258 The Browns argued that they ultimately complied with Nationwide’s request.259

The court concluded that the seven-month delay would cause the interview to be less useful and that Tamara’s concealment of James’s location effec-

246. Flowers, 854 F.3d at 844 (citing Prudential Ins. Co. of Am. v. Estate of Russell, 274 So. 2d 113, 116 (Miss. 1973). 247. 2017 WL 4401453 (D. Conn. Sept. 30, 2017). 248. Id. at *4. 249. Id. at *5. 250. Id. at *12. 251. Id. at *13. 252. 2017 WL 1436488 (E.D. Mich. Apr. 24, 2017). 253. Id. at *12. 254. Id. at *3. 255. Id. 256. Id. at *4. 257. Id. 258. Id. at *10. 259. Id.

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tively deprived Nationwide of the EUO.260 Moreover, the Browns were un- able to show that Tamara’s conduct was not deliberate or willful.261 The court granted judgment to Nationwide.262

Florida’s absolute litigation privilege provides that “a defendant can slander [a] plaintiff and lie to her and the court, and still be absolutely im- mune from [suit] for defamation . . . as long as the slander and lies were made in the courtroom or during a formal discovery process and had some relation to the [trial].”263 The Florida District Court of Appeal in Arko Plumbing Corp. v. Rudd264 recently held that Florida’s absolute litiga- tion privilege does not apply to an EUO.265

2. Proof of Loss

Traditionally, proof of loss provisions have been considered a condition precedent to recovery under an insurance policy. Thus, if insureds did not comply with the proof of loss provision, they could not recover under the policy. Under Texas law, however, the insurer must demon- strate that it was prejudiced by the insured’s failure to comply. To dem- onstrate prejudice, the insurer must prove that one of the recognized pur- poses of the provision has been frustrated.266 In a variety of cases addressing Allstate’s “Action Against Us” provision and the effect of an insured’s failure to provide a proof of loss, Texas courts held that Allstate did not show prejudice and its motions to dismiss were denied.267

Submitting a sworn statement in proof of loss under a Standard Flood Insurance Policy (SFIP) remains a condition precedent. In Scharr v. Selec- tive Insurance Co. of New York ,268 the court granted the insurer’s motion for summary judgment when the insured failed to submit a signed and sworn proof of loss within sixty days of the flood-related loss.269 The in- sured argued substantial compliance by submitting of a proof of loss for the undisputed damage, as well as submitting various reports that in-

260. Id. at *11. 261. Id. 262. Id. at *12. 263. Arko Plumbing Corp. v. Rudd, No. 3D16–1689, 2017 WL 4654904, at *1 (Fla. Dist.

Ct. App. Oct. 18, 2017). 264. No. 3D16–1689, 2017 WL 4654904 (Fla. Dist. Ct. App. Oct. 18, 2017). 265. Id. at *1. 266. Vilaythong v. Allstate Ins. Co., 2017 WL 4805522, at *8 (N.D. Tex. Oct. 25, 2017)

(citing Blanton v. Vesta Lloyds Ins. Co., 185 S.W.3d 607, 612 (Tex. App. 2008)). 267. See id. at *3; Rogers v. Allstate Veh. & Prop. Ins. Co., 2017 WL 3215292, at * 2 (N.D.

Tex. July 28, 2017); Wilson v. Allstate Ins., Co. 2017 WL 1313854, at *1 (E.D. Tex. Apr. 10, 2017); Lopez v. Allstate Veh. & Prop. Ins. Co., 2017 WL 1294453, at *3 (E.D. Tex. Apr. 4, 2017); Polen v. Allstate Veh. & Prop. Ins. Co., 2017 WL 661836, at *2 (E.D. Tex. Feb. 17, 2017). 268. 2017 WL 4778779 (W.D.N.Y. Oct. 23, 2017) 269. Id. at *6.

