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February 2020


Terence Ridley recently secured a trial court ruling in favor of the insurer, on remand from the Colorado Supreme Court, finding and concluding that a policyholder-appointed appraiser was improperly biased. The trial court vacated in toto a ~$2.5 million property-damage appraisal award, arising from a hail claim,  by a Homeowner’s Association, backed by a public adjuster.  In detailed Findings and Conclusions,  the court ruled, inter alia,  that the appraiser’s actions favored the policyholder and that the appraiser influenced the appraisal process for the policyholder’s benefit.  The court concluded that the “appraiser’s conduct was replete with examples of acting as an advocate motivated by a desire to benefit the HOA.” Owners Ins. v. Dakota Station II Condo Ass’n, Inc. (Jefferson Cty. Dist. Ct., Colo., Jan. 10, 2020).



Click here to view "Court- Finding of Fact, Conclusions of Law, and Final Order"



November 2019


Arbitration Adoration: 5th Circuit Confirms Validity Of Arbitration Provisions In International Insurance Policies

By: Matthew Byers and Melissa D’Alelio, Robins Kaplan LLP


Insurers (and their counsel) love arbitration.  Rightfully so, given arbitration is generally cheaper and less rigorous procedurally.  Perhaps most importantly, it typically embraces industry custom and practice in addition to legal precedent.  Accordingly, many insurance policies come equipped with some variation of an arbitration provision funneling coverage disputes away from the courthouse and towards a conference room.

Not all, however, are enamored with arbitration.  A number of states have statutes or insurance code regulations nullifying, or otherwise thwarting the effect of arbitration clauses in insurance policies. While anti-arbitration legislation comes in various forms, states with some form of law restricting the enforcement of arbitration provisions in insurance policies at large include, but are not limited to: Georgia, Kansas, Kentucky, Louisiana, Maryland, Missouri, Montana, Nebraska, Oklahoma, South Carolina, Hawaii, Washington, Iowa, Virginia, and Rhode Island.  Despite state law restrictions, the Fifth Circuit, in McDonnel Grp., L.L.C. v. Great Lakes Ins. Se, 923 F.3d 427 (5th Cir. 2019), recently issued a ruling allowing the insurer-arbitration relationship to lovingly endure, at least, that is, for overseas insurers. 

In McDonnel, insured general contractor McDonnel Group LLC (”McDonnel”) was hired to renovate an older property in the French Quarter of New Orleans.  McDonnel purchased a builder’s risk insurance policy from foreign-based insurers Great Lakes Insurance SE (UK Branch), Lloyd’s Syndicates CNP 4444 and 958, and Inter Hannover (collectively, the “Insurers”).  During the course of McDonnel’s renovations, the property suffered significant damage from water intrusion.  McDonnel submitted a claim to the Insurers who began adjusting the loss.  During the adjustment, a coverage dispute arose and McDonnel filed a declaratory judgment action in the District Court for the Eastern District of Louisiana seeking coverage, and also alleging breach of contract and bad faith against the Insurers. 

The Insurers moved to dismiss the action, relying primarily on the policy’s arbitration provision.  In opposing the Insurers’ motion, McDonnel pointed to La. Rev. Stat. Ann. § 22:868, which is the Louisiana statute that effectively voids arbitration agreements in insurance policies covering property in Louisiana. See McDonnel, 923 F.3d at 429. The District Court agreed with the Insurers and dismissed the action, relying on the Fifth Circuit’s decision in Safety Nat'l Cas. Corp. v. Certain Underwriters, 587 F.3d 714 (5th Cir. 2009).McDonnel, 923 F.3d at 429.  Safety held that, with respect to international contracts, state statutes prohibiting arbitration provisions are preempted by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, signed by the United States and formally enacted by the Federal Arbitration Act (the “Convention”).

On appeal, McDonnel argued that, even though La. Rev. Stat. Ann. § 22:868 was pre-empted, it nonetheless triggered the policy’s “conformity to statute” provision. McDonnel, 923 F.3d at 429.  The provision stated, in part, that “[i]n the event any of the terms of this Policy are in conflict with the statutes of the jurisdiction where the Insured Property is located, such terms are amended to conform to such statutes.” Id.  McDonnel argued that, because of the conformity provision, the arbitration provision was null and void ab initio because it conflicted with La. Rev. Stat. Ann. § 22:868’s.  Thus, the precise question presented to the Fifth Circuit was: where an insurance policy contains a conformity provision, must it conform to a state law that is preempted by the Convention?

            The Fifth Circuit’s holding relied heavily on the Safety decision, which explored the interplay between, La. Rev. Stat. Ann. § 22:868, the Convention, and the McCarran-Ferguson Act.  Borrowing from Safety, the Fifth Circuit explained that, ordinarily, the Convention, as an international treaty to which the US is a signatory, would preempt conflicting state laws. McDonnel, 923 F.3d at 431.  The McCarran-Ferguson Act, however, “protects state laws regulating the insurance industry from the preemptive effect of” acts of Congress. 15 U.S.C. § 1011.  Nonetheless, the Safety court determined that because the Convention is a treaty, it is therefore not an “Act of Congress” under the McCarran-Ferguson Act, and so maintains preemptive effect over anti-arbitration state laws. McDonnel, 923 F.3d at 431-32. Accordingly, the Fifth Circuit reiterated that U.S. courts must refer parties to arbitration when their dispute arises out of an international contract containing a valid and enforceable arbitration provision, despite conflicts with anti-arbitration state law. Id. at 431.

While Safety “decided the more difficult questions regarding preemption,” it did not involve a conformity provision, and did not address whether a conformity provision in an insurance policy is triggered by preempted state law. McDonnel, 923 F.3d at 432. The Fifth Circuit affirmatively held that the preempted Louisiana statute did not trigger the conformity provision in McDonnel’s policy. McDonnel, 923 F.3d at 432-33. The Fifth Circuit found that, because the policy was issued by international insurers to a US-based insured, it was an international contract within the purview of the Convention. Id. at 432 n.8.  Based on Safety, the Fifth Circuit found that La. Rev. Stat. Ann. § 22:868 was preempted with respect to the policy’s arbitration provision, because enforcement of La. Rev. Stat. Ann. § 22:868 would conflict with the Convention. Id. at 432.  Turning to the policy, the Fifth Circuit explained that the conformity provision at issue is only triggered if the policy and an applicable statute are “in conflict.” Id.  As a result, because “the statute does not and cannot apply to McDonnel’s policy” no conflict ever existed between the policy and the statute. Id.  Finally, the Fifth Circuit held that, in the absence of such conflict, the conformity provision was not triggered, the arbitration provision survived, and the parties should be forced to arbitrate. Id. at 432-433. 

While McDonnel may not aid domestic insurers, the decision could prove to be remarkably useful to international insurers seeking to enforce arbitration provisions in the midst of coverage disputes.  McDonnel’s argument presented a clever loophole for insureds to avoid contractually mandated arbitrations.  In holding that conformity provisions are not triggered by conflicts between a policy’s arbitration provision and preempted anti-arbitration state laws, the Fifth Circuit effectively dismantled that loophole.




June 2019


Insured Refuses Fire Department’s Request for a Polygraph Exam

Evidence of Refusal Inadmissible to Support Insurer’s Defense of Bad Faith 


Claim Background

Most states prohibit an insurance company from requiring an insured to submit to a polygraph exam as a condition to coverage. Moreover, because the results of a polygraph are usually deemed inadmissible, an insurer will likely be precluded from using any such evidence obtained by law enforcement. That said, at least one court has held that an insured’s expressed willingness to submit to a polygraph test is admissible as evidence of the insured’s credibility, even though the polygraph results, themselves, would be inadmissible.

However, what if an insured refuses law enforcement’s request for a polygraph exam? In that case, shouldn’t an insurer be allowed to use their refusal as evidence to defend itself against a bad faith allegation, and to support their basis for denying the claim? The Supreme Court of Washington examined this novel issue many years ago, and rendered an opinion that is still current and instructive to insurers.


