CHAPTER FIVE - SECTION ONE - CONDITIONS

 

DUTIES AFTER LOSS

 

ISO. 2.

Your Duties After Loss. In case of a loss to covered property, you must see that the following are done:

a.    give prompt notice to us or our agent;

b.    notify the police in case of loss by theft;

c.     notify the credit card or fund transfer card company in case of loss under Credit Card or Fund Transfer Card coverage;

d.    (1)   protect the property from further damage;

(2)   make reasonable and necessary repairs to protect the property; and

(3)   keep an accurate record of repair expenses;

e.     prepare an inventory of damaged personal property showing the quantity, description, actual cash value and amount of loss. Attach all bills, receipts and related documents that justify the figures in the inventory;

f.     as often as we reasonably require:

(1)   show the damaged property;

(2)   provide us with records and documents we request and permit us to make copies; and

(3)   submit to examination under oath, while not in the presence of any other insured, and sign the same;

g.    send to us, within 60 days after our request, your signed, sworn proof of loss which sets forth, to the best of your knowledge and belief:

(1)   the time and cause of loss;

(2)   the interest of the insured and all others in the property involved and all liens on the property;

(3)   other insurance which may cover the loss;

(4)   changes in title or occupancy of the property during the term of the pol­icy;

(5)   specifications of damaged buildings and detailed repair estimates;

(6)   the inventory of damaged personal property described in 2e above;

(7)   receipts for additional living expenses incurred and records that support the fair rental value loss; and

(8)   evidence or affidavit that supports a claim under the Credit Card, Fund Transfer Card, Forgery and Counterfeit Money coverage, stating the amount and cause of loss.

 

Other Company.         2.         Your Duties After Loss. After a loss to which this insurance may apply, you shall see that the following duties are performed:

a.    give immediate notice to us or our agent. Also notify the police if the loss is caused by theft. Also notify the credit card company or bank if the loss in­volves a credit card or bank fund transfer card;

b.    protect the property from further damage or loss, make reasonable and neces­sary repairs required to protect the property, keep an accurate record of repair expenditures;

c.     prepare an inventory of damaged or stolen personal property. Show in detail the quantity, description, actual cash value and amount of loss. Attach to the inventory all bills, receipts and related documents that substantiate the fig­ures in the inventory;

d.    as often as we reasonably require:

(1)   exhibit the damaged property;

(2)   provide us with records and documents we request and permit us to make copies;

(3)   submit to examinations under oath and subscribe the same; and

(4)   produce employees, members of the insured's household or others for examination under oath to the extent it is within the insured's power to do so;

e.     submit to us, within 60 days after the loss, your signed, sworn proof of loss which sets forth, to the best of your knowledge and belief:

(1)   the time and cause of loss;

(2)   interest of the insured and all others in the property involved and all en­cumbrances on the property;

(3)   other insurance which may cover the loss;

(4)   changes in title or occupancy of the property during the term of this pol­icy;

(5)   specifications of any damaged building and detailed estimates for repair of the damage;

(6)   an inventory of damaged or stolen personal property described in 2.c.;

(7)   receipts for additional living expenses incurred and records supporting the fair rental value loss;

(8)   evidence or affidavit supporting a claim under the Credit Card, Bank Fund Transfer Card, Forgery and Counterfeit Money coverage, stating the amount and cause of loss.

 

NOTE:  This section of the policy provisions is quite detailed, and could easily be ignored by a policyholder.  This is a very important part of a Homeowners policy, and there are many court cases regarding the inaction or improper action, of an insured after an insured loss.  A professional agent would be well served to point out these requirements to a new insured and/or particularly after a claim.  If an insured receives a list of instructions as to their responsibilities in case of a loss, it can be overwhelming unless they are forewarned.

 

The cases and situations described below are only a very small sample of the importance of understanding and complying with the provisions of the policy in case of loss.

 

 

Examination under oath:  Execution under oath provision in a policy is condition precedent (a condition which must happen or performed before some right depend thereon can be performed) to the insured's recovery under policy and right to file suit; the insured's willingness to submit to an EUO (examination under oath) after a suit was filed did not comply with the policy.

 

Purpose of notification:  The purpose of the policy's notification requirement is to allow for investigation of facts and to assist the insurer in preparing defense.  Where policy's notification provision is to be enforced, the court will interpret the term "as soon as practicable" to mean within a reasonable time frame.

 

Insured’s financial condition:  It is widely accepted that an insured's financial condition was a proper subject of the insurer's postloss examination, where officials had informed the insurer that cause of fire loss was intentional.

 

Timely notice:  The requisite of timely notice of accident or occurrence is a condition precedent to the insurer's liability coverage, requiring substantial compliance by the insured.  A two-year delay in providing the insurer with notice of claim was substantial and material; the insurer was not required to demonstrate that it was prejudiced by such a policy violation.

 

NOTICE

 

Insured seeking to be excused from notice requirement:  An insured, seeking to be excused from the notice provision of the policy, has the burden of showing lack of prejudice to the insurer.

 

Reasonable time:  Many court cases revolve on what is a “reasonable time” for notification, and conflicts with the “immediate notice” provision of the policy.  Courts have a tendency to give quite a bit of leeway to insureds who report later than the insurer wishes.  The insurer has certain responsibilities and if the insurer waives a late notice defense by failing to state such defense as grounds for denying claim and then if the insured gives notice within a reasonable time, failure to give "immediate notice" will not bar claim.

 

Delayed notice:  Where the insured failed to notify the insurer of her loss until more than 30 days after the theft of her property and was subsequently interviewed by the insurer and was requested to accompany a claims representative to the site of the loss, and she was asked to submit a proof of loss.  Such acts of claims administration by the insurer did not constitute a waiver of a Homeowners policy requirement that the insurer be given immediate notice of loss.

 

Requirement of notifying insured of policy provisions:  It has been mentioned earlier that an agent should notify the insured of his duties in case of loss by at least calling it to the attention of the customer.  However, the insured is charged with notice of the policy provisions, and it is not the duty of the insurer to otherwise inform the insured of his duties.

 

Requirements of notification:  Requirements of notification, if they closely follow the ISO or similar forms, should stand the test of reasonableness.  One company had a 24-hour notice of loss, and the court found that the failure to comply with the requirement (that notice of theft be given within 24 hours of the loss) would not defeat recovery.

 

Immediate loss notification required:  However, a court from the same state, found that a six-month delay in reporting a theft of jewelry violated the requirement that notice of loss be submitted "immediately" or "as soon as practicable."  "Immediate" with regard to notice meant with reasonable celerity, with reasonable and proper diligence, and what was reasonable depended on all the facts and circumstances of the case.  Shortly after that decision, a court in another state ruled that the insured's failure to give the insurer immediate written notice of loss as required by the Homeowners policy until 16 months after loss precluded the insured's recovery for water damage to the insured's home.

 

PROTECTION OF PROPERTY

 

As a practical matter, property that has been damaged but not totally destroyed, should be protected to the best of the insured’s ability to forestall any further damage or loss.  Most people are aware that if a window is broke, they should cover it with plastic or wood so as to protect the interior of the building, etc.  The situations are not always clear-cut, however.

 

 

 

VERIFICATION OF LOSS

 

Additional living receipts:  It is absolutely necessary that the insured’s furnish the insurer with receipts for covered expenses.  For instance, in one case the court ruled that the insurer did not breach the policy by refusing to pay insureds their additional living expenses because the insureds failed to provide receipts for the additional living expenses, as required by the policy conditions after a loss.

 

 

EXAMINATION UNDER OATH

 

Refusal to submit to examination under oath:  The typical response of a court in respect with the failure of an insured to submit to an examination under oath, is simply stated in this decision:  The insured's failure to submit to an examination under oath is a material breach of the policy that relieves the insurer of its liability to pay.