646 Tort Trial & Insurance Practice Law Journal, Winter 2018 (53:2)

cluded the estimated amount of damages.270 The U.S. District Court for the Western District of New York concluded the insureds’ submission of a proof of loss for the undisputed amount did not relieve the insured of the obligation to submit a proof of loss setting forth all claimed damages.271

C. Appraisal

1. Scope of Appraisal

Courts continue to wrestle with whether appraisers may consider issues of causation in addition to issues of valuation, and if so, to what extent. Many states have interpreted the phrase “amount of loss” found in a typical ap- praisal provision as limiting appraisal to determining solely disputes re- garding valuation. However, in recent years, some courts have permitted appraisers to determine issues of causation.

In Allied Mechanical Services v. National Fire & Marine Insurance Co.,272 the U.S. District Court for the Western District of Michigan determined that a dispute concerning the amount of loss was appropriate for appraisal, but that all other disputes must be resolved by the court.273 There, the insured sued for breach of contract because the insurer refused to participate in appraisal after a fire loss.274 The insurer contended that appraisal was premature be- cause there were coverage issues regarding which definition of ACV applied to the claim.275 The court held that a question regarding the interpretation of the policy is generally not resolved in appraisal.276 However, the court also held that, since the dispute involved which policy provision should be used to calculate ACV was a factual and not legal question, it should be resolved through appraisal, because ACV applies to the calculation of damages.277

In Matter of Pottenburgh v. Dryden Mutual Insurance Co.,278 after a cov- ered vandalism loss, the plaintiff demanded appraisal to determine the amount of loss.279 The insurer rejected the appraisal demand, contending that there was a dispute about the scope of coverage and appraisal was not appropriate.280 The plaintiff petitioned to compel appraisal and the in- surer moved to dismiss her petition. The plaintiff conceded that the dis- puted items were not damaged by vandalism, but contended that they still

270. Id. at *6–7. 271. Id. at *7. 272. 2017 WL 1313897 (W.D. Mich. 2017). 273. Id. at *3. 274. Id. at *1. 275. Id. at *3. 276. Id. 277. Id. at *5. 278. 48 N.Y.S.3d 885 (N.Y. Sup. Ct. 2017). 279. Id. at 888. 280. Id.

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needed to be repaired or replaced due to issues with matching and work necessary to repair the property that was damaged by vandalism. The New York Supreme Court held that “issues of causation relate to the scope of coverage, which is not a proper subject for an appraisal, and is- sues regarding the extent of necessary repairs involve valuation of dam- ages, which are properly submitted for an appraisal.”281 Accordingly, the court held that, the insurer’s objections to the appraisal were limited to the extent of necessary repairs to the property, which was within the scope of appraisal because it did not implicate a question of causation.282

In Walnut Creek Townhouse Association v. Depositors Insurance Co.,283 the in- surer denied the insured’s claim for damage to its buildings as a result of hail, contending that the damage was not covered under the policy.284 The in- sured sued, demanded appraisal, and asked the court to approve the language to be used on the appraisal form.285 Although the Iowa Court of Appeals de- clined to approve any specific language, it did identify which issues would be determined by the appraisers and which issues should be left for litigation.286

The court held that appraisers may make the initial causation determination because “causation is an integral part of the definition of loss, without con- sideration of which the appraisers cannot perform their assigned func- tion.”287 The court also held that a natural part of the appraisal process re- quires appraisers to determine the cause of loss and the amount necessary to repair the loss as “[c]ausation relates to both liability and damages because it is the connection between them.”288 Accordingly, the court held that an ap- praisal panel must make causation determinations.289

In Royal Publications, Inc. v. Travelers Indemnity Co.,290 the insured sought coverage for water damage that it alleged resulted from a storm.291 The

281. Id. 282. Id. at 889. 283. No. 16-0121, 2017 WL 3077916 (Iowa Ct. App. July 19, 2017). 284. Id. at *1. 285. Id. 286. Id. at *2. 287. Id. (quoting N. Glenn Homeowners Ass’n v. State Farm Fire & Cas. Co., 854

N.W.2d 67, 71 (Iowa Ct. App. 2014)). 288. Id. at 5 (quoting State Farm Lloyds v. Johnson, 290 S.W.3d 886, 891–92 (Tex.