Industrial Indemnity Company of the Northwest, Inc. v. David and Judith Kallevig The Supreme Court of Washington, 114 Wn.2d 907, 792 P.2d 520 (June 14, 1990)

On the night of January 27, 1986, the Peach Tree Restaurant was destroyed by fire. The business was owned and operated by David and Judith Kallevig and insured by Industrial Indemnity Company. At 8:00 p.m. that evening, employees Chuck Smith and Diana Kay Smiley closed the restaurant and both were certain that Smith turned off the two switches in the food preparation area before leaving. One switch powered a light above the dishwasher, and the other powered a fluorescent light above the food preparation table and a wall outlet box. The wall outlet box, which was known to be occasionally hot, was located about 6 inches above the food preparation table. In addition, the restaurant frequently used a hot plate that

 was sometimes left on by accident. However, there was contradictory testimony as to whether it had been used on the day of the fire.

At approximately 8:15 p.m. on the date loss, David Kallevig arrived at the restaurant, counted money, put it into the floor safe and left the restaurant fifteen minutes later. Allegedly, this was his usual practice. At approximately 9:05 p.m., the Yakima Fire Department received a report that the restaurant was on fire.


Yakima Fire Department Lieutenant, Steven Scott, investigated the fire and discovered a late notice issued to the restaurant by Pacific Power and Light, and discovered that the Department of Labor and Industries had filed a lien against Kallevig on the day of the fire. Consequently, the Yakima Fire Department requested that Kallevig submit to a polygraph examination, however he refused their requests. In light of this evidence, Lt. Scott concluded that David Kallevig intentionally set the fire.


Industrial Indemnity also conducted an investigation and retained Gerald Anderson of INS Investigations Bureau, Inc. to investigate the fire. Anderson determined that the fire was not caused by an electrical malfunction; rather it was intentionally set. Industrial Indemnity also retained an accountant, Henry Smilowicz, who examined the restaurant's financial records and found that their liabilities exceeded its assets.


Notwithstanding, an Industrial Indemnity internal report reflected that the cause of the fire "may be the result of faulty workmanship of an electrical contractor" and noted that the carrier anticipated subrogation against the electrical contractor. Despite this information, the carrier did not retain an electrical expert to investigate the possibility of faulty workmanship as a cause for the fire, and they later canceled the policy because of "underwriting-poor risk."

 Industrial Indemnity ultimately denied the claim, alleging that David Kallevig had intentionally caused the fire, and they filed a declaratory judgment action asking the court to declare that they were not obligated to pay for the loss. The Kallevigs counterclaimed seeking policy benefits and bad faith damages, contending that Industrial Indemnity had failed to adequately investigate the fire and had denied the claim based upon speculation and conjecture.


 Prior to trial, the court entered an order barring Industrial Indemnity from presenting any evidence that David Kallevig refused to take a polygraph examination. Subsequently, a unanimous jury rendered a verdict that Kallevig had not started the fire, and reached a verdict for the insureds on their bad faith claim.


Industrial Indemnity filed an appeal, in part, on the issue of whether Kallevig’s refusal to submit to a polygraph examination should have been admissible as evidence of their good faith basis for denying coverage. However, the Washington Court of Appeals affirmed the jury’s verdict and the case was granted review by the

 Supreme Court of Washington.


Evidence of Insured’s Refusal to Take a Polygraph Exam is Not Admissible


The Supreme Court first noted that an insurer must make a good faith investigation of the facts before denying coverage, and may not deny coverage based on a defense that a reasonable investigation would have shown to be unfounded. That said, the high court determined that Industrial Indemnity denied coverage based upon an arson defense that it believed established four points:

 First, David Kallevig was at the restaurant the night of the fire and, therefore, had an opportunity to set the fire. Second, based upon the financial position of the restaurant, David Kallevig had a financial motive to set the fire. Third, the Yakima Fire Department’s investigators concluded the fire was caused by arson. Fourth, electrical engineer George Picatti concluded that the fire was not caused by an electrical malfunction of the hot plate. In other words, Industrial Indemnity theorized that David Kallevig intentionally caused the fire using the hot plate. The Kallevigs, however, presented contrary evidence on each point, and the trial court found that there was substantial evidence to support the jury's verdict that

 Industrial Indemnity denied coverage in bad faith.

 Accordingly, the major issue in dispute was whether the jury would have concluded that Industrial Indemnity had demonstrated a good faith basis for denying the claim if they were aware of Kallevig’s refusal to submit to a polygraph examination? In answering that question, the Supreme Court held:


 While the polygraph information may have been probative of [Industrial Indemnity's] state of mind in denying the Kallevigs' claim, the risk of the jury considering it as evidence that Mr. Kallevig committed arson was so great that the trial court properly excluded it. Washington...does not regulate or certify polygraphs, license polygraph operators, or provide standards or requirements for training polygraph operators. In this regulatory void, litigants may be required to condition important rights upon their decision to submit to an examination in which there are no standards for the machine

 or its operator. That is a result we refuse to sanction.

As the evidence would have been likely to have been improperly considered by the jury as to the arson policy defense despite any limiting instruction, the trial court did not err in balancing the prejudice against the probative value and denying admission.

Accordingly, the Supreme Court of Washington held that under these circumstances, it was correct to exclude evidence of the insured’s refusal to submit to a polygraph examination in support of the insurer’s defense against allegations of bad faith.




It is important to note that the breach of contract and bad faith counts alleged against Industrial Indemnity were not bifurcated. In other words, both counts were tried at the same time in front of the jury. Therefore, the court arguably had a legitimate concern that the jury would use evidence of Mr. Kallevig’s refusal to submit to a polygraph as a basis to find that he committed arson. Instead of this potential outcome, the court determined that it would be more “equitable” to not disclose this evidence to the jury, and to bar Industrial Indemnity from using it to

 defend itself against a bad faith claim. Needless to say, the question of “equity” is a matter of opinion.


Had these counts been tried separately, however, the court would likely have allowed the jury to hear evidence of the insured’s refusal to submit to a polygraph test during the bad faith portion of the trial, and excluded that evidence during the breach of contract portion of the case. Under that scenario, Industrial Indemnity might have received a favorable verdict on the insureds’ allegations of bad faith.


March 2019


In a massive purported class action filed in Colorado against a wide swath of the property insurance industry, the defendants prevailed at every step of the case – in the U.S. district court on a motion to dismiss, in the Tenth Circuit on appeal, and in the U.S. Supreme Court where certiorari was denied.  The action involved a wholesale attack on replacement cost value property policies, and included claims ranging from insurance bad faith, to breach of contract, to violation of various state and federal statutes, including RICO.

Ridley argued the fee petition as liaison counsel for the various defendants who moved for attorney fees against the named plaintiffs, under a Colorado Statute, and against plaintiffs’ counsel, under 28 USC § 1927.  In an order from U.S. District Court (Colo.) the federal court awarded fees to the moving defendants in an amount that exceeded $1.6 million. The Court noted, inter alia, that plaintiffs’ counsel had multiplied the proceedings “unreasonably and vexatiously ” (Snyder v. Acord Corp. et al., No. 14-cv-017736 ).


September 2018


Terence Ridley and a team from Wheeler Trigg O’Donnell recently obtained vacatur of a $3,000,000 property damage appraisal after a one-week trial before the Chief Judge of the United States District Court, District of Colorado. Copper Oaks Master Home Owners Ass’n. v. American Family Mut. Ins. Co., 15-CV-01828-MSK-MJW, 2018 WL 3536324 (D. Colo. July 23, 2018)


The appraisal award was made against American Family in connection with a 2013 hail damage claim by a homeowners’ association. The claim alleged hail damage to brick and siding on all four elevations of every building in the 16-building, multi-family HOA complex. American Family, however, did not find that the brick and siding required replacement. The appraisal award, signed by two members of the three-member panel, ultimately came in at approximately five times the amount of the insurer’s estimated loss.


