Insurance Final Exam - Property

Burden of Proof Issues in Concurrent Causes

Typically, insured had burden of establishing coverage and insurer has burden of establishing exclusion Where we truly don't know the cause - the burden is allocated to who we'd prefer to win

Sample Policy Anti-Concurrent Clause Language

"We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss." - Majority Rule in Bongen

Underlying Reasons for Exclusions in Property Insurance Policies

-Adverse selection -Moral hazard -Correlated loss --->Insurance companies don't like correlated losses because of cost liquidation issues when pooling risks --->EX: Flood wipes out an entire city and have majority of the insurance pool filing claims Coordinated market segmentation (don't cover losses insured by other policies) --->Don't want to pay the same coverage twice

Typical elements of business interruption

1. Damage to covered property 2. Caused by a covered peril 3. Resulting in a necessary interruption of business 4. As a consequence of which there is a covered loss 5. Which occurs during the period of restoration

Concurrent Causes - Statefarm v. Bongen (P's house destroyed by both a mud slide and city's negligence in installing electric line)

2 Possible Causes of Loss: 1) Mud slide; 2) Negligence of city in installing electric line Policy Exclusion for Movement of Earth: Statement that the movement does not have to be the dominant/starting cause - just within the cause to exclude coverage Takeaway: An insurer may expressly preclude coverage when damage to an insured's property is caused by both a covered and excluded risk Analysis: Courts should enforce the express language of the contract. To that end, the contract language explicitly states that when earth movement is any party of the cause of the damage, then coverage is excluded. This is a justified approach because parties have the freedom to contract and choose language. -->Problematic holding because insureds don't really have power to choose insurance language or terms

Does property damage include repair for losses which will imminently happen, but have not yet? Case: Rosen v. Statefarm (wanted coverage for repairing deck that was about to collapse)

Analysis: Here, the exclusion should be upheld because "collapse" is unambiguously defined in the contract and therefore should be enforced as is - overrides public policy argument Takeaway: Where the language of an insurance policy is clear, courts may not require the coverage to conform to public policy or the insured's expectations, rather will enforce the unambiguous language of the policy even if it is to the insured's detriment Potential problems with approach: Creates incentive for policy holder to engage in a dangerous manner

Trigger of physical loss or damage coverage - Port Authority (asbestos case in New York buildings)

Asbestos was present in several downtown buildings in NY ->P contended that it required asbestos abatement in various properties it owned was covered by physical loss or damage clauses in policy. ->D argued the coverage was only triggered when the quantity and condition of asbestos in a IV given property made the property unusable or uninhabitable. Takeaway: "Physical Loss or damage" coverage is triggered with regard to asbestos in a covered structure only where they caused physical damage to the building or the quantity and condition of the asbestos make the structure unusable or uninhabitable, constituting loss of use. -->Court finds that plaintiff must show direct physical loss to the property even though there is evidence the asbestos are there - no direct physical loss unless the building is rendered unusable or uninhabitable

Subrogation rights with limited interests in property - Mortgages

Bank has an interest in the property - maybe even more than the owner Bank will require that you purchase property insurance and it's listed as a mortgagee on the policy Problems arise when interests of mortgager and mortgagee conflict

Intrinsic Loss: Chute v. North River (P had an opal that cracked and sought coverage from her policy which insured against all risks)

Burden of proof: on the insured to prove that the physical loss falls within the coverage grant ->i.e. the damage to the covered property is an insured peril -->In this case the insured peril is an outside force causing the opal to crack Takeaway: An insurance policy that covers "all risks of loss or damage" does not cover loss that occurs from inherent flaws in the property whereas extraneous damage is insurable because it is the result of an outside force -->Even though "all risk or loss" language may lead to an ambiguity, court will not construe language in favor of the insured to include deterioration Purpose: Insurance covers against events which might happen not events that will happen

Trigger and Occurrence Issues

Burden of the Insured must be able to prove that there was a loss which was covered and a peril insured against under the policy Burden of the Insurer to prove the applicability of any exclusions if they want to dispute coverage Test for "Direct Physical Loss" - Need to have a distinct and demonstrable physical alteration to the building OR loss of use (EX: maintenance work in 9/11 cases) Direct physical damage does not include intrinsic damage

Determining whether damage is covered by regular Business Interruption Insurance or Contingent Business Interruption Insurance

Business Interruption Insurance - Direct business interruption -->Ask whether the business owns, leases, or uses and controls the premises Contingent Business Interruption Insurance -->Ask whether the supplier or customer base has been destroyed but not the actual business.