2009)). The dissent argued that appraisers should determine only the amount of the loss, which is a question of damages, and not whether there is a loss, because that determination is an issue of liability. The dissent further argued that giving appraisers authority to deter- mine issues of causation raises due process concerns. 289. Walnut Creek Townhouse Ass’n, 2017 WL 3077916, at *5; see also Runaway Bay Con-

dominium Ass’n v. Phila. Indem. Ins. Cos., 2017 WL 1478114, at *1 (N.D. Ill. Apr. 25, 2017) (court held causation may be decided in appraisal); Snyder v. Am. Family Ins. Co., 2016 WL 5796838, at *3–4 (D. Minn. Oct. 3, 2016) (the court compelled appraisal, holding that an appraisal panel is allowed to determine causation). 290. No. 15–cv–02719–RM, 2016 WL 7732999 (D. Colo. Oct. 13, 2016). 291. Id. at *1.

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insured demanded appraisal.292 The insurer contended that appraisers could not determine causation.293 The U.S. District Court for the District of Colorado focused on the purpose of appraisal, i.e., to avoid litigation and encourage settlement.294 Accordingly, the court held that, because the ap- praisal provision permitted the insurer to deny the claim and permitted par- ties to dispute coverage issues even after an appraisal award, appraisers may determine causation.295

2. Timeliness of Demand or Refusal to Appraise

In Matter of Pottenburgh,296 the insurer also claimed the appraisal demand was untimely.297 The New York Supreme Court held that, to determine the timeliness of an appraisal demand, it must consider the following fac- tors: “1) whether the appraisal would result in prejudice to the insured party; 2) whether the parties engaged in good-faith negotiations over valu- ation of the loss prior to the appraisal demand; and 3) whether an appraisal is desirable or necessary under the circumstances.”298 Relying on these fac- tors, the court held that, because the insurer had timely notice of the claim and an opportunity to inspect the property, there would be no prejudice to the insurer if the motion to compel appraisal was granted.299

3. Enforcing and Modifying Appraisal Awards

In Garcia v. Lloyds,300 the insured submitted a claim for storm damage to her property.301 After the insured sued, the insurer demanded ap- praisal.302 The parties agreed to appraisal for the sole purpose of calculat- ing the amount of the loss, and the suit was stayed.303 An appraisal award was issued and the insurer paid the award.304 The insurer moved for sum- mary judgment, arguing that the insured was estopped from continuing her breach of contract action because the appraisal award resolved the dis- pute.305 The insured rejected the insurer’s payment and opposed sum-

292. Id. 293. Id. at *2. 294. Id. at *3. 295. Id. at *4. 296. 48 N.Y.S.3d 885 (N.Y. Sup. Ct. 2017). 297. Id. at 887. 298. Id. (quoting Zarour v. Pac. Indem. Co., 113 F. Supp. 3d 711, 716 (S.D.N.Y. 2015)).

Although the Matter of Pottenburgh court noted that it considers whether the insured would be prejudiced by the appraisal as a factor in determining the timeliness of an appraisal demand, the court’s analysis here focused on the potential prejudice to the insurer. 299. Id. at 888. 300. 514 S.W.3d 257 (Tex. App. 2016). 301. Id. at 262. 302. Id. 303. Id. 304. Id. at 263. 305. Id.