Among other things, the Court focused on an amended fee agreement with the policyholder’s appraiser. Under Colorado federal court precedent, appraisers should not work on a contingency fee. While an original agreement called for 10% of amounts recovered above the amount offered by the insurer, the amended agreement eliminated that provision and instead called for an across-the-board flat hourly fee of $350/hr. The Court stated: “Curiously, even though the ‘amended agreement’ eliminated any reference to the original fee cap of 10% of the insurance award, Keys’ [the appraiser’s] fee of $233,240 . . . was almost precisely that amount--9.8% of the final valuation of the claim by the appraisal panel.”


The Court found that the HOA never intended to pay Mr. Keys on an hourly basis. The Court wrote, “The absence of traditional indicia of an hourly rate agreement, Keys’ billing of clerical time at inflated rates ($350/hr.), and Keys’ own lackadaisical reaction to questioning about his lax timekeeping also suggest to the Court that Keys’ ‘hourly’ billings were simply a façade intended to conceal what was, in reality, a standard contingent fee” [footnote omitted].


According to the Court: “Mr. Keys’ testimony was often evasive, ambiguous, and largely incredible.” The Court went on: “Mr. Keys’ appraisal was so bereft of methodology and supporting evidence as to be completely implausible.” The Court ultimately concluded that the appraiser engaged in actions that rendered him not “fair and competent” under the Colorado DOI bulletin, and that the umpire as well engaged in actions that rendered him not “fair, competent and impartial” as required by the bulletin. The Court further found that both the appraiser and the umpire “engaged in conduct that prejudiced the appraisal process and distorted the final award.”  Accordingly, they failed to satisfy the standards of impartiality required under federal and state law.


The case was the subject of a July 26 analysis in Claims Journal.


Ridley and his team have also successfully contested similar litigation involving Mr. Keys for other insurers in federal and state courts in Colorado. These include a pair of victories in the Tenth Circuit Court of Appeals. Ridley and the firm are also involved in related litigation currently before the Colorado Supreme Court, which will determine the standard for impartiality that appraisers and umpires must meet moving forward in Colorado. That case is Owners Ins. Co. v Dakota Station II Condominium Ass’n. Inc., and oral arguments are anticipated in 2019.



July 2018


Colorado Supreme Court Finds No Limitation Period Applicable To An Insured’s Cause of Action For Unreasonable Delay or Denial of Insurance Benefits

In Rooftop Restoration, Inc. v. Am. Family Mut. Ins. Co., 418 P.3d 1173 (Co. S. Ct. 2018), the Colorado Supreme Court considered a certified question from the U.S. District Court for the District of Colorado regarding the applicability of the statute of limitations to Colorado Statute Section 10-3-1116; the statute that governs claims for unreasonable delay or denial of insurance benefits. The Court held that the one-year statute of limitations does not apply to actions brought under this particular statute because the legislature did not intend for the statute to operate as a penalty within the context of the statutory scheme.

Homeowners, Denish and Betty Jo Chastain, submitted a claim for hail damage to their roof to their insurer, American Family Mutual Insurance Company (“American Family”). American Family conducted an inspection of the Chastains’ roof and estimated that the cost to repair the hail damage was less than their policy’s $1,000 deductible. The Chastains disagreed with American Family’s estimate and assigned their claim to their contractor, Rooftop Restoration, Inc. (“Rooftop”) who estimated the cost to repair the roof at $70,000. American Family subsequently re-inspected the roof and increased its estimate to $4,000 and issued payment to the Chastains for $3,000 less the policy’s $1,000 deductible. More than a year later, Rooftop sued American Family alleging breach of contract and unreasonable delay or denial of insurance benefits under the Section 10-3-1116 in state court. American Family removed the case to federal court. The federal district court denied American Family’s motion for summary judgment as premature and certified the question of whether the statute of limitations applied to Section 10-3-1116 to the Colorado Supreme Court since no Colorado appellate court had addressed the issue.

Initially, the Colorado Supreme Court noted that the one-year statute of limitations applies to “all actions for any penalty or forfeiture of any penal statutes.” While recognizing that Colorado courts usually apply a three-part test for determining whether a particular cause of action operates as a penalty, the Court refused to do so in this case. The Court, considering the legislative intent of Section 10-3-1116, reasoned that the legislature simply did not intend for the one-year statute of limitations to apply to the statute because the legislature did not intend for the statute to operate as a penalty.

Interestingly, the Court did not decide whether causes of action for the unreasonable delay or denial of insurance benefits have any limitations period. Nevertheless, insurers should continue to work diligently and reasonably when handling claims from Colorado policyholders since a bad faith cause of action is ever looming.


May 2018

Submitted by: Rick Hammond


Insured Suspected of Arson Fails to

Produce Cell Phone Claiming it’s “Lost”

Insurer Argues Spoliation of Evidence and Seeks Dismissal of Suit




During a fraud investigation, an insured’s cell phone is often viewed as “ground zero” and the primary battleground where a fight for evidence takes place. Thus, a person’s phone often contains location information, substance of text messages, and search history that might be extremely helpful when investigating fraud.  For this reason, an insurer is severely prejudiced if the insured’s cell phone turns up missing before a forensic examination of the phone can be undertaken. 


So, what are the consequences if an insured fails to preserve their phone or the evidence that existed on it?  Well, a court in Pennsylvania has recently addressed this issue.


Corey Brown v. Certain Underwriters at Lloyds, London, et al

U.S. Dist. Ct. for the Eastern Dist. Of Pennsylvania, No. 16-CV-02737 - June 9, 2017


This case arises out of an incendiary fire that occurred on May 1, 2015 at Corey Brown’s property in Philadelphia, Pennsylvania.  Mr. Brown filed a lawsuit alleging that his insurer, Certain Underwriters at Lloyds, London refused to compensate him for losses incurred as result of that fire and in breach of his insurance policy.

On March 9, 2017, Lloyds requested that Mr. Brown produce the cell phone used by him at the time of the fire.  Allegedly, Lloyds suspected that Mr. Brown was involved in setting the fire, and they were interested in examining his cell phone to determine whether it contained any evidence that would tend to corroborate their suspicion. 

The request for the production of his phone was not a surprise to Mr. Brown, because Lloyds had previously advised him of their interest in his cell phone as far back as August 12, 2015.  On that date, before suit was filed, counsel for Lloyds took Mr. Brown’s examination under oath (EUO) and requested on the record that he preserve any evidence existing on his cell phone for potential future discovery. 

According to a transcript of the EUO, Mr. Brown and counsel had the following exchange regarding his cell phone:


Q. . . . I’ll just ask that you not delete anything or erase anything with respect to your phone.

A:        No problem. . . .

Q: . . . [M]y point is that what I don’t want you to do between now and the time this thing is resolved –- I don’t want you to delete or erase anything.  You can be guided by your attorney’s instructions in that regard, but I’m just making a specific formal request that this information and documents in your phone data be preserved.  Fair enough?

Q. . . . Here’s the point, Mr. Brown: I haven’t made actually a formal request for any of that information or that data, and I may not.  So, my point is just that it not disappear…

A:        And I have no problem with that. . . .


Two years later and one day before Mr. Brown was scheduled to produce his cell phone, he filed an objection stating that he lost the cell phone “months ago.”  Lloyds thereafter moved for spoliation sanctions.


Lloyds argued that they are significantly prejudiced by the loss of location information, as well as information regarding calls and/or the substance of any text messages received at or about the time of the fire contained in Mr. Brown’s cell phone.  They also contend that because the fire appears to have been intentionally set, the spoliated evidence would have been highly relevant in determining the merits of Mr. Brown’s claim for insurance benefits and the merits of their counterclaim for insurance fraud. 

