Insurance Recovery & Advisory Recent Developments in Property Insurance Coverage Litigation This article was originally published in Tort Trial & Insurance Practice Law Journal, Fall 2013 (49:1). by James P. Bobotek

I. Introduction II. Business Interruption/ Over the past few years, this survey of Civil Authority developments in property insurance In Northrop Grumman Corp. v. litigation seemed to be dominated Factory Mutual Insurance Co.,1 the by cases arising from certain sets of U.S. District Court for the Central common facts: initially hurricane-re- District of California held that lated claims arising out of Hurricane covered business interruption or Katrina and other storms and, more time element losses must be “the James P. Bobotek recently, claims arising from Chinese direct result of insured physical Insurance Recovery & Advisory drywall. This year we do not see a loss or damage.”2 The policy at +1.202.663.8930 common factual theme: property issue provided coverage for “TIME [email protected] insurance litigation has returned, it ELEMENT loss . . . directly resulting seems, to cases revolving around from physical loss or damage of the Jamie Bobotek is a partner in Pillsbury’s more individual fact patterns. type insured by this Policy.”3 The Insurance Recovery & Advisory practice and is parties disputed whether the insured based in Washington, D.C. He concentrates his Practitioners will note, though, at was required to demonstrate that practice on a variety of insurance coverage, risk least two themes in the cases we its time element losses were tied management and risk allocation issues. review. The question of what caused directly to insured physical loss or a given loss—and the policy language damage. Northrop argued that its that in various ways attempts to time element losses need only be the address those losses resulting in some direct result of “[property] damage of way from at least one covered risk the type insured” by Factory Mutual and one or more noncovered risks— and “not necessarily damage to continues to create thorny questions insured property.”4 Factory Mutual for insurers, policyholders, and courts. asserted that there was coverage Several of the decisions we review only for losses arising from insured throughout the survey address this physical damage.5 The court agreed complicated issue. Another major with the insurer, holding that the theme is the rights and duties of “directly resulting [language] requires the parties to a property insurance that there be a causal link between contract after a loss, including the insured property damage and the appraisal, the application of the suit claimed Time Element loss.”6 limitations clause, and the require- ments to prove a loss, all of which III. Collapse gave rise to interesting opinions In Queen Anne Park Homeowners during the survey period. Association v. State Farm Fire and Casualty Co.,7 the U.S. District

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Court for the Western District of after a fire occurred at the insured rented terminal.25 The equipment was Washington determined the meaning property. The husband and another destroyed while it was being moved.26 of “collapse” as used in the extensions investor had purchased the property, The newly acquired property of coverage in the policy at issue. In and the husband and wife secured coverage extension of the policy 2009, the insured “discovered that the the policy covering the dwelling and provided coverage for “business siding on the condominium buildings contents.17 The insurer moved for personal property . . . that you newly was leaking.”8 Following the insurer’s summary judgment dismissing the acquire, at any location you acquire denial of coverage, the insured filed complaint as to the wife, in part, on other than at fairs, trade shows or a declaratory judgment and breach the basis that she “did not have an exhibitions.”27 The insured had rented of contract action and moved for insurable interest in the damaged the terminal for six days to store the summary judgment on the meaning property.” 18 The trial court denied equipment before delivery to its final of “collapse.”9 The motion was the motion, concluding that “the destination.28 The primary issue was denied without prejudice, pending insurable interest clause of the policy whether the terminal “constitute[d] a decision by the Washington Supreme was ambiguous and . . . required location [the insured] acquired within Court.10 The district court noted consideration of extrinsic evidence.”19 the meaning of the . . . coverage that cases involving the meaning of extension.”29 The U.S. District the term “collapse” typically fall into On appeal, the New York Appellate Court for the Northern District of one of two categories: the majority Division concluded that the Iowa had held that the extension of of courts have held that “in addition insurable interest provision, which coverage to “any location you acquire” to actual collapse, imminent collapse provided in relevant part that “[i] was ambiguous and that “Iowa is covered”11 while a minority “have n the event of a covered loss, the law require[d it] to construe that used a strict ‘rubble-on-the-ground’ defendant [would] not pay for more ambiguity in [the insured’s] favor.”30 standard.”12 Although the Washington than an insured person’s insurable The Eighth Circuit upheld the district Supreme Court declined to answer interest in the property,” was not court’s grant of summary judgment to which approach it would follow, ambiguous.20 The court further the insured.31 the district court noted that it had found that the plain language of the “significant doubt about whether insurable interest provision limited V. Exclusions Washington will follow the ‘imminent the insured’s recovery “to the extent A. Causation collapse’ line of cases.”13 The district of [the] person’s insurable interest.”21 1. Generally court concluded that “even if Although the term “insurable In American Home Assurance Co., Washington were to adopt a relaxed interest” is defined as “any lawful Inc. v. Sebo,32 the insured purchased standard somewhere short of ‘rubble- and substantial economic interest in a home that began to leak during on-the-ground,’ it would require an the safety or preservation of property rainstorms. It became clear that the insured seeking collapse coverage from loss, destruction, or pecuniary leaks were caused by major design to show, in addition to a substantial damage,”22 the court concluded and construction defects.33 Almost impairment of structural integrity, an that “the interest must be of such two years later, the insured sued imminent threat of collapse.”14 Since a character that the destruction of the sellers, the architect, and the the insured property raised no issue the property will have a direct, and construction company that built the of an imminent threat of collapse, the not a mere remote or consequential, house.34 The suit alleged that the district court denied the insured’s effect . . . ,” and the wife did not have home had been “negligently designed renewed motion for summary an “insurable interest” in the dwelling and constructed,” and the sellers judgment.15 because she lacked a direct economic failed to disclose the home’s defects.35 interest in it.23 The insured settled most of his claims IV. Covered Property and filed a declaratory judgment A. Insurable Interest B. Newly Acquired Property action against his homeowner’s In Azzato v. Allstate Insurance Co.,16 In Amera-Seiki Corp. v. Cincinnati insurer, seeking coverage for the the insureds, husband and wife, Insurance Co.,24 the insured submitted water damage.36 The Florida District brought suit to recover benefits under a claim for a newly purchased piece Court of Appeal held that the a landlord’s package insurance policy of equipment that was stored in a “efficient-proximate-cause theory,”

