Insurance Carriers’ Increasingly Asserted Requirement In First Party Cases That
Insureds Pay Out-Of-Pocket Before Reimbursement Of Various Covered Costs
The Nuts And Bolts Of How To Defeat A Strategy
That Essentially Renders Some Coverage Illusory
In these economic times, there is an almost unassailable argument that insurance companies have even greater incentives to underpay on claims. Although decisional, statutory, and regulatory law (as well as fundamental notions of integrity), proscribe the practice, the claims department may become a means for the carrier to attain profitability.
The Insurance Services Office (“ISO”) estimates that in 2010, the U.S. property/casualty insurance industry’s net income after taxes reached $34.7 billion. This is up from its net income of $28.7 billion in 2009. (ISO Studies and Whitepapers, Insurer Financial Results, 2010, Executive Summary, p. 1.)
ISO also concludes, however, that it is clear that the “Great Recession” has had an adverse impact on the property/casualty insurance industry - its 2010 net income of $34.7 billion is just over half of its $62.5 billion in net income for 2007. (Ibid.)
In 2008 alone, it is estimated that the housing market crash cost homeowner insurers $1 billion in lost premium growth, due to a 50 percent decline in new home construction, and stricter lending standards resulting in fewer sales. (Robert P. Hartwig, Ph.D., Insurance Information Institute, “The Financial Crisis and the P/C Insurance Industry: Challenges Amid the Economic Storm,” September 23, 2008.)
With this backdrop, property/casualty carriers - particularly homeowner insurers - have been more unyielding vis-à-vis claim proof requirements - to the point of wavering from past industry standards or practices.
Based on trends we have observed over the past 25 years of practice, including most recently a homeowner bad faith trial that spanned 7 weeks (which concluded with a confidential resolution), we focus in this article on homeowner carriers’ evident evolving attitude towards claims handling in first party homeowner cases.
Additional Living Expenses
Standard ISO homeowner Forms provide Coverage D, Loss of Use Coverage, and include “Additional Living Expense (“ALE”).” After their homes suffer a catastrophic loss, most insureds initially are primarily concerned about their ALE coverage.
The purpose of ALE is to provide immediate relief due to uninhabitability of the home, and to help insureds maintain their “normal,” pre-loss standard of living.
ALE benefits often are the first payments the insurance company makes. Prompt payment of ALE benefits in an amount reasonably necessary for insureds to maintain their “normal” standard of living - e.g., for a comparable residence - often facilitates the smooth handling of the claim thereafter.
Because of the critical and immediate nature of this coverage, carriers in the past typically would front ALE costs - even before insureds provided receipts and proofs of out-of-pocket costs. Once insureds were able to secure long term relocation, if necessary, they then provided cost proofs to their carriers.
Even in situations where ALE was advanced, it was not unusual, however, for the homeowner carrier to thereafter delay in ALE payments. During the October 2003 wildfires, 3,700 homes were deemed a total loss. There were 123 consumer complaints to the Department of Insurance. After complaints of under-insurance, the next predominant consumer complaint was delay and denial of ALE. (See, e.g., Kenneth Reich, “Insurance Firms Get Good Grade on Fire Response,” Los Angeles Times, February 13, 2004.)
A trend we have seen emerging is that some carriers are reluctant to make any ALE advances - they require proofs of cost immediately, as a condition to ALE payment.
This gives rise to hardship for the insured, and the entire claims process often degrades to the point that a breach and bad faith case ensues.
Specific ALE Provision - Exemplar
In a case where the insurance company required the insured to provide proof of actual out-of-pocket payments, the ALE provision stated as follows:
“1. Additional living expense
If covered accidental direct physical loss or damage to the dwelling makes the dwelling uninhabitable by you, we will reimburse you for the reasonable and necessary increase in living expenses incurred by you. This coverage is for your household to maintain its normal standard of living it had at the time of the loss event. . . Upon our request, you must provide receipts for expenses incurred.” (Underscored emphasis added.)
At trial, the insurance company took the position that the policy’s ALE provision required as a condition to ALE coverage receipts and proof of out-of-pocket payments. The carrier cited specifically to the “we will reimburse you,” and the “[u]pon our request, you must provide receipts for expenses incurred” language.
