Dig a Little Deeper
By Bruce D. Hicks, CPCU, CLU
A HOUSE DIVIDED
Court case highlights the need for clear language and good-faith communication efforts
The Court Decisions column is a popular part of Rough Notes magazine. One reason for this is that the court room is where the promises made in an insurance contract often become real. All insurance professionals can develop “what if” scenarios but until those scenarios are tested with an actual loss and a court decision, they remain mental exercises. This column comes from the industry expert editors of Policy Forms & Manual Analysis (PF&M). This is a knowledge base consisting of more than 15,000 pages of coverage explanations from Rough Notes Company’s digital solutions. The editors are going to dig a little deeper into one of those court decisions to identify a coverage problem, provide possible solutions and/or offer broader perspectives.
This case, Gonzalez v. People’s Trust Insurance Company, involves a special endorsement that expanded an insurance carrier’s options on how it could respond to insured property losses. A couple’s home was insured under a homeowners policy. The policy included an endorsement that allowed the insurance company to choose its own sources to repair or replace damaged property that suffered a covered loss. The policyholders, because they agreed to the option, benefited from a lower premium.
It is tragic and expensive when a situation is likely so confusing that a lawsuit arises before even sharing estimates on a loss.
The home in question was treated poorly by storm activity. Specifically, an uprooted tree fell onto the property and caused a substantial loss. The incident also began a dispute between the two parties—the insureds and the insurance company. The policyholders filed a claim. The insurer responded quickly. First, it chose one of the construction service providers it works with to make temporary, emergency repairs to the home. Second, an adjuster was dispatched to inspect the damages.
Afterwards, the insured homeowners were told that the loss was covered and that a list of what the company believed needed to be repaired would be provided to the insured once it was completed. The insurance company, per policy provisions, asked for a signed and sworn proof of loss.
Now, here’s the point where the situation goes sideways—and both parties contributed to the problem. While the policyholders received word that an inspection was completed, no dollar amount was shared. At the same time, they were reminded of their responsibility to arrange for and send the insurer a proof of loss. Rather than comply with the “proof” request, the homeowner made some changes regarding the estimates to insurer documents and sent a proof of loss that the insurer found unacceptable. The proof did not include any dollar figures and, instead, contained language used in the insurer’s estimate and endorsement documents.
The homeowners and their insurer created a standstill. The former would not provide a sworn proof of loss that documented a dollar loss, and the latter did not provide additional estimate details while it insisted on a viable proof of loss. So, it was off to the courts. The result there was essentially fruitless. A lower court decision in favor of the insurer was reversed on appeal and sent back for rehearing.
The parties failed each other. They initially agreed to abide by a modified insurance policy intended for their mutual benefit. It seems likely that the endorsement that allowed the insurer to select among a group of construction services to handle losses was the main issue. Insurance policies are contracts, and their purpose is to function to the benefit of all contracting parties. It is critical that contract terms and party intentions are clear. A good way to accomplish this is to use straight-forward contract language (including what is used in endorsements) and effective communication.
Consider the contract (policy and endorsement) wording. Did the endorsement loss settlement language account for and mesh with the policy’s existing conditions? Language compatibility may also exist due to the endorsement containing its own appraisal wording. Was it designed to supplement or replace the base policy’s provision on the same topic?
Admittedly, this is speculation, but the endorsement’s modification of the base policy may have caused confusion and/or changed policyholder expectations. Once the policyholders were told of a forthcoming repair estimate, did that trigger a belief that it would be counterproductive to supply their own estimate via the proof of loss?
The communication breakdown should have been avoided. While trading correspondence concerning the loss, why wasn’t a flag raised? It certainly appeared that the policy-holders did not understand the proof of loss obligation. It is also likely that both parties may have been confused concerning appraisal.
Rather than getting on the same page, the parties litigated—unsuccessfully. It is quite common to sue when failing to agree on the amount or nature of a loss. It is tragic and expensive when a situation is likely so confusing that a lawsuit arises before even sharing estimates on a loss.
Clear language and good-faith communication efforts can avoid many problems.
Bruce D. Hicks, CPCU, CLU, is senior vice president, Technical & Educational Products Division, at The Rough Notes Company, Inc. He has more than 30 years of property/casualty insurance experience, including personal and small business underwriting as well as compliance duties for several national and regional insurers. Active in the CPCU Society, Bruce served as a governor of the organization from 2007 through 2010 and currently serves on its International Interest Group Committee.