Pillsbury Winthrop Shaw Pittman LLP Recent Developments in Property Insurance Coverage Litigation and not the “concurrentcausation provided “[b]ut, if the same is the Notably, litigation surrounding the doctrine,” applied to determine direct result of a covered cause of loss, inclusion of artificial and manmade the cause of the loss.37 The court we do insure direct physical loss or causes in the earth movement explained that “a covered peril can damage to covered property caused exclusion will likely become more usually be found somewhere in the by the actual contact of the covered prevalent in the future. Effective in chain of causation, and to apply the property with the pollutants.”48 The 2013, the Insurance Services Office is concurrent causation analysis would court found that “the plain language adding the following wording to the effectively nullify all exclusions in an of the exception to the [p]ollution earth movement exclusion causes of all-risk policy.”38 [e]xclusion . . . allows coverage for loss forms (CP 10 10, CP 10 20, and pollution caused by a covered cause CP 10 30): “This exclusion applies 2. Anti-Concurrent/ of loss [and] prevails over the anticon- regardless of whether any of the Anti-Sequential Causation current causation clause’s restriction above, in paragraphs (1) through (5) In Association of Apartment Owners of coverage.”49 [various types of earth movement], of Imperial Plaza v. Fireman’s Fund is caused by an act of nature or is Insurance Co.,39 an insured made a B. Earth Movement otherwise caused.” claim under its all-risks policy for In recent years, courts nationwide arsenic damage to its property.40 have been asked to decide if the C. Vacancy The arsenic damage was caused by earth movement exclusion applies to In West Bend Mutual Insurance moisture infiltrating the insulation natural and manmade forces. There Co. v. New Packing Co.,55 an insured layer below a concrete slab on the was a significant split of authority purchased a warehouse that “had fourth floor of the building.41 Under among the states, and even within been vacant for more than [sixty] the concrete was an insulation certain states, as to the breadth of the consecutive days prior to closing.” layer of canec, a building material standard earth movement exclusion. The warehouse was vandalized unique to Hawaii, which had been In the past survey period, however, twice within seventeen days after part of the original roof of the we have seen increased litigation the insurer issued an endorsement building and was “treated with of nonstandard earth movement “adding the warehouse as an insured inorganic arsenic compounds as an exclusions. In Bentoria Holdings, property.”56 The insurer denied the anti-termite agent.”42 In 2003, testing Inc. v. Travelers Indemnity Co.,50 the claim based on a policy exclusion that was conducted on the fourth floor New York Court of Appeals reversed precluded coverage if the insured to determine the source of floor the trial court’s holding that the property was “vacant for more than deflections.43 The testing revealed earth movement exclusion, even [sixty] consecutive days before [the] that “moisture in the [i]nsulation though it referenced “manmade” loss or damage occur[red].”57 After [l]ayer was decomposing the canec.”44 and “artificial” causes, did not apply the insurer brought suit, the court In 2010, the insured discovered to exclude damage as a result of found that the vacancy exclusion did that arsenic had migrated into the excavation of an adjacent lot.51 The not apply “under the circumstances concrete slab on the fourth floor.45 court explained that “[b]y expressly in this case.”58 The appellate court The migration of the arsenic was excluding earth movement ‘due to affirmed, finding that while the caused by moisture in the insulation manmade or other artificial causes,’”52 vacancy exclusion technically applied layer that dissolved the canec.46 The the policy precluded argument “that to preclude coverage, the insurer insurer denied the resulting claim ‘the intentional removal of earth by “had an opportunity to inspect the based, in part, on the pollution humans’ is not an excluded event.”53 premises to determine if it was exclusion, which contained anti-con- Accordingly, the court concluded that vacant” and chose not to do so.59 current causation language.47 In “the policy [could not] reasonably be Finding that the insurer was estopped the subsequent coverage litigation, read to cover” the plaintiff ’s alleged from relying on the vacancy exclusion, the court noted that although the damage, and the trial court was the appellate court stated that “[a]n pollution exclusion did contain instructed to reverse its decision and insurance policy may not be issued anti-concurrent cause language, enter summary judgment in favor of on a vacant building and then be it also contained a contradictory the insured.54 excluded from coverage because it is exception to the exclusion, which a vacant building.”60

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D. Dishonest Acts insurer denied BSI’s claim under the excluded from coverage by the “faulty, In Telamon Corp. v. Charter Oak builder’s risk policy based on the inadequate, or defective materials” Fire Insurance Co.,61 a temporary faulty workmanship exclusion, which exclusion in the policy.79 The policy at employee leased by the insured from included an ensuing loss provision.71 issue did not cover loss caused by a “labor leasing firm” stole over $5 The district court concluded that “[f ]aulty, inadequate or defective . . . million of the insured’s inventory the faulty workmanship exclusion [m]aterials used in repair, construc- and personal property.62 Charter applied to exclude coverage and that tion, renovation or remodeling.”80 The Oak denied coverage, relying on the the ensuing loss provision did not insured argued that the exclusion property policy’s “dishonest acts” apply.72 did not apply “because the drywall exclusion, which precluded coverage maintains its form and performs its for dishonest acts of the insured, On appeal, BSI presented the issue function,” while the insurer argued including its “leased employees.”63 of whether the exclusion “excludes that “drywall that releases sulfuric gas After Charter Oak moved for coverage only for defects in the is ‘faulty, inadequate or defective.’”81 judgment on the pleadings, the quality of the project as constructed The court found that the drywall court found that the policy included or whether it also excludes coverage “could not reasonably be said to a “Crime Additional Coverages” for accidental damage to the project perform its function” because the endorsement providing coverage for, during construction.”73 The Eighth sulfuric gases “rendered the house among others things, theft committed Circuit predicted that the Missouri uninhabitable.”82 As a result, the by “any natural person who is leased Supreme Court “would read the drywall was defective and the “faulty, to you under a written agreement.”64 faulty workmanship exclusion to inadequate, or defective materials” The U.S. District Court for the encompass both a flawed product and exclusion applied.83 Southern District of Indiana denied a flawed process and thus exclude Charter Oak’s motion for judgment, coverage under the circumstances of F. Mold and Water Damage stating that the “significance of this this case.”74 The court reasoned that 1. No Direct Physical Loss endorsement is that it appears to “because the damaged