Arguments Against The Out-Of-Pocket Requirement
As a fundamental matter, insurance policy interpretation must give effect to the “mutual intention” of the parties. (See, Waller v. Truck Ins. Exchg. (1995) 11 Cal.4th 1, 18.) Such intent is to be inferred, if possible, solely from the written provisions of the insurance contract.
Thus, the rules governing policy interpretation “require us to look first to the language of the contract in order to ascertain its plain meaning or the meaning a layperson wold ordinarily attach to it.” (Ibid.) The “clear and explicit” meaning of policy provisions, interpreted in their “ordinary and popular sense” control - unless “used by the parties in a technical sense or a special meaning is given to them by usage.” (Ibid.)
A policy provision is ambiguous if it is capable of two or more reasonable constructions. The California Supreme Court also emphasizes that even “plain and clear” language, when considered in isolation, may be ambiguous when read in the context of the policy as a whole and the circumstances of the case. (See, MacKinnon v. Truck Ins. Exchg. (2003) 31 Cal.4th 635, 652.)
“Although examination of various dictionary definitions of a word will no doubt be useful, such examination does not necessarily yield the ‘ordinary and popular’ sense of the word if it disregards the policy’s context.” (Id., 31 Cal.4th at 649.) Rather, the Supreme Court in MacKinnon cautioned, a court should put itself in the layperson insured’s position, and understand how he or she might reasonably interpret the language. (Ibid.)
The Supreme Court reaffirmed in State of Calif. v. Allstate Ins. Co. (2009) 45 Cal.4th 1008, 1018, that ambiguous provisions are to be interpreted to protect “the objectively reasonable expectations of the insured.” (See also, e.g., Montrose Chem. Corp. of Calif. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 667 (“[W]e generally interpret the coverage clauses of insurance policies broadly (in order to protect) the objectively reasonable expectations of the insured. . .”); Silberg v. Calif. Life Ins. Co. (1974) 11 Cal.3d 452, 464.)
Finally, provisions that purport to limit or take away coverage reasonably expected by the insured must be “conspicuous, plain and clear” to be enforceable. (See, Haynes v. Farmers Ins. Exchg. (2004) 32 Cal.4th 1198, 1206.)
Application of the foregoing rules of contract interpretation illuminates that the ALE language in many homeowner policies arguably is ambiguous. This undermines homeowner carriers’ insistence that before they will advance ALE, insureds must first prove out-of-pocket expense.
The coverage - by its express terms - is designed to allow insureds to “maintain” their “normal standard of living” that they “had at the time of the loss event.”
Insureds’ “normal standards of living” do not include having to pay rent out-of-pocket for another dwelling because their home is uninhabitable. Insureds’ “normal standards of living” do not entail paying the mortgage on their home - and paying rent out-of-pocket on a comparable home or apartment.
The implication of “normal standard of living” is that insureds’ cash flow will not be adversely affected - or decimated - by having to pay for two dwellings, after they have suffered a catastrophic loss.
Thus, a carrier’s contentions that insureds must first pay rent for an alternative living arrangement, and that only after paying rent will they receive the benefits of this coverage, underscore the ambiguity of this ALE coverage. More critically, such an interpretation essentially renders the coverage illusory. (See, Scottsdale Ins. Co. v. Essex Ins. Co. (2002) 98 Cal.App.4th 86, 95.) Many insureds cannot afford to front the costs of a rental, while also paying on their home mortgage.
Equally demonstrative that the provision is ambiguous, and the carrier’s out-of-pocket cost insistence is erroneous, is the Coverage D - Loss of Use limit in most policies. According to the Insurance Information Institute, most ALE limits are typically at least up to 20 percent of the structure limits.
By the carrier’s analysis, the insured must first be out-of-pocket ALE payments upwards of tens of thousands of dollars - possibly more - before the carrier’s ALE obligations are triggered. This is not the reasonable expectation of any insured, and this does render the coverage illusory - few and far between are the insureds who could afford such an out-of-pocket expenditure.
The carriers may say such a result is preposterous, and that insureds need only submit their expense invoices to secure incremental payments.
Yet, in the case we tried, that is precisely what the insured did. The insured had contacted a relocation specialist. The specialist found a comparable home for rent, and provided the insured with invoices demonstrating the 6 month cost to lease that comparable home. The insured in fact had nowhere else to live, and was going to move into the “comparable home” secured by the relocation specialist. The insured presented his homeowner carrier with the relocation specialist’s invoices.
