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The Rough Notes Company Inc.



December 29
10:13 2020

Unknown May Not Mean Uncovered

The owners of a mobile home park, which was large enough to have its own sewer treatment facility, sought reimbursement for losses connected with having to shut it down. The park’s facility was affected by a party, that was never identified, who dumped an unknown substance there. The operation was closed when the substance was discovered. The operators wanted to make sure that the substance did not enter the waterways connected to the facility.

The substance turned out to be more problematic than just being a pollutant. The substance stuck to the treatment center’s walls and machinery. The shutdown was also necessary to get it cleaned off all surfaces and then it was re-opened. When filing a claim with its insurer, the latter denied the loss, claiming that nothing occurred to trigger a commercial property policy’s protection.

Below is full information on how the opposing arguments were viewed by the trial and appellate courts.

Editor’s note: This case is from 1995. We have decided to address it now as the summary may be helpful. This case has become a popular reference for many current cases involving business interruption as it revolves around the question of tangible loss.

At the time of a loss, Azalea Mobile Home Park (Azalea) was insured under both a Commercial Property and a Commercial Liability policy. The coverage was issued by American States Insurance Company (States).

Azalea’s premises included its own facility that treated the park’s sewage which, then, was released into an adjacent river. In Spring of ’93, Azalea filed a claim that sought reimbursement for having to shut down its facility, including testing, clean-up and rental costs for alternative waste treatment. States denied the loss. The insurer held that no tangible damage occurred to the facility, so no coverage obligation existed. Azalea sued and appealed after a lower court ruled against it.

Upon appeal, the same arguments made by both parties were reviewed. Azalea asserted that the damage was tangible. The problem was caused by an unknown party dumping an unidentified substance into the sewer treatment system. The substance was noticed by the facility’s management and it was closed down. Later, city authorities ordered that it remained closed until the situation was safely corrected. Eventually, Azalea suffered expenses for the work of engineers and for repairs. The substance killed off a bacterial colony used in waste treatment. The substance also stuck to walls of the facility. Azalea’s claim for damage included the costs to remove the substance from walls, flushing out and cleaning the facility and replacing the waste treatment materials.

The higher court reviewed the policy wording, noting the fact that the sewer treatment building was specifically included as an insured structure. It also noted that the policy included protection against vandalism. In the end, that court viewed things a bit differently than the lower court. In its view, the fact that the substance that was dumped into the treatment building adhered to its walls and damaged the treatment bacteria were instances of physical damage due to vandalism. It deemed the bacterial colony as a component of the treatment building. In light of this finding, the lower court decision was, in part, reversed. The lower court was found to have wrongfully denied coverage for a significant portion of claimed damages.

Azalea, Ltd., a California limited partnership, Appellant, versus American States Insurance Company, an Indiana corporation, Appellee. No. District Court of Appeal of Florida, First District. No 94-2147. Filed June 23, 1995. Reversed and Affirmed in Parts. https://scholar[dot]google[dot]com/scholar_case?case=8230416364903329974&hl=en&as_sdt=6&as_vis=1&oi=scholarr [downloaded 10/1/2020]

Can We Get Some Agreement?

Insurance policies are agreements that are prone to misunderstandings about their execution. Losses are always stress tests that perform the role of refining coverage obligations. We know that various policies are purchased as protection against certain sources of loss. We also know that both the policyholder and the insurer should have a clear understanding of how and when a given policy should respond. However, it isn’t until a loss occurs and a claim is made is there proof of how the expectations of the two parties align.

What is revealed, time and again, is that nothing about insurance policies are safe from disputes. When claims are denied, insurers must offer justification, usually pointing out one or more parts of a policy. While denials are frequently accepted, just as routinely, they also function as the starting point of a disagreement.

Read below for an excerpt of wording regarding coverage found under the Commercial Property Section of PF&M in Advantage Plus.

This analysis is based on the 10 12 edition of this coverage form. Changes from the 06 07 edition are in bold print.


This coverage form opens by defining the terms “you or your” as the named insured and “we, us, and our” as the company that provides the insurance coverage. Named insured is not defined. As a result, it means only entities listed or named on the declarations. If a given entity is not listed, there is no coverage for its property except as personal property of others, if scheduled. This coverage form has other words that have special meanings. They are defined in H. Definitions.


The coverage form obligates the insurance company to pay for direct physical loss or damage to certain types of property. The property must be at a location listed or described on the declarations. However, this is not open-ended coverage. The loss or damage must be the result of a cause of loss described in the causes of loss form attached to the policy in order for coverage to apply.

Coverage applies to only loss or damage that occurs at a definite place and time. There is no coverage for a loss event that is not tangible or that is not capable of being measured.

The reference to premises means that coverage applies to only property located in or on the premises listed or described on the declarations. This is why the declarations is a very important document. Coverage does not apply if the location and type of property is not properly listed or described.