 

Examination under oath vs. Fifth Amendment:  Ever so often, someone will attempt to use the Fifth Amendment (self-incrimination) as a reason not to submit to an examination under oath.  The response to this would be that the insured's refusal to submit to an examination under oath premised upon his Fifth Amendment rights, rendered the policy void without any requirement that the insurer show it was prejudiced by the refusal.  Sometimes the insured, knowing in advance that this 5^th Amendment ploy will not work, will subsequently offer to submit to an examination.  That should not work and the court would undoubtedly rule that it was unreasonably conditioned on the company's agreeing to waive its defense of noncompliance with the terms of the policy, so it was unreasonable as a matter of law, and did not cure the breach.  In other words, the insurer does not pay.

 

EUO while under indictment:  In another situation, the insured refused to submit to an examination under oath while she was under indictment for arson, but the court ruled that that would void the insurance.  This was a lose-lose proposition for the insured, as if she stated under oath that she did not set the fire, then she could be convicted of perjury.  If she stated that she did set the fire, then she could be convicted for arson.

 

Responsibility of insurer to request proof of loss:  Again, the insurer must also strictly follow the guidelines.  Courts have ruled that if the insurer does not request a sworn proof-of-loss statement, the insured has no responsibility to file such a form and there would be no forfeiture of coverage.

 

Failure to produce records:  An insured sued his Homeowners insurer for failure to pay a theft claim on the contents of the personal residence.  After the insured failed to produce corporate books and records, the court found that this was material breach of policy pre­cluding recovery on the theft claim.  Under the "examination under oath" clause, the insured must produce information demanded where circumstances of the loss are suspicious and the demand is reasonable and specifically related to the genuineness of the claim.

 

Questions regarding motive and financial information permitted:  The district court ruled in favor of an insurer in an insured's declaratory judgment action that sought determination that the "examination under oath" provision of its policy did not permit the insurer to question the insureds about possible motives for arson and that sought recovery for an alleged "bad faith" refusal to pay a fire claim.  The Fourth Circuit affirmed the district court's decision, finding that the scope of the "examination under oath" clause permitted questions regarding motives and financial information.

 

 

SWORN STATEMENT IN PROOF OF LOSS

 

Unreasonable extension of investigation time:  Insurer was required to pay a statutory penalty and lawyer's fees where it was in a position either to admit or deny a fire loss claim under a Homeowners policy within 60 days after the proof of loss was submitted and the insurer did not show a reasonable need for investigation past the 60-day period.

 

Furnishing information within time frame:  If an insured furnishes information to an insurer sufficient for the insurer to apprise the insurer of the character and extent of the claim, and the information is filed within 60 days, courts have generally considered that as sufficient if there were no particular forms required.

 

 

 

Following specific instructions at time of loss:  While some courts appear to be overly liberal in interpreting these provisions, actually some of the “toughest” states have had court decisions that emphasize the need for the insureds to follow the directions of the insurer to the letter.  As an example, where a public adjuster retained by the insured submitted an unsworn building estimate setting forth the extent of damage rather than a sworn statement in proof of loss as requested by the insurer, the court ruled that the insured's failure to submit a sworn proof-of-loss statement within 60 days of insurer's request was an absolute bar to claim on the policy.

 

Time limit for proof of loss:  A similar decision was where the insurer gave its insured written notice of its desire that proof of loss be furnished,  and even provided a suitable form for such proof, the failure of the insured to file proof of loss within 60 days after receipt of the notice, or within any longer period specified in the notice, is an absolute defense to an action on the policy, (absent waiver of the requirement by the insurer or conduct on its part estopping it from asserting the defense).  Proof of loss submitted approximately one week after expiration of 60-day period was untimely and precluded recovery on the policy.

 

 

 

LOSS SETTLEMENT

 

ISO.

3.  Loss Settlement. Covered property losses are settled as follows:

a.    (1)   Personal property;

(2)  Awnings, carpeting, household appliances, outdoor antennas and out­door equipment, whether or not attached to buildings; and

(3)   Structures that are not buildings;

at actual cash value at the time of loss but not more than the amount required to repair or replace.

 

Other Company.         3.         Loss Settlement. Covered property losses are settled as follows:

a.    Personal property and structures that are not buildings at actual cash value, up to the applicable limit of liability, at the time of loss. We will not pay an amount exceeding that necessary to repair or replace;

b.    Carpeting, domestic appliances, awnings and outdoor antennas, whether or not attached to buildings, at actual cash value, up to the applicable limit of li­ability, at the time of loss. We will not pay an amount exceeding that neces­sary to repair or replace;

 

Actual Cash Value:  Typically, the purchase price or the price of replacement and the date of purchase, are used to determine the actual cash value.

 

Determining the replacement cost:  In some cases, it is very difficult to ascertain the replacement cost, and in those situations the courts have generally allowed other evidence.  In one case in particular, the court ruled that despite contract language implying that the insured must provide proof of the actual cash value or market value of personal property as a precondition to payment of insurance proceeds, the insured's estimates of replacement cost were sufficient to support a jury verdict for damages to her personal property.

 

Purchase price:  Evidence of the purchase price offered on an arms-length transaction for the insured premises before it was damaged and the price offered after damage is sufficient to support an award of damages for the difference in many situations.

 

 

 

 

Home contents replacement cost endorsement:  A “Home contents replacement cost endorsement” does not increase the insurer's limit of liability for unscheduled property; instead, the endorsement simply changes the definition of the insuring clause to eliminate depreciation as a consideration of value within policy limits.

 

 

 

Measuring damage by fire loss:  The measure of damages involving fire to real and personal property is the difference between the reasonable value of property immediately before and immediately after casualty.  Cost of repair is not a proper measure of damage unless damage is comparatively insignificant considering total value.

 

Limit of insurer’s liability on total loss by fire:  An equitable decision regarding overinsurance was made in a court decision that stated that the limit of insurer's liability on total loss by fire is the actual cash value of the property at the time of loss.  Premiums charged for coverage in excess of actual cash value would be returned to the insured, with interest.

 

Determination of value of household effects:  It is difficult to determine the value of household effects and clothing after a fire.  An equitable decision was that under a Homeowners policy, the measure of damages for loss of household effects and used wearing apparel generally is, for insurance purposes, the value of its use to the owner who suffers from its deprivation, and not what a secondhand dealer would pay or what it would bring at a forced sale.  Another court, more succinctly stated that “The measure of recovery for the loss of used household furnishings and personal effects is not ‘fair market value’ but, rather, is the value of such goods to the insured.”

 

Inflation affecting cash value:  For anyone that owned, bought or sold a house a few years ago, particularly in California, by the time that a totally destroyed home was replaced, inflation would have pushed the value much higher.  This problem was solved by the courts and the insurers taking the position that "actual cash value" did not include post-loss effects of inflation, but insureds are entitled to interest for delay in receiving proceeds.  Insureds are entitled only to recover costs of repair as of date of loss and not as of date of judicial award.

 

 

 

LOSS SETTLEMENT - BUILDINGS

 

ISO. 3.  Loss Settlement. Covered property losses are settled as follows: ...

b. Buildings under Coverage A or B at replacement cost without deduction for depreciation, subject to the following:

(1)   If, at the time of loss, the amount of insurance in this policy on the dam­aged building is 80% or more of the full replacement cost of the building immediately before the loss, we will pay the cost to repair or replace, af­ter application of deductible and without deduction for depreciation, but not more than the least of the following amounts:

(a)   the limit of liability under this policy that applies to the building;

(b) the replacement cost of that part of the building damaged for like construction and use on the same premises; or

(c) the necessary amount actually spent to repair or replace the damaged building.

(2)   If, at the time of loss, the amount of insurance in this policy on the dam­aged building is less than 80% of the full replacement cost of the build­ing immediately before the loss, we will pay the greater of the following amounts, but not more than the limit of liability under this policy that applies to the building:

(a)   the actual cash value of that part of the building damaged; or

(b) that proportion of the cost to repair or replace, after application of deductible and without deduction for depreciation, that part of the building damaged, which the total amount of insurance in this poli­cy on the damaged building bears to 80% of the replacement cost of the building.