roof resulted In Beck v. Utica Mutual Insurance override the ‘dishonest acts’ exclusion in a flawed product (the building Co.,84 the owner of a skateboard shop and provides coverage for employee project), the damage fell within the filed suit against his property insurer theft.”65 faulty product definition.”75 The court for the loss of his merchandise value, found that “because the subcontrac- claiming the loss resulted from the E. Faulty Workmanship tors negligently stored and carried collapse of a portion of the roof of the In BSI Constructors, Inc. v. Hartford equipment on the unprotected roofs, warehouse where his business was Fire Insurance Co.,66 the Eighth they engaged in a faulty process to located.85 However, the portion of the Circuit confirmed a Missouri district complete the building project.”76 warehouse containing his business court’s grant of summary judgment Further, the court found that the was not damaged or otherwise to the insurer based on the faulty ensuing loss provision did not apply affected by the roof’s collapse.86 The workmanship exclusion in a builder’s because that exception applies “for insured did not relocate his shop or risk policy. 67 In that case, BSI ‘loss’ to other covered property”— merchandise after the collapse.87 In Constructors agreed to construct a which must be property “ ‘other’ than fact, it was about eight months later, commercial building and engaged the roof that suffered damage due to when moving the merchandise from subcontractors for work on various the defective workmanship but is not his business to his home, that the portions of the project.68 The roofing otherwise excluded.”77 insured first noticed that some of his subcontractor finished the roof while skateboards were warped and some other subcontractors continued work In Travco Insurance Co. v. Ward , the of his other inventory had a “musty in various trades.69 Two other subcon- Supreme Court of Virginia answered smell.”88 The trial court held that the tractors were instructed to take certified questions from the Fourth claimed loss was not covered under precautions to protect the roof but Circuit involving coverage questions the policy as “direct physical loss” failed to do so; the roof was damaged, arising from installation of Chinese- because there was no evidence that allowing water to penetrate the roof made drywall.78 One of the certified the belated claim was a direct result and enter the roofing system.70 The questions was whether damages were of the roof collapse.89

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2. Anti-Concurrent Causation insurance contract only if the extent where a building had been vacant In Orleans Parish School Board of the damage was substantially for “more than 30 consecutive days v. Lexington Insurance Co.,90 the known before the parties entered immediately before the loss.”109 The Louisiana Court of Appeal considered into the insurance contract.”98 The insured argued that the explosion and the application of mold exclusions trial court denied summary judgment, fire were caused by a spark and thus with anticoncurrent causation finding that, based upon the factual constituted an “ensuing loss” separate (ACC) clauses in a series of excess record, a reasonable jury could from the vandalism so that coverage insurance policies to claims arising conclude that the extent of damage should be provided.110 In rejecting from Hurricane Katrina.91 The court was not “substantially known” before the insured’s argument, the court reversed the trial court’s summary the insurance policy was negotiated.99 noted that Connecticut courts utilize judgment ruling that held that the a proximate cause analysis when ACC clauses excluded all coverage G. Ensuing Loss evaluating ensuing loss.111 The court for mold damage “regardless of . . . In Rapid Park Industries v. Great held that “the efficient cause of the source or contributing factor[s].”92 Northern Insurance Co.,100 Great explosion is the removal of the copper Instead, the court found that the plain Northern denied business interrup- propane lines, which constitutes language of the ACCclauses indicated tion coverage when Rapid Park’s ‘the cause to which the loss is to that they were not meant “to exclude garage was ordered closed because of be attributed,’ although the ‘other coverage from mold damage that “imminent danger to the life and safety cause,’ here, the spark from the water would otherwise be covered under of the occupants.” 101 The garage heater, ‘may follow it and operate the policy as attributed to a covered floors were dilapidated and in danger more immediately in producing the loss.”93 The court explained that the of collapse.102 The district court disaster.’”112 ACC clauses were actually meant granted summary judgment for Great to “exclude coverage for damages Northern, finding coverage excluded VI. Damages incurred as a direct result of the under multiple provisions, including A. Overhead and Profit appearance of mold, regardless of the “wear and tear or deterioration” In Trinidad v. Florida Peninsula whether those particular elements exclusion.103 The appellate court Insurance Co.,113 the Florida Supreme of damage would have occurred as a affirmed, rejecting Rapid Park’s Court held that if a policyholder result of some other covered loss.”94 reliance on the exclusion’s “ensuing is “reasonably likely to need a The court remanded the case for a loss or damage” exception to argue general contractor for . . . repairs,” factual determination of whether the that “it was ‘originally water seeping the insurance company’s “required claimed damages were due to “an into the garage’ that resulted in the payment under a replacement initially covered loss” or due to the deterioration of the garage.”104 The cost policy includes overhead and presence of mold.95 court found that “this damage was profit.”114 Florida Peninsula admitted not ‘ensuing,’ in the sense that it was coverage for a fire loss to Trinidad’s 3. Insured’s Knowledge of Prior a separate, subsequent event that home and made payment “even Water Damage occurred due to the deterioration,”105 though Trinidad did not make In Strauss v. Chubb Indemnity but was instead “directly related to repairs . . . or hire a . . . contractor Insurance Co.,96 a homeowner’s the original excluded risk.”106 to undertake the repairs.”115 Even insurer brought a motion for though the payment included other summary judgment in relation to New London County Mutual Insurance costs “necessary to make the repairs,” a water damage and mold claim, Co. v. Zachem107 involved a scenario in it did not “include an amount for a arguing in part that the claim was which a thief, while stealing copper general contractor’s overhead and barred by the “known loss” or pipes from a house, broke a copper profit.”116 Florida Peninsula claimed “loss in progress” doctrines.97 The gas line, causing a basement to fill that it could “withhold payment of U.S. District Court for the Eastern with propane gas, which “ultimately overhead and profit until Trinidad District of Wisconsin noted that exploded and caused a fire that actually incurred those particular the Wisconsin Supreme Court had destroyed the house.”108 New London expenses in repairing or contracting previously held that “the known loss denied coverage due to a vandalism- to repair the home.”117 The court doctrine precludes coverage under an exclusion, which precluded coverage reasoned that “overhead and profit

