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Commercial Lines
When Must an Insurer Pay a Property Claim?
After
a loss, a commercial policyholder needs to get repairs completed and business
back up and running at full speed as quickly as possible. Frequently, the
proceeds of the property insurance policy are necessary to accomplish this
very important goal. Not all policyholders have the ability to finance
repairs themselves while they wait for the adjustment process to be completed
and the insurance company to pay the loss.
by Jay M. Levin
Reed
Smith
Many
insurers recognize this and will frequently advance a portion of the loss
payment at an early date to speed repairs and help the insured recover from
the casualty. This is particularly true in larger losses where there is less
risk that an advance will exceed the ultimate amount of loss.
Some
insurers, however, are much less willing to make advance payments, even where
the insured needs the money to begin or complete repairs. In those
situations, the insured business may end up suffering additional and
unnecessary losses. These situations invariably lead to the question of when must an insurer pay a loss? The answer is not as
clear-cut as one might think.
Proof of
Loss
The date a
loss becomes payable is generally determined by the policy or state statute
or regulation. As with any insurance coverage question, the best place to
start is the policy language. Typical commercial property policy language is
as follows:
We will pay
for a covered loss within thirty days after we receive the sworn proof of
loss if:
- You have complied with all
of the terms of this policy; and
- We have reached agreement
with you on the amount of loss; or
- an appraisal award has been
made.
Under this
and similar provisions, three things must occur before an insurer is
obligated to pay: (1) a proof of loss must be submitted to the insurer; (2)
ascertainment of the loss or damage must be made by agreement between the
insured and the insurance company or by appraisal or judgment; and (3) 30
days (60 or 90 days under some policy forms) must elapse from the date the
proof of loss is submitted and the loss is ascertained. Usually all three are
necessary.
While
"proofs of loss" have been used in property insurance claims for
over 100 years, different policies have different requirements for what must
be contained in a proof of loss. Most require that the insured provide a
sworn proof of loss stating the time and origin of loss, identifying anyone
with an interest in the insurance proceeds, and the amount of loss. Insurers
will frequently reject proofs of loss if they are for other than an agreed
amount of loss or if some of the required information is missing. However,
courts generally require only substantial, rather than strict, compliance
with the provisions for proofs of loss.
The main
impediment in obtaining money from the insurer is usually disagreement over
the amount of loss. Most commercial property policies make no provision
whatsoever for advance payments. Even those policies that do, almost
invariably state that the insurer has complete discretion as to whether it
will make an advance payment. However, most property insurers will timely
investigate a loss and begin the adjustment process by compiling estimates of
the cost to repair or replace the property. In that situation, the
policyholder has a strong argument that, at least as to the amount of the
loss calculated by the insurer, there is agreement between the policyholder
and the insurer.
The
policyholder should argue to the insurer that as long as the policyholder
submits a satisfactory proof of loss for a partial payment, the insurer's
time within which payment must be made has been triggered. As a practical
matter, therefore, it is very important for the insured and its adjustment
team to make sure that the insurer is moving quickly to investigate and
calculate the amount of loss and that copies of the insurer's estimates are
promptly obtained. That way, even if the insurer is initially reluctant to
make an advance payment, the insured has a strong argument that the insurer
has agreed at least to the amount of loss it has calculated, which should be
paid.
On the
other hand, some courts have rejected this concept. See, e.g., Florists' Mut. Ins. Co. v.
Tatterson, 802 F. Supp. 1426, 1437 (E.D. Va. 1992). The Tatterson court explained
that there is nothing in the policy which required the insurer to make any
advance whatsoever.
Unfair
Trade Practice Laws
Many states
attempt to prevent unreasonable delays by insurers in the payment of claims
with unfair trade practice laws. Conduct constituting unfair claims
settlement practices under these laws include:
- Failing to act reasonably promptly upon communications with
respect to claims.
- Failing to adopt and
implement reasonable standards for the
prompt investigation and processing of
claims.
- Failing to affirm or deny
coverage of claims within a reasonable time
after proof of loss requirements have been completed and submitted.