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mary judgment, arguing that the award should be vacated because the ap- praisers exceeded the scope of their authority by failing to use prior esti- mates prepared by the parties in the determining the award.306 The in- sured argued that the appraisers made an improper causation determination when they did not consider certain items during the appraisal, which she con- tended the parties had already agreed were covered.307

The Court of Appeals of Texas noted that appraisal awards made pursu- ant to an insurance policy are binding and enforceable unless: (1) “the award was made without authority;” (2) ”the award was made as a result of fraud, accident, or mistake;” or (3) ”the award was not in compliance with the re- quirements of the policy.”308 The party seeking to set aside the appraisal award bears the burden of demonstrating that it was not valid.309 In deter- mining whether the appraisers had exceeded their scope of authority, the court analyzed case law regarding whether appraisers may decide causa- tion.310 On the one hand, the court held that appraisers have no authority to determine issues of causation, liability, or coverage and that appraisers should determine solely the amount of loss.311 However, the court also ac- knowledged the practical reality that distinguishing between causation as a question of damages versus coverage is difficult, because appraisers must con- sider causation, at least as an initial matter, when separating different types of damage to the same item of property.312 Thus, the court held that “[a]ny ap- praisal necessarily includes some causation element, because setting the amount of loss requires appraisers to decide between damages for which cov- erage is claimed from damages caused by everything else.”313 The court also reasoned that, if appraisers determine causation, there would be no liability determination left for the courts.314 The court ultimately held that deciding whether appraisers exceeded their authority by determining causation de- pends heavily on the circumstances of each case.315 The court held the plain- tiff had not raised a triable issue of fact regarding the validity of the appraisal award because the appraisal provision of the policy did not dictate the man- ner in which the award had to be made and, therefore, the appraisers had not exceeded their authority by disregarding the parties’ prior estimates.316

306. Id. at 267. 307. Id. at 266. 308. Id. at 265. 309. Id. at 264. 310. Id. at 266–67. 311. Id. at 266. 312. Id. at 266–67. 313. Id. at 267 (quoting State Farm Lloyds v. Johnson, 290 S.W.3d 886, 893 (Tex. 2009)). 314. Garcia, 514 S.W.3d at 267. 315. Id. 316. Id. at 270.

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In Zarour v. Pacific Indemnity Co.,317 the insureds moved to modify an ap- praisal award to include losses sustained to their property due to mold.318

Initially, the appraisal solely determined and awarded losses caused by wind.319 In their affidavits in support and in opposition to the motion, the appraisers offered competing explanations for why they did not con- sider mold damage.320 The U.S. District Court for the Southern District of New York noted that, because appraisal in New York is limited to “fac- tual disputes over the amount of loss for which an insurer is liable,” and ap- praisal resolves solely questions of valuation, a party seeking to challenge an appraisal award may challenge it only by showing “fraud, bias, or bad faith.”321 An appraisal panel’s valuation determination is presumed valid absent a showing of the forgoing factors.322 However, the court also noted that the insureds were not challenging the valuation determinations made by the appraisers.323 They were arguing that the panel did not com- plete its “contractual and court-ordered task” by solely calculating the dam- age caused by wind and failing to calculate the amount of loss sustained due to mold.324 In other words, the appraisers made an improper coverage de- termination by omitting mold damage from their calculations when it was a part of the insured’s claim.325 The court determined that the scope of the plaintiffs’ claim was not an issue for appraisal, and the panel exceeded its authority by failing to determine the amount of damage caused by mold.326

4. Appraiser Qualifications

In Owners Insurance Co. v. Dakota Station II Condominium Association, Inc.,327 the insurer filed a petition seeking to set aside an appraisal award based on the lack of impartiality of the insured’s appraiser.328

The appraisal provision in the insurance policy stated that “each party will select a competent and impartial appraiser,” but the phrase “impar- tial” was not defined in the policy.329 The Colorado Court of Appeals de- termined that, to be considered impartial, an appraiser must render his or

317. No. 15-cv-2663 (JSR), 2017 WL 946332 (S.D.N.Y. Feb. 22, 2017). 318. Id. at *1. 319. Id. 320. Id. 321. Id. at *2 (quoting Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 411 F.3d

384, 389 (2d Cir. 2005) and Forbes v. Cendant Corp., No. 99-9180, 2000 WL 232069, at *2 (2d Cir. Jan. 28, 2000)). 322. Id. 323. Id. 324. Id. 325. Id. 326. Id. at *3. 327. No. 16CA0733, 2017 WL 3184568 (Colo. Ct. App. July 27, 2017). 328. Id. at *1. 329. Id. at *2.

