Episode 36. Avoidable Mistakes

This week, Bob continues his discussion of the LA Wildfires, providing a case example that demonstrates mistakes that can be made by both insurers and insureds around policy limits and claims adjustments.  

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Transcript

As part of our continuing series on insurance coverage for the Los Angeles fires,

I wanted to talk a little bit about policy limits that may be available both to

private homeowners as well as commercial property owners and some of the issues and

difficulties that may crop up in the adjustment of these claims. I would like to

note in advance that the good news seems to be that the Palisades fires and the

Hughes fire are listed as fully contained as of February 8th and that's good news.

The bad news is that 26 people have lost their lives and thousands of homes and

businesses had been destroyed and it feels a little callous to talk about insurance

coverage for the property damage and to not talk about the bodily injury that has

occurred but we'll address bodily injury in a later later issue of coverage council

is in. I think that the lawsuits that have been filed particularly those against

Southern California Edison, are going to impact a lot of the bodily injury,

wrongful death kinds of claims that are out there. And of course at this juncture

the cause of the fires has not been determined. There are allegations but there's no

proof at this point in time. So I'm still going to focus on adjustment of property

damage claims as homeowners and businesses try to rebuild and try to pick up from

where they left off. I'm gonna do this by telling you a story based on a real

case. This happened a few years ago and I'm going to change the names or at least

use generic names, but I'm going to talk about the adjustment of the fire loss and

what happened in connection with it as a cautionary tale for insurers and claims

adjusters and also talk about things that the property owners need to know in

evaluating how much they're going to recover from their insurance.

The claim I'm talking about involved a property insurance claim resulting from a fire

loss at a commercial property in Lodi, California.

The insurer issued a property policy to a real estate company

Who I won't identify by name and of course I'm not going to identify the insurer

by name but the real estate company had owned the property and then sold it and

Leased it back as part of the lease back the real estate company was obligated

under the lease to provide fire insurance for the property and the insurer had

issued a policy with a policy limit for the particular property of slightly more

than 1 .2 million dollars. We're gonna call the property at issue 9 North.

At the time of the fire the real estate company had a note in its favor from the

from the museum that had purchased the property and the outstanding amount of the

note was slightly more than a million dollars. The note was secured by five

neighboring properties. Nine North was just one of them.

So there was a fire that destroyed the property.

The insurance company took a look at the fire adjustment loss.

And as you're going to hear,

the adjustment placed the insurer's exposure at more than a million dollars.

And so it appears that there were several attempts by the insurer to figure out how

to reduce

the amount that it's owed. So what the insurer said

was that when it learned that the real estate company no longer owned the property,

the insurance company had to determine the extent of the real estate company's

insurable interest. So with the assistance of a forensic accountant,

the insurer calculated the insured real estate insurance at insurable interest at just

a little bit more than $266 ,000. This is against a stated limit for the property

of slightly more than $1 .2 million. As you can imagine, the real estate company was

not happy with that valuation and filed a lawsuit when it felt it could no longer

work with the insurance company. So here's the insurance company's statement of facts

about this loss. So the realty company was the former owner of the property,

meaning nine north, and four adjoining parcels, which it sold to the museum in 2018.

The purchase price of the properties was $2 .2 million which was secured by a loan

from the real estate company to the museum in the amount of $1 .2 million.

At the time of the fire the outstanding amount on the node was $1 ,080 ,000.

After the real estate company made a claim to the insurer for the fire damage,

the insurer learned that the real estate company had sold the properties that the

outstanding amount of the node was $1 ,080 ,000.

And then the insurer took the position that the note applied to all five properties

not just the property damaged by the fire and so the insurance company had to

determine what the insurable interest in the one property nine north was.

As you will see, this is now me talking, not the insurance company's position. That

was a mistake because of some unique characteristics of the loan and the note on

the properties. The insurance company and the claims adjuster did not understand the

impact of those terms that were in the note and on the on the mortgage and that

was its first mistake. Back to the insurance company's stated position,

it said it retained a forensic accountant to allocate the outstanding amount of the

note owed for each property based on the appraised values of each parcel.

