By Daniel Pickett, Sedgwick New York

On May 6, 2013, the New Jersey state legislature approved Assembly Bill A-3642, which now becomes Public Law 2013, c.53, requiring homeowners insurance policies delivered or renewed in New Jersey to contain a one-page summary of the policy which identifies any notable coverages or exclusions.

Under the prior law, when a homeowners insurance policy was issued or renewed, insurers were required to provide a consumer information brochure to the insured which included certain information about the National Flood Insurance Program as well as the insurer’s hurricane deductible program. The amended law, which was introduced in the wake of Super Storm Sandy, now expressly requires the brochure to be written in a manner that is simple, clear, understandable and easily readable. It also expands the contents of the brochure to include the one-page summary. The law, which goes into effect in 90 days, leaves it to the New Jersey Commissioner of Banking and Insurance to determine which coverages and exclusions are to be considered “notable”.

The law explicitly provides that the summary is not to be considered a replacement for the terms of the policy or as having the effect of altering coverage terms. Additionally, it provides that the summary will not confer new or additional rights beyond those expressly provided by the policy.  Indeed, it requires that the summary expressly state that it is only provided to the homeowner as a guide to understanding the terms of the policy. It is anticipated that this should thwart any attempts by policy holders to assert that the summary is evidence that coverage is broader or different from that provided for by the terms, conditions and exclusions of the policy.

By Aaron F. Mandel, Sedgwick New York

Earlier this week, the Florida District Court of Appeal once again concluded that, where an insurance policy does not impose a stricter standard for voiding insurance policies based on misrepresentations than section 627.409 of the Florida Statutes (“Section 627.409”), Section 627.409 permits an insurer to do so based on even innocent misrepresentations if the insurer demonstrates that it would not have issued the policy had it known the truth.

In Universal Property & Casualty Insurance Co. v. Johnson, No. 1D12-0891, 2013 WL 1809639 (Fla. Dist. Ct. App. 1st Dist. Apr. 30, 2013), a fire destroyed the Johnsons’ home.  Universal insured the home, and its policy contained a condition (the “Voidance Condition”) providing that the entire policy would be void if, before or after a “loss,” the insured:  (1) “intentionally concealed or misrepresented any material fact or circumstance”; (2) engaged in fraudulent conduct; or (3) “made false statements.” Universal investigated the claim and denied coverage based on a misrepresentation in the Johnsons’ policy application.  Specifically, the Johnsons answered “no” when asked if either of them had been convicted of a felony in the last 10 years, but Mrs. Johnson had actually been convicted of five felonies in July 1998.  It was later determined that this misrepresentation was innocent in that it was based on a misunderstanding as to the actual date when Mrs. Johnson had been convicted, and that Universal would not have issued the policy had it known the truth about Mrs. Johnson’s criminal history.

The Johnsons sued Universal for coverage and Universal counterclaimed, arguing that it was entitled to void the policy pursuant to Section 627.409.  The Johnsons claimed that Universal could not rely on Section 627.409 to void the policy because the Voidance Condition imposed a more stringent standard than Section 627.409 – i.e., it required that the misstatements be intentional in order to void the policy.  The trial court agreed, and Universal appealed.

The appellate court reversed.  Although it acknowledged that parties to insurance policies are free to contract out of the requirements of state or federal law (provided they don’t violate public policy in the process), the appellate court concluded that the Universal policy did not impose a stricter standard for voiding its policy than Section 627.409.  The court first noted that the Johnsons’ interpretation of the Voidance Condition’s third prong rendered it superfluous of the condition’s other two prongs, in violation of Florida law.  The court also rejected the Johnsons’ argument that the third prong required intent based on the Voidance Condition’s title, “Concealment or Fraud,” even though concealment and fraud require intent.  Specifically, the court reiterated its prior holding that, “headings or subheadings of a document do not dictate the meaning of the entire agreement, especially where the literal language of the heading is contrary to the agreement’s overall scheme.”