(3)   To determine the amount of insurance required to equal 80% of the full replacement cost of the building immediately before the loss, do not in­clude the value of:

(a) excavations, foundations, piers or any supports which are below the undersurface of the lowest basement floor;

(b) those supports in (a) above which are below the surface of the ground inside the foundation walls, if there is no basement; and

(c) underground flues, pipes, wiring and drains.

 

Other Company. 3.  Loss Settlement. Covered property losses are settled as follows; ...

       c.  Buildings under Coverage A at replacement cost at the time of loss without deduction for depreciation, subject to the following:

(1)  We will not pay more than the $10,000 limit on Land as provided in Sec­tion I, Additional Coverages.

(2)  We will not pay the cost of repair or replacement, without deduction for depreciation, but not exceeding the smallest of the following amounts:

(a) the limit of liability under this policy applying to the building;

(b) the replacement cost of that part of the building damaged for equiv­alent construction and use on the same premises; or

(c) the amount actually and necessarily spent to repair or replace the damaged building.

 

Replacing damaged property with property of higher cost/value:  With rapidly expanding technology, not only are computers obsolete relatively quickly, but also building materials continue to improve quite rapidly.  What happens when an insured suffers a loss and wants to replace the former material with a newer and more expensive but much better material?  The courts have not allowed this and in one case involving replacement of a vinyl floor, they ruled that the insurer's obligation to pay replacement cost was satisfied when they paid the amount necessary to replace the insured's vinyl floor with one of comparable quality to that which was damaged, even though the damaged floor was the best quality available at the time of installation but a better quality was available at the time of the loss and was selected by the insureds to be installed in their home.

 

Equivalent construction:  In a very similar situation, the loss settlement clause of the Homeowners policy did not require the insurer to provide the insureds with a cement floor in the garage after the insureds' garage with a wooden floor was destroyed by fire, even though a city's ordinance required a cement floor. The settlement clause limited indemnity to "equivalent construction."

 

Work performed by insured:  How about where the insured performed the work himself?  A court found that where the insured completed repairs himself for a lesser amount than the repair estimate, based on the clear language of the contract, the insured was not entitled to more than the amount actually spent on the repairs.

 

 

Insurer sued for breach of contract and bad faith:   The insureds and their mortgagee sued the insurer, seeking recovery for a breach of contract and bad faith in connec­tion with their claims for coverage after the insureds' house was damaged by fire.  The court held that: (1) the policy clause allowing the insurer to withhold replacement cost payment until actual re­pairs or replacements were made was not unconscionable and did not violate public pol­icy; (2) the mortgagee's recovery under the policy was limited to the amount of the loan that remained outstanding after the insured sold the house; (3) the issue of whether the insured acted in bad faith in calculating actual cash value had to be determined solely by consideration of its actions before it made its initial offer; and (4) the insurer made a timely initial offer after the fire, precluding the insured's claim for bad faith.

 

 

LOSS SETTLEMENT METHOD

 

ISO.  3.    Loss Settlement. Covered property losses are settled as follows: ...

(4) We will pay no more than the actual cash value of the damage unless:

       (a)   actual repair or replacement is complete; or

(b)   the cost to repair or replace the damage is both:

(i)    less than 5% of the amount of insurance in this policy on the build­ing, and

(ii)   less than $2500.

 

Other Company.    3.         Loss Settlement. Covered property losses are settled as follows: .

(3) We will pay the actual cash value of the damage to the buildings, up to the policy limit, until actual repair or replacement is completed.

 

Time for payment of repair or replacement:  Sometimes there appears to be a “Catch-22” situation where the insurer will pay for repair only after repair has been completed, but contractors may want their money “up front.”  In one such case, the insurer was not obligated to pay replacement cost for property destroyed by fire prior to completion of the actual repair or replacement.  A mere intention to replace does not trigger the insurer's replacement cost payment obligations, despite the insureds' allegations that they could not afford to effectuate that rebuilding because the insurer refused to guarantee the additional monies due under the policy to the contractor who had agreed to rebuild their home and that refusal constituted a breach of the duty of good faith and fair dealing.

 

Payment of loss after work completed:  An insurer may withhold some of the loss payment until the repair work is completed.  In such a situation, following a partial windstorm loss caused by Hurricane Andrew, the insurer withheld a holdback for depreciation under the replacement cost policy until the repair work was completed.  The court rejected the insured's argument that withholding of depreciation is prohibited by the state’s valued-policy law, finding that the statute is applicable only to partial fire or lightning losses and is not applicable to partial windstorm losses.

 

Rebuilding after receiving actual value from insurer:  Conversely, courts have held that under a replacement cost provision of a Homeowners policy, so long as a claim is asserted within 180 days of loss, the Homeowners are not required to rebuild their house until they receive payment of the actual cash value from their insurer.

 

As practical matter, there are many good contractors who will repair a residence with no payment until the repair has been completed.  Most insurers have a list of “approved” contractors, and by using one of them, the problem generally goes away.

 

When is insured entitled to receive payment for loss: In respect to personal property is concerned; the insurer's right under a policy to limit payment to actual cash value until property was repaired, restored, or replaced, is typically considered unenforceable to the extent it is inconsistent with the insured's statutory right to a sum of money equal to damage done to the property.  Insured's failure to buy replacements for personal property damaged by fire does not entitle Homeowners insurer to withhold depreciation. Any policy provision entitling the insurer to pay only actual cash value until property was repaired, restored, or replaced is unenforceable to the extent that it is inconsistent with the insured's statutory right to a sum of money equal to damage under the property.  Some states have statutes entitling an insured to money equal to damage done to the property or to repair to extent of damage whenever there is partial destruction of damage, and it would apply to real and personal property.

 

 

Amount withhold by insurer:  The amount that an insurer can withhold has also been established by the courts.  A contractor may require 20% of the cost for overhead and profit, and on occasion an insurer would withhold this amount in order to guarantee the workmanship of the contractor.  The insurer may also withhold any depreciation from the claims payment.  However, some courts have ruled that because repair or replacement costs include any cost an insured is reasonably likely to incur in repairing or replacing a covered loss-including, in some instances, the use of a general contractor; the insurer may not automatically withhold both depreciation and a flat 20% representing contractor overhead and profit from its advance payment of actual cash value.

 

Reconstruction does not entitle vendor to replacement cost:   As a matter of first impression, the court held that the purchaser's reconstruction of their home destroyed by fire did not entitle the insured vendor to replacement cost, rather than actual cash value from the home­owner's insurer.  Although the insured retained title to the property under a contract for deed and had an insurable interest in its full value, the policy only entitled the insured to actual cash value if the actual repair or replacement was complete.  Payment under the replacement cost provision was limited to the lesser of (1) the replacement cost or (2) the necessary amount actually spent to repair or replace the building.  Further, the facts show that the insured spent nothing to replace the dwell­ing and did not live there.

 

 

ACTUAL CASH VALUE CLAIMS

 

ISO. 3.

Loss Settlement. Covered property losses are settled as follows: ...

(5) You may disregard the replacement cost loss settlement provisions and make claim under this policy for loss or damage to buildings on an actual cash value basis. You may then make claim within 180 days after loss for any additional liability on a replacement cost basis.

 

Other Company. 3.

Loss Settlement. Covered property losses are settled as follows: ...

(4) You may disregard the replacement cost loss settlement provisions and make claim under this policy for loss or damage to buildings on an actual cash value basis and then make claim within 180 days after loss for any additional liabil­ity on a replacement cost basis.

 

Duty of insured to abide by terms of contract:  The insurer always has to abide by the terms of the contract, even more strictly than the insured, as noticed in previous discussions.  In a situation where the insurer interfered with the replacement of the property through unnecessary acts (according to the court), the court found that the insured was entitled to replacement cost coverage following collapse of her home during renovation despite her failure to comply with the policy term requiring her to rebuild the house and make a claim for replacement costs within 180 days, because the insurer's interference caused the insured to fail to meet the deadline.

 

What if the insured decides not to replace the building?  In valued-policy statute states, if the insured sustained total loss to dwelling covered under fire policy and did not replace the dwelling, the valued policy statute required payment of the full face value of the policy (absent any change increasing the risk without the consent of the insurer and absent any fraud by the insured), despite a policy provision establishing payment upon an actual cash value basis until actual repair or replacement was completed.