And the forensic accountant concluded that the amount owed on 9 North was $266 ,337.

So that's how they came up with how much they were willing to pay for the fire

loss on a property for that they had insured for $1 .2 million.

So here's here are some, this is now me talking, not the insurer.

There are some principles that we can agree on at this point in the case. So first

of all, a contract for insurance is not on a piece of property,

is not valid unless the insured has an insurable interest. So that's true everywhere.

You can't buy insurance to benefit you for somebody else's property,

you have to have an insurable interest. But what constitutes an insurable interest is

more than just ownership. With respect to an insurable interest,

since this property was in California, we can talk about the California insurance

code, it defines an insurable interest under insurance code section 281 as "every

interest in property, or any relation thereto, or liability in respect thereof,

of such a nature that a contemplated peril might directly damnify the insured,

is an insurable interest. Therefore, it's not just owning the property, having an

interest in a property, it's also having a relationship to that property or a

liability related to that property that a fire loss might impact.

So that's insurable interest, and if you don't have one you don't get insurance and

that's what the insurance company was focused on. So one of the positions that the

insurer took was that when the policy is issued to an owner of the property and

the owner sells that property, the former owner has no insurable interest.

That's absolutely true and not in dispute. But the problem in the case that we're

citing is the example here. A mortgagee of insured property does have an insurable

interest, but to the extent of the unpaid balance of the note.

So that was one of the issues and where the insurer came up with $266 ,000 as the

amount they were willing to pay because they determined that that was the extent of

the mortgage on nine north, but as I said and we're coming up to this That's not

how the note read and that's not how the market dread and it was the insurance

company's misunderstanding of real estate law that led to their error.

So the insurer took the position that the real estate company was no longer the

owner of the property and so it's only remaining interest was a was as a mortgagee.

So it only had an insurable interest up to the unpaid balance of the node.

Then they took the unpaid balance of the node and divided that among the five

properties that were securing it.

And so they looked at the appraised value of nine north compared to the other four

properties came up with a percentage and then applied that to the one million eighty

thousand dollar outstanding amount on the note.

The problem here now is that they didn't have the right to do that and so you're

going to see now I'm turning to the insured's argument And you'll see why the

insured had a claim for more than just the $266 ,000.

So now I'm going to turn to the insured's position on this and to an explanation

of how the insurer made errors, but also some errors that the insured made along

the way. So here we go with the insured's position. So the insured said that even

though the insurer had sold one million,

$228 ,000 of fire insurance for nine North, its offer of 6 ,000 when the building

was destroyed by fire was not enough The building was security for a 1 .2 million

dollar loan that the real estate company had given to the museum and The real

estate company also owned a leasehold interest in nine north coupled with an

obligation to obtain fire insurance on it. So the real estate company's insurable

interest was therefore the replacement cost of the building capped at the stated

limit of $1 .2 million. That was the position of the real estate company.

In contrast to the insurer's position that the insurable interest was only $266 ,000.

First, and here's why the real estate company said the insurer was wrong,

the note and deed of trust do not contain a provision for partial reconvenience.

As a matter of law, the property secured the entire loan balance,

not just a prorata share. Therefore, the insurer's obligation was to pay the entire

amount of the note, not just the amount that the insurer had decided would be

allocated to the one piece of property. And the interesting thing here is that the

insurers, forensic account accountant, had warned the insurer of this at the time he

performed his calculation.

So while the insurance company acknowledged that the real estate company was insured

to the full remaining balance of the node, but offered only the prorated amount on

the argument that It could separate the security among the five buildings.

It was wrong as a matter of law Because the note did not contain a provision for

partial reconvenience the next mistake was that California law establishes that the

owner of a leasehold interest with an obligation to obtain insurance has an insurable

interest to the full value of the property. The insurance company ignored that the

real estate company was leasing back the property and that the real estate company

had a duty to provide fire insurance. Therefore the insurable interest under the

mortgage was not the only way to look at the real estate company's insurable

interest. The insurers should have looked at the leasehold and the obligation to

obtain fire insurance but they refused to do that.