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[were] no different than any other [the homeowner’s insurer] was claim or a replacement cost claim.”134 costs of a repair,” such as labor and reimbursed from the settlement.”126 Because the insured submitted an materials, and that “[r]equiring the actual cash value claim, the court held insurer to pay overhead and profit The Supreme Court of South Carolina that the claim was not subject to a [under a replacement cost policy] relied on the “other insurance” coinsurance penalty.135 regardless of whether the insured clauses of the policies to reverse actually repair[ed] the property [was] the trial court’s grant of summary In Lexington Insurance Co. v. JAW consistent with [Florida statutory judgment to the insured.127 While the Pointe, LLC,136 the court held law].”118 The court found that the UIMpolicy’s clause stated “this that the insured must prove that Florida Peninsula’s “interpretation insurance shall be excess over other amounts claimed under “Ordinance of replacement cost insurance—that valid and collectible insurance,” the or Law Coverage” and “Demolition is, excluding all costs until they are homeowner’s policy stated: “if a loss and Increased Cost of Construction” actually incurred—would in actuality covered by this policy is also covered endorsements were caused by or render the coverage meaningless.”119 by other insurance, we will pay only result from a “Covered Cause of our share of the loss.”128 Based on this Loss.”137 The claim arose out of B. Other Insurance language, the court found that the hurricane damage to an apartment In Bardsley v. Government Employees UIMpolicy was an “excess” clause, complex.138 The policies issued to Insurance Co.,120 a homeowner and the homeowner’s policy was a the insured did not include flood filed suit after her residence was “pro rata” clause that provided the coverage, so the insurer paid the severely damaged and her husband primary coverage.129 portion of the loss claimed to be was killed when a vehicle crashed the result of wind damage, less into the home.121 The homeowner C. Valuation—Actual Cash Value and the applicable deductible.139 After brought claims for property damage Replacement Cost Hurricane Ike, the city determined under their homeowner’s policy and Several interesting decisions that the damage to the apartment their automobile insurance policy’s involving valuation issues were complex exceeded 50 percent of its underinsured motorist (UIM) decided during the survey period. market value and required that it be property damage coverage.122 She In Buddy Bean Lumber Co. v. Axis demolished and rebuilt to comply also brought a claim on behalf of Surplus Insurance Co.,130 the with current code requirements.140 her deceased husband against the EighthCircuit addressedwhether The “Ordinance or Law Coverage” driver, and the liability insurers of under Arkansas law a coinsurance endorsement provided coverage the driver paid their policy limits.123 provision should be applied to the for increased repair costs caused by The homeowner’s insurer also paid actual cash value or replacement enforcement of an ordinance the property damage claim, which cost of the covered property.131 The “[i]f a Covered Cause of Loss occurs was below its policy limits, but then insured had purchased optional to covered Building property.”141 sought to recover that amount from replacement cost coverage, and Axis Because the insured was not able to the amount paid by the driver’s argued that the insured’s decision to demonstrate that the city based its insurance in a subrogation action.124 purchase such coverage “changed the “substantial damage” determination The homeowner returned the definition of ‘value’ in the coinsurance on wind damage alone, which is a property damage payment from the provision from ‘actual cash value’ to “Covered Cause of Loss”—rather than proceeds paid by the driver’s liability ‘[r]eplacement [c]ost.’ ”132 The insured flood or a combination of wind and insurance.125 The homeowner then asserted that the term“value of flood—it was not entitled to additional filed suit to recover the property Covered Property” in the coinsurance coverage.142 damage amount under their UIM provision “depends on [what] type property damage coverage under of claim it files.”133 The court agreed, VII. Obligations and Rights of the theory that the UIM carrier was concluding that “the proper interpre- the Parties obligated to pay the property damage tation of the coinsurance provision A. Misrepresentation claim because the claim was “not paid varied depending upon whether the Several cases during the survey out of the available insurance because insured has filed an actual cash value period dealt with the intersection

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between policy clauses allowing defense did not apply in the Dodd EUO,” the insured argued there must the insurer to void the policy for case, however, because the policy- be “some outside limit to an insurer’s misrepresentation in an application holders failed to raise the waiver issue ability to demand an EUO.”161 The and statutory provisions allowing the in the lower court.151 court agreed, holding that although same result. In Universal Property and an EUO may have been justified, “we Casualty Insurance Co. v. Johnson,143 B. Duties cannot be sure because Allstate the Florida District Court of Appeal 1. Examinations Under Oath never explained what information it held that the insurer was free to In Staples v. Allstate Insurance Co.,152 was seeking from the EUO that [the impose a stricter avoidance provision the Supreme Court of Washington insured] had not already provided.”162 than that established by state statute, announced new limitations to an Accordingly, the court declined to which allowed the policy to be voided insurer’s right to an examination address this issue.163 only upon an intentional misrep- under oath (EUO). In Staples , when resentation, rather than a noninten- the insured submitted a theft claim, The court next addressed whether tional misrepresentation.144 However, “Allstate took two recorded statements the insured “substantially complied” under the policy language at issue, the from the insured.”153 The insurer sent with Allstate’s request for an EUO.164 court determined that the insurer had several letters requesting various Because the record demonstrated not contracted for a stricter rescission documents as part of its investigation a genuine issue of material fact, it provision.145 and informed the insured that it was remanded this issue to the trial exercising its right to an EUO.154 court.165 Conversely, in Nationwide Mutual The EUO, although scheduled, was Fire Insurance Co. v. Guster Law Firm, conditioned on the insured producing The insured’s final argument was LLC,146 a federal court construing the requested documents.155 When that Allstate was required to prove Alabama law refused to apply a state the insured failed to produce all of it was prejudiced before denying the statute allowing rescission for “even the requested documents, Allstate insured’s claim.166 Allstate argued that innocent material misrepresentations” canceled the EUO but offered to an EUO requirement was a “valid where the policy required the misrep- reschedule it when the documents condition precedent” to bringing resentation to be intentional in order were received;156 hearing nothing, it suit and, as such, no prejudice need for the insurer to avoid the policy.147 then denied the claim.157 The insured be proven.167 The court noted it has The court explained that “Alabama indicated he would submit to an required a showing of prejudice “in courts have read [the state statute] EUO if Allstate would extend the nearly all other contexts to prevent into the policy ‘when the contract contractual suit limitations period, insurers from receiving windfalls attempted to impose more