However, Mr. Brown argued that Lloyds suffered no prejudice at all because it obtained a copy of his phone records through discovery and is aware of what numbers he called at all relevant times.  As to the text messages, Mr. Brown argued that Lloyds isn’t prejudiced because “[t]here may be no text messages applicable” and because they had “ample opportunity” to examine the cell phone and the messages therein but elected not to do so. 


The court, however, disagreed:


It is true that when considering the degree of prejudice suffered, “the court should take into account whether that party had a meaningful opportunity to examine the evidence in question before it was destroyed, but Mr. Brown’s argument makes little sense in this case. Lloyds issued a request for production within the time allowed for discovery.  They are no less prejudiced by the loss of relevant evidence because they could have chosen to request Mr. Brown’s cell phone at an earlier date.


The Duty to Preserve the Cell Phone was Reasonably Foreseeable


Generally speaking, spoliation occurs where (1) the evidence was in the party's control, (2) the evidence is relevant to the claims or defenses in the case, (3) there has been actual suppression or withholding of evidence, and (4) the duty to preserve the evidence was reasonably foreseeable.  


In this case, the court concluded that Mr. Brown had control over his own cell phone, that the evidence lost was relevant to this case; the contents of Mr. Brown’s cell phone, including location information, text messages, and search history was very important evidence that related to the question of whether Mr. Brown was involved in setting the fire.  The court also determined that the duty to preserve his cell phone and its contents was reasonably foreseeable to Mr. Brown since before the litigation commenced, counsel for Lloyds requested and Mr. Brown agreed on the record that the cell phone and the data included in it would be preserved for potential future discovery.


Insured took no Steps to Preserve the Evidence Existing on his Phone


The court next sought to determine if there had been intentional suppression or withholding of evidence by Mr. Brown.  In that regard, the court noted that he had submitted a signed affidavit swearing that he “lost” the phone in October 2016 and “did not intentionally dispose of it.”


The Court finds, however, that Mr. Brown’s undetailed account of losing his phone is not credible and that, rather than innocently losing his phone, Mr. Brown made a deliberate choice to withhold it from production.  In making that finding we note that Mr. Brown and his attorney did not notify Lloyds of the loss of relevant evidence that he had a known duty to preserve until hours before the requested time of production, even though its loss had supposedly been known for at least four months.


Mr. Brown has offered zero explanation as to how he came to lose his phone.  He has also offered no indication that he took even rudimentary steps to preserve the evidence that existed on his phone, as was his obligation, or to take any measures to find the phone after it was somehow lost.


Therefore, the Court found that Lloyds was prejudiced by Mr. Brown’s spoliation of evidence because they have not and will not have any opportunity to determine whether information on his cell phone would have aided in their defense of his claim or in their own insurance fraud counterclaim.   The court further found that Lloyds has satisfied its burden of showing that Mr. Brown has purposely suppressed or withheld relevant evidence. 


The court next considered what sanction, if any, was appropriate.  Lloyds argued that the appropriate sanctions must be a dismissal of the case.  However, the court declined to impose the drastic sanction of dismissal and decided that an adverse jury instruction would be sufficient to cure the prejudice to Lloyds. 


Accordingly, the court instructed the members of the jury that they could infer that if Lloyds had been permitted to inspect Mr. Brown’s cell phone, any evidence would have been unfavorable to Mr. Brown. The court further ordered for Plaintiff to pay fees associated with the discovery and motion practice concerning the “lost” cell phone.




It is very important to note at this point that the requirement to preserve evidence is a “two way street.”  Thus, insurers also have a burden to maintain evidence that could be material and relevant, particularly, evidence that might serve to free a policyholder from the inference of fraud. 


That said, it would be worthwhile for insurers and their attorneys, at the outset of a fraud investigation, to routinely demand for insureds to preserve evidence such as surveillance videos, computers, cell phones, security systems etc.  An early demand, as in this case, may later pay benefits.   


Rick Hammond is a Partner in the Chicago office of the law firm of HeplerBroom, LLC and he serves as national counsel on matters relating to property insurance coverage, fire and explosion cases and bad faith.  He also serves as an expert witness on insurance law and bad faith, and as an adjunct Professor on Insurance Law at the Loyola University Law School in Chicago.  He is also a member of Loyola University’s Board of Trustees.  Mr. Hammond formerly served as Assistant Deputy Director at the Illinois Department of Insurance’s Chicago office, and he is Past-President of the Illinois Association of Defense Trial Counsel, a member of the Federation of Defense and Corporate Counsel, and a former Illinois State Representative of DRI.  Mr. Hammond was one of two attorneys in the country previously selected by the Lexis Nexis Insurance Law Center to receive its "Insurance Lawyer of the Year Award," and he was recently inducted into the American College of Coverage and Extra-Contractual Counsel, an organization that is composed of preeminent coverage and extra-contractual counsel in the United States and Canada.  Questions or comments can be directed to Mr. Hammond at the law firm of HeplerBroom, LLC, 30 North LaSalle, Suite 2900, Chicago, Illinois 60602, (312) 205-7743, or at the e-mail address of



April 2018

Submitted by: Gordon K. Walton, Esq.


The Appraisal Provision In A Homeowner’s Policy Permitting Either The Insured Or The Insurer To Ask A Judge To Select An Appraisal Umpire Requires Judicial Action And Thus, Must Follow The Rules Of Civil Procedure


In Ronald Witcher and Jodi Witcher v. State Farm Fire and Casualty Company, 2018 IL App (5th) 170001 (March 6, 2018), the Witchers’ home was decimated by fire. The Witchers and their homeowners’ insurer, State Farm Fire and Casualty Company, agreed that the fire resulted in a total loss but disagreed on the loss valuation. The Witchers invoked the appraisal provision in their homeowners’ policy and identified an appraiser to State Farm. Despite receiving the Witchers’ appraisal demand, State Farm failed to identify an appraiser within 20 days pursuant to the provision, which precluded the parties from proceeding to the next step of identifying a neutral appraisal umpire. As a result, the Witchers filed a petition with a circuit court judge in Madison County, Illinois requesting that the court appoint the appraisal umpire. However, the petition and summons was never served on State Farm. Nevertheless, the court granted the Witchers’ petition on the same date that the petition was filed, appointed an appraisal umpire and retained jurisdiction for the “filing and enforcement of a binding Appraisal Award under the insurance policy contract. . . .”


A week later, State Farm filed a reply to the petition alleging that its adjuster had been in contact with the Witchers’ agent trying to resolve the claim outside of the appraisal process and that it had selected an appraiser. State Farm requested that the court allow it to participate in the selection of the umpire before making an appointment.


Five days after State Farm filed its reply, the court appointed appraisal umpire accepted the appointment. State Farm moved to vacate the appointment on the basis that it never received notice of the court’s actions, particularly the court’s order appointing the appraisal umpire on the same day that the petition was filed. Essentially, State Farm argued that it was denied due process where the appointment order was entered without any notice and without jurisdiction over it. The Witchers disagreed arguing that State Farm had forfeited and defaulted on its obligation to participate in the appraisal process.


While State Farm’s motion to vacate was pending, the appointed umpire and the Witchers’ appraiser filed an appraisal award with the court. The court eventually denied State Farm’s motion to vacate and approved the appraisal award on the basis that the Witchers acted in accordance with the appraisal provision in their policy.


The Illinois appellate court held that the circuit court did not have personal jurisdiction over State Farm when it entered the appointment order because State Farm was never issued a summons or served with the petition. In fact, the appointment order was entered prior to State Farm filing an appearance in the case. Thus, the appellate court held that the appointment order must be vacated. The appellate court disagreed with the Witchers that the appraisal provision did not require that summons be issued and the petition served. The court noted that the appraisal provision specifically stated that either the insured or the insurer could ask “a judge of a court of record” to select an appraisal umpire. Thus, the filing of a petition was a judicial action and therefore, required that the Witchers follow the rules of civil procedure. According to the court, since the petition requesting the appointment of an appraisal umpire was a judicial proceeding, State Farm was entitled to notice and an opportunity to be heard before the court ruled on the petition.