- Not attempting in good
faith to effectuate prompt, fair, and
equitable settlements of claims in which liability has become reasonably clear.
- Delaying the investigation or
payment of claims by requiring the insured to submit a preliminary claim
report, and then requiring the subsequent submission of a formal proof
of loss, both of which contain substantially the same information.
- Failing to promptly settle claims where liability has
become reasonably clear under one
portion of the insurance policy to influence settlements under other
portions of the insurance policy.
The common
issue throughout the various state statutes is whether any delay in claims
handling or payment is reasonable. Only where delay is unreasonable will an
unfair claims settlement practice be found. Of course, many of these statutes
do not provide for a private cause of action. Those that do not offer no help
to the policyholder.
Duty of
Good Faith and Fair Dealing
An
insurer's delay in payment of a loss is a common basis for bad faith claims.
Reasonableness of the delay is again the key element in determining if there
is a valid cause of action. In most jurisdictions which recognize first-party
bad faith, before an insurer can be found to have acted in bad faith due to
delay in payment of policy benefits, it must be shown that the insurer acted
unreasonably or without proper cause. What is reasonable must be evaluated as
of the time of the insurer's decisions and actions. Damages available for bad
faith delays vary from state to state and often include an award of punitive
damages, attorney fees, penalty interest, prejudgment interest, and/or
consequential damages.
Delays in
the payment of a claim might also lead to the award of consequential damages.
For example, business interruption coverage is typically provided for a
defined period of time, which is considered to be the amount of time
necessary to repair or replace the damaged property. In circumstances where
an insurer unreasonably delays paying a loss, some courts may enlarge the
period of restoration by the time it took for the insurer to begin paying the
claim.
Conclusion
Most
property insurance claims are paid in a timely fashion and in a manner which
reduces the loss and inconvenience to the insured. However, where there is
unreasonable delay on the part of the insurer, remedies may be available to
compensate policyholders for that delay. The availability of those remedies
also acts as a deterrent to insurers which ignore their responsibility to pay
losses in a timely fashion.
Managing the Risks of a Household Move
Selling
one house and moving to another creates a plethora of added risks in your
life. You cannot manage or treat risks unless you have identified those
risks.
This
article shows you what those added risks are—focusing on three
different types of moving scenarios—and recommends how to best manage
those risks.
Scenario
1—Selling One House While Building Another
Phillip
Sanderson and his wife Alice are selling their house of 20 years and are
buying a "Manor Home," under construction, to be completed in 4
months. The kids are gone, and they are downsizing. The closing won't take
place until completion, so there are no construction risks to be concerned
about at this point.
They are
having their $600,000 of personal property professionally moved. However, due
to the downsizing, they are selling or giving away to their children and
charities about $200,000 of property, leaving them with a $400,000 exposure.
Until their new home is completed, they are renting a furnished apartment.
They will store with the moving company $300,000 of their personal property
while using the remaining $100,000 of personal property at the apartment.
What the Mover Does and Doesn't Cover
Unless you
declare a higher value and pay extra, the standard moving contract from most
moving and storage companies limits their liability for damage to your
property to cents per pound—typically $.50 or $.60. So if they damage
your $5,000, 60-pound plasma television set, they will only owe you $30 (60
lbs. x $.50/lb.). In addition, the moving contract typically excuses them for
any responsibility for damage caused by acts of God (i.e., if the warehouse
floods from heavy rains, ruining your personal property in storage).
For an
additional cost, you usually can upgrade the coverage from the moving company
from cents per pound to "full value" either on a per-piece basis or
on a blanket basis. A lot of people naively do upgrade, without knowing that
there are some pitfalls. First, settlement is on a current value/depreciated
basis—not full replacement cost. Second, breakage is excluded unless the
movers do the packing and you pay some significant extra charges. Third,
there are still some excluded losses such as flooding, groundwater, etc.
What the Homeowner's Form 3 Does and
Doesn't Cover
The
HO–3 covers personal property in transit for the full Coverage C
personal property limit. (The 10 percent off-premises limit usually only
applies to property at another residence not listed on the policy.) The
policy also covers personal property for the full limit in storage facilities
(i.e., see definition of "insured location"). Losses are settled at
actual cash value or optionally full replacement cost if that option is
included or purchased, and then only for those items that are actually
replaced. Optional Special Perils contents coverage will cover breakage of
all but fragiles (collectibles, china, vases, fine arts, etc.)