 

 

 

PAIR OR SET

 

ISO.

4.    Loss to a Pair or Set. In case of loss to a pair or set we may elect to:

       a.  repair or replace any part to restore the pair or set to its value before the loss; or

       b.  pay the difference between actual cash value of the property before and after the loss.

 

Other Company.

4.    Loss to a Pair or Set. In case of loss to a pair or set, we may elect to:

a.  repair or replace any part to restore the pair or set to its value before the loss; or

b.  pay the difference between actual cash value of the property before and after the loss.

 

Loss of one of pair or set:  When one of a pair or set is lost or destroyed, a determination of the value of the loss can become tricky.  The general rule is that where an insured lost one diamond from a multiple setting on a ring, the burden was on the insured to show the particular value of the object lost, as contrasted with the total value of the pair or set.

                                                GLASS REPLACEMENT

 

ISO. 5.

Glass Replacement. Loss for damage to glass caused by a Peril Insured Against will be settled on the basis of replacement with safety glazing materials when re­quired by ordinance or law.

 

Other Company. 5.

Glass Replacement. Loss for damage to glass caused by a Loss Insured shall be settled on the basis of replacement with safety glazing materials when required by ordinance or law.

 

No “quotable” recent cases to illustrate this provision.  It is another straight-forward provision, requiring glass replacement to be of the standards set by law.

 

 

APPRAISAL

ISO.

6.  Appraisal. If you and we fail to agree on the amount of loss, either may demand an appraisal of the loss. In this event, each party will choose a competent appraiser within 20 days after receiving a written request from the other. The two appraisers will choose an umpire. If they cannot agree upon an umpire within 15 days, you or we may request that the choice be made by a judge of a court of record in the state where the residence premises is located. The appraisers will separately set the amount of loss. If the appraisers submit a written report of an agreement to us, the amount agreed upon will be the amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will set the amount of loss.

Each party will:

a. pay its own appraiser; and

b. bear the other expenses of the appraisal and umpire equally.

 

Other Company.

6.  Appraisal.  If you and we fail to agree on the amount of loss, either one can demand that the amount of the loss be set by appraisal.  If either makes a written demand for appraisal, each shall select a competent, independent appraiser.  Each shall notify the other of the appraiser's identity within 20 days of receipt of the written demand. The two appraisers shall then select a competent, impartial umpire.  If the two appraisers are unable to agree upon an umpire within 15 days, you or we can ask a judge of a court of record in the state where the residence premises is located to select an umpire.  The appraisers shall then set the amount of the loss. If the appraisers submit a written report of an agreement to us, the amount agreed upon shall be the amount of the loss.  If the appraisers fail to agree within a reasonable time, they shall submit their differences to the umpire.  Written agreement signed by any two of these three shall set the amount of the loss. Each appraiser shall be paid by the party selecting that appraiser.  Other expenses of the appraisal and the compensation of the umpire shall be paid equally by you and us.

 

 

Right to demand an appraisal:  This clause stipulates that either the insurer or the insured has the right to demand an appraisal in order to determine the monetary damage or loss to an insured property.  The appraisal procedure is a valuation of property for damage resulting from an insured peril or for establishing the base amount of insurance coverage to be purchased.  If an insured and insurance company cannot agree on the amount of an insurer’s liability for a property loss, the policy specifies that the dispute be submitted to appraisal.  The procedure is as set out above, simply each party appoints an appraiser, and the two of them appoint the third – or a judge appoints the third if necessary.

 

There are a multitude of court cases involving this procedure; the following discusses only a few important decisions.

 

Appraisal when insurer denied payment:  An insurer was not obligated to submit to appraisal where it had denied payment because of suspicious circumstances surrounding the fire loss which, the court held, was an issue of coverage and thus for the trial court to determine.

 

Overturning appraisal provision:  On occasion, a court will overrule the Appraisal provision if there is substantial disagreement among the Appraisers.  (In the following court decision, “stare decisis” means to adhere to and abide by previous cases.  Obviously in this case, there had been a precedent set, quite unusual in this situation, but it is discussed here to illustrate the point that provisions can be ignored by the courts.)  The insurer moved for appointment of an umpire after the two appraisers could not agree on an umpire, and, at the hearing on the insurer's motion, the court declared the appraisal clause of the Homeowners policy void because it lacked mutuality. The court felt compelled to reach this decision under the doctrine of stare decisis because of an earlier opinion.

 

Insured’s right to refuse to submit to appraisal:  Another decision contrary to policy provisions:  Following a claim for loss resulting from Hurricane Andrew (incidental note, many laws, ordinances and statutes were enacted and interpretations of policy provisions changed, following the devastation in Florida of this storm), the insureds refused to submit to appraisal on the basis of the part of the appraisal provision reserving the insurer's right to deny the claim. The court held the insureds did not have to submit to appraisal because the clause lacked mutuality of obligation, which was incompatible with the goals of arbitration and rendered illusory any purported agreement to submit to binding arbitration.  (Mutuality means reciprocation.)  Mutuality of obligation {or mutuality of contract} means that obligation rests on each party to do or permit doing of something in consideration of other party’s act or promise; neither party being bound unless both are bound. 

 

Appraisal vs. Arbitration:  The “Appraisal” clause in a Homeowners policy is frequently equated with an “Arbitration” clause used widely in contracts.  One court, for instance, equated the appraisal clause in the Homeowners policy with an arbitration clause and held appraisal may be compelled by only one party where it is clear that the parties have agreed to submit to appraisal.  The lengthy settlement negotiations preceding the filing of the lawsuit did not waive the insurer's right to invoke the appraisal clause.  (What is interesting here, is that this is the same state that brought up the “mutuality of obligation” condition in earlier rulings.)

 

Appraisal right:  Since the word “may” appears (ISO model), one insured insisted that that makes it “permissive”, but the courts disagreed.  The court rejected the insured's contention that the word "may" in the appraisal clause connoted that the clause was permissive only.  Rather, the court held that neither party has the right to deny the demand once it is made and appraisal is mandatory.  Equating appraisal with arbitration, the court held the insurer's demand for arbitration was timely, and the insurer did not act inconsistently with that right at any point in the proceedings.

 

Impartiality:  The picking of an appraiser must be above-board and very much at arms-length.  If an appraiser works for, or has worked for, one of the parties, in any capacity, the courts may disallow the appointment.

 

Loss exceeding the face value:  Even where the loss may exceed the face value of the policy, disagreeing parties still have an obligation to submit the situation to appraisal.

 

Appraisal vs. jury trial:  Using the appraisal to settle differences, does not unconstitutionally deprive the insured of the right of jury trial.  Courts have found that even though an insurance contract is one of adhesion, it does not mean that either it or any of its terms are invalid or unenforceable.  It merely requires the court to examine its terms with special care and refuse to enforce terms it finds unconscionable.  The appraisal provision is not unconscionable but is an election to use an alternative dispute-resolution mechanism that the law not only recognizes but encourages.

 

Acceptance of court-appointed appraiser:  Parties submitted to appraisal, cannot question a court-appointed appraiser once the appointment has been made.  During an appraisal process, appraisers need not view each piece of damaged personal property in calculating the amount of the loss. The proper time to attack the credentials of a court-appointed umpire is at the time the court is considering the appointment.

 

Appointing an appraiser before filing a lawsuit:  Not appointing an appraiser before a lawsuit is filed, can be costly – particularly to an insurer.  One court ruled that absent a policy provision to the contrary, the insurer was not entitled to demand appraisal of loss after the insured had commenced lawsuit to recover for loss caused to residence by water damage from burst pipes.  Insurer's failure to demand appraisal prior to commencement of lawsuit led to determination of amount of loss under alternate provision in "loss payable" clause in Homeowners policy.