The carrier deemed such invoices inadequate because they were not receipts for actual out-of-pocket payments. The insured’s finances were such that he could not sign a contract for the 6 month lease without some assurance from the carrier that the cost would eventually be covered and paid. The carrier refused - the invoices were not proof of out-of-pocket payments.
Finally, the exemplar ALE provision states that “upon” the carrier’s request, receipts must be provided. Given that the coverage provides that the carrier may request receipts, it does not follow that insureds are only entitled to reimbursement after actual out-of-pocket payment, and provision of such receipts.
It should be noted that many homeowner policies require, under the Section I - Property Conditions - Duties after loss provision, that the insured must send within 60 days after the carrier’s request, a “signed, sworn statement showing:. . . receipts and records that support additional living expenses. . . .”
However, an insurer claiming that it is relieved of providing ALE coverage because the insured did not fulfill the policy’s conditions bears the burden of proving the insured’s policy condition breach. (See, Clemmer v. Hartford Ins. Co. (1978) 22 Cal.3d 865, 881 - 882 (late notice); Billington v. Interinsurance Exch. of So. Calif. (1969) 71 Cal.2d 728, 737 - 738 (breach of duty to cooperate).)
Moreover, an insured’s policy condition breach does not automatically release the insurance company from its obligations. The insurance company must also establish prejudice resulting from the insured’s failure to comply with policy conditions. (See, Hall v. Travelers Ins. Cos. (1971) 15 Cal.App.3d 304, 308.) To prevail on its prejudice claim, the insurance carrier must prove there is a substantial likelihood that a trier of fact would find in the carrier’s favor if the insured had not breached the policy condition. (See, United Services Auto. Ass’n v. Martin (1981) 120 Cal.App.3d 963, 965 - 966.)
Concomitantly, principles regarding policy interpretation are not the only method for undermining carriers’ out-of-pocket contention.
Evidence extrinsic to the policy
If the claim is in litigation, the insured should propound discovery for the homeowner carrier’s claims manual or claims handling guidelines. Some claims handling guidelines allow advance ALE payments under certain circumstances, for lodging made necessary by loss of use of the insured dwelling.
Further, carriers may admit through deposition or trial testimony that such advances are allowed, or have been made in the past. Form letters to the insured may acknowledge ALE obligations, without mentioning proof of costs actually incurred.
The carrier may have a “direct bill” program, through which the insurer pays for alternative accommodations directly to the landlord, or a relocation service provider.
Carrier claims documentation or training videos may outline a company philosophy of offering help to insureds when claims are made, and when insureds are in need, regardless of technical procedures involved.
Such extrinsic evidence supports the position that the homeowner carrier does owe an obligation to advance ALE, and that at a minimum, the policy’s ALE provision is ambiguous.
Expert testimony regarding industry standards
A claims handling expert may testify regarding industry standards. (See, Jordan v. Allstate Ins. Co. (2007) 148 Cal.App.4th 1062, 1077.) The insured’s claims handling expert may be of the opinion that it is the industry standard for carriers to make advance ALE payments. Whether this standard persists, given recent trends, arguably remains to be seen.
As a practical matter, ALE advances do fulfill the insured’s objectively reasonable expectations of coverage. (See, e.g., Olson v. American Bankers Ins. Co. (1994) 30 Cal.App.4th 816, 824 - 825.)
Most insureds do not expect that at their greatest time of need, the insurance company will require that they fund the costs for temporary housing, when the policy purports to provide “coverage for. . . your household to maintain its normal standard of living it had at the time of the loss event.” (See, e.g., Stamm Theaters, Inc. v. Hartford Cas. Ins. Co. (2001) 93 Cal.App.4th 531, 543 (Property policy covered structural collapse due to hidden decay - “decay” was broadly construed to include gradual deterioration, not just dry rot - this protected the reasonable expectation of the insured).)
It is true that some courts have found that insureds must first establish that they have actually incurred the ALE cost - and have paid those costs out-of-pocket. (See, e.g., Hilley v. Allstate Ins. Co. (Ala. 1990) 562 So.2d 184.)
In California, however, for years, the industry practice was to advance ALE coverage during claim investigation. Because of the economic climate, and insurance carriers’ increasing reliance on language such as in the exemplar ALE provision, those days may be waning.
Pursuant to the typical homeowner policy’s Section I - Property Conditions, the policy provides that in the event of a covered loss or damage to insured property, the insured should make reasonable and necessary emergency repairs or perform loss mitigation needed to protect the property from further damage.