The appellate court reversed the circuit court’s order denying State Farm’s motion to vacate the appointment of the appraisal umpire, vacated the circuit court’s order confirming the appraisal award and remanded the case for further proceedings.


Witcher is helpful in that it confirms a pathway for an insured or insurer to invoke a court’s jurisdiction in the appraisal process when one side is not cooperating. However, once a court is involved, the parties must follow the procedural rules or all will be for naught.



March 2018

Submitted by: Richard D. Gable


Adverse Inference Appropriate Sanction for Spoliation of Evidence

by Homeowners in Property Coverage Suit


Anderson v. State Farm Fire and Casualty Co., No. 2:2015-cv-05590 (D.N.J. 2018) involved a claim under a homeowners insurance policy for fire damage. Shortly after the fire, the plaintiffs' property insurer, State Farm, complained of difficulty inspecting the damaged property due to the extraordinary number of personal belongings located in the home. State Farm eventually provided a repair estimate but cautioned the homeowners not to begin repairs until they had provided State Farm with any counter-estimates they intended to rely upon.


The homeowners subsequently obtained an estimate to completely rebuild the home and had the home demolished before sharing the estimate with State Farm.  When State Farm eventually received the estimate, more than 18 months after the fire, it refused to pay any more than its previously provided repair estimate.  This lawsuit ensued.


State Farm moved for summary judgement for violation of the policy's cooperation provision and for common law spoliation.  Judge Linares of the District of New Jersey denied both motions, finding the reasons behind plaintiffs' failure to preserve the home for additional inspection to be an issue of fact for the jury.  However, the court found it undisputed that plaintiffs had failed to preserve relevant evidence and concluded that an adverse inference instruction was the appropriate remedy.  Although coverage litigators frequently focus on the application of policy terms and conditions, this decision provides a good reminder to practitioners not to ignore the application of common law remedies in coverage litigation.





February 2018

Submitted by: Tom Bazemore


On Thursday, December 7, 2017, Huie, Fernambucq & Stewart partner and FDCC member Tom Bazemore, along with Huie partner Jimmy Brady, secured a defense verdict for a large insurance company. The four-day jury trial took place in the Circuit Court of Jefferson County in Alabama.


The lawsuit arose from a fire that occurred at the plaintiff's home. The plaintiff alleged claims of breach of contract and sought $350,000 in contractual damage plus mental anguish. In the case, the plaintiff claimed the fire occurred as the result of a grease fire which spread and was accelerated due to the presence of a dry Christmas tree. However, the defendant argued the fire was an intentional act. Both parties retained experts who testified as to the origin and cause of the fire. At the conclusion of the trial, the Jefferson County jury returned a verdict for the insurance client after two hours of deliberation.





January 2018

Submitted by: Rick Hammond & Gordon K. Walton, Esq.



Insurer Seeks Rescission Due to Misrepresentation in an Application for Insurance

Court Rules that an Insurer is Required to not only ask Questions

But also to Investigate Answers





Virtually all property policies provide an insurer with the right to rescind coverage when there’s evidence that the insured intentionally concealed or misrepresented material facts in their application for insurance.  For a misrepresentation to be deemed material, it must have been an untrue fact that would have, if the truth was known, caused the insurer to reject the application.  In other words, an insurer is entitled to truthful responses so that it can determine whether the applicant meets its underwriting criteria.

Under that backdrop, the U. S. Court of Appeals in California recently determined the extent to which an insurer is required to investigate whether an insured’s answers in an application for insurance are true, and how a waiver might occur by a failure to investigate.


Star Insurance Company v. Sunwest Metals, Inc.,

WL 3741305, U.S. Dist. Ct., C.D. Calif. So. Div. (May 18, 2017)

Sunwest Metals operated a recycling facility that processed various commodities including metals, plastics, paper, and glass.  Beginning in August 2011, Sunwest was insured for two consecutive year-long policies for fire coverage under Star Insurance Company’s “Scrap Dealers Program.”  Notably, in order to be eligible for the Scrap Dealers Program, no more than fifteen percent of a prospective insured’s revenue may come from paper and plastics processing.  Thus, the program was designed primarily for metal scrap and glass recyclers; and paper and plastic recyclers were eligible for the program only when the paper and plastic recycling were incidental exposures.


In April 2013, Sunwest suffered a catastrophic fire and filed a claim under its policy.  It is important to note however, that prior to the fire, Star Insurance apparently became aware that Sunwest recycled some degree of paper and plastics because that information was allegedly reviewed on Sunwest Metals’ website by a Star Insurance underwriter.  In 2011, after the underwriter reviewed the website, she sought confirmation from the insured’s broker that paper and plastic recycling were only incidental parts of the company’s total revenue.


In 2012, when the policyholder applied for the policy to be renewed, the underwriter again asked for confirmation from the insured’s broker that Sunwest Metal’s operations consisted of 80% aluminum and 20% iron and steel.  The broker confirmed those figures and attempted to reconcile conflicting information that a previous site inspection had revealed by stating that “Each day the amount [of metal versus paper] varies.  The day the inspector came in may have had slightly different numbers.  The application [for insurance reflects] an average of the entire policy year.”  The truth, however, was that paper processing comprised the vast majority—nearly 66 percent—of Sunwest’s revenue.


Therefore, after Sunwest filed its fire loss claim, Star Insurance filed suit seeking rescission of the policy and denial of coverage based on misrepresentations in the application for insurance, and arguing that it was entitled to rely on the producer’s confirmations that paper and plastic recycling were only miniscule percentages of Sunwest metals’ annual revenue.  Sunwest responded by filing an action for breach of contract and bad faith.


After a five-day bench trial, the district court determined that Star Insurance had waived its right to rescind by failing to investigate evidence of misrepresentation and granted judgment in favor of Sunwest in the amount of approximately $978,000.  Thereafter, Star Insurance appealed.



An Insurer Cannot Ignore Information that “Distinctly Implies” a Misrepresentation


The Appellate court began its review by noting that neither Star Insurance nor Sunwest Metals dispute that the statements made in the insurance application process regarding the volume of Sunwest Metals’ paper and plastic recycling business were false.  In that regard, Sunwest Metals argues that there are genuine issues of material fact as to the rescission claims because Star Insurance had notice that the representations were inaccurate and thus; (2) Star Insurance waived the alleged misrepresentations by failing to conduct a reasonable inquiry; (3) Star Insurance unduly delayed giving notice of rescission, prejudicing Sunwest Metals; and (4) that the alleged misrepresentations were not subjectively material to Star Insurance.


The appellate court responded by stating that Star will be considered to have waived its right to rescind the policy if it ignored information that “distinctly implied” misrepresentation of true facts regarding Sunwest’s operations.  Thus, as a general rule, an insurer may “rely upon [the insured] ... for such information as it desires” in determining whether to provide coverage.  But it may not blindly ignore evidence of misrepresentation, collect premiums, and then opportunistically rescind once a claim is filed, i.e.,


[T]he right to information of material facts may be waived ... by neglect to make inquiries as to such facts, where they are distinctly implied in other facts of which information is communicated.  In other words, where an insurer has before it information that plainly indicate[s] that the insured’s statements [are] not true, it has a duty of further inquiry to determine the pertinent facts.  This includes a duty to investigate information which if pursued with reasonable diligence would reveal misrepresentations.


In that regard, the appellate court noted numerous pieces of evidence spanning nearly two years that “distinctly implied” the falsity of information in Sunwest’s insurance applications and subsequent communications with Star.  For example, (i) Sunwest’s website advertised paper and plastic recycling as a main part of its business; (ii) a September 2011 site inspection of Sunwest revealed that Sunwest “fill[ed] large dumpster bins” with, [among other things], paper products; and (iii) two other site inspections—one in January 2012 and one in 2008, the report of which Star received in February 2012—noted substantial paper processing.  Thus, as the court explained:


[T]he duty of inquiry requires an insurer to not only ask questions, but also to investigate answers.  Here, Star made inquiries, but then ignored the inadequacy of the answers it received. Having turned a blind eye for nearly two years, Star waived its right to rescind when Sunwest filed a claim.