 

Arbitration unenforceable in some states:  A homeowners policy containing an appraisal clause, which provided that if the insurer and the insured failed to agree on the amount of loss, either could demand an appraisal consisting of two appraisers and an umpire to de­termine the amount of loss, constituted an unenforceable arbitration clause under a statute prohibit­ing such clauses in insurance contracts. (Very few states have this restriction)

 

 

 

OTHER INSURANCE

 

ISO.     7.  Other Insurance. If a loss covered by this policy is also covered by other insurance, we will pay only the proportion of the loss that the limit of liability that applies under this policy bears to the total amount of insurance covering the loss.

 

Other Company.         7.         Other Insurance. If a loss covered by this policy is also covered by other insur­ance, we will pay only for our share of the loss. Our share is the proportion of the loss that the applicable limit under this policy bears to the total amount of insurance covering the loss.

 

 

 

Two insurers covering the same risk:  Where property was damaged by fire after agreement of sale was signed but before settlement occurred, seller's insurer could recover a pro rata contribution from the buyer's insurer , even though the agreement placed the risk of loss on the seller.  The policies covered the same subject matter, protected against the same risk, and covered the same interest because both parties had an interest in the entire property at the time of loss. The terms of the agreement of sale did not alter the rights of the two insurers.

 

Prorating of claim amount:  In order to determine what each will pay, each insurer's liability for fire damage is prorated-calculated by dividing amount of coverage by sum of dwelling coverage of both policies, not including personal property or loss of use coverages.

 

 

Two insurers with pro-rata clauses:  Where there are two insurers who have contracted to pay a loss and each insurer's policy contains a pro rata clause, each insurer is liable to the insured only for its proportion of the loss; for "other insurance" to trigger operation of the policies' pro rata clauses, the other insurance must generally cover the same property and interest against the same risk in favor of the same party.

 

 

SUIT AGAINST INSURER

 

ISO.  8.    Suit Against Us. No action can be brought unless the policy provisions have been complied with and the action is started within one year after the date of loss.

 

Other Company.         8.         Suit Against Us. No action shall be brought unless there has been compliance with the policy provisions.  The action must be started within one year after the date of loss or damage.

 

Time frame for filing suit against insurer by insured:  Where the insured sued insurer for policy benefits arising from soil subsidence damage, the court held that (1) the one-year suit provision did not begin to run until damage became observable; (2) the one-year provision applies to the date of discovery of the loss itself, not the date of confirmation of the cause of loss; (3) insured's bad faith claims did not arise until the date of the insurer's wrongful denial of coverage and therefore were not subject to the one-year suit provision.

 

Physical damage required during policy period:  The court held that a property owner is not entitled to recover under a first-party "all-risk" Homeowners policy unless there is some manifestation of physical damage to the insured property during the policy period.  Diminution in market value due to neighboring landslide is not physical damage under the policy.  The court also held that the time for filing a suit is tolled during the period that the insurer is reviewing the claim presented by the insured.

 

Time for providing claim report:  The Homeowners could not toll (to abate) the period of limitations (show facts which remove its bar of the action) by contending that they belatedly discovered the policy might provide coverage for their first-party losses.  The court also held that a bad faith claim cannot be maintained unless policy benefits are due and owing.

 

Commencement of suit:  The one-year period of limitation contained in a Homeowners policy requiring suit to be commenced within 12 months after the inception of a loss, begins to run upon inception of the loss but may be equitably tolled from the time the insured gives timely notice of the loss until the insurance company formally acts upon the claim.

 

Tort claims against insurer:  The specific policy provision requiring suit against the insurer to be commenced within 12 months, applied to contract claims against the insurer,  but would not bar tort claims of bad faith, delay or denial of claim.

 

 

Length of time for action to be taken:  Where state laws on the length of time during which action on contracts must be made, and an insured did not take action against an insurer within 12 month, the courts ruled that a State statute provided that an action on a written contract be brought within 10 years after the cause of action had accrued, but did not prohibit shorter contractual limitations periods.  In an action against a property insurer to recover under the policy for a fire loss, the insured argued that the 10-year state provision applied.  The court held that the state statute did not conflict with or invalidate the one-year suit limitation in the policy and that the one-year provision was valid and enforceable as the parties had mutually consented and agreed to the provision.

 

When does the one-year period start?  The insured held a Homeowners policy insuring against loss caused by mine subsidence.  After she filed a claim for loss caused by mine subsidence, which was denied, she failed to file suit within one year of the loss.  She claimed that, for mine subsidence losses, the one-year suit limitation contained in the policy should begin to toll only after her discovery of the last expert opinion favorable to her claim.  The court held that the one-year suit limitation provision began from the date of the loss, not from the date of events that caused the loss, and was valid and enforceable.  Also, there was no waiver of the contractual time limitation even though the insurer did not flatly deny claim in denial letter.

 

Latent of progressive property claims:  For claims made under Homeowners policy for latent or progressive property damage, the date of loss from which the limitation period in the policy begins to run is determined on the basis of when appreciable damage occurred.  Summary judgment was not appropriate where a factual question existed as to whether the insured suffered appreciable damage when a thunderstorm caused initial cracking of basement walls or later when damage due to cracking spread throughout the house.

 

Statute of Limitations:  Absent a provision in the insurance policy or an express statute to the contrary, the statute of limitations applicable to a suit on a policy is six years from the date on which the insured discovers, or by exercise of reasonable diligence and intelligence should have discovered, facts that form the basis of a cause of action.  The insureds were barred from recovery because they were aware of the loss immediately after its occurrence, failed to bring suit until more than six years later, and offered no evidence that the insurer engaged in conduct to mislead them that litigation could be avoided or that it would waive its defenses, including the statute of limitations.  The insureds were not barred from recovery for a later loss brought within the six-year statutory period.  The policy's twelve-month suit limitation period began to run from the date of the casualty but was tolled from the time the insured gave notice of the loss until coverage was formally denied.  Because the insurer did not formally deny coverage, an action brought almost six years after the loss was not barred.

 

Time limit to file suit conflicting with statute of limitations:  (Notice six-year statute of limitations above, some states are even more).  A Provision in Homeowners policy requiring the insured to file suit within one year after loss was not unreasonable and did not conflict with statute generally providing for 15-year limitation for actions upon written contracts, and no waiver existed as to enforcement of provision where the insurer denied claim on the basis of evidence of arson one month prior to expiration of suit-limitation period.

 

Suit limitation provision not contrary to public policy:   People will try anything, even insisting that this provision is contrary to public policy.  But, as a court ruled, the policy's one-year suit-limitation provision was not contrary to public policy.  Insureds were barred from recovery where they failed to produce any evidence to support their assertion that the insurer induced them to delay bringing suit by leading them to believe that the limitation period would not be enforced.

 

Inception of loss:  The term “inception of loss” was defined in the following case:  When the insured suffered damage to roof of dwelling as a result of a hailstorm, which damage went undiscovered for two months after the storm, the failure to bring suit within one year after the date of the loss as required by Homeowners policy barred the insured from recovery.  The term "inception of the loss" refers to the date of the injury or damage and not the date when the loss is discovered or could have been discovered through the exercise of reasonable diligence.

 

 

OUR OPTION

 

ISO.  9.    Our Option. If we give you written notice within 30 days after we receive your signed, sworn proof of loss, we may repair or replace any part of the damaged property with like property.

 

Other Company.         9.         Our Option. We may repair or replace any part of the property damaged or stolen with equivalent property.  Any property we pay for or replace becomes our property.

 

The following Consumer Application illustrates this provision:

 

 

                  

                                                            LOSS PAYMENT

 

ISO.  10. Loss Payment. We will adjust all losses with you. We will pay you unless some other person is named in the policy or is legally entitled to receive payment. Loss will be payable 60 days after we receive your proof of loss and:

a.  reach an agreement with you;

b.  there is an entry of a final judgment; or

c.  there is a filing of an appraisal award with us.

 

Other Company.         10. Loss Payment. We will adjust all losses with you. We will pay you unless some other person is named in the policy or is legally entitled to receive payment. Loss will be payable 60 days after we receive your proof of loss and:

a.  reach agreement with you;

b.  there is an entry of a final judgment; or

c.  there is a filing of an appraisal award with us.