By Kimberly L. Steele, Sedgwick Dallas

A recent federal opinion from Judge Sam Lindsay of the Northern District of Texas, Dallas Division, found that an insurer’s payment of an appraisal award was insufficient to defeat the insured’s breach of contract claim, and that the insured’s statutory and common-law bad faith claims remained viable as well. In the case of Church On The Rock North d/b/a North Church v. Church Mutual Ins. Co., No. 3:10-CV-0975-L (N.D. Tex. Feb. 11, 2013), North Church sued Church Mutual over its handling of a claim for damages arising out of an April 2010 thunderstorm. The parties agreed on the cost of a number of repairs, but differed on others, including the amount to be paid for replacement of North Church’s roof. Church Mutual invoked the appraisal process, and while appraisal was ongoing, North Church sued.

Church Mutual removed the lawsuit to federal court, and the case was administratively closed (subject to a potential future motion to re-open) so that appraisal could be completed. Upon receipt of the appraisal award, Church Mutual issued two checks, one for the remaining unpaid balance of the loss owed, and a second for the withheld depreciation. Church Mutual later moved to re-open the lawsuit and for summary judgment on North Church’s claims for breach of contract, common law bad faith, and violations of the Texas Insurance Code and the Deceptive Trade Practices Act. According to Judge Lindsay’s order, “[b]oiled down to its essence, [Church Mutual’s] contention is that without a viable contract claim, North Church’s other claims necessarily fail, and North Church cannot succeed on its contract claim because it is estopped by the alleged binding appraisal award and [Church Mutual’s] timely payment of that award from pursuing a contract claim[.]”

Judge Lindsay rejected Church Mutual’s position in all respects. Specifically, he concluded that Church Mutual had failed to establish as a matter of law that the appraisal award was binding and enforceable, but only assumed that it was true. Moreover, Church Mutual did not present sufficient evidence to prove that North Church intended to be bound by the award, failed to prove that its payments were timely, and did not establish as a matter of law that its calculations of deductible, depreciation, and prior payments were correct. Thus, Church Mutual’s motion for summary judgment on the contract claims was denied.

Judge Lindsay likewise denied Church Mutual’s summary judgment in relation to the insured’s extra-contractual claims. He did so not only because their contract claims remained viable and because mere payment of an appraisal award, without more, did not preclude an award for pre-appraisal violations of the Insurance Code. He also noted that North Church’s statutory claims were based on timing of payment and purported misrepresentations, not allegedly wrongful underpayment or denial of policy benefits, so the statutory claims would not stand or fall with the common-law bad faith claim. In closing, Judge Lindsay expressly stated that he was not commenting on the strength or weakness of North Church’s case, but only that Church Mutual had not met its summary judgment burden.

The Insurance Law Blog has looked at appraisal awards in Texas in earlier posts.  Please click here for a post from December regarding appraisal clauses and the disputes in Texas over the appraisal process.

By Lisa M. Henderson, Sedgwick Dallas

A Texas State Senator has introduced legislation that would require residential property insurance carriers to include on the declarations page a dollar amount and explanation for every deductible.  The Senator, Eddie Lucio Jr., believes the bill is necessary to eliminate the confusion caused by deductibles that are listed as percentages, as opposed to a certain dollar amount.  Mr. Lucio believes that policyholders often assume that the deductible is a percentage of their loss when, in fact, the deductible is a percentage of the insured value of the residence.  The bill would require that declarations pages: (1) list and explain each type of deductible under the residential insurance policy; and (2) list the exact dollar amount of each deductible under the residential property insurance policy.  The bill was approved by the Business & Commerce Committee on February 6, 2013.  If enacted, the bill will apply to all residential property insurance policies issued in Texas on or after January 1, 2014. 

We will continue to track S.B. 112 and post any developments.