Do we value property on cost to replace or actual cash value?: Economic Losses

Depreciation of an asset is looked at economic loss - diminution in value and actual cash value of the asset currently -->Issue: If don't take depreciation out of recovery, then the insured may be better off than they were before because the current cost is more expensive than when they bought it -->Homes don't normally depreciate, but housing prices fluctuate Commercial Property losses tend to be seen as economic losses How to prove: a.)Real estate experts get together and testify about sale value b.)Alternate approach: calculate replacement cost and then depreciate c.)Courts allow broad evidence: per Elberon market value, replacement cost, depreciation, are all admissible to aid the question of fact

Exclusions: Intrinsic Loss

Even when a policy is sold on an all risk or open peril basis, typically loss must be caused by some independent force rather than a characteristic that is inherent in the property it self The concern is when you know that an inherent flaw is going to manifest and the insurer doesn't - what matters is whether the parties think it is a risk rather than it being fortuitous Property insurance is for forces acting on the subject matter from the outside à extrinsically caused loss -->If property insurance covered intrinsically caused loss then it would be insuring the quality of the property -->Maintenance for normal wear and tear is not insurable

Insurable Interests - Gosset v. Farmers Insurance (Trusty Deed Case)

Facts: P obtained homeowner's insurance from D on a home they intended to buy, but were not yet owners and were renovating. The house burned down while Trusty Deeds still had title to the property. Rule: A party must have an ownership interest in property, or an obligation to buy in order to collect insurance benefits on its loss. There was no evidence of debt, obligation to purchase from Trusty Deed, no security interest. Analysis: P's here had no security interest in the home nor an obligation or debt - Trusty Deeds held title to the property, thus they did not have any insurable interest in the full value of the house. -->However, P's paid premiums (which do not constitute an insurable interest) but could be found to be a partial interest; and -->They could recover what they lost on actually improving the home because they had an insurable interest in the actual completed improvements because they had lost value (and nothing more - principle of indemnity) ---->Cannot recover what they expected the value of the improvements to be because expectations do not constitute an insurable interest

Subrogation Rights - Landlord Tenant: What happens when a tenant negligently damages leased property?

General rule: The landlord will buy insurance to cover both parties -->Tenant does not have a full insurable interest however, because they have no interest in the bricks of the building -->The landlord's insurer CANNOT sue tenant in a subrogation action Exception: If there is an express agreement in the lease which makes the tenant liable to the LL< then there is no reason why the insurer cannot have the subrogation right against him - MUST STATE PRESERVING SUBROGATION RIGHTS - MAKING LIABLE TO LL IS NOT ENOUGH

Passive Subrogation (Pustilnik)

How does it work? a) Insurer pays claim b) Insured brings suit against tortfeasor c) Insured wins suit, must pass money through to insurer to not violate the principle of indemnity d) Most policies have a clause to allow insurer to bring subrogation claim to recoup from insurer if the insured brings a claim e) Collateral source rule exists in order to vindicate insurers right to subrogation

Active Subrogation - Insurer Sues

How does it work? a) Insurer pays claim, then is subrogated to insured's right to recover from tortfeasor b) Insurer brings suit against tortfeasor c) Tortfeasor pays if negligent What are the effects of active subrogation? a) Liability insurance costs a little more b) Property insurance costs a little less c) Insured is fully compensated d) Insurer is fully reimbursed

Real Estate Leases - What to do when there is a gap of time between the sales contract and closing of the deed transfer

If loss occurs during gap and not clear whether the buyer or seller was to have insurance, then courts tend to look at the sales contract Result: One party may face an uninsured loss Best practice: Ensure that both parties have polices during this time

Insurable Interest

Indemnity principle that doesn't allow you to be made better off than you would have been if the loss hadn't occurred Insured cannot recover more than their interest in the property Moral hazard problem - cannot inflate the value of property on policy

Business Interruption Insurance

Insurance against loss of profits caused by property damage, economic loss coverage Trigger: Loss of profits resulting frim loss of use of the property due to physical damage to it -->Typically purchased as part of commercial property insurance as an add on -->Most issues in these cases are about figuring out what profit would have been

Contingent Business Interruption Insurance

Insurance that you will lose income because of a loss to someone else's property i.e. suppliers; must be purchased separately from regular business interruption -->Damage to supplier or customer base will not trigger regular business interruption insurance

Insurer's Subrogation Rights

Insured can do nothing to interfere with insurer's subrogation rights - most policies expressly reserve insurer's subrogation rights -->Insured has legal authority to release 3rd party, but subrogation clause provides that if the insured interferes, then the insured voids coverage Even if not expressly spelled out in the policy, courts will likely find insurance had an equitable right to subrogation

Do we value property on cost to replace or actual cash value?: Functional Losses

Insured decide when buying property Functional loss: Cost to repair or replace Issue: Way to replace is more expensive today than when it was built -->This creates moral hazard So the insurer will charge more à but most homeowner's want this coverage -->How to combat moral hazard? Only pay replacement cost if the house is actually rebuilt Residential losses are often considered functional

Subrogation - What is it?

Insurer steps into shoes of insured with respect to lawsuits against 3rd parties 1. Insurers should be allowed to recover from the responsible party 2. Supports the principle of indemnity/combats moral hazard 3. Keeps premiums down and makes tortfeasor liable for his negligence 4. Cannot get subrogation against insurer's own insured -->If insured chooses to release tortfeasor's negligence liability, then that can defeat the insurer's own subrogation rights

Exclusion Issues: Concurrent Causation

Issue: When is there coverage of a loss that has more than one cause, if losses resulting from one cause are excluded from coverage losses resulting from the other cause are not excluded? Anti-concurrent causation clauses: Clause