 

Double-signature checks:  The typical loss settlement practice of putting both the insured and the contractor on the check can cause problems when the contractor’s work is not suitable to the insured.  A court ruling is rather typical of this situation when it stated that pursuant to the loss payment provision, the insurer put both the names of the insured and the repair contractor on the check, but it was not contractually responsible for supervising the repair contractor.

 

Bad Faith claim:  The charge of a “bad faith” claim is often raised.  A typical response to this would be as follows:   The insurer had an arguable, debatable basis for denying coverage for the insured's wall claim resulting from the rotting and deteriorated condition of the wall.  The overall structure of the policy provided coverage for damage caused by water intrusion that was immediate and accidental but excluded coverage for losses that resulted from long periods of decay and deterioration.

 

Penalty for Bad Faith:  The penalty for bad faith claims can be quite severe.  A jury verdict awarding compensatory damages for a contract claim and punitive damages for a bad faith claim was affirmed on appeal.  The facts regarding the insurer's entitlement to void the policy because of misrepresentation was a question for the jury, and there was evidence that the insured's application should have put the insurer on notice that further inquiry was necessary.  Further, the insurer could have checked its records and found, "with a minimum of inquiry," that the insured's application misrepresented the actual facts.  (Undoubtedly, the company’s records will be diligently searched with each new application from that point forward.)

 

Bad Faith claim where insurer had basis for denying the claim:  The same state, 3 years earlier, gave the following decision on a similar situation.  Under state law, a claim for the tort of bad faith failure to pay an insurance claim cannot succeed, regardless of how recklessly the insurer conducted its investigation, where the insurer had an arguably lawful basis for denying the claim at the time the denial decision was made.  Evidence of possible arson and intentional misrepresentation of the home's contents by the insureds provided an arguable basis for denying their claim.

 

Attorneys fees:  In many states, the insurer’s settlement will include the insured’s attorney’s fees, if the insured is victorious.  After an insured has filed suit to recover under an insurance policy, the insurer's settlement and payment to the insured ordinarily does not relieve the insurer of the obligation to pay a lawyer's fee pursuant to state statute.  The insurer could be held liable, jointly and severally, with the lawyer's clients where the insurer had notice and knowledge of the lawyer's claims before it paid the proceeds of the settlement or made its offer.

 

Punitive damages:  Punitive damages were addressed above, and an insurer could find themselves paying punitive damages if they deny a claim without “rock-solid and concrete” reasons.  Under the laws of many states:

 

 

Putting it in another context:  An insured wife was not entitled to punitive damages for the insurer's alleged failure to pay her for a fire loss where a legitimate basis for denial included (1) attributing her husband's criminal act of arson to her, (2) a reasonable belief that she was guilty of complicity in the arson, and (3) her false statements during the course of the investigation that were both willful and material.

 

Arguable reason to deny claim:  When the circumstances provided the insurer with considerably more than an arguable reason to deny the claim, the insured's counterclaim for bad faith will be denied.

 

Responsibility of the insurer to not delay payment:  Yes, the insured has certain responsibilities in this area also. “The insurer did not wrongfully delay payment of the claim for a fire loss beyond the 60-day period prescribed by the policy because the taking of an initial examination under oath of the insureds was reasonably required and was delayed beyond the expiration of the 60-day period solely because of the actions of the insureds and their lawyer.”

Prompt claim settlement:  The insurer must settle the claim promptly.  The insured under a Homeowners policy was entitled to prejudgment interest where the complaint against the insurer alleged, and the insurer acknowledged, that the insured premises and its contents were a total loss so that there was no question as to the amount of coverage involved.

 

 

Purchaser of house having equitable ownership under policy:  A purchaser of a house by con­tract for deed brought an action against the vendors and their fire insurer to recover for destruction of the house. The court held that the purchaser's status as a stranger to the fire insurance policy is­sued to the vendors did not defeat his right to insurance proceeds after payment of indebtedness on the contract for deed, even though the policy did not have the named purchaser as the insured. The purchaser had an equitable ownership interest and was subrogated to the rights of the vendor un­der the insurance policy.

 

 

ABANDONMENT

 

ISO.  11. Abandonment of Property. We need not accept any property abandoned by an insured.

 

Other Company.         11. Abandonment of Property. We need not accept any property abandoned by an insured.

 

Abandonment in a Homeowners policy is not interpreted or defined the same as in Inland Marine and Marine insurance, but takes the legal definition which defines it as “the relinquishing of a right or interest with the intention of never again claiming it.”  Abandoned property is therefore, “property that the owner voluntarily surrenders, relinquishes, or disclaims.”

 

 

 

CONDITIONS – MORTGAGE, NUCLEAR, VOLCANIC & RECOVERED PROPERTY CLAUSES

 

ISO.

12. Mortgage Clause.

The word "mortgagee" includes trustee.

If a mortgagee is named in this policy, any loss payable under Coverage A or B will be paid to the mortgagee and you, as interests appear. If more than one mortgagee is named, the order of payment will be the same as the order of precedence of the mortgages.

If we deny your claim, that denial will not apply to a valid claim of the mortgagee, if the mortgagee:

a.    notifies us of any change in ownership, occupancy or substantial change in risk of which the mortgagee is aware;

b.    pays any premium due under this policy on demand if you have neglected to pay the premium; and

c.     submits a signed, sworn statement of loss within 60 days after receiving no­tice from us of your failure to do so. Policy conditions relating to Appraisal, Suit Against Us and Loss Payment apply to the mortgagee.

If the policy is cancelled or not renewed by us, the mortgagee will be notified at least 10 days before the date cancellation or nonrenewal takes effect. If we pay the mortgagee for any loss and deny payment to you:

a.    we are subrogated to all the rights of the mortgagee granted under the mortgage on the property; or

b.    at our option, we may pay to the mortgagee the whole principal on the mortgage plus any accrued interest. In this event, we will receive a full assignment and transfer of the mortgage and all securities held as collateral to the mortgage debt.

Subrogation will not impair the right of the mortgagee to recover the full amount of the mortgagee's claim.

 

Other Company.    12. Mortgage Clause. The word "mortgagee" includes trustee:

a.    If a mortgagee is named in this policy, any loss payable under Coverage A shall be paid to the mortgagee and you, as interests appear. If more than one mortgagee is named, the order of payment shall be the same as the order of precedence of the mortgages.

b.    If we deny your claim, that denial shall not apply to a valid claim of the mortgagee, if the mortgagee:

(1)   notifies us of any change in ownership, occupancy or substantial change in risk of which the mortgagee is aware;

(2)   pays any premium due under this policy on demand if you have neglected to pay the premium;

(3)   submits a signed, sworn statement of loss within 60 days after receiving notice from us of your failure to do so. Policy conditions relating to Appraisal, Suit Against Us and Loss Payment apply to the mortgagee.

c.     If this policy is cancelled by us, the mortgagee shall be notified at least 10 days before the date cancellation takes effect.

d.    If we pay the mortgagee for any loss and deny payment to you:

(1)   we are subrogated to all the rights of the mortgagee granted under the mortgage on the property; or

(2)   at our option, we may pay to the mortgagee the whole principal on the mortgage plus any accrued interest. In this event, we shall receive a full assignment and transfer of the mortgage and all securities held as collat­eral to the mortgage debt.

e.     Subrogation shall not impair the right of the mortgagee to recover the full amount of the mortgagee's claim.

 

 

 

 

WHO ARE THE MORTGAGEES

 

 

Keeping property for the benefit of the sellers:  Where sale contract provided that buyers were to keep property insured for the benefit of sellers, (a common requirement), but failed to name sellers in policy, sellers had no standing to recover under "standard mortgage clause" of buyer's policy.  Moreover, even though equitable lien doctrine applied, seller's rights were no greater than those of buyers, who could not recover because of intentional burning of premises (the obvious purpose of the lawsuit).  Therefore, sellers could not recover.