Accordingly, the appellate court held that Star was clearly aware that the information in the application for insurance was inconsistent with these facts, as indicated by its repeated inquiries into Sunwest’s operations. Therefore, the appellate held that the district court did not err in finding that Star Insurance had prior information that “distinctly implied” material misrepresentations, and that it failed to satisfy its duty to investigate such evidence.  The appellate court, however, found no evidence of bad faith concerning the coverage decision reached by Star Insurance in this case.





It should be noted that Star Insurance Company wisely filed a declaratory judgment action rather than simply rescinding the policy and denying coverage.  That approach likely mitigated the allegations of bad faith and supported the court’s ruling in favor of the insurer on that count.


That said, not all states require an insurer to conduct an independent verification of the information provided by an insured in an application of insurance.  Nor, do all states require a showing of intent to misrepresent material facts in order to establish a basis for rescission. So, it’s important for an insurer to review the law concerning these issues in the relevant state before considering a rescission action.





Rick Hammond is a Partner in the Chicago office of the law firm of HeplerBroom, LLC and he serves as national counsel on matters relating to property insurance coverage, fire and explosion cases and bad faith.  He also serves as an expert witness on insurer bad faith and as an adjunct Professor of Insurance Law at the Loyola University Law School in Chicago.  Mr. Hammond formerly served as Assistant Deputy Director at the Illinois Department of Insurance’s Chicago office, and he’s Past-President of the Illinois Association of Defense Trial Counsel, a member of the Federation of Defense and Corporate Counsel and Chair of their Property Insurance Law Committee.  Mr. Hammond was one of two attorneys in the country previously selected by the Lexis Nexis Insurance Law Center to receive its "Insurance Lawyer of the Year Award," and he was also recently inducted into the American College of Coverage and Extra-Contractual Counsel, an organization that is composed of preeminent coverage and extra-contractual counsel in the United States and Canada.  Questions or comments can be directed to Mr. Hammond at the law firm of HeplerBroom, LLC, 30 North LaSalle, Suite 2900, Chicago, Illinois 60602, (312) 205-7743, or at the e-mail address of


December 2017

Submitted by: Gordon K. Walton, Esq.


Insuring intangible assets:

Is the insurance industry keeping pace with its customers’ changing requirements?

Written by: Stephen Carter and Samantha Wilson

With developments in technology and the increasing value of intangible assets, does the insurance industry need to reassess the role it plays in protecting its customers against significant losses flowing from damage to these assets?


Tangible and Intangible Assets

A Harvard Business Review article from May 1981 described a more useful way of distinguishing goods and services as being to speak of tangible and intangible products.  This concept is therefore relatively new to the 300 year old insurance market. 


The tangible assets of a company are widely understood and easy to identify; they are the buildings, machinery and equipment – anything that you can touch and feel. The intangible assets are the parts of a company which are not physical in nature but are resources which are controlled by the company. These could include intellectual property, supply chain resilience, contacts database, business methodology, reputation and goodwill or the network through which the company conducts its business.


The significant development in technology over the past 40 years has seen the perceived value of intangible assets soar. From Amazon to Uber, the meteoric rise of technology driven companies, whose value is rooted predominantly in their intangible assets, has disrupted, and in some cases completely wiped out, longstanding businesses and business models. In less than a generation, technology has changed everything from the way we buy groceries to how we interact socially. Around the time of the Harvard article, intangible assets represented only a small percentage of a company’s value. As at 2016, Forbes estimated that figure to be around 80%.


Take Amazon as an example: most of its value is not in its warehouses or its stock (though these are, of course, significant). It is in its reliable reputation, that its efficient network provides customers instant access to its website, to search its extensive supply network, for almost any conceivable product, which will be sourced at a competitive price and delivered from one of its warehouses to the customer in as little as an hour. The customer’s belief that each step in this process will work reliably is what makes Amazon so successful.


These often incredibly valuable intangible assets cannot be destroyed in a fire or a hurricane. However, they can be damaged even in momentary carelessness.  A 15 minute outage in BA’s power supply, possibly caused by an engineer’s human error, lead to 75,000 customers being stranded and an estimated £150m damages bill. It is therefore increasingly important to a business that these assets are sufficiently protected in the event something does go wrong.


Insuring Intangible Assets

Insurance has developed by assessing the risk of a peril to a physical asset and underwriting that risk based on an analysis of data acquired from similar losses. Applying the same method to intangible assets, which are more difficult to quantify and in relation to which the effects of losses are less predictable, is more of a challenge. The industry already successfully covers some intangible assets, such as loss of supply chain, by means of business interruption insurance, though this is usually still linked to a physical loss. Such losses are easier to quantify to the extent that a comparison can be made against previous annual turnover and past performance.


One of the major concerns for risk managers is whether their businesses will be sufficiently covered in the event that significant damage is caused to one of their valuable intangible assets.


The area of cyber risks is a good illustration of this problem.


In the 1980s, when the internet was a closed-off community mostly used by academics, cyber threats were relatively unknown.  By the late 2000s, the internet was an important part of every day life. Most businesses now had some form of online presence and relied on the internet and internet-connected systems to run their company. However, the internet is vulnerable. If a virus breaks through your fire wall, or accesses your system through a less secure company in your supply chain, your entire network is exposed. The rise of smart phones over the past 10 years provides a further unprecedented level of accessibility to a company’s most valuable assets. Many employees now access their work email through their personal smart phone, which is unlikely to have the same level of security as their company’s main network. 


Any company of any size in any sector is at risk. A recent poll by Barclaycard showed that SMEs are more concerned about a cyber attack on their business than the effect of Brexit. 


Whatever the type of attack (commoditised attacks, affecting millions of victims; targeted attacks, which have the highest chance of a significant financial reward; and high end attacks, focussing on few victims for very high reward), the legal and financial ramifications can be astronomical and commercially catastrophic.



Cyber risks insurance is available, albeit that coverage is provided on a broadly similar basis to other forms of insurance. Thus, coverage is provided for the cost of reinstating a computer system and database and associated costs, such as notification, forensic investigations and dealing with regulatory authorities.


Lloyd’s of London has this week published a report, “Counting the cost: Cyber exposure decoded”, concluding that a major cyber attack could generate losses to the businesses affected of up to £40.7bn. The scenarios set out in the Lloyd’s report show that there is a substantial gap in the take up of coverage and in the event of a significant incident, as little as 7% of economic losses of the type insured by a Lloyd’s policy would actually be insured.


However, the real point is that insurance is rarely even offered to protect businesses for loss or damage to their intangible assets arising out of a cyber-related loss.


Companies are improving their ability to analyse and value their intangible assets. Such businesses want to be protected against the risk of damage to those assets. The insurance industry, even if it covered such risks, would be unlikely to have the capacity to deal with such catastrophic losses. Few insurers would want to provide cover up to the limits required. Equally, few customers would be willing to pay a premium high enough to cover it.


How can the insurance industry adapt?

There are a number of ways in which the insurance industry could respond to the challenge of protecting intangible assets.


Pooling – Similar to Pool Re (which, consequently, specifically excludes damage caused by virus, hacking and similar actions), the industry could collaborate with the government to create a scheme that would cover losses to intangible assets, but underpinned by an agreement that, if the losses became so big that they exhausted reserves, then it could draw funds from the UK government to meet its obligations. This is a realistic possibility and would provide the resources required to protect against the significant losses described. However, as with the terrorist atrocities in the 1990s which precipitated the establishment of Pool Re, it may require a catastrophic event to take place before the industry would consider it worthwhile to develop the product.