The Risks To Be Concerned about
The
following are seven types of risk that the Sandersons face in their move.
- Loss/breakage, theft,
collision, etc. to $400,000 of personal property while being loaded and
moved to two locations—a storage facility and a temporary
apartment while the new home is being built.
- Loss, damage, theft, and
flood/groundwater damage, etc., to the $300,000 of personal property
while being stored.
- Loss, damage, or theft to
$100,000 of personal property that will be used in the apartment.
- The moving company's
contractual limit of $.60 a pound, with a breakage exclusion and water
damage exclusion.
- $400,000 loss or damage to
the property in the moving truck while being moved from the two
locations to the new home.
- Homeowner's Coverage C
covers only named perils (i.e., no breakage from load shifting; no water
damage coverage). Losses are settled on an actual cash value basis
unless the replacement cost optional endorsement is added.
- Optional special perils
contents coverage covers most breakage and flooding away from the
described residence premises but excludes breakage of fragiles such as
collectibles, china, vases, fine arts, etc.
The Risk Management Strategy I Recommend
The
warehouse location is over 10 miles away from the rented apartment, so the
risks of property at both locations being destroyed in the same loss in
Minnesota is extremely remote (i.e., no exposure in Minnesota to hurricanes
or earthquakes).
Step 1: Don't cancel the
homeowners policy when the current house is sold until the move to storage
and to the apartment is completed so that the full Coverage C $400,000
transit limit will apply. If the current homeowners policy does not include
optional coverage for replacement cost valuation and special perils, add
those endorsements to the current Homeowner's Form 3. The special perils
coverage will cover the transit and breakage risks, except for fragiles.
Step 2: Set up a
Homeowner's HO–4 Renter's policy covering contents for $300,000 at the
apartment. This full $300,000 coverage also extends to items in storage.
(Note: the 10 percent limitation on personal property away from the premises
only applies to property at other residences not covered by the policy.) The
temporary storage facility is not another residence. Thus, although there is
only $100,000 personal property exposure at the apartment, by insuring the
contents for $300,000, you also pick up the full $300,000 away from premises
at the storage facility.
Step 3: Hire the moving
company to pack the fragiles and buy specific optional full-value coverage
from the moving company on just those fragiles, including breakage.
Step 4: Include both the
replacement cost and special perils coverage endorsements on the HO–4
Renter's Policy. The special perils coverage excludes groundwater and flood
damage except to personal property away
from the described residence premises.
Step 5: Start the new
Homeowner's Form 3 on the manor home under construction with both replacement
cost and special perils coverage effective the earlier of the closing date or
the date personal property is being moved into the home or the garage so that
the full Coverage C limit will apply to the second move. Raise the Coverage C
Contents limit to the full $400,000 if the new homeowners policy doesn't
automatically cover that amount.
Step 6: Don't cancel the
Renter's Policy until the later of the day after the personal property is
moved out or the date the lease ends. (It is necessary to keep liability
coverage in force until the lease ends, even after the personal property has
been moved out, in case any injuries occur to anyone at the vacant premises.)
Scenario
2—Moving Yourself
When you
rent a truck and get friends to help you load and unload, there is the same
need for replacement cost and special perils contents endorsements on the
current homeowners policy to give the best possible coverage to the items
being moved. Those fragile items that are not covered by the Special Perils
Endorsement—especially if they are of high value—can be appraised
and scheduled on a Fine Arts Floater with optional breakage coverage added.
However, in most cases, reducing risk is the best idea with thorough, careful
packing with bubble wrap, etc. There are a couple of new risks in this
scenario pertaining to the rental of the large truck—liability for
injuries and property damage to the public and liability for damage to the
rented truck itself, often worth $50,000 or more.