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her valuation opinion in “fairness, good faith, and lack of bias,” but there is no requirement that the appraiser be impartial in the same way as a judge, arbitrator, or umpire.330 Although an appraiser should be unbiased and disinterested, an impartial appraiser may favor one side over another, as the policy does not state to the contrary.331 Accordingly, the court held that the insured’s appraiser was impartial despite the fact that he had pre- appraisal meetings with the insured and public adjuster and communi- cated with the public adjuster during the appraisal.332

D. Who Can Sue on the Policy and Collect Proceeds?

In Givaudan Fragrances Corp. v. Aetna Casualty & Surety Co.,333 the New Jer- sey Supreme Court held that “once an insured loss has occurred, an anti- assignment clause in an occurrence policy may not provide a basis for an insurer’s declination of coverage based on the insured’s assignment of the right to invoke policy coverage for that loss.”334 In reaching this holding, the Supreme Court aligned New Jersey law with the majority rule.335 Be- fore this decision, two New Jersey Superior Court, Appellate Division decisions—Flint Frozen Foods, Inc. v. Fireman’s Insurance Co. of Newark336

and Elat, Inc. v. Aetna Casualty & Surety Co.337—reached the same conclu- sion, but no previous New Jersey Supreme Court case decided the issue.338

E. Suit Limitations

In Woodson v. Allstate Insurance Co.,339 the U.S. Court of Appeals for the Fourth Circuit held that the one-year suit limitations period in the SFIP was not tolled by timely filing suit in state court because the SFIP requires that suit be filed in federal court.340 The insured argued that timely filing the state court action equitably tolled the limitations period because the case was removed to federal court.341 The court rejected that argument be- cause removal occurred after the limitations period expired.342

330. Id. at *3–4. 331. Id. at *4. 332. Id. at *4–5. 333. 151 A.3d 576 (N.J. 2017). 334. Id. at 579. 335. Id. at 586. 336. 79 A.2d 739 (N.J. Super. Ct. Law Div. 1951) (reversed by the New Jersey Supreme

Court using an analysis that did not contradict the post-loss assignment analysis). See Flint Frozen Foods v. Firemen’s Ins. Co. of Newark, 86 A.2d 673 (N.J. 1952). 337. 654 A.2d 503 (N.J. Super. Ct. App. Div. 1995). 338. Givaudan Fragrances Corp., 151 A.3d at 584–85. 339. 855 F.3d 628 (4th Cir. 2017). 340. Id. at 634. 341. Id. 342. Id. at 634–35.

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In Ryan v. Liberty Mutual Fire Insurance Co.,343 the court, applying New Jersey law, held that an insurer’s letter explaining that flood damages was not covered, but did not state that coverage was “denied,” did not restart the running of the limitations period, which had been tolled by the in- sured’s filing the claim.344 The court held that the insurer’s letter amounted to a denial, the letter’s description of the appeal process did not make the denial equivocal, and New Jersey law does not require an insurer to point out a policy’s suit limitation provision.345

In Albert Frassetto Enterprises v. Hartford Fire Insurance Co.,346 the plain- tiff argued that the policy’s suit limitation provision did not apply to busi- ness interruption (BI) claims because it appeared in the property coverage part and was not repeated in the BI coverage form, and because the BI coverage was separate and distinct from the property coverage.347 The court disagreed, and held that “the only fair construction of the policy language is that the [BI] coverage form provides coverage for losses inci- dent to the direct physical property damage or loss [and is not] separate and distinct coverage falling outside of the coverage part to which the two-year limitation period condition applies.”348

In Holmes v. Safeco Insurance Co. of America,349 the court enforced a one- year suit limitations period in an all-risk homeowner’s policy, rather than the 18-month period applicable to fire insurance policies, even though the policy covered fire losses. The plaintiffs’ home was damaged by heavy snow and ice dams in February 2011.350 The court held that the 18- month period did not apply because the loss at issue was not a fire loss.351