Then then the last point that That the insured made was that the insurer compounded

its error By insisting on deducting the amount paid for debris removal From the

amount of the building coverage it offered But the policy afforded a separate limit

For demolition and debris removal So it was improper for it to duct to deduct the

amount it paid for debris removal from the coverage of The fire damage to the

building. So those were some Errors that the insured

pointed out Now I want to get into a little more detail about the facts so that

you'll understand them and these facts are my reading of the

Separate briefs that were filed by the insurer and the real estate company So my

summary goes like this. So for many years The defendant insurer had ensured the real

estate company's interest in many properties including five buildings in Lodi.

A fire in one of those buildings nine north was the source of the dispute.

The real estate company had sold those five properties to a museum for $2 .2

million. And as part of the transaction, the museum signed a note promising to pay

$1 .2 million to their real estate company. That $1 .2 million note was secured by a

deed of trust on all five properties. The deed of trust stated,

Now, I'm quoting from the Deed of Trust "In the event that herein described

property, or any part thereof, or any interest therein is sold,

agreed to be sold, conveyed or alienated by the trustor,

or by the operation of law or otherwise, all obligations secured by this instrument,

irrespective of the maturity dates expressed therein, at the option of the holder

hereof, and without demand or notice, shall immediately become due and payable.

Under this provision, if the museum sold nine north,

the entire amount owed on the note would become due and payable even though the

museum may have retained the other four parcels. Furthermore, the museum could deliver

clear title to the purchaser of Nine North only if the entire loan balance was

repaid and the deed of trust cleared. If the museum had defaulted on the note,

the real estate company could levy on nine north for the full amount of owed on

the note. Hence the value of the real estate's security interest in nine north was

at least the balance due on the node.

Also as part of the real estate company's sale to the museum,

The museum leased the five properties back to the real estate company and the lease

allowed the real estate company to sublease any part of the properties. It also made

the real estate company "responsible for property and casualty insurance" for all five

properties. So these provisions gave the real estate company, an insurable interest in

9 North up to the full cost of repairing or replacing it.

When the real estate company applied to renew the policy, the application form asked

if any of the insured properties had been sold. And here's a problem for the

insured. The space for the answer was left blank. Now here's the problem for the

insurer. The insurer issued the policy covering all five properties without knowing

the answer to whether they had been sold.

As you'll see later the insurance company started to make claims of fraud and the

inducement but it's beyond the scope of this coverage council is in podcast but the

insurers failure to follow up in the application on a unanswered question doomed the

rescission argument based on fraud and the inducement in the inducement

so a fire substantially damaged not in North at a time when the insurer had agreed

to insure it up to its replacement value stated value of 1 .2 million in change.

Now the damage to the property was so bad that the city of Lodi was concerned that

the unreinforced brick building was unstable and unsafe So it closed the entire

street.

Two days later, the insurance company received an accord notice form that told the

insurer that the insured leases the building and is responsible for the insurance on

the building. The lease clearly showed that the real estate company was a tenant and

not a landlord of the property, and it also showed that the real estate company had

agreed to obtain liability and fire insurance for the property.

The next day, the insurer's claim supervisor reviewed the file.

It contained little more than the accord notice and the lease, which clearly showed

the real estate company did not own Nine North, but leased it and was responsible

for ensuring it. The claims supervisor wrote in consideration of all those facts,

"no coverage issues noted." But later,

after learning how much the claim would cost and that its policy limit was at risk,

The insurance company would decide that the real estate company's status as a tenant

and not an owner created coverage issues.

Now at the time of the original supervisor review, the insurance company knew that

it had insured nine North for a replacement value up to 1 .2 million dollars that

the real estate company was a tenant in that building and had agreed to provide

insurance for it and as a result the coverage obligation was to pay the cost of

repairing the property up to 1 .2 million dollars.