stringent which was just about to expire.158 at the expense of the public.”168 The conditions on the insured than in the Allstate declined the offer.159 court noted that the policy specifically statute, but have refused to read the required a showing of prejudice if the statute into the contract when the The court addressed three issues: insured failed to submit to an EUO.169 contract sets less stringent standards Accordingly, the court rejected on the insured.’”148 (1) Must an insurer’s request for an Allstate’s argument that an insured EUO be reasonable or material to must submit to an EUO before filing In Dodd v. American Family Mutual the insurer’s claim investigation . . .; suit and found that genuine issues Insurance Co.,149 the Supreme Court (2) Did the insured in this case . . . of fact existed regarding whether of Indiana held that under Indiana substantially comply with Allstate’s Allstate was prejudiced.170 law, an insurer may waive its right to request for an EUO . . . ; and (3) rely on a defense of misrepresentation Must an insurer show prejudice 2. Proof of Loss to void a policy if it fails to return the before denying a claim for failure to Ornoff v. Westfield National Insurance premiums paid to the policyholder submit to an EUO?160 Co.171 involved fire damage to the “within a reasonable time after the insureds’ property.172 Within several discovery of the alleged breach.”150 On the first issue, while Allstate months, the insureds submitted The court ruled that waiver of the argued it had “an absolute right to an an itemized accounting of their

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loss.173 About two months later, C. Appraisal [W]hen different causes are alleged they submitted a notarized “Sworn 1. Scope of Appraisal for a single injury to property, Statement in Proof of Loss.”174 The In TMM Investments, Ltd. v. Ohio causationis a liability question for next month, the insurer denied Casualty Insurance Co.,184 the Fifth the courts. . . . By contrast, when the claim based on exclusions for Circuit reinstated an appraisal award different types of damage occur intentional acts and misrepresenta- a Texas district court had set aside.185 to different items of property, tion.175 The denial letter referenced The insured owned a shopping center appraisers may have to decide the the policy, which tolled the that suffered severe roof damage damage caused by each before the contractual suit limitation (two years during a hailstorm.186 Because there courts can decide liability.194 from the date of loss) by the “number was a difference of over $600,000 of days between the date proof of loss between the insured’s estimate and Because this case was similar to is submitted and the date the claim is the insurer’s, the insured invoked Johnson , the court concluded that denied in whole or in part.”176 While the appraisal clause of the insurance it was appropriate for the appraisal the insurer used the “proof of loss” policy.187 The appraisal panel panel to decide causation.195 submission to calculate March 26, concluded that the replacement cost 2012, as “the last day in which [the was $73,015 and the actual cash value 2. Enforcing and Modifying insured] could file suit against [the of the loss would be $49,633.188 The Appraisal Awards insurer,]” the suit was not filed until district court, however, set aside the The insureds in Citizens Property March 27.177 award, determining that the appraisal Insurance Corp. v. Casar196 “filed a panel “exceeded the scope of its claim for water damage alleged to The insureds argued that the tolling authority” when (1) the umpire acted have been caused by a refrigerator period began when they submitted prior to a disagreement between the line leak.”197 The insurer, however, the itemized accounting of their loss, appraisers and (2) the appraisers concluded that some damage was which was, in many respects, more “improperly considered causation caused by water damage while other detailed than the “Sworn Statement and coverage issues when evaluating items were not caused by the leak.198 in Proof of Loss.”178 The court rejected the damage to certain parts of the The insureds “sent a written demand the insureds’ argument, also noting property[.]”189 for appraisal of the entire claim.”199 that “[t]he requirement that the The insurer forwarded an “appraisal insured swear under oath for a proof The Fifth Circuit disagreed, holding agreement” per the terms of the of loss is a significant one.”179 The first that although the umpire policy.200 Because the agreement court noted that at least “[o]ne exceeded his authority when he only included those items that both purpose of the proof of loss is to excluded the damage to the insured’s parties agreed were damaged by the . . . ‘bind the insured and protect HVAC unit from the award, the water, the insureds refused to sign against the imposition of fraud.’”180 umpire’s minor mistake should the agreement and filed a motion Because the policy dictated that the not “taint the entire award,” nor to compel appraisal.201 The Florida contractual suit limitations period did it justify “ignoring the intent of appellate court reversed the lower was tolled only by the submission of a the parties to have damages issues court’s order compelling appraisal “proof of loss,” the earlier, albeit more submitted to and decided by an because the insured refused to sign detailed accounting of the loss was appraisal panel.”190 Second, the court the appraisal agreement, which was insufficient to trigger the commence- concluded that the more recent Texas clearly required by the policy for an ment of the tolling period.181 The Supreme Court case State Farm appraisal to take place.202 “Appraisals policy expressly established the Lloyds v. Johnson191 controlled the are creatures of contract,” the court form of the document to start the issue of causation, as opposed to the noted, and “[w]hat is appraised and tolling period.182 The court upheld Texas appellate case Wells v. American whether a party can be compelled the insurer’s motion to dismiss the States Preferred Insurance Co.,192 to appraisal depend on the contract complaint as time-barred.183 which was relied on by the district provisions.”203 court.193 Quoting Johnson, the Fifth Circuit stated:

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An insurer sought to overturn the of these challenges, explaining that [was] void based on concealment trial court’s grant of summary “[t]he theory behind unconsciona- or misrepresentation of material judgment to an insured condominium bility in contract law is that courts facts concerning the [p]roperty association confirming an appraisal should not enforce a transaction so [insured under the policy].”217 The award in Citizens Property Insurance one-sided, with so gross a disparity insured contended that “because Corp. v. River Manor Condominium in the values exchanged, that no it invoked its right to an appraisal Association, Inc.204 The insurer argued rational contracting party would have under the [p]olicy” before the that the lower court’s judgment entered the contract.”211 The insured insurer filed the declaratory should exclude amounts awarded cited no authority supporting its judgment action, the insurer must for damage to property that was position that the appraisal provision show “that it [had] satisfied all excluded under the policy.205 Despite was unconscionable, and the court conditions precedent to the filing these exclusions, the insured pointed out that the Texas Supreme of its declaratory judgment action, condominium association contended Court “recognizes the general validity including the appraisal provision,” or the