1. Covered Property

Covered Property is defined in two ways. In the first, the coverage form lists the types of property eligible for coverage. In the second, it provides information on the types of property not eligible for coverage. One way to determine if an item is covered is to take the following steps:

Step 1. Is the item described in the listings provided under Building, Your Personal Property, or Personal Property of Others? If the answer is no, there is no coverage. If yes, continue to Step 2.

Step 2. Is there a limit of insurance on the declarations for the qualifying type of property? If the answer is no, there is no coverage. If the answer is yes, continue to Step 3.

Step 3. Is the item of the type of property described in Property Not Covered? If the answer is yes, there is no coverage. If the answer is no, this coverage form should cover that item.

Example: Lydia’s declarations has a $50,000 limit of insurance for business personal property. There are no other limits on the declarations. When Lydia has a loss, she determines the items that are covered by using the step method described above:

Property Description Step 1. Step 2. Step 3. Coverage
Owned floor coverings Yes Yes No Covered
Owned grills and storage bins Yes Yes No Covered
Stock Yes Yes No Covered
$5,000 in cash Yes Yes Yes Not Covered
Borrowed desk and cabinets Yes No Yes Not Covered
  1. Building

Building is the first type of covered property. The following property is covered in addition to the actual building or structure listed on the declarations:

  • Completed additions

Note: This means an addition to the described structure during the policy term is covered even though it did not exist at policy inception.

Trust Is Essential

In this situation, the mobile home park did not accept the insurer’s position. Policyholders have every right to challenge denials. While agreements usually involve parties of equal standing, that is rarely the case with insurance contracts. Insurance companies typically sell standard policy forms that are considered contracts of adhesion. An assumption is that insurers have superior knowledge regarding their products. But superior knowledge is not perfect knowledge.

A relationship between the parties to an insurance contract are defined by obligations as well as expectations. An insurer has a primary obligation to fulfill its duty to pay for eligible claims and a policyholder has a primary obligation of paying premiums in a timely matter. It is important that losses are handled in a manner that, eventually, is understood by both parties. Disputes are natural and how they are resolved often depends upon the level of trust that exists.

Here is an article discussing trust under E-marketing for Agencies found in Advantage Plus.

Insurance – A Matter of Trust

Insurance policies involve trust. Insurance policies are written agreements that involve at least two parties. One is the insurance company that provides the applicable form of protection. The other is the party who is protected by the policy. These two parties have a contractual relationship with each other. The insurer agrees to protect the insured if the insured agrees to pay for the protection.

The trusting relationship begins before any policy is issued. Insurers want to provide policies to persons who meet their qualifications. Qualified persons are discovered by using applications. Besides collecting identifying information, applications also gather details that determine if a person is eligible for a given policy. The information also helps the insurer decide how much to charge for the coverage, what level of coverage it should agree to grant and the conditions for providing the protection.

The insured should also be able to trust the insurer. He, she (or a business entity) has to rely on the company actually issuing the type of coverage it promises. The insured also trusts the company to pay for a loss (that is eligible under the coverage) and to handle any loss fairly and efficiently. Both parties must approach the contractual agreement honestly and fairly. The contract is affected if either party fails to act in good faith.

When an insurance company refuses to cover an eligible loss without a valid reason or when an insured refuses to pay for the policy; these are instances of breaking the contract. An insured may also break the contract if he or she either withheld information or intentionally supplied false information. Of course, the information must involve some significant item that would have affected the company’s decision to accept the insured. Breaching a contract may allow an insured to sue a company for coverage or allow a company to void the policy it issued.

Whenever policies are not handled in good faith, there are consequences that impact more than just the two parties. Third parties, such as other businesses or persons, may also be harmed by insurance contracts that turn out to be invalid. Modern economies depend upon the role played by insurance contracts. It would be impossible to handle large transactions without a way to protect all parties against possible losses. Further, many parties would not even attempt certain types of transactions without the support of insurance, such as large building projects, major equipment sales, vehicle rentals and numerous other transactions.

Certainly, there are many times when one party fails to handle their insurance obligations in good faith. However, such instances are the exception. Our economy and standard of living are made possible because most parties deal with each other honestly and we all benefit when that happens.

This Is Taking Time

Once a policyholder notifies its carrier about a loss, the next step is crucial. An insurer begins with gathering more information which may lead to arranging for paying a claim or other options, including a denial. The more clear-cut the situation, the quicker a decision is made. Sometimes, more time may be needed and the insurer may choose to investigate a loss in more detail in order to make a decision. A reservation of rights letter may be used to allow for further study of a claim and this letter plays an important role.

Taking more time to decide about the eligibility of a loss can create an expectation that coverage is due. Rather than allowing this development, an insurance company can send a letter to a policyholder that a loss is being evaluated but that the process does not necessarily mean that coverage will be granted. The reservation of rights letter permits a proper evaluation while maintaining a right to, possibly, deny coverage. A key item is the tone of communications. While denials are rarely welcome, the manner in which they are made and explained often determines whether the issue is resolved or further disputed, even litigated.

Here is an article that further discusses misunderstandings between insurers and policyholders. It’s from Rough Notes Magazine found in Advantage Plus.