So the same day that the supervisor reviewed the file and said no coverage issues.

She authorized retention of an independent adjuster. Also the insurance company's house

council for subrogation matters became involved and the claims examiner estimated the

exposure range to be eight hundred seventy five thousand to one point $1 .3 million.

Adjustment of the claim proceeded. And for subrogation purposes, the insurance company

decided to retain an expert to determine the cause and origin of the fire.

The insurer did not retain a building consultant to estimate the repair costs at

that time. However, that happened a couple of weeks later. So it was looking more

at the subrogation claim than at the amount that it owed to its insured.

A couple of days later, the insurance company received a notice and an order to

repair or demolish the property issued by the Lodi police department

within eight days of getting the notice in order to repair or demolish the insurance

company had received a rough order of magnitude cost of repair estimate of nearly 1

.8 million dollars

Within a week of that the insurance company asked the museum if it had insurance on

the property and asked for the balance on the mortgage. The museum responded that it

had no insurance and this is not surprising because the real estate company had

agreed that the real estate company would insure the property.

The museum who was also under pressure

I believe we will have a decision by Friday on our repair /replacement process." But

subsequent work and material in the file showed that the insurer never made the

decision whether it was going to demolish the building or not, because instead it

was looking to reduce the value that it had to pay based on the insurable interest

argument.

Three days later, after telling the museum that it hadn't made a decision,

the claims manager wrote that the client has an interest in the building only up to

the mortgage node.

So the claim manager's position that the real estate company's interest in the

property was capped by the node actually ignored the real estate company's interest

in the property as a tenant who had agreed to obtain insurance for the property and

who could sublease it.

The next day the museum told the insurance company that the node is now 80 ,000

dollars for all five parcels.

The subrogation units subsequently decided to close its file while noting quote

preliminary estimate which does not include code upgrades is 1 .562 million dollars

end quote. This meant that the insurer had given up on the idea of pushing onto

someone else the substantial cost of complying with the demolish or repair order

because it didn't think it had somebody it could subrogate against. A week later,

after the subrogation unit closed its file, the claims manager reviewed and approved

a reservation of rights to the insured that states,

"Currently we are still evaluating the coverages for this loss. Attached is a letter

which explains our current position and investigation. To be clear,

We have concerns around the ownership of the building. I will keep you up -to -date

as we continue to evaluate the coverage available for this loss."

The letter itself that was attached to the email states,

"We have recently been been made aware that the real estate company does not own

the loss location." End quote. Now these two statements approved by the claims

manager were not true. The initial notice that the insurer had received a month and

a half earlier stated that the insured real estate company leased the building and

it had included a copy of the lease. Nevertheless, the insurer perpetuated its story

telling the broker and now I'm going to quote from a letter that the insurer sent

to the broker. "We were not aware that the building had been sold, nor that the

policyholder was now a tenant of the property.

If you can please provide any leasing documents so we can review for consideration,

we would appreciate it.

That's the end of that quote. In a mere month and a half, the insurer went from

knowing that the real estate company was a tenant,

not an owner, and seeing no coverage issues to asserting there was a coverage issue

because the real estate company was a tenant, not an owner. So why the change in

position? So the insured argued that the change in the position was because the

insurance company was trying to shirk its responsibility. The real estate company said

that because the repair cost Estimates exceeded 1 .5 million and that there was no

subrogation claim that the insurer could could use to recoup its losses and the fact

that the Museum that now owned the buildings had no insurance or all of them

combined showed that the insurer was trying to place its interests ahead of the

insurers and improperly reduce the amount owed under the policy.

Now you'll recall that the insurer had already received a copy of the lease but

then asked for the copy of the lease again.

