Those Who Cause Losses Must Be Accountable
Insurance works best when a party that suffers a covered loss is fairly compensated for a loss that is eligible under a given insurance policy. Typically, such situations involve prompt notification to an insurer; quick, efficient investigation by claims personnel; and then, payment.
We know that, commonly, a paid claim may not be the end. Ideally, the party that is responsible for injury or damage to others should, financially, be held accountable. If another party is identified, insurers may use its policyholder’s right to subrogate. Subrogation refers to an insurer standing in the place of the policyholder and seeking repayment from the party that caused the loss and its financial harm.
See below for a litigated incident where an insurance company discovers information it believes to be relevant. Specifically, it found the information on the previous owner of the covered property justified its seeking restitution. The courts had their perspectives on whether the insurer was obligated to respond.
DNJ, Inc., purchased a forage chopper from Burks Tractor Company, Inc. The chopper was made by Krone North America, Inc., and was the subject of two warranties: the New equipment Limited Warranty and the Krone North America Crown Guarantee. On October 15, 2012, the chopper was destroyed by fire. Western Community Insurance Co., (Western) DNJ’s insurer paid it $440,779 for the loss. Western then brought a subrogation action in which it advanced theories of express warranties found in the two warranties provided by Krone, breach of the covenant of good faith, and violations of the Idaho Consumer Protection Act (ICPA). The court dismissed Western’s ICPA claims against Krone and Burks, holding that that they were prohibited under that act.
Although all parties’ pleadings identified Burks as the chopper’s owner when it was sold to DNJ, shortly before trial Krone revealed that the chopper actually had been owned by Krone. Western filed an amended complaint that reflected this new information. In response, Burks filed an answer that included several new affirmative defenses. Western filed a motion to strike the new defenses. The court denied the motion, finding that the amendments did not prejudice Western.
At trial, a jury found for Krone on all counts. Afterwards, Western filed motions for reconsideration and a new trial. The court denied both motions. On appeal, the court held that the trial court erred in dismissing Western’s claim and in relying on a case that was markedly different than the current action. It did agree with the lower court’s denial of the motion for a new trial.
The court found further that the lower court did not abuse its discretion by denying Western’s motion to strike and permitting Burks to assert new legal and factual defense before trial after it was discovered that Krone, rather than Burks, actually owned the chopper. The higher court found no errors in any of the other rulings made by the lower court, including its decision to enter a directed verdict in Burks’ favor. The judgment of the lower court was affirmed and Burks and Krone were awarded attorney fees and costs.
Western Community Insurance Co., Vs. Burks Tractor Co. Inc., Supreme Court of Idaho. No. 44372. Filed September 6, 2018. Affirmed.
Coverage Decisions Must Rest On Relevant Points
The insured/insurer relationship is contractual. This is reflected initially in the policy’s insuring agreement. The agreement varies little among the myriad lines of business. The applicable policy may cover any of the following:
• Mobile Equipment
• Commercial Property
• Money & Securities
• Recreational Vehicles
• Business Automobiles
Here is a discussion of a policy insuring agreement/coverage. The excerpt is from ISO’s EB 00 20-Equipment Breakdown Protection Coverage Form Analysis under PF&M found in Advantage Plus.
The Insurance Services Office (ISO) Boiler and Machinery Coverage Form was revised with the 07 01 edition and renamed Equipment Breakdown Protection Coverage Form. This name more accurately and completely responds to insureds’ coverage needs in the 21st century. This change required developing completely new forms, provisions, and endorsements. This analysis is of the 01 13 edition of EB 00 20. Changes from the 09 11 edition are in bold.
EB 00 20–EQUIPMENT BREAKDOWN PROTECTION COVERAGE FORM ANALYSIS
The coverage form opens by stating that certain provisions in it restrict coverage. It encourages careful reading of the entire policy in order to understand the rights and duties of both the named insured and the insurance company as well as to determine what is covered and what is not covered. It also points out that the insurance company uses the terms you and your to refer to the named insured and the terms we, us and our refer to the insurance company that provides coverage. Additional terms are also defined, but their definitions are found in F. Definitions later in this analysis.
1. Covered Cause of Loss
The only covered cause of loss is a breakdown of covered equipment.
Note: Breakdown and covered equipment are both defined terms and are explained in detail in F. Definitions.
2. Coverages Provided
Insurance applies to only coverages that have a limit or the word INCLUDED entered in the spaces provided on the declarations. There is no coverage if there is no entry in that space.
The limit of insurance entered for each coverage is the primary limit. If INCLUDED is entered next to the coverage on the declarations, that coverage is included in the total limit per breakdown.
Each coverage provided applies to only the part of any loss that results directly from the covered cause of loss. There are ten coverages.