If you have
a personal automobile policy, regardless of the size of the truck, you and
your spouse have automatic bodily injury and property damage liability
coverage when driving this rented truck. However, the coverage won't extend
to friends driving the trucks. So, since you often could be dragged into
lawsuits caused by the friend's negligent driving, it's best to avoid that
risk by limiting the driving to family members only.
Under most
rental contracts, you are also responsible for any kind of physical damage
that occurs to the truck while it is in your custody, from collisions that
you cause to collisions that someone else causes to hail damage, windstorm
damage, vandalism, glass breakage, etc. If you have a personal automobile
policy with collision and comprehensive coverage on at least one vehicle,
those coverages generally will transfer to a non-owned rented vehicle, even a
large moving truck, subject, of course, at the time of the loss to your
collision and comprehensive deductibles. A few states, such as Minnesota,
require that the automobile property damage liability coverage cover the
damage to rented vehicles with no deductible. If you are in such a state, you
just have to make sure that your property damage liability limit is adequate
to replace the rented vehicle—in this case a $50,000 truck.
For a
one-day move, and due to your unfamiliarity with driving a large truck, it's
probably best to buy the optional collision coverage from the rental company
if it's not too expensive. Not only does it make claim settlement easier with
them if there is damage, but it also helps protect your own personal auto
policy against claims which will ultimately affect your future auto insurance
rates.
Scenario
3—The Sale and Rent-Back Agreement
Many times,
although the closing date and ownership changes occur on the same day, on
both the property you are selling and the new property you are buying, the
dates of occupancy do not coincide. This can occur when you, the buyer of a
home, have agreed to let the seller of your new home, stay on for a couple of
months or so because they can't get into their
new place right away. So, you become a landlord for 2 months on the new house
and perhaps a tenant for the same 2 months on the home you are selling. What
are the risks? First, since you're now a landlord, liability for injuries to
the tenant may be excluded under your current homeowners policy. On your
current home that you have closed on but in which you are still residing, you
are now a tenant, Although you no longer own the building per se, you still need
coverage on contents and liability which your existing homeowners policy on
that property will continue to provide those coverages for you. You also need
liability and structural coverage at the new location where you are renting
the home out to the seller.
I think the
safest and easiest thing to do there is to buy a homeowners policy on the new
location while communicating to the insurance company underwriter the
existence of a temporary rental situation—that the home will not at
first be owner-occupied. In effect, you will have two homeowners policies in
place for the duration of the rental arrangement—one covering your
contents and liability at the old location and one covering your ownership
structural exposures and liability at the new location.
I think
these strategies for handling this temporary rental exposures at two
locations are easier by far and probably better coverage than the "by
the book" approach, which is to cancel your homeowners policy the day
you sell. Buy a tenant's policy at your current location to be canceled in 2
months and rewritten as a full homeowners policy. And to set up a Dwelling
Fire Policy for the structure and liability exposures at the new location,
which also has to be canceled in a couple of months.
Closing
Thoughts
Household
moves introduce a significant number of new or volatile exposures, many of
which go uncovered mostly because they are unidentified. But really taking
the time to identify the exposures related to household moves for both
property and liability, and then developing a strategy that works to greatly
reduce or transfer these exposures, is hugely important.
Life & Health
Disability, the Insurance That Is
Often Sadly Overlooked
It took just 17 days for Cindy Wrenn to realize that her disability
insurance premium was not just another drain on her checking account.
One-third of American workers are likely to be disabled for an extended
period, and she became one of them when she had a stroke and brain aneurysm
at age 28. Skip to next paragraph
Mrs. Wrenn signed up for
her long-term disability insurance policy in February 2002, as a supplement
to the one she had through her job as a licensed title agent. After her
medical emergency, the policies paid 70 percent of her salary for the six
months it took her to get back to work full time.
“We thought we were too
young to have an illness and were pretty secure in our jobs,” said Mrs.
Wrenn, of Knoxville, Md. “It wasn’t an outrageous premium, so we did it.
Because of disability insurance, we got to follow through with the purchase
of our house, and that is where we are living today.”
Disability insurance
provides partial income replacement so that if someone becomes disabled, they
need not dive into savings, sell a home or radically change how they live.