So the insurers send another copy of the lease, and then after the insurance company

reviewed it, they sent an email to the insured's insurance broker,

which stated, and I quote, "Upon further review,

Line 40 really spells it all out." Landlord is responsible for repairs,

which is covered in the insurance section as well relating to the email I just

sent. Another thing to consider while we investigate coverage is line one above the

museum's plans are to remove the buildings as part of the lease agreement as well.

Let me know if you see anything else in the lease that I may have missed end

quote

upon receiving that email the

Insurance broker

Informed the insurer of something in the lease that it had missed He said quote,

please see Section 40 paragraph 5, that paragraph states,

"tenants shall be responsible for property and casualty insurance for the premise."

The claims file contains, that's the end of the quote, the claims file contains no

evidence that the insurer ever specifically acknowledged or analyzed the effect of

this language even though the broker specifically pointed it out and as we shall see

in a minute this agreement combined with the tenancy created the insurable interest

necessary for the insurer to cover the entire loss up to the policy limit.

So moving ahead, the insurer knew that North Sacramento Street remained closed because

of the danger that the damaged building would collapse, yet still had not decided

whether to demolish the building, even though it had promised more than a month

earlier to announce a decision soon. So the broker asked,

"What is your timeline for your response and the demo and receiving no answer the

broker asked the insurer again. Any updates as the city is threatening to start

issuing fines if demo doesn't start soon? Two days later the claims manager responded

asking for a fully executed copy of the lease, the sales agreement and all

appraisals. Keep in mind that the lease had already been provided twice.

The sales agreement was irrelevant because of the lease and the appraisals for the

properties were taken care of by the stated value in the policy.

Then the claims manager said, and I quote, "While we continue to gather information

into the client's insurable interest and conduct our coverage investigation,

the insurer continues to reserve all rights and connection with this claim."

The claims manager did not explain why he needed the appraisals to adjust the claim

however, the insurer having previously acknowledged that the client has an interest in

the building up to the mortgage note and then having found out that the $1 ,080 ,000

was due on that note had changed its position instead, contending that the real

estate company's interest was only a pro -rata share of the note balance. The

insurance company would soon contend that the share allocated to nine north should be

determined by dividing the value of nine north by the value of all five properties,

and then Multiplying the outstanding note balance by that percentage

That's why it was looking for some of the information that hit had requested from

the broker

now in mid -october so

Four months after the fire had destroyed the building, the insurance company reviewed

an estimate of the cost of debris removal and paid it, less than $10 ,000

deductible. Then a month later, the insurance company hired its forensic accountant to

"determine how much is remaining owed on the "Nine North," end quote,

and provided some documentation to the account via email that begins,

quote, "Danny, thanks for speaking with me earlier," end quote. The claims file

contained no claim note documenting the conversation.

The forensic accountant then prepared a document titled, quote, estimated allocated

principal and interest due on nine north and

in it he allocated

$266 ,337 of the $1 ,080 ,000 due on the note using the pro rata approach previously

described and he allocated the remaining $831 ,000 loan balance to the other four

properties. He did this even though he acknowledged, quote,

"Lone is secured by all parcels. "It does not appear that a payment can remove the

lien "on a particular parcel, "but that the loan must be fully repaid "to remove

the lien from all parcels."

This document was sent to the insurance company noting that the analysis was

preliminary, enlisting additional information that the insurer had not provided.

The transmittal closes with "We understand a phone call with you may be necessary to

answer questions." The claims file contained no note of any phone conversation and

follow -up to that position. However, the next day, the claims manager made a short

claim note that is entirely redacted. So, probably under attorney -client privilege.

Five months After the fire loss, the insurance company announced its coverage

position. It was based on the forensic accountants preliminary analysis that was based

on incomplete information. The letter begins, quote, "We write to follow up on our

discussions with your broker regarding the above -referenced claim for fire damages

with the insurance company under the above captioned insurance policy.

In that discussion, we explained that the insurance company has concluded its

investigation and has determined that the total insurable interest for the loss of 9

North is $266 ,337. "Your broker agreed with this conclusion." Now the claims file

indicates no record of the reference conversations with the broker and the broker

denied agreeing with the insurer's position.