policy was in conflict with of such appraisal provisions absent the complaint was “premature [and a Florida statute that required a illegality or waiver.”212 failed] to state a claim upon which condominium association to provide relief may be granted.”218 The court b. Appraisal versus Arbitration— insurance for “[a]ll portions of the held that appraisal in this case was While arbitrations can encompass condominiumproperty located not a condition precedent to the the entire dispute between parties, outside the units,” and, therefore, insurer filing the action, explaining appraisal is generally limited to the policy had to be “amended” to as follows: deciding the amount of loss. There comply with the statute.206 The is a split, however, among the states appellate court, however, found that Under Missouri law, whether an regarding the extent to which the statute in question “regulates appraisal is a condition precedent appraisal should be treated the same condominiums—not insurance to filing suit depends on whether as arbitration. Although the majority companies” and held that the statute the dispute[ ] between the insured of states view appraisal as distinct was “not intended to impose a and the insurer is properly charac- from arbitration, some states consider mandatory insurance obligation upon terized as a coverage dispute or a appraisal to be analogous to it and carriers.”207 Thus, the court reversed disagreement over the amount of apply principles from arbitration the judgment below to the extent it loss. The Missouri Supreme Court law to it.213 Several courts addressed awarded damages for the excluded has held that the appraisal process this distinction during the survey property.208 is not appropriate for resolving period.214 questions of coverage.219 3. Miscellaneous Issues c. Appraisal Not Condition Precedent a. Appraisal Clause Not Illusory—A to Insurer Filing a Declaratory D. Bad Faith contract challenge to the enforce- Judgment Action—In Certain The Washington Supreme Court held ability of an appraisal provision Underwriters at Lloyd’s London that, in the context of first-party bad was one of the issues in In re Public v. SSDD, LLC,215 a federal court faith claims handling cases, courts Service Mutual Insurance Co.209 The in Missouri addressed the issue must apply a presumption that no insured contended that “the appraisal of whether complying with the attorney-client privilege exists.220 provision [was] unenforceable under appraisal provision in an insurance In Cedell v. Farmers Insurance Co. general contract law principles” policy was a condition precedent to of Washington, the policyholder because the provision (1) was illusory, the insurer bringing a declaratory sued its insurer for bad faith claims (2) lacked mutuality, (3) “requir[ed judgment action.216 In part, the handling, alleging the insurer made the insured] to relinquish a jury declaratory judgment action sought unreasonably low offers on its fire trial on valuation,” and (4) was “rescission of the policy based loss claim and was unresponsive.221 “unconscionable because the contract on material misrepresentations When the insurer produced in states that [the insurer] retains the and/or omissions in the [p]olicy discovery a “heavily redacted claims right to deny the claim even after application” or, in the alternative, file,” the policyholder filed a motion appraisal.”210 The court rejected each “for a declaration that the policy to compel, alleging privilege claims

www.pillsburylaw.com Insurance Recovery & Advisory are inapplicable in first-party bad handling work from their coverage its duties by undervaluing Plaintiffs’ faith cases.222 Reasoning that “[f ]irst work.225 loss, regardless of whether Plaintiffs party bad faith claims by insureds overvalued their loss.”228 against their own insurer are unique In another case involving an insurer’s and founded upon two important alleged undervaluation of its insured’s In another pro-policyholder public policy pillars: that an insurance claim, the Tenth Circuit held that an development, the Florida Second company has a quasi-fiduciary duty insurer’s underpayment of a claim District Court of Appeal held that to its insured and that insurance by $200,000 raised the inference an appraisal award constituted a contracts, practices, and procedures that the insurer had been “less “favorable resolution” of coverage are highly regulated and of substantial than diligent in investigating” the necessary to sustain the policyhold- public interest,” the court ruled policyholder’s fire loss claim, thereby er’s bad faith claim.229 Under Florida that there is a presumption of no breaching the implied obligation of law, the court explained, a first-party attorney-client privilege in such good faith and fair dealing under Utah insured may not bring a cause of cases.223 The court ruled, however, law. 226 In Blakely v. USAA Casualty action for bad faith before its claim that the insurer can “overcome the Insurance Co., the policyholders sued for insurance benefits is resolved in presumption of discoverability” upon their insurer for bad faith after an its favor.230 The decision in Hunt v. an “in camera showing” that “the appraisal determined that the insurer State Farm Florida Insurance Co.231 is attorney was providing counsel to had “significantly undervalued” the in accord with a 2012 decision from the insurer and not engaged in a claim, among other alleged claims the Fourth District Court of Appeal232 quasi-fiduciary function.”224 In order handling improprieties.227 The and a 2006 decision from the Florida to ensure that communications with Tenth Circuit reasoned that the Supreme Court holding that an counsel regarding coverage remain district court’s focus on the insureds’ appraisal award in the insured’s favor privileged, Cedell will require insurers overvaluation of their claim should satisfies the “favorable resolution” to restrict attorneys from performing not have been dispositive to its bad prerequisite to a first-party bad faith claims handling functions or, at faith ruling, stating that “[a] jury action.233 minimum, segregate their claims could conclude Defendant breached

Endnotes 1 No. CV 05-08444 DDP (PLAx), 2013 WL 3946103 20 Id. at 647–48. 39 939 F. Supp. 2d 1059 (D. Haw. 2013). (C.D. Cal. July 31, 2013). 21 Id. at 648. 40 Id. at 1061. 2 Id. at *7. 22 Id. at 648–49 (quoting N.Y. INS. LAW § 3401 41 Id. at 1061–62. 3 Id. at *6. (McKinney 2007)). 42 Id. 4 Id. at *7. 23 Id. at 649 (quoting 3 Steven Plitt et al., Couch 43 Id. 5 Id. on insurance § 41:11 (3d ed. 2013)). 44 Id. at 1062. 6 Id. at *7 (citing Syufy Enters. v. Home Ins. Co. of 24 721 F.3d 582 (8th Cir. 2013). 45 Id. at 1062, 1068. Ind., No. 94-0756 FMS, 1995 WL 129229, at *2 25 Id. at 584. 46 Id. at 1062. (N.D. Cal. Mar. 21, 1995)). 26 Id. 47 Id. at 1062, 1074. 7 No. C11-1579 TSZ, 2012 WL 5456685 (W.D. 27 Id. 48 Id. at 1075. Wash. Nov. 8, 2012). 28 Id. 49 Id. 8 Id. at *1. 29 Id. at 585. 50 980 N.E.2d 504 (N.Y. 2012). 9 Id. 30 Id. at 587. 51 Id. at 505. 10 Id. (citing Sprague v. Safeco Ins. Co. of Am., 276 31 Id. 52 Id. P.3d 1270 (Wash. 2012)). 32 No. 2D11-4063, 2013 WL 5225271 (Fla. Dist. Ct. 53 Id. (citing Pioneer Tower Owners Ass’n v. State 11 Id. at *3. App. Sept. 18, 2013). Farm Fire & Cas. Co., 908 N.E.2d 875, 877 12 Id. 33 Id. at *1. (N.Y. 2012)). 13 Id. (citing Sprague, 276 P.3d at 1276). 34 Id. 54 Id. 14 Id. at *4. 35 Id. 55 No. 1-11-1507, 2012 WL 6962117 (Ill. App. Ct. 15 Id. 36 Id. Nov. 30, 2012). 16 99 A.D.3d 643 (N.Y. App. Div. 2012). 37 Id. at *6. 56 Id. at *1. 17 Id. at 643–45. 38 Id. (citing Garvey v. State Farm Fire & Cas. Co., 57 Id. 18 Id. at 647. 770 P.2d 704, 705 (Cal. 1989)). 58 Id. at *4. 19 Id. 59 Id.