Captive Insurer – As insurers internal to a particular group of businesses, captives could provide coverage at a lower rate of premium than the open market.  One issue faced by an insured is that many insurance products contain a number of exclusions, so businesses are not confident their loss would be covered. A captive could provide that breadth of cover. However, even a captive backed by reinsurance is unlikely to be able to provide limits of cover for the type of exposure under discussion.


Incentives for increased security – A significant issue for businesses is finding the capital to invest in better security for their intangible assets. Insurers could provide incentives such as reduced premiums for businesses that can show they have improved their security and therefore decreased the likelihood of making a claim. This is a long-term solution that would only work if an insured could demonstrate the ability to meet premium and remain claim free for a number of years. It would not protect businesses that require the capital assistance now.


Insurance Linked Securities These are financial instruments whose values are driven by insurance loss events, usually providing substantial limits of cover. Investors underwrite the same type of risks that insurers and reinsurers do, collecting premiums and paying out losses as and when these materialise. As such, insurers are able to pass on unwanted accumulations of risk to the capital markets. As catastrophic losses are low-probability, they could be attractive to investors. However, investors will no doubt wish to take a cautious approach on premium, so this is likely to be a relatively expensive option.


Risk Management – Here the idea is that experts would be consulted before a crisis required them to become involved. Companies would have their risks assessed, systems updated and protections put in place before they suffered a loss. These systems would then be monitored and tested regularly, to ensure the greatest protection against suffering damage.


The one great opportunity for the insurance industry arising from the above is that insurers have the specialist knowledge and expertise to put these systems in place.  Rather than paying a significant premium, an insured could use those resources to pay for expert consultants to assess their security requirements and bring their systems up to the standard required to minimise the risk in the first place. This would provide comfort to insurers who could continue to monitor the risk and charge lower premiums as a result, for the risks that they do actually take on in the traditional manner.  The issue with this approach is that it would require a significant financial outlay at the start and negotiating who would be responsible for those costs could be problematic.


CPB Comment

Many of the discussed options have proved successful in providing the high levels of coverage required to cope with catastrophic losses to tangible assets.  All have their disadvantages; however we consider that the final option presents the best opportunity for insurers to use their expertise and resources to meet their customers’ needs. Rather than looking at how to deal with issues of capacity, the industry could assist its customers to properly assess their risk and secure against future losses. In a more advisory role, insurers would be assisting the insured to put a lock on the warehouse door rather than pay to replace the equipment stolen from inside it.  




November 2017

Submitted by: Richard D. Gable



Federal Judge finds post loss assignment of benefits proper under Pennsylvania law


In a recent opinion, Judge Schmehl of the Eastern District of Pennsylvania denied a forced placed insurer’s Motion to Dismiss a suit brought by the assignee of a homeowner for water damage to the home.  In Williams v. American Surety Insurance Company, the subject home was damaged by water while the mortgage company was in the process of foreclosing on the home.  The homeowner, who had been designated as “Borrower” under a forced placed insurance policy issued to the mortgage company, made a claim under the policy.  After the home was subsequently purchased at Sheriff’s Sale, the new buyer obtained an assignment of the claim.  The claim was denied and the purchaser brought suit.


In denying the insurer’s Motion to Dismiss, the court ruled that the policy’s anti-assignment clause only served to bar pre-loss assignments.  The claim, being a fixed and vested right at the time of the loss, is assignable under Pennsylvania law.   The court also rejected arguments relating to timing of the assignment, finding that it was irrelevant that the original claimant had already sold the home at the time the assignment was made.  The court found that the only issue that mattered was whether the assignor had an insurable interest at the time of the loss, which the court concluded she did.


Notably, the court cited with approval to the Florida decision of One Call Prop. Servs., Inc. v. Security First Ins. Co., 165 So .2d 749 (Fla. 4th DCA 2015) for the proposition that the assignable right accrues as of the date of loss even though payment may not be due.  Florida courts are awash in assignment of benefits (AOB) suits brought by restoration companies.  While the avalanche of AOB cases in Florida is likely the product of the state’s unique one-way, fee shifting statute (§ 627.428), it will be interesting to see whether decisions like Williams will encourage similar litigation in Pennsylvania. 




October 2017

Opinion Piece re Texas House Bill 1774 – “Hailstorm Litigation Reform Bill”


By:       W. Neil Rambin & Susan Egeland

            Drinker Biddle & Reath LLP

            Dallas, Texas 75201


Texas is known for its prolific weather events – wind, hail, tornadoes, and the most recent Hurricane Harvey – all of which can wreak havoc and cause significant damage to residential and commercial properties. As the locals say: “If you don’t like the weather in Texas, wait five minutes” and the next weather pattern will roll in. But 6-12 months after the storm rolls out, Texas is (or was) known for another prolific event: the filing of storm litigation cases across the state. While some of these claims were meritorious, many were not, resulting in clogged courthouses and escalating attorneys’ fees.  


Texas House Bill 1774, which became law on September 1, 2017 (codified as Texas Insurance Code §542A, “Certain Consumer Actions Related to Claims for Property Damage”), is Republican-backed legislation intended to address “insurance claims and certain prohibited acts and practices in the business of insurance.” It applies to all first-party property claims which pertain to “damages to or loss of covered property caused, wholly or partly, by forces of nature, including an earthquake or earth tremor, a wildfire, a flood, a tornado, lightning, a hurricane, hail, wind, a snowstorm, or a rainstorm.” Supporters argue the legislation will reduce unwarranted storm litigation by: (1) weeding out frivolous claims before they reach the courthouse; and (2) giving insurance companies a means to identify and settle meritorious claims before they become lawsuits. Opponents argue the legislation is draconian and unfairly swings the pendulum back too far in favor of the insurance companies.


To accomplish its goals, §542A introduces new pre-suit notice requirements; pre-suit inspection requirements; options for abatement; limitations on actions against individual agents; and restrictions on the award of attorneys’ fees. The key provisions of §542A include:


-       An insured must give specific pre-suit written notice specifying his damages and attorneys’ fees incurred to date at least 60 days before filing suit. (§542A.003). This provision allows the insurance company to evaluate the claim for potential early resolution. Failure to comply with the pre-suit notice requirement may prevent the insured’s recovery of attorneys’ fees should the claim become a lawsuit.


-       Upon receiving pre-suit written notice, an insurance company is entitled to request a pre-suit inspection. (§542A.004). This provision, too, allows an insurance company to evaluate the claim for potential early resolution.


-       If the insured does not comply with the pre-suit written notice or pre-suit inspection requirements, the insurer may seek abatement of the case. (§542A.005). This should stop the insured’s attorneys’ fees from accruing while the insurance evaluates the claim.


-       For actions brought against an insurer’s agents – including individual employees, representatives, and adjusters who perform acts on behalf of an insurer – the insurer “may elect to accept whatever liability an agent might have to the claimant for the agent’s acts or omissions related to the claim by providing written notice to the claimant” which then prevents the plaintiff from suing the agent individually. (§542A.006). Practically speaking, this allows an insurance company to streamline its defense without having to incur additional fees defending its agents. Further, this provision is intended to eliminate an insured’s ability to add a Texas-resident agent for the sole purpose of defeating diversity to prevent the insurance company from removing the case to federal court.


-       Should the case proceed to trial, an insured’s recovery of attorneys’ fees is tied to his original pre-suit written notice specifying his damages. The insured has an incentive to be accurate in his assessment of damages or else risk not receiving any attorneys’ fees (for example, if the judgment awarded to the insured for damage to covered property is less than 20% of the amount alleged to be owed for that damage in the original pre-suit notice, the court may not award attorneys’ fees). (§542A.007).


Creating particular consternation is House Bill 1774’s modification of existing Texas Insurance Code §542.060(c) which lowers the interest payment on claims not paid promptly to only 5% above the prejudgment interest rate as determined by §304.003 of the Texas Finance Code (which is currently 5%) resulting in a current interest rate of 10%. Compare this to the prior law’s 18% interest rate. As a result of this provision, which applies to all claims made on or after September 1, 2017, Texas saw a barrage of social media posts, lawyer advertisements, and media articles urging insureds to submit all Hurricane Harvey claims before September 1 in an attempt to lock in the 18% interest on any claims not paid promptly.