The insurer's letter also stated that the insurance company will be issuing the

remaining balance of $166 ,728.

$166 ,728, end quote. It explained that the principal on the no was $1 ,000,

or $1 ,080 ,000. And of this amount, $266 ,337 was owed on nine North to explain why

its payment was based on that amount. It stated, quote,

I guess I won't quote it. It's a little too long, but it quoted the provisions of

the California insurance code relating to insurable interest. But the insurance company

did not explain why it was appropriate to allocate a pro -ratashare of the loan

balance to the property. And even though the insurer acknowledged that the real

estate company was a tenant, and the broker had pointed out the real estate

company's obligation to obtain insurance for the properties. The insurance company did

not acknowledge that these facts also created an insurable interest.

The insurer also did not explain its apparent position

that these facts were irrelevant to the insurable interest question. Finally,

the insurance company's letter does not describe how it calculated the amount it

committed to pay.

It valued the insured's insurable interest at the $266 ,000,

but stated it would pay $100 ,000 less. And apparently what the insurer did was

subtract from the insurable interest, the $100 ,000 approximately,

the insurer had already paid for debris removal. But as we previously talked about,

that $100 ,000 was a separate limit. And did not impact the $1 million,

the $1 .2 million stated value of the property.

The insurance company's coverage position letter also introduced an alleged offense to

coverage, the allegation that the real estate company concealed a material fact by

not reporting it had sold the low -dye properties.

So to recover the full amount that the insurance company owed, the real estate

company hired coverage counsel who wrote to the insurer making the following points

and these are worth quoting. So quote California Insurance Code section 284 provides

that, quote, the measure of an insurable interest in property is the extent to which

the insured might be damnified by loss or injury thereof, end quote.

As applied to the beneficiary of a deed of trust, the value of its insurable

interest is the amount of the debt. A lessee also has an insurable interest.

Insurer did not consider the insured's interest as a less e in its calculation.

Only the insured's interest as a mortgagee. As mortgagee,

the insured had a blanket lien against five parcels. Neither the note nor deed of

trust apportioned the loan amount to any of the parcels and did not contain a

provision for partial release of a single parcel. Under those circumstances each of

the parcels was encumbered to the full balance of the loan. That's the end of the

quote of the policyholders lawyer's letter. The insurance company's file contained a

file note stating that it received the letter but the rest of the entry is

redacted, again indicating that it had communicated with its in -house lawyers.

The claims file also contains no indication that the insurer considered any of the

points made in the policy holder's letter.

The insurance company did not respond in writing to the letter and never explained

its failure to acknowledge an insurable interest based on the tenancy and agreement

to provide insurance. So that's a pretty long -winded factual scenario.

So let me get to the main points of how things went wrong.

So in looking at this, let's start with the adjustment of the claim and the

valuation of the insurable interest. First, under the deed of trust,

the insured's beneficial interest in nine north was the entire balance on due on the

note because of the deed of trust and the tenancy and the obligation to provide

insurance.

If the

museum sold Nine North, the full amount due on the note would become due and

payable.

The museum could only provide the purchaser clear title to Nine North if the entire

note balance was paid and the deed of trust cancelled. Hence,

as the mortgagee, the real estate company's interest in Ninorth was the entire

balance on the note.

The insurance company seemed to ignore this fact

and that was especially egregious because the claims file indicates that the insurer

had not analyzed this provision, even though the policy

holder's lawyer had articulated it and so had the forensic accountant that the

insurer had hired.

