California Wildfires: Coverage Disputes May Be Heating Up

On a number of well-publicized occasions, California homeowners have been ravaged by a series of wildfires with devastating results. Most recently in May in Santa Barbara, for example, the Jesusita Fire burned 80 homes and cost $20 million in firefighting expenses. In the same county on Nov. 13, 2008, the Tea Fire reached temperatures as high as 3,500 degrees, and more than 200 homes were totally destroyed.

Impacted homeowners should have been fully protected by a combination of property insurance and by Federal Emergency Management Agency. Yet, many of those homeowners were seriously underinsured. Their coverage limits simply did not encompass the real costs of rebuilding homes today, especially in California.

Insurers sometimes assert that policyholders and insurance intermediaries bear the responsibility for requesting sufficient coverage limits. There exists an open question whether the insurance intermediaries are agents for the insurers, brokers for the insureds or both. In any case, policyholders undoubtedly rely on the intermediaries to advise them through the coverage web. And, FEMA apparently takes the position that it has no responsibility if the policyholder has sufficient insurance to cover the loss, although it is doubtful that anyone is sufficiently insured.

As an overlay to this entire scenario, the California Insurance Commissioner publicly has announced his intent to make sure that insurers are meeting their obligations to pay all valid claims presented to them. The Commissioner also reported that the estimated exposure to insurers for the Tea Fire, as of Jan. 29, 2009, was $281 million and that insurers had paid about $122 million. Substantial reconstruction costs and related claims for personal property and additional living expenses remain in issue.

Many policyholders do not fully comprehend the technical requirements of their insurance policies. Whether they decide to negotiate with insurers, intermediaries, FEMA, or turn to the Insurance Commissioner, they should be prepared initially to request at least the following information, which they are entitled to receive:

• A certified copy of the policy, including the declarations and all endorsements.
• All “claim-related documents,” including all documents that relate to the evaluation of damages … repair, and replacement estimates and bids, appraisals, scopes of loss, drawings, plans, reports, third-party findings on the amount of loss, covered damages and cost of repairs, and all other valuation measurement, and loss adjustment calculations of the amount of loss, covered damage, and cost of repairs.
• The underwriting file in which the insurance company based its determination to issue the insurance policy.
• Copies of all documents establishing the basis upon which policy limits were established, including any computer models.
• Any and all disclosures of the nature and extent of an insured’s insurance coverage. (See Cal. Ins. Code § 2084, 2071, 10103.5, 10102, and California FAIR Plan standard policy).

Most importantly, agents should inform their policyholders to present a sworn proof of loss; they may be required to do so. The California Insurance Code contains a Standard Form Fire Insurance Policy for the state. That form requires the insured to provide a sworn proof of loss within 60 days of the loss unless extended in writing by the insurance company. Some policy forms do not require a sworn proof of loss unless requested by the insurance company.

Whatever the specific provisions may require, many insureds are unaware of the proof of loss requirements. However, California law may preclude an insurance company from avoiding its obligations to its insured — even if the insured did not provide a timely or complete proof of loss — unless the insurance company can meet the high standard of proving that it was “prejudiced.” In fact “in the majority of jurisdictions, the insurer can deny coverage based on a failure timely to submit a proof of loss statement only if it can prove that such failure prejudiced it.” Allen D. Windt, Insurance Claims & Disputes § 303, at 117 (3rd ed. 1995).

Under California law, an insurer may not deny a claim based on a defective notice or proof of loss so long as the insured has “substantially complied with those conditions.” … Similarly, where an insurance policy requires the insured to give the insurer notice of a loss within a prescribed time period, the insurer may not deny a claim based on the insured’s failure to comply with this requirement unless the insurer establishes “actual and substantial prejudice” resulting from such non-compliance. Scherz v. South Carolina Ins. Co., 112 F. Supp. 2d 1000, 1007-08 (C.D. Cal. 2000); see also McCormick v. Sentinel Life Ins. Co., 153, Cal. App. 3d 1030, 1046, 200 Cal. Rptr. 732, 741 (1984):

An insurance company has a duty to pay a claim when it has acquired, through one means or another, sufficient evidence to establish the validity of that claim. It does not have the right to insist the claim be proved only through certain types of evidence. Nor does it exhibit good faith in denying a claim merely because an insured failed to dot the i’s or cross the t’s on a claim form or other submission. The issue is not whether the insurance company has received every item of information it requested from an insured. The question is not even whether the insurance company appears to have in its hands the exact type of information it prefers when deciding on a claim. Rather the real question is whether there was enough evidence of whatever form and however acquired that it would be unreasonable for the insurance company to refuse to pay the claim.

Moreover, an insurance company that does not respond to a sworn proof of loss in a timely fashion could be liable for unfair insurance practices under California law, opening the door to civil penalties to be fixed by the Insurance Commissioner. Moradi-Shalal v. Fireman’s Fund Ins. Co., 46 Cal. 3d 287, 758 P.2d 58, 250 Cal. Rptr. 116 (1988). In fact, California Insurance Code § 790.03(h)(4) lists as an unfair practice “failing to affirm or deny coverage of claims within a reasonable time after proof of loss requirements have been completed and submitted by the insured.”

Insureds also must be mindful of the short statute of limitations in the California Standard Form Fire Insurance Policy. Pursuant to California Insurance Code § 2071, suits must be filed within 12 months after inception of the loss. Although this time period should be tolled between the insured’s filing of a claim and an insurer’s denial of coverage (see Prudential-LMI Commercial Insurance v. Superior Court, 51 Cal. 3d 674, 699, 798 P.2d 1230, 1242 (1990)), insureds should be proactive. They can do so by either obtaining a written tolling agreement from their insurer that stops the statute of limitations from continuing to run, or by filing a suit before the year expires.

Insureds must be insistent on protecting their interests, and communications with agents and insurers should be in writing to avoid any miscommunications.

Topics California Catastrophe Natural Disasters Carriers Profit Loss Wildfire