Emergency orders issued by the Supreme Court of Texas to extend procedural deadlines on account of Hurricane Harvey did not impact the effective date of the law, which applies to all claims and lawsuits filed on or after September 1, 2017. While the impact of House Bill 1774 remains to be seen, the basic premise is sound: any claimant, whether in the insurance context or not, should be able to clearly articulate his claim and damages before filing suit.




Lee Losciale v. State Farm Lloyds, 2017 WL 3008642 (S.D. Texas, Houston Division).
The Court granted State Farm’s motion for summary judgment following full and timely payment of the appraisal award. After receipt of the appraisal award, State Farm issued payment based on the actual cash value of the award. Replacement cost benefits were not released, as Plaintiff had not submitted any repair/replacement documentation. After issuing payment, State Farm sought summary judgment based on its timely payment of the award. Plaintiff argued that Menchaca overruled the vast legal authority regarding payment of an appraisal award, which eliminates both contractual and extra-contractual claims following payment of the award. The Court listed the five rules outlined in Menchaca and commented that Plaintiff did not identify which of the “rules” he relied on as support for his Insurance Code claims against State Farm. Nonetheless, the Court found that none of the rules apply given State Farm’s full and timely payment of the appraisal award. In line with Hurst, the Court reasoned that payment of the appraisal award satisfied Plaintiff’s right to receive benefits under the Policy; therefore, there was no “loss of benefits.” Additionally, Plaintiff presented no evidence of an independent loss that did not flow or stem from the original denial of policy benefits. Thus, summary judgment was granted in favor of State Farm.
Certain Underwriters at Lloyd’s of London v. Lowen Valley View, LLC and Panade II LTD, d/b/a Hilton Garden Inn, 2017 WL 3115142 (N.D. Texas, Dallas Division).
This is an insurance coverage dispute involving damage to a hotel. The policy period at issue was June 2, 2012 to June 2, 2013. In November 2014, the manager of the hotel, Ajay Desai, was evaluating the property for potential capital improvement projects when he noticed the shingles “looked bad.” The roofing contractor he hired to look at the roof found significant hail damage to various roofing systems at the Property. The weather report obtained by the Contractor noted nine events of hail “at location” between January 1, 2006 and December 21, 2014. Of the nine hail events, only one (June 13, 2012) was during the policy period. After learning of the hail damage, Desai reported the damage to his agent, who then reported a claim to Underwriters with a June 13, 2012 date of loss. Following inspection, the adjuster sent out by Underwriters determined the roof needed replacement. On March 2, 2015, Underwriters sent a Reservation of Right letter based on “potential coverage issues.” After a year of investigation, Underwriters denied the claim based on a failure of the insured to provide timely notice. On the same day, February 18, 2016, Underwriters filed its Original Complaint and Request for Declaratory Judgment. Underwriters then moved for summary judgment on Defendants’ breach of contract and Texas Insurance Code counterclaims because: 1) Defendants presented no evidence segregating damage attributable from the June 13, 2012 storm from the damage attributable to the other storms; and 2) Defendants failed to provide prompt notice of the loss. Under Texas law, the insured must prove that its claim falls within the insuring agreement. The Court agreed with Underwriters that Defendants failed to provide evidence that would allow the trier of fact to segregate covered losses from non-covered losses and granted summary judgment in favor of Underwriters.






Recent practices involving construction of multi-apartment units have moved to the area of all wood construction.  In recent months we have investigated two losses in excess of $50 million which were frighteningly similar in that they involve new construction that was approximatley 90% complete.  The construction is essentially entirely cured wood with no effective fire stopping or gypsum board included.  Likewise, in both cases the residential sprinkler system was not operational nor was there any effective fire or smoke detection, fire watch or security detail.  Both fires are suspicious in origin. 


In both cases the general contractor had responsibility for site safety and security.  In neither case was there any security program in place other than fencing the project.  Not surprisingly, subrogation was barred in both cases by the terms of the builder’s risk coverage, OCIP, CCIP and/or effective waivers of subrogation. 


Would it be sensible to reexamine these types of coverage programs with an eye towards encouraging general contractors and others to provide effective security and fire detection at ongoing construction projects before Certificates of Occupancy have been issued. 

Perhaps breach of the security obligation could be an exception to the waiver of subrogation.  We would suggest this be considered because of the magnitude of the losses that can and do result from the absence of effective security.  For example, the Protective Safeguards Endorsement includes as one of its items, security that must make hourly property reviews.  In both recent instances, the severity of the loss would likely have been substantially less if the fires were discovered in their incipient stages. 



JUNE 2017

The New Jersey Supreme Court recently decided its first property insurance case arising from Storm Sandy in
Oxford Realty Group v. Travelers Excess & Surplus Lines Co. The central issue was whether the debris removal coverage in the policy applied in addition to the policy’s endorsement sublimiting flood coverage for all losses “resulting from flood to buildings, structures or property in the open” in the policy’s flood zone.  In a 5 to 2 decision, the court held that the debris removal coverage did not apply in addition to the flood endorsement’s $1 million sublimit. If the Appellate Division’s decision had not been overturned, insureds may have used the same line of argument to assert that various other property coverages, including business interruption coverage arising from a flood, would not be limited to the flood sublimit. A similar line of argument also could have been made for other sublimits tied to a particular peril, such as earthquake. The decision also contains some significant holdings that contra proferentem and the reasonable expectations doctrine generally do not apply to benefit sophisticated commercial entities, and that both doctrines apply on if there are ambiguous or misleading policy terms. The court held that because the terms of the policy were not ambiguous, it did not need to address the insured’s arguments on contra proferetem or the reasonable expectations doctrine.


FDCC member Wystan Ackerman of Robinson & Cole LLP briefed and argued this case for the insurer. 



APRIL 2016

In Metsack v. Liberty Mutual Fire Ins. Co., 2017 U.S. Dist. LEXIS 24062 (D. Conn Feb. 21, 2017), a Connecticut federal judge held, in a case of first impression, that the gradual deterioration of a concrete foundation caused by a corrosive mineral in the concrete aggregate was not a “sudden and accidental” collapse under the terms of an Allstate Insurance Company homeowners insurance policy, and granted Allstate’s motion for summary judgment on all counts of the plaintiff’s complaint.  FDCC member firm Robinson + Cole LLP (of Hartford, CT) represented Allstate in the action. 

Metsack was one of many lawsuits now pending in Connecticut’s federal and state courts involving the failure of concrete foundations that were poured during the 1980s and 1990s.  The failures involve cracking and deformation due to long-term corrosion of the mineral pyrrhotite, found in a quarry from which a concrete supplier in northeastern Connecticut excavated aggregate used in the concrete mix.  Lawyers for the homeowner plaintiffs argue that the cracking of the concrete constitutes a “collapse” of the foundation. In Beach v. Middlesex Mutual Ins. Co., 205 Conn. 246, 532 A. 2d 1297 (1987), the Connecticut Supreme Court held that where an insurance policy provides coverage for “collapse,” and that term is not otherwise defined in the policy, “collapse” means a “substantial impairment of the structural integrity of the building.”  In Metsack the Court held that Allstate’s policy was different than the policy at issue in Beach because the Allstate policy, while providing limited coverage for “collapse,” required that a covered collapse be “a sudden and accidental direct physical loss.” Rejecting the plaintiff’s contention that the term “sudden” was ambiguous in the context of the Allstate policy, the District Court held: “Because the parties do not dispute that the Metsacks’ basement walls deteriorated over time, rather than ‘suddenly,’. . .the Allstate policy excludes coverage for their loss. . . .” 2017 U.S. Dist. LEXIS at *23.  



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