A typical Section I - Property Conditions - Emergency Services provision states as follows:
“1. Emergency Services
In the event your covered property sustains covered loss or damage, you should protect the property from further damage. You should make any reasonable and necessary emergency repairs or perform loss mitigation needed to protect the property from further damage (hereinafter ‘emergency services’). We will reimburse the reasonable costs you incur for necessary emergency services for covered loss or damage to mitigate or abate the cause of the loss or damage.”
Many carriers - and empirical experience indicates increasingly so - require insureds to pay out-of-pocket for emergency services or repairs after a catastrophic loss. Only after proof of the insured’s payment will the carrier reimburse for such expense.
This repair requirement includes the insured paying out-of-pocket for items such as board up, or dry out of a home saturated by fire-extinguishing water. Immediate dry out is particularly important to prevent the formation of harmful mold.
After a catastrophic calamity, insureds often are at a loss - financially, mentally, and emotionally - to find, make arrangements with, and pay for emergency services providers who can assist them with making such repairs. Many insureds are not equipped to make the repairs themselves.
While insurance carriers may interpret their policy’s emergency services provisions as requiring out-of-pocket payments by the insured, this essentially leaves the insured to his or her own devices after a covered loss.
This is not what the California Department of Insurance envisions as demonstrated by the Regulations promulgated pertaining to covered loss. The California Fair Claims Settlement Practices Regulations, section 2695.4, states that: “Every insurer shall disclose to a first party claimant. . . all benefits, coverage, time limits or other provisions of any insurance policy issued by that insurer that may apply to the claim presented by the claimant.” (See, Fair Claims Settlement Practices Regulations, California Administrative Codes, Title 10, Chapter 5, subchapter 7.5, §§ 2695.1, et seq.; see, 10 CCR § 2695.4(a).)
Indeed, it is the custom and practice in the California insurance industry for an insurance company to offer the insured, for example: emergency board-up where a home has been damaged and left exposed to vandalism; or dry out services where a home has been saturated with water. Expert trial testimony regarding such custom and practice should be offered.
Conversely, the insurance industry’s argument that insureds must first pay out-of-pocket is often asserted at trial through the testimony of insurance company executives and training personnel. This testimony leaves the jury with the distinct - and very distasteful - impression that the carrier’s interpretation of its own obligations would result in only the wealthy being protected by insurance.
Reimbursement after insureds pay for their own losses is not what insurance is about - this does not give effect to the reasonable expectations of any insured.
Dwelling Restoration Scopes And Repair Estimates
Similarly, many carriers will prepare dwelling restoration scopes and repair estimates with zeroes (or an “as incurred” requirement) for: temporary fencing; temporary power; temporary toilets; architectural fees; permit costs; asbestos testing fees; etc.
In the standard homeowner policy (with the possible exception of language regarding code upgrades), there is no language that allows an insurance company to estimate literally nothing for these cost items.
The typical homeowner policy is written on a replacement cost basis. The carrier is required to estimate the true cost to repair and restore the insured’s home. This is called Replacement Cost Value (“RCV”). Based on specified criteria (see, e.g., Ins. C. § 2051(b)(2); Regulations, § 2695.9(f)(1)), the carrier makes various deductions for physical depreciation. RCV minus allowable depreciation equals Actual Cash Value (“ACV”).
By having zeroes in its dwelling restoration scopes and repair estimates, the carrier is able to reduce the ACV payment to its insured. This is significant - the zeroes allow the carrier to underpay ACV, inuring to the insured’s detriment in a myriad of ways. For example, an undervalued and underpaid ACV may make it more difficult for the insured to find a reputable, qualified general contractor willing to commit to perform the home repair work, as proscribed by the insurance company’s estimate.
It is important that the insured have a qualified general contractor prepare a complete dwelling scope and repair estimate that includes, inter alia, numbers for the “zero” items in the insurance company’s estimates. It is vital that the insured or his or his representatives understand and insist on the protections afforded in the Regulations, section 2695.9(d)(1), (2), and (3).
The above presents just some of the ways insurance companies are progressively, and improperly, narrowing their obligations under their homeowner policies. Viau & Kwasniewski hopes this article will provide some nuts and bolts ideas to help defeat improper carrier contentions, and ease the pain of your clients/insureds.