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60 Id. (citing Poland v. Phillips, 371 So. 2d 1053, 1056 111 Id. at 532–33. 153 Id. at 203. (Fla. Dist. Ct. App. 1979)). 112 Id. at 533–34 (quoting Sansone v. Nationwide 154 Id. at 204. 61 No. 1:13-cv-00382-RLY-DML, 2013 WL 4458886 Mut. Fire Ins. Co., 770 A.2d 500, 503 (Conn. Super. 155 Id. (S.D. Ind. Aug. 20, 2013). Ct. 1999)). 156 Id. 62 Id. at *1. 113 121 So. 3d 433 (Fla. 2013). 157 Id. 63 Id. 114 Id. at 435–36. 158 Id. 64 Id. at *2. 115 Id. at 436. 159 Id. 65 Id. 116 Id. 160 Id. at 205. 66 705 F.3d 330 (8th Cir. 2013). 117 Id. 161 Id. 67 Id. 118 Id. at 440–41 (addressing Fla. Stat. Ann. 162 Id. at 207. 68 Id. at 331. tit. 37, § 627.7011(3), (6) (West Supp. 2008) 163 Id. 69 Id. (amended 2011)). 164 Id. 70 Id. 119 Id. at 441. See also Haynes v. Universal Prop. 165 Id. 71 Id. at 331–32. & Cas. Ins. Co., 120 So. 3d 651, 654 (Fla. Dist. 166 Id. at 208. 72 Id. at 332. Ct. App. 2013) (holding that the “insurer is not 167 Id. 73 Id. (citation omitted). entitled to withhold replacement cost payments 168 Id. at 209. 74 Id. until the insured actually incurs the expenses or 169 Id. 75 Id. at 333. enters into a contract . . .”). 170 Id. at 210. 76 Id. 120 747 S.E.2d 436 (S.C. 2013). 171 No. 1-12-2728, 2013 WL 3972162 (Ill. App. Ct. 77 Id. at 334. 121 Id. at 438. Aug. 1, 2013). 78 736 S.E.2d 321, 324 (Va. 2012). 122 Id. 172 Id. at *1. 79 Id. 123 Id. 173 d. 80 Id. at 326. 124 Id. at 439. 174 Id. at *2. 81 Id. at 326–27. 125 Id. at 438, 443. 175 Id. 82 Id. at 327. 126 Id. at 439. 176 Id. 83 Id. 127 Id. at 443. 177 Id. 84 No. CV116022761, 2013 WL 3388880 (Conn. 128 Id. 178 Id. at *10–11. Super. Ct. June 18, 2013). 129 Id. 179 Id. at *12. 85 Id. at *1. 130 715 F.3d 695 (8th Cir. 2013). 180 Id. (quoting Barnes v. State Farm Fire & Cas. Co., 86 Id. at *1, 3. 131 Id. at 697, 700. 623 F. Supp. 538, 540 (E.D. Mich. 1985)). 87 Id. at *3. 132 Id. at 697. 181 Id. at *8. 88 Id. 133 Id. at 698. 182 Id. 89 Id. 134 Id. at 698, 699–700 (citation omitted). 183 Id. at *13. 90 No. 2012-CA-0095, 2013 WL 4564677 (La. Ct. 135 Id. at 700. 184 730 F.3d 466 (5th Cir. 2013). App. Aug. 28, 2013). 136 No. 14-11-00881-CV, 2013 WL 3968445 (Tex. App. 185 Id. at 476. 91 Id. at *1–3. Aug. 1, 2013). 186 Id. at 468–69. 92 Id. at *1. 137 Id. at *9. 187 Id. at 469. 93 Id. at *19. 138 Id. at *1–2. 188 Id. 94 Id. 139 Id. at *3, 6. 189 Id. at 470. 95 Id. at *29. 140 Id. at *2–3. 190 Id. at 472–73 (citation omitted). 96 Nos. 11-CV-981-JPS, 12-CV-062-JPS, 2013 WL 141 Id. at *8. 191 290 S.W.3d 886 (Tex. 2009). 27344 (E.D. Wis. Jan. 2, 2013). 142 Id. at *10–11. 192 919 S.W.2d 679 (Tex. App. 1996). See TMM Invs., 97 Id. at *6. 143 114 So. 3d 1031 (Fla. Dist. Ct. App. 2013). Ltd., 730 F.3d at 473 (noting that Wells “held that 98 Id. at *7 (citing Am. Family Mut. Ins. Co. v. Am. 144 Id. at 1037 (citation omitted). See Fla. Stat. Ann. the appraisal panel’s responsibility is simply to Girl, Inc., 673 N.W.2d 65 (Wis. 2004)). tit. 37, § 627.409(1) (2007). determine the value of property damage and that 99 Id. 145 Johnson, 114 So. 3d at 1037. questions of what caused or did not cause the 100 502 F. App’x 40 (2d Cir. 2012). 146 Civil Action No. 2:11-cv-1183-AKK, 2013 WL loss are questions to be decided by the court”). 101 Id. at 41. 1346593 (N.D. Ala. Mar. 28, 2013). 193 TMM Invs., Ltd., 730 F.3d at 473–74. 102 Id. 147 Id. at *7. See Ala. Code §§ 27-14-7, 6-5-101 194 Id. at 475 (quoting Johnson, 290 S.W.3d at 892). 103 Id. (1975). 195 Id.; see also In re Pub. Serv. Mut. Ins. Co., 2013 104 Id. at 41–42. 148 Nationwide Mut. Fire Ins. Co., 2013 WL 1346593, WL 692441, at *5 (Tex. App. Feb. 21, 2013) 105 Id. at 42. at *7 (quoting State Farm Fire & Cas. Co. v. Oliver, (concluding that “the appraisal provision in this 106 Id. (quotingNarob Dev.Corp. v. Ins.Co. of N. Am., 658 F. Supp. 1546 (N.D. Ala. 1987), aff’d, 854 F.2d policy may not be disregarded simply because 219A.D.2d 454 (N.Y.App.Div. 1995)). 416 (11th Cir. 1988)). coverage or causation issues about which storm 107 74 A.3d 525 (Conn. App. Ct. 2013). 149 983 N.E.2d 568 (Ind. 2013). caused the roof damage may overlap with issues 108 Id. at 527. 150 Id. at 570. about of [sic] the amount of the loss and repair 109 Id. at 528. 151 Id. costs,” reasoning that “‘[a]ny appraisal 110 Id. 152 295 P.3d 201 (Wash. 2013). necessarily includes some causation element