By Kelly Nugent

In Cardio Diagnostic Imaging, Inc. v. Farmers Insurance Exchange, Case No. B239145 (Dec. 18, 2012; certified for publication), the Second Division of the California Court of Appeal affirmed the lower court’s ruling that an exclusion in a first-party property insurance policy precluding coverage for damages caused directly or indirectly by “water that backs up or overflows from a sewer, drain or sump” was unambiguous and barred coverage for flood damage to the insured’s property caused by a malfunctioning toilet that overflowed due to a blockage in a connecting sewer line.

On appeal, the insured (“Cardio”) made three arguments as to why the exclusion should not preclude coverage for the damage to its property.  First, Cardio argued that the phrase “backs up or overflows from” meant that water must come out of the sewer or drain and does not include water unable to proceed down an interior drain.  Second, Cardio argued that the exclusion should be limited to water damage from large-scale disasters because it was listed among other exclusions precluding coverage for damage caused by such disasters.  Third, Cardio argued that the exclusion did not apply because the damage was caused by water overflowing out of a toilet as opposed to water overflowing out of a drain.

The Appellate Court disagreed, finding the inclusion of the word “or ” in the exclusion critical to the interpretation of the exclusion.  Applying the fundamental principle that policy language must be construed so as to give effect to every term, the Appellate Court concluded that the exclusion unambiguously applied both to water which “backs up,” and to water that “overflows from” a sewer or drain.  Additionally, the Court rejected Cardio’s argument that the exclusion’s placement among other exclusions related to large-scale disasters warranted limiting its application to those types of events because the wording of the exclusion was not so limited.  Finally, the Court rejected Cardio’s attempt to negate the exclusion because the overflow resulted from a toilet and not a “drain,” finding the distinction immaterial given that the toilet was connected to a drain.

We thought our readers would be interested in an article by Lisa Henderson from the Fall 2012 issue of newsletter by the Alternative Dispute Resolution Committee of the Tort Trial & Insurance Practice Section of the American Bar Association.  Lisa discusses appraisal clauses commonly found in property insurance contracts and the dispute over the appraisal process in Texas over the past few years.

Click here to read the article.

We are pleased to announce that three of the editors of the Insurance Law Blog have been elected to the firm’s partnership, effective January 1, 2013.  Alex Potente, David Dolendi and Maria Cousineau are longstanding members of Sedgwick’s editorial team and helped transition our insurance and property coverage newsletters to a blog format.  A few other of our insurance attorneys were promoted, including Valerie Rojas (LA – Fidelity/Bond and D&O) and John Seybert (NY – Healthcare).  Congratulations to all!

Please click here for more information.

It has been a month since Superstorm Sandy hit the east coast causing tens of billions of dollars of damage to homes and businesses. On the insurance front, various states have revised regulations or issued executive orders impacting the way claims are assessed and handled. Today, NY Governor Cuomo issued an executive order directing that temporary licenses be issued on an expedited basis to out-of-state insurance adjusters. In addition, the NY Department of Financial Services (DFS) issued a new regulation requiring insurance companies to start investigating claims in 6 business days, rather than 15 days under current rules. The DFS website will feature online report cards on performance of insurance companies since the storm.

Following the storm, governors of New York, New Jersey, Connecticut and Maryland directed insurance companies not to enforce the homeowners’ hurricane deductibles given that the National Hurricane Center downgraded sandy to a “post-tropical storm” just before it made landfall. But, other states may allow insurance companies to enforce the hurricane deductibles. For instance, Sandy was still classified as a hurricane when it passed by North Carolina.

Estimates are that there will be between $10 billion to $20 billion in insured losses from the superstorm.

We are closely following the business and insurance implications from the storm and will provide updates on regulations and litigation as they arise.

By David Dolendi

In Pfeffer v. Harleysville Group, Inc., No. 11-CV-4513, 2012 WL 5392933 (2d Cir. Nov. 6, 2012) (applying New York law), a panel of the U.S. Court of Appeals for the Second Circuit held that the insured’s notice of a property damage claim to his insurance broker did not constitute notice to his insurance carrier under New York law.