 

Holding assignment of second mortgage:  The plaintiff held assignment of second mortgage on real properly and chattel mortgage on furnishings, and both real and personal property were destroyed by fire.  In considering issue of recovery under a Homeowners policy, the court held that the plaintiff was entitled to recover as a mortgagee for the loss to the real property, but was not entitled to recover upon the chattel mortgage because it was not named in the policy as a chattel mortgagee.  The insured's assignment to plaintiff of her right to recover under the policy was enforceable.

 

 

Error in naming servicing agent:  An error in naming a mortgagee's servicing agent as a mortgagee in a contract does not bar a claim by a true mortgagee under the insurance contract. True mortgagee's interest also survived the foreclosure of mortgagee.

 

Naming the mortgagee:  The mortgagee must be named in the insurance policy.  If a lienholder or creditor is not a party to an insurance contract, they cannot complain of not receiving benefits of contract covering the insured property.  Under the mortgage clause in the Homeowners policy, the unnamed mortgagee was only entitled to receive amount due on its mortgage out of funds recovered by or due the insured. The mortgagee occupied the status of equitable lienholder and was subject to a defense asserted successfully against the insureds by the insurer.

 

MORTGAGEE'S RIGHTS & DUTIES

 

Relationship of mortgagee, mortgagor and insurer:  A mortgagee acquired an interest in the proceeds of an insured mortgagor's fire policy as a loss payee at the time of the fire, to the extent of its outstanding mortgage on the property.  At the same time, the insureds acquired an interest in the balance up to the policy limit; the execution of a pro tanto (as far as it goes) settlement and release was released.  However, between the mortgagee and the mortgagor, in which the mortgagee disclaimed any interest in any proceeds recovered from the insurer.  This resulted in the insureds mortgagors becoming the exclusive beneficial owners of money due from the insurer under the policy.

 

Mortgagee may not collect more than the value of the mortgage debt:   The sale of a mortgage to an assignee, unlike the sale of mortgaged property itself at a foreclosure sale, does not result in the extinguishment of the mortgage debt.  Further, it does not prevent the assignee, standing in the shoes of the original mortgagee, from asserting that the mortgagee's rights to insurance pro­ceeds were payable on the destruction of the mortgage property in a fire, though the assignee did not acquire the mortgage from the original mortgagor until after the property had already been de­stroyed.  The court held that once a mortgage debt had been fully satisfied at a foreclosure sale, the mortgagee has no right to insurance proceeds payable for damage to the mortgage property, as the mortgagee may not collect more than the amount of mortgage debt.

 

Requirement of Mortgagee to give notice to insurer:  In considering the issue of mortgagee's recovery under Homeowners policy, the court held that, where a policy contained a "standard union" mortgage clause, (which also required the mortgagee to notify the insurer of any change in ownership or occupancy and increase of hazard that shall come to the knowledge of the mortgagee), material issues of fact remain as to whether the mortgagee had breached its duty to give the insurer such notice.  Further, if the insurer had suffered prejudice, loss, or damage as a result, because the mortgagee had been advised by the insured that (1) ownership of the property had been transferred to second mortgagee, (2) that house had been flooded, (3) that insureds were no longer residing in the property, and (3) that two weeks later the house was destroyed by fire. Therefore, there was sufficient issues of fact to be determined by the court.

 

 

 

 

 

 

If a mortgagee has separate and distinct contracts of insurance on its own interest, having independent status, mortgagee may be able to recover even if the insured owner could not.

 

 

 

 

 

Two contracts:  By now, it should be apparent that there really are two contracts where a mortgagee is listed on a policy.  In 1985, this was recognized when a court ruled that although only one insurance commitment is present in a policy against fire loss, the insurer's obligation to mortgagee and named insured are two separate contracts.  Named insured has no legal interest in the unpaid mortgage balance and cannot collect that amount from the insurer.

 

Time of notice to mortgagee:  The rules change when a mortgagee is involved.  For instance, time of notice was the subject of a court decision in 1995.  The mortgagee is subject to policy provisions relating to the time of bringing suit only upon notification of the loss by the insurer.  To the extent that the policy purported to require a mortgagee to bring suit within two years of the date of loss, rather than within two years after it was notified of the loss by the insurer, it is found to be inconsistent with statutes and will not be enforced.”

 

Mortgagee’s performance in case of loss:  A mortgagee does not have to perform in the same fashion as an insured incase of a loss.  A mortgagee named in a fire insurance policy containing a standard mortgagee clause is not obligated to comply with the provisions of the policy requiring the named insured to submit to an examination under oath.

 

Separate contract between insurer and mortgagee:  Further, a standard mortgage clause in a fire policy creates a separate contract between the insurer and mortgagee; misrepresentations made by the insured on application for insurance, which supported voiding of the policy as to the insured, did not void the policy as to the mortgagee.

 

Relationship between mortgagee and insurer:  Another court ruled that the mortgagee under a standard mortgage clause in a fire insurance policy has an independent contract with the insurer which cannot be invalidated by any act of the owner and which continues valid and enforceable until rendered invalid by a subsequent act or neglect of the mortgagee.  In the event of loss, a mortgagee has an independent right to an appraisal.  There is no relationship of principal and agent between the owner and the mortgagee.

 

Mortgagee’s interest in Second Mortgage:  In the case of a Second Mortgage, a second mortgagee is also covered, but with the restriction that the insurer will not have to pay more than the value of the loss.  The standard mortgage clause is designed to protect the mortgagee from any acts of the mortgagor that could invalidate coverage and leave the mortgagee without security.  A mortgage clause provides that a mortgagor may do nothing to diminish a mortgagee's rights under the policy.  However, the mortgagee must comply with the terms of the policy if he is to recover.  Where a first mortgagee is covered by an insurance policy, a second mortgagee covered by a separate and distinct policy must prove the amount of the first mortgagee's interest in order to comply with long-standing rule that insurer's payout liability cannot exceed the value of loss itself.

 

FORECLOSURE

 

 

Mortgagee purchases property at foreclosure sale:  Where the mortgagee successfully bid the full amount owed on its mortgage at the foreclosure sale, it extinguished any insurable interest it held in the property and could not thereafter recover under the insured's Homeowners policy for damages to property caused by fire on the property prior to the foreclosure sale.

 

Notice to insurer:  Where a policy contained a standard mortgage clause and premises were damaged by fire three days after mortgagee obtained a quitclaim deed through foreclosure proceedings from the named insured, mortgagee was entitled to proceeds of the policy even though it did not notify the insurer of change in status.

 

Satisfying the mortgage debt:  When a mortgagee foreclosed on the property after a fire loss, and purchased it at the foreclosure sale for a price in excess of the mortgagor's indebtedness, the mortgage debt is satisfied and the mortgagee's right to proceeds under mortgage-loss-payable clause of insurance policy is terminated.

 

Protection of mortgagee’s rights:  The mortgagee’s rights are well protected.  A Mortgagee was entitled to proceeds from the settlement of an action on policy brought by a Homeowner after pipes burst and caused water damage to home.  Mortgagee's rights to proceeds became vested at the time of loss and such rights were not affected by the insurance company's delay in payment, subsequent foreclosure of property, or expiration of redemption period.

 

Plaintiffs in this case foreclosed on the house insured under the policy shortly after it had been severely damaged by fire.  Plaintiffs' bid of $6,700.00 at the foreclosure sale was accepted and left a deficiency of $25.70.  The court held that plaintiffs were entitled only to the deficiency as recovery under the policy in that their only interest under the policy was represented by the indebtedness, which had been extinguished by payment of the bid at the foreclosure sale.

CANCELLATION/NONRENEWAL

 

Mortgagee as loss payee:  A first mortgagee listed as loss payee on an insurance contract is not barred from recovery under a non-renewed contract where no notice of the impending expiration date was provided to the mortgagee and mortgagee had no knowledge of the nonrenewal.

 

 

 

 

The right of the insurer to cancel a policy covering a home can be exercised only after a strict compliance with the terms of the agreement between it and mortgagee.