Working people are more likely to become disabled than they are to die
prematurely, even though twice as many people have life insurance as have
disability coverage, according to industry statistics.
According to the Department of Housing and Urban Development,
illness is a major factor in home foreclosures.
About one-third of
20-year-old workers today will become disabled before they hit retirement age
at 67, according to the Social Security
Administration. And the primary cause of disability is chronic
disease — cardiovascular, musculoskeletal problems and cancer are leading diagnoses — rather
than work-related mishaps or nonworkplace accidents, according to a 2007
study for the Life and Health Insurance Foundation for Education, a nonprofit
organization that informs the public about insurance needs.
While job-related
expenses decrease if someone cannot work, other expenses can soar, especially
if homes must be altered to accommodate a disability, said Craig Sampson, a
lawyer in Richmond, Va. He bought disability insurance in 1999 when he was
self-employed. He pays about $800 a year for $30,000 in coverage.
“Being disabled, you can
go down the financial tubes fairly quickly,” he said. “Not only do you have
regular living expenses you are unable to meet, but you have other expenses
and all the uncovered medical bills. There’s a lot of stuff health insurance
doesn’t cover.”
There are two major types
of disability insurance. Short-term coverage, often offered by employers,
covers the first part of a disability and may provide income for
Long-term insurance
starts after short-term coverage ends and helps replace income for a
predetermined period, usually two or five years or when the disabled person
retires. It can be offered through work — though usually not free
—as well as through private policies.
Even those with a policy
through work should consider buying private coverage, as an employer’s policy
may be bare-bones, could take a while to begin and will not continue when the
employee changes jobs. It may also exclude pre-existing health problems.
About 42 percent of full-time workers have no short- or long-term
disability. Specialist agree that if you can afford only one type of
disability insurance, buy long-term coverage since being without an income
for several months would be a burden but being without an income ever again
could be devastating.
Because independent disability insurance tends to be expensive — and
becomes more so as people age — specialists urge workers to buy it as
soon as they start working so they can lock in lower rates. Besides, young
workers often have not yet developed health problems that will hinder
coverage later.Skip to next
paragraph
Many employers offer disability policies, but some have been
shifting costs to employees. At the same time, insurers are changing policies
to make benefits less generous. They also are becoming more selective in who
is granted a private policy.
The policy should
replace at least 60 percent of take-home salary and ideally up to 80 percent,
if that level of coverage is affordable. Disability insurance will not cover
the whole salary for fear that there would be no incentive to work if the
entire paycheck could be collected for staying home.
Before purchasing an
individual long-term disability policy, it is best to figure out monthly
expenses as well as any income from employers, investments or the government.
Realize, however, that Social Security payments tend to be minimal, have a
five-month waiting period and apply only if someone cannot do any job.
Payouts through work policies are subject to taxes, while benefits through
independent coverage are tax free.
Premiums vary depending
on age, sex, income, health, whether a person smokes, what type of job they
have and the exclusions they accept. Generally a young nonsmoking accountant
who would not need a payout for two years would pay a smaller premium than a
chain-smoking construction worker who
would want immediate disbursements.
Cara J. Lovenson, an
insurance broker and employee benefits consultant in New York City, said she
recently sold a policy to a 45-year-old man in relatively good health who is
paid about $200,000 a year. She said the policy cost him about $2,800 a year,
covered 80 percent of his salary and started payments after 90 days.
Mrs. Wrenn said that
when she and her husband, Matthew, discuss ways to cut expenses, dropping
their disability is never an option.
“I’ll never let it go,”
Mrs. Wrenn said, “well, not until I retire.”
Construction/ Surety News
By Finley N. Middleton
The New York City Department of Transportation has listened to PIA and
members, and have significantly modified their bond requirements to go into
effect May 15, 2007. There are a number of new changes. Now the bond forms
apply separately for a single location, from two to 50 locations, 51 to 100
and over 100, with bond limits more appropriately designed for the number of
locations.
The Department of Transportation will be keeping count by permitted
locations, as stated in the bond title. Based upon preliminary information,
the New York City Department of Transporation is confident that sureties are
able to meet these revised requirements.
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