The insured owned a six-unit apartment building in Brooklyn.  In December 2006, the insured received complaints from his tenants about noise and vibrations caused by a nearby construction project.  The insured investigated the complaints and noticed minor cracks and wall shifts in his building and reported the incident to his insurance broker.  The broker advised him to “wait and see” if the damage became worse upon the completion of the neighboring construction before filing a claim.  The insured then proceeded to retain engineers to evaluate the damage and also hired an attorney to pursue legal action against the adjacent property owner.  The loss was eventually reported to the insurer in January 2008, which was more than a year after the insured first contacted the broker.

The insurer denied coverage for the claim based on the condition in the policy that required the insured to provide the insurer with “prompt notice of the loss or damage.”  The insured filed suit in New York state court seeking coverage for the loss.  The insurer removed the case to the federal district court and then immediately moved for summary judgment.  The district court granted the insurer’s summary judgment and held that the insured’s delay of more than a year to report the property damage claim was untimely and unexcused.  The Court of Appeals affirmed the decision, finding that the insured’s notice of the loss was not “prompt” because he consulted two engineers, took extensive notes regarding the damage, and retained an attorney to pursue litigation against his neighbor all before notifying the insurance carrier.  The Court of Appeals also rejected the insured’s argument that the untimely notice should be excused because he reasonably relied on the broker’s advice that he should wait to evaluate the damage before filing the claim with the insurer.  The court noted that New York courts have previously held that notice to a broker is not notice to the insurance carrier.

It does not appear from the court records that the insured also asserted a claim against the broker for professional negligence, but the Sedgwick Insurance Law Blog will be following any developments in this matter.

By Lisa  Henderson

In an August ruling from the Texas Court of Appeal, the court held that factual statements on a proof of loss form constitute admissions by the insured that signed the form.  In United States Fire Ins. Co. v. The Lynd Co., No. 04-11-00347-CV (Tex. App.—San Antonio, Aug. 15, 2012), hail had caused property damage to two apartment complexes in Austin, Texas in two separate storms.  U.S. Fire underwrote primary insurance for the property manager, The Lynd Company.  RSUI Indemnity Company provided excess insurance coverage for the damaged property.

Based upon its investigation, U.S. Fire concluded that the two apartment complexes in Austin were damaged by a single storm that occurred in early May 2006.  U.S. Fire paid its policy limit of $5,000,000 for the damage to the two complexes.  Lynd then sought coverage from RSUI, which took the position that two storms had caused the damage, thereby triggering two limits of liability.  U.S. Fire argued that there was only one storm and, therefore, one occurrence.  Lynd sued U.S. Fire and RSUI, asserting breach of contract and extra-contractual claims.

The trial court granted summary judgment for Lynd on its breach of contract claim against U.S. Fire.  On appeal, U.S. Fire argued that it was error for the trial court to grant summary judgment as there was sufficient evidence to create a fact issue as to whether the complexes were damaged by a single storm or two storms.  The Court of Appeals reversed, agreeing with U.S. Fire and reasoning that the court “need look no further than the Proofs of Loss for Mandalay and Oak Hollow, which were sworn to by Michael Lynd, Sr. on behalf of The Lynd Company,” and which stated that the complexes were also damaged by the May 2006 storm. 

Lynd contended that the proofs of loss did not constitute evidence because the U.S. Fire adjuster had filled out the form.  Therefore, Lynd argued that the forms merely repeated the “baseless and conclusory opinion” that the May 2006 storm was the cause of the damage.  The court, rejecting this argument, held that after Lynd signed the forms he was charged with knowledge of their contents and the factual statements constituted his admissions regardless of who filled in the blanks on the form.  Accordingly, the court held that Lynd did not conclusively establish, as a matter of law, that two separate hailstorms caused the damage to the complexes, and summary judgment on the breach of contract claim was not warranted as a matter of law.