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because setting the ‘amount of loss’ requires 214 Citizens Prop. Ins. Corp. v. Mango Hill #6 Condo. 222 Id. at 242–43 (citing Soter v. Cowles Publ’g Co., appraisers to decide between damages for which Ass’n, Inc., 117 So. 3d 1226, 1230 (Fla. Dist. 130 P.3d 840 (Wash. Ct. App. 2006), aff’d, 174 coverage is claimed from damages caused by Ct. App. 2013) (holding trial court could not P.3d 60 (Wash. 2007)). everything else’”) (quoting Johnson, 290 S.W.3d confirm appraisal award pursuant to the Florida 223 d. at 246 (citations omitted). at 893). Arbitration Code because it is not applicable to 224 Id. 196 104 So. 3d 384 (Fla. Dist. Ct. App. 2013). appraisals); Transcapital Bank v. Merchants Mut. 225 Id. at 249. 197 Id. at 385. Ins. Co., No. 3:11 CV 1176, 2013 WL 322156, at 226 Blakely v. USAA Cas. Ins. Co., 500 F. App’x 734, 198 Id. *2 (N.D. Ohio Jan. 28, 2013) (explaining under 740 (10th Cir. 2012). 199 Id. Ohio law, “an appraisal condition in an insurance 227 Id. at 737. 200 Id. policy is not subject to arbitration statutes”); 228 Id. at 741. 201 Id. Contra Centrust Bank, N.A. v. Montpelier U.S. 229 See Hunt v. State Farm Fla. Ins. Co., 112 So. 3d 202 Id. at 385–86. Ins. Co., No. 12-cv-9233, 2013 WL 1855838, 547, 549 (Fla. Dist. Ct. App. 2013). 203 Id. at *2 (N.D. Ill. May 1, 2013) (citing Travis v. Am. 230 Id. (citing Blanchard v. State Farm Mut. Auto. Ins. 204 No. 4D12-901, 2013 WL 1441294 (Fla. Dist. Ct. Mfrs. Mut. Ins. Co., 782 N.E.2d 322, 324 (Ill. App. Co., 575 So. 2d 1289, 1291 (Fla. 1991)). App. Apr. 10, 2013). Ct. 2002)) (“Illinois courts have held that ‘an 231 Id. at 547. 205 Id. at *1. appraisal clause is analogous to an arbitration 232 Trafalgar at Greenacres, Ltd. v. Zurich Am. Ins. Co., 206 Id. at *1–2. See Fla. Stat. Ann. tit. 40, § clause and is enforceable in a court of law in 100 So. 3d 1155 (Fla. Dist. Ct. App. 2012). 718.111(11)(b) (2005). the same manner as an arbitration clause.’”); 233 Dadeland Depot, Inc. v. St. Paul Fire & Marine Ins. 207 Citizens Prop. Ins. Corp., 2013 WL 1441294, at *6. San Souci Apts. v. Nat’l Surety Corp., No. Co., 945 So. 2d 1216 (Fla. 2006). 208 Id. CV-12-2389-PHX-GMS, 2013 WL 428091, at *1 209 No. 03-13-00003-CV, 2013 WL 692441 (Tex. App. (D. Ariz. Feb. 4, 2013) (citing Meineke v. Twin City Feb. 21, 2013). Fire Ins. Co., 892 P.2d 1365, 1369 (Ariz. Ct. App. 210 Id. at *6. 1995)) (explaining “Arizona courts have held that 211 Id. (citing In re Olshan Found. Repair Co., 328 ‘appraisal is analogous to arbitration’ and the S.W.3d 883, 892 (Tex. 2010)). ‘principles of arbitration law’ should be applied to 212 Id. (citing In re Universal Underwriters, 345 proceedings involving appraisals”). S.W.3d 404, 407 (Tex. 2011)). 215 No. 4:13-CV-193 CAS, 2013 WL 2403843 (E.D. 213 A nationwide review of the appraisal process Mo. May 31, 2013). including a complete review of how each of the 216 Id. at *3. 50 states views appraisal will be included in 217 Id. at *2. the soon-to-be-published book by J. Randolph 218 Id. at *3. Evans, Stephen Berry & Robin Besaw, 219 Id. at *8 (citations omitted). Appraisals in Property Damage Insurance 220 Cedell v. Farmers Ins. Co. of Wash., 295 P.3d 239, Claims: Law, Strategy, and Practical Advice 246 (Wash. 2013). (forthcoming 2014). 221 Id. at 241–42.

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