Bringing insurers and corporations to the table saves time and money

By Phil Zinkewicz

Every day, we read in the daily newspapers, periodicals, and trade publications, and hear on television and radio, of multi-million- dollar lawsuits involving corporations and sometimes individuals, little known or of celebrated fame. The cases run the gamut of human experience-a woman who spills hot coffee on herself, a bar patron who was injured in an altercation, or a fast-food addict who blames McDonald’s for making him fat. In almost every case, however, the one common denominator is the insurance industry.

David M. Siesko, founder and principal of Siesko Partners, a newly formed organization that specializes in litigation consultancy, says that the insurance industry currently faces more lawsuits than any other industry, spanning product liability, environmental class actions, directors and officers claims, and coverage for hurricanes and terrorist attacks. Moreover, he says, in the past year, insurance companies also had more than five times the average number of cases pending than did the next highest sectors-energy, retail and financial services.

Siesko says his new consulting firm focuses on quickly resolving disputes between large corporations and insurance companies that may arise during any phase of the claims process. He says his approach can save both parties substantial time and money that otherwise would be spent on months or years of ongoing litigation.

Siesko brings to his firm some impressive credentials in the claims area. He most recently was global corporate chief claims officer at Zurich Financial Services before leaving in September 2006 to establish his new firm. He has more than 20 years’ experience working with Fortune 2000 companies and insurers. He devoted more than 15 years of his career to developing the customer services division at Zurich Financial Services, where he successfully negotiated and settled large payouts for domestic and international Fortune 2000 companies. He was director of claims and counsel, respectively, in Zurich’s specialty division. Prior to joining Zurich, Siesko worked on major claim and legal issues for American International Group. A member of the bar associations in New Jersey and Pennsylvania, Siesko early in his career represented industrial clients on labor and environmental law. He also worked with the London law firm Lowells during the development of its environmental practice He formed Siesko Partners, he says, to create an entity that will “reduce and prevent long, protracted legal battles, which create financial waste, drain corporate resources and create inefficiencies in the insurance market.” He also maintains that few, if any, independent third-party entities exist to work with both sides to achieve meaningful solutions in reasonable periods of time.

“We are not an arbitration organization,” says Siesko. “Arbitration panels tend to produce results that are binding and usually are called in when all other attempts at negotiations have failed. We are mediators, but we don’t try to force a compromise that just splits the difference. We are independent, unbiased mediators. Other parties often face pressures during a negotiating process. Insurance brokers have to balance their relationships with both carriers and the insured, while lawyers have specific, vested interests in the outcome of the events. Because we understand all aspects of the industry, corporations or insurance carriers can retain us to objectively access the facts of the case and make logical recommendations. Litigation should not be the only option when there is a dispute.”

How it works

Siesko describes his approach this way: “First there’s the ‘reservation of rights’ letter that is usually automatically sent to an insured when a claim has been filed. Generally, this letter lists 15 or 20 reasons why the claim might be denied. This sets up an adversarial relationship. The insured becomes angry and frustrated. Imagine a homeowner receiving such a letter when a claim is presented to a carrier. It is not a good basis for a relationship. Ideally, we work with an insured before a claim is filed, so as to prevent any possibility of a denial. We tell the client that the reservation of rights letter is nothing more than a formality and not to view it as a cause for concern. When the client understands that, he or she can concentrate on the factual elements of the claim. If the client files the claim before we’re called in, we can work with the insurance company to determine a realistic settlement. We can work from both perspectives.”

Siesko says his firm can represent a corporate client, an insurance company and even producers when a managing general agency is in a dispute with the client or the carrier. For commercial insureds, he says, Siesko Partners can perform a variety of services: decrease litigation expenses and improve a company’s chance of favorable resolution; act as an insurance consultant, offering hands-on knowledge about the types of policies corporations need as well as the potential legal and regulatory issues they may face and how to handle them; and stay abreast of key regulatory issues, advising corporations how these issues will affect their interactions with insurance companies.

“For insurance carriers, we can save unnecessary legal fees, help to avoid negative and potentially damaging press coverage and give insight on complex claim strategy,” says Siesko. The areas of expertise in which Siesko Partners excels, he says, include health care/product liability, environmental liability, commercial property, professional liability, and international disputes.

Siesko comments on current market conditions in some of the areas in which he acts as a consultant. He says that the directors and officers market is “strong” at the present time. “Rates are softening, as well as terms and conditions,” he says. “I think the industry has already digested Enron and WorldCom and all the other corporate scandals that have captured the attention of the public. Product liability is always in a state of flux. The state of the market usually varies with the latest verdict. Professional liability is a strong area of growth for the insurance industry. However, it depends on what professionals are being insured. Those professions that are subject to regulatory or press scrutiny are always going to be expensive in terms of premiums and restricted in terms of coverages. Those that are not highly regulated or subject to press scrutiny will fare better in terms of rates and restrictions.”

Siesko Partners has been in operation for about six months, and Siesko says the firm has already taken on several corporate negotiations.

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