In De Jongh v. State Farm Lloyds,352 State Farm Lloyds closed the plain- tiff’s file on July 12, 2012, but did not issue a denial letter.353 A month later, State Farm Lloyds reopened the file, reinspected the home, issued a denial letter, and closed the file again.354 The plaintiff filed suit in No- vember 2012 against an entity related to State Farm Lloyds, but did not name State Farm Lloyds as a defendant until she amended her petition on July 14, 2014.355 The court held that the plaintiff’s legal claims ac-

343. 234 F. Supp. 3d 612 (D.N.J. 2017). 344. Id. at 617–19. 345. Id. 346. 144 A.D.3d 1556 (N.Y. App. Div. 2016). 347. Id. at 1557. 348. Id. at 1558. 349. 157 A.3d 1147 (Conn. Ct. App. 2017). 350. Id. at 1148. 351. Id. 352. 664 F. App’x 405 (5th Cir. 2016). 353. Id. 354. Id. at 406–07. 355. Id. at 407.

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crued on July 12, 2012, when State Farm Lloyds first closed the file.356

The court concluded that the plaintiff’s claims against State Farm Lloyds were barred by the suit limitations provision because the plaintiff did not name State Farm Lloyds as a defendant until two years and two days after the accrual date.357

F. Bad Faith

The Pennsylvania Supreme Court recently confirmed in Rancosky v. Washington National Insurance Co.358 that to prevail on a claim pursuant to Pennsylvania’s bad faith statute, a policyholder is not required to prove that an insurance company acted with a “motive of self-interest or ill-will.”359 After the 1990 passage of Pennsylvania’s bad faith status, Section 8371, Pennsylvania courts struggled to define “bad faith.”360

Then, in Terletsky v. Prudential Property & Casualty Insurance Co.,361 the Pennsylvania Superior Court established a two-part test for bad faith, holding that to recover under Section 8371, an insured must show by clear and convincing evidence: (1) the insurer did not have a reasonable basis for denying benefits under the policy, and (2) the insurer knew or recklessly disregarded its lack of a reasonable basis in denying the claim.362 Relying on Terletsky, insurers over the years had argued that the insured was also obligated to prove a third element—that the insurer was motivated by “self-interest or ill will.”363

The Pennsylvania Supreme Court unanimously rejected the insurer’s attempt to add the element of “motive of self-interest or ill will” to the elements of statutory bad faith. Reasoning that requiring ill will would make it “highly unlikely that any plaintiff could prevail thereunder,” the court reasoned that the Pennsylvania legislature could not have intended such a stringent standard.364

In Perez-Crisantos v. State Farm,365 the Supreme Court of Washington refused to allow a policyholder to sue an insurer for bad faith under the Washington’s Insurance Fair Conduct Act (IFCA) based solely on proce- dural violations of insurance regulations.366 The IFCA made it unlawful for insurers to unreasonably deny certain claims and allowed for attorney

356. Id. 357. Id. at 407–08. 358. 170 A.3d 364 (Pa. 2017). 359. Id. at 365. 360. Id. at 371. 361. 649 A.2d 680 (Pa. Super. Ct. 1994). 362. Id. at 689–90. 363. Rancosky, 170 A.3d at 369. 364. Id. at 376. 365. 389 P.3d 476 (Wash. 2017). 366. Id. at 482–83.

654 Tort Trial & Insurance Practice Law Journal, Winter 2018 (53:2)

fees and treble damages.367 The Washington Supreme Court held that State Farm could not be held liable under the IFCA based solely on the company’s alleged unfair conduct in handling a policyholder’s claim for coverage of medical bills following a car accident.368 After analyzing the history of the IFCA, the court held that the state legislature had not in- tended to create an independent cause of action under IFCA for regula- tory violations and that the IFCA only allows claims where an insurer un- reasonably denies coverage or benefits.369

367. Id. at 480. 368. Id. at 482–83. 369. Id.

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