So the the insurance company, if it had given its consultants full report,

any thought, It would have realized that the loan would have to be fully repaid to

remove the lien from any individual parcel and That conclusion would have required

the insurer to pay its limits Instead the insurer focused solely on the number that

it had asked the forensic accountant to calculate Ignoring the forensic account,

account statement, and its own internal recognition that the

mortgagee's amount of note secured by the property was the extent of the mortgagee's

insurable interest. Courts around the country have held that when a seller purchases

insurance for the sold property in which it retains a security interest,

the insurer is required to pay the full limit and not merely the amount due on the

property. I can tell you that no California decision addresses this question,

but courts in other states have held that when the seller of property retains a

security interest in the property and purchases insurance for the property, The

seller's insurable interest is for the full value of the property and just and not

just the amount owed by the buyer. This is true in Michigan. There's a case there

called Wilson versus Fireman's Fund where the York's sold a house to the Wilson's

retaining title to secure the Wilson's obligation to pay the full amount owed.

The house was destroyed by fire and the York's insurer paid them only the balance

due on the property. The trial court held that the York's insurer was liable for

the full value of the house, but the court of appeal reversed holding its liability

was limited to the amount due on the sale. The Supreme Court then reversed and

reinstated the original trial court judgment citing a Pennsylvania decision.

Another Michigan court later explained that Wilson establishes the quote "a land

contract vendors interest cannot limit the vendors right to the full policy limits

despite language and the insurance policy to the contrary." So,

the Wilson rationale has been cited with approval in Ohio and in Montana.

So, this line of cases makes some sense because the insurance company accepts and

retains a premium to ensure the property and in the case we're discussing here with

nine north the premium was for a replacement cost of one point two million dollars

that premium was no doubt determined by multiplying that amount by a rating factor

so under the line of authorities that were citing The insurer should have honored

its obligation to pay that full amount, leading to a claim that its failure to do

so was wrongful and

to the bad faith suit that was filed against the insurer.

We don't know how the real estate company and the insurance company resolved their

dispute. We know it was mediated and we don't have access to the settlement

agreement. All we know is that the bad faith case was ultimately dismissed.

But here are some lessons for insurers and insurers alike that may come up in

connection with the adjustment of claims in the Los Angeles Fires situation.

First, a homeowner's policy may have a stated limit or a replacement cost associated

with it. If history is any guide, the replacement cost is going to be a lot higher

than anybody anticipates. This may present an incentive for some insurers to look for

ways to reduce the amount they have to pay. In the case example,

the insurer did this by undervaluing the insurable interest,

ignoring

explanations from both its own expert and the policyholders lawyer that explained why

the allocation approach the insurer took was incorrect and not even responding to

those arguments prior to suit and apparently not even during the suit.

That set the insurer up for a claim of bad faith claims handling. The second thing

the insurance company did was delay its coverage decisions by repeatedly asking for

documentation that had already received, not explaining why it wanted that

documentation, and putting the insured under pressure to accept the amount the

insurance company was willing to pay by delaying responses to governmental authorities

that were seeking answers and threatening penalties and fines. Finally,

in the context of reducing the amount that it had to pay,

the insurer in the example case did pay its full limits for debris removal,

but then tried to deduct that amount from the fire loss value when the debris

removal limit was a separate limit that under the terms of the policy of issue did

not serve to reduce the replacement cost limits. Not all insurers make these kinds

of mistakes. Not all insurers take these kinds of approaches.

but certainly considering the number of residential and commercial properties that have

been destroyed in Los Angeles and the amount of money that's going to be required

to help people rebuild, there may be some insurers who could fall into the trap of

making these mistakes, especially where they don't know the impact of certain terms

of contracts. It's important in their adjustment process that they get proper advice

and not ignore the advice they get as the insurer in the example case did with its

forensic accountants advice. There's going to be a lot of work that insurers have to

do in adjusting the losses of the LA fires. And there are going to be a lot of

insurers who are looking to rebuild and some of them may be disappointed that

they're not entitled to as much as they want to rebuild where and how they want.

But my hope in giving this example is to show that mistakes can be made on both

sides, and it's important that people work with all deliberate speed,

but also accurately and carefully to make sure that things are documented properly,

communicated timely, and evaluated correctly.

So that's it for this episode of Coverage Counsel is in. Thank you for listening.

Talk to you next week. Goodbye.