Insurable Interest Is More Important Than Purchase Details
We frequently discuss the contract aspect of insurance. We do so because it is of foundational importance. Policyholders are expected to fulfill their obligations with regard to both when they apply for coverage as well as afterwards, when an insurer provides them with protection. Meeting contractual responsibilities is not only the right behavior, it also a legal requirement.
When an insured fails to comply with expected actions or with duties that are laid out in a policy, there can be significant consequences including possible loss of coverage. One principal element of insurance is that the person seeking coverage must have a bonafide financial stake in property that is lost, damaged, or destroyed. In the court case featured in this month’s In Action, the insurer argued that their obligation to provide coverage was affected by the policyholder providing incorrect information about who owned the covered property prior to their acquisition. The court rightfully questioned the relevance and determined that it didn’t affect the policy provisions.
Below is a discussion of insurance as a contract from Gordis on Insurance found in Advantage Plus.
The insurance contract is an agreement where one party obligates itself to make good the financial loss or damage sustained by a second party when a designated event occurs. The event must be fortuitous and happen by accident. The named insured must have insurable interest at the time of loss. One final point is that in order for any contract to be considered insurance, there must be a risk of loss.
An occurrence largely beyond the control of any involved party; happening by chance; accidental; for example: fire, lightning, windstorm, explosion, or flood.
In order to recover from a loss to property, the holder must have an insurable interest in the property at the time of the event or occurrence. An insurable interest is any right, title, or interest in property where the holder of that right, title or interest sustains financial loss if the property is damaged or destroyed. Any lawful and substantial economic interest in the safety or preservation of the property from loss, destruction or damage also constitutes an insurable interest.
An entity does not have to be the property owner to have an insurable interest in it. Examples include, but are not limited to, mortgagees, trustees, vendors, lessees and bailees. Insurable interest for any entity must exist at the time the loss occurs.
RISK OF LOSS
If property could never be destroyed, there is no risk of loss. If property must necessarily disintegrate or be destroyed, there is no risk of loss. Between these two extremes is the exposure of risk that can be insured.
BINDERS (not mentioned in the policy)
A binder provides immediate coverage on a risk. A binder may be written or oral and is temporary evidence of coverage. It is issued to show evidence of insurance coverage subject to the policy being issued, is usually effective for a 30-day period and remains in force for this period of time unless cancelled or replaced by the actual policy.
Special Legal Concepts
Affecting Insurance Contracts
A contract of adhesion is basically one prepared by one party to be accepted by the second party. As a result, any ambiguity in the contract is construed against the preparer; in this case, the insurance company.
This is a contract whose performance depends on chance. Insurance policies are always considered aleatory contracts because they promise to perform only if certain events happen.
Sometimes Insurers Forget What’s Important
Insurance professionals commonly understand that the occurrence of a loss is where the “rubber meets the road.” In other words, insurance most matters when it’s called upon to respond to a claim. It’s important that a proper response often includes denying a claim. Though bitter to handle, policyholders can accept such decisions when they’re justified. However, dissatisfaction results when there’s a perception that an insurer is not acting fairly.
For example, again referring to our feature court case, the insurer resisted payment when it discovered that some information provided to it before the policy was issued was incorrect. However, it was decided, via a lawsuit, that the incorrect was immaterial. In the end, the loss involved property that was eligible for coverage and the policyholders were, at the time of loss, the legitimate owners of the property. This was an instance where an insurer permitted a technicality to affect its actions. Increasingly, courts show less tolerance for minor items that don’t prejudice (significantly harm) an insurer’s rights. Sometimes insurers act in a manner that is mistaken, but other times the behavior may be considered acting in bad faith. Either the fact or the perception of such is a common reason for lawsuits.
Here you can read part one of a two-part discussion of insurance company claims settlement from Emarketing for Agencies found in Advantage Plus.
UNFAIR CLAIMS PRACTICE – PART 1
Faithfully handling your premium payments creates the expectation that your insurance company will investigate and, if applicable, pay for a loss. Loss payment includes taking care of expenses associated with settling a loss, including handling the defense costs of a lawsuit.
In most instances, disputes with an insurance company are legitimate disagreements. Parties may, justifiably, hold different positions on whether a certain loss is covered or, if covered, the amount of the loss. It is unfortunate, but sometimes an insurance company may have an attitude toward paying claims that fails to meet your expectations. In fact, a company may deal with you unfairly. Your right to fair treatment is, generally, protected under state law. State agencies, typically via a special insurance or commerce division, are responsible for seeing that insurance companies and agents are true to the commitment represented by the insurance policy.
Most states actively enforce the requirement that insurers fairly settle valid claims against their policies. Insurance companies and agents operating within a state are also provided with complete information regarding unacceptable claims practices. A state’s rules on settling claims are based on the National Association of Insurance Commissioners (NAIC) Unfair Trade Practices Model Act. The guidelines, developed from the original act and other regulations (which vary by state) are meant to shield you from practices that are misleading, unfair, or deceptive.
For more information on such practices, please see part two of this article.