 

 

 

 

OTHER

 

 

The mortgagee’s insurable interest:  A mortgagee has an insurable interest in the insured property up to the amount of the mortgage debt.  When a mortgagee purchased the insured property by a full credit bid, the mortgagee's insurable interest was extinguished.  An insurer has no duty to inform a mortgagee that the mortgagee's insurable interest will be extinguished by a full credit bid purchase of the insured property.

 

 

 

 

 

 

Additional monies after foreclosure sale:  After the insured's home was partially destroyed by fire, the mortgagee foreclosed on the property and sought insurance proceeds as assignee under terms of the mortgage.  However, the mortgagee could not recover additional monies because the purchase price at the foreclosure sale equaled the full amount of the debt.  An appraisal regarding value of loss to home was not set aside by the court in absence of evidence of bad faith, fraud, misconduct, or manifest mistake by the appraisers.

 

Assignment vs. subrogation:  Whoops, wrong choice!  The insurer was required to elect between taking an assignment of mortgagee's interest in the property or becoming subrogated to mortgagee's rights.  The insurer's decision to take an assignment foreclosed it from pursuing the remedies available had it chosen to become subrogated to the mortgagee's rights.

 

 

The insured’s right to receive the mortgagee’s interest in case of loss:  If an insurer pays a mortgagee, one would assume that the amount paid to the insured would be reduced by this amount.  However, there are several cases where the insureds attempted to receive the total payment after a loss, including the amount paid to the mortgagee.  In a lawsuit for fire damages to a dwelling house which ended in a judgment for the insured, the insurer was entitled to have court reduce the judgment by the amount paid to a mortgagee named on the policy.  In another case, the insurer was entitled to assert, as affirmative defense, that if the insured establishes right to recovery under the policy, the recovery should be reduced by the amount the insurer paid to the mortgagee.

 

Credit allowed for mortgagee payment:  In another case, the insurer was properly allowed a credit for the amount paid to the named mortgagee on the policy.  Where an insurance company has properly paid a benefit required by the policy, it is entitled to a credit for the amount paid against a judgment rendered on the policy.

 

 

NUCLEAR HAZARD

 

ISO. 14.  Nuclear Hazard Clause.

a.    "Nuclear Hazard" means any nuclear reaction, radiation, or radioactive contamination, all whether controlled or uncontrolled or however caused, or any consequence of any of these.

b.    Loss caused by the nuclear hazard will not be considered loss caused by fire, explosion, or smoke, whether these perils are specifically named in or otherwise included within the Perils Insured Against in Section I.

c.     This policy does not apply under Section I to loss caused directly or indirectly by nuclear hazard, except that direct loss by fire resulting from the nuclear hazard is covered.

 

Other Company. 2.  We do not insure under any coverage for any loss which would not have occurred in the absence of one or more of the following excluded events. We do not insure for such loss regardless of: (a) the cause of the excluded event; or (b) other causes of the loss; or (c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss: ...

f.     Nuclear Hazard, meaning any nuclear reaction, radiation, or radioactive contamination, all whether controlled or uncontrolled or however caused, or any consequence of any of these. Loss caused by the nuclear hazard shall not be considered loss caused by fire, explosion, or smoke. However, we do insure for direct loss by fire resulting from the nuclear hazard.

 

There are no pertinent recent court decisions regarding nuclear hazards, and the provision is quite precise and easy to understand.  Any reiteration would be redundant. 

 

 

 

 

POLICY PERIOD

 

ISO.   1.      Policy Period. This policy applies only to loss in Section I or bodily injury or property damage in Section II, which occurs during the policy period.

 

Other Company.         1.         Policy Period. This policy applies only to loss under Section I or bodily injury or property damage under Section II which occurs during the period this policy is in effect.

 

 

 

Latent defect:  Where defective construction, design, or fabrication of property results in the property's failure or deterioration before its normal life and the defect is not apparent upon reasonable inspection but only after postfailure examination by an expert, then the resulting loss is caused by a "latent defect."  The court also held that the trial court did not err by concluding that the "latent defect" exclusion applied to a contractor's negligence. Finally, the court held that when progressive damage occurs during the periods when successive policies are in force, the policy covering the loss is the policy in force at the time the damage becomes appreciable or manifest.

 

 

 

 

STUDY QUESTIONS

1.  Jim did not notify the insurance company of the extent of a otherwise covered theft loss for 90 days after the theft had occurred.  Jim insisted that the insurance agent had not notified him of the necessity of immediate notification and he did not want to report it until he got back from a lengthy cruise.

      A.  The insurer will have to accept the claim as Jim was “out-of-territory”, an exception to the immediate notification rule.

      B.  It is not the responsibility of any other party to notify Jim of his duties under the policy, so the insurer would probably deny coverage.

      C.  The insurer will pay as there is no time limits for loss by theft.

      D.  If the insurer does not pay the claim, Jim can successfully sue the age

 

2.  Which of the following is not considered in determining the actual cash value in case of loss?

      A.  The purchase price.

      B.  Price of replacement.

      C.  Date of purchase.

      D.  Value of emotional distress at the loss of the property.

 

3.  A “Home Contents Replacement Cost Endorsement”

      A.  increases the insurer’s limit of liability for unscheduled property.

      B.  changes the definition of the insuring clause to eliminate depreciation as a consideration of value within policy limits.

      C.  is not allowed in nearly all the states at the present time.

      D.  changes the definition of the insuring clause to eliminate depreciation as a consideration regardless of (outside of) policy limits.

 

4.  Many states have a “Valued Policy” law.  What is this law?

      A.  The insurer must pay the Actual Cash Value of the policy, instead of the Face Amount.

      B.  The insurer must pay the Face Amount instead of the Actual Cash Value of the policy.

      C.  The Insurance Department appoints an appraiser to determine the value of the property.

      D.  The insurer must not insist on a coinsurance provision in property policies.

 

5.  If the insured and the insurer fail to agree on the amount of loss, each party appoints an individual to represents their interest who will then appoint a 3^rd party.  If the two representatives cannot agree on an amount, it will be forwarded to the third party who will make the determination.  In a Homeowners policy, this is procedure is called

      A.  Arbitration.

      B.  Appraisal.

      C.  Justification.

      D.  Loss Value Determination.

 

6.  Under the Homeowners policy, “If a _____________ is named in this policy, any loss payable under Coverage A or coverage B, will be paid to the _________ and you, as interests appear.

      A.  vendor

      B.  coinsured

      C.  mortgagee

      D.  mortgagor

 

7.  A mortgagee foreclosed on the insured’s property after a fire loss, and then purchased it at the foreclosure sale for a price in excess of the mortgagor’s indebtedness.

      A.  The mortgage debt is satisfied and the mortgagee’s right to proceeds under the policy is terminated.

      B.  The mortgagee must still receive the full amount of the proceeds.

      C.  The mortgagee is not allowed to force foreclosure on the property that it later purchases.

      D.  By paying the claim to the mortgagee, the insurer is now liable to the insured for the full amount also.

 

8.  Agent Don sold a Homeowners policy with the named mortgagee making premium payments.  The insured decides to place the Homeowners with another company after 6 months.  Agent Don should

      A.  try to salvage the business, but if unsuccessful, just drop the matter.

      B.  initiate a law suit against the other insurance company for “twisting” the policy.

      C.  report the incident to the Department of Insurance as that is all he has to do.

      D.  immediately notify the mortgagee.

 

9.  “A hidden problem or product imperfection that is not discoverable by reasonable inspection, and for which a seller or lessor is generally liable if the flaw causes harm” is the definition of

      A.  Hidden Defect.

      B.  Latent Defect.

      C.  Concurrent Cause.

      D.  Subrogation.

 

10.  When progressive damage occurs during the periods when successive policies are in force, the policy covering the loss is

      A.  the policy in force at the time the damage becomes appreciable or manifest.

      B.  the policy that was in force at the time the first indications of the action causing the loss became apparent.

      C.  considered null and void, however some insurers will reissue with exclusions for the damaged property.

      D.  is considered as “nol appropo” (not appropriate) for either, therefore the loss is split between the two policies.

 

 

ANSWERS TO STUDY QUESTIONS

 

1B     2D     3B     4B   5B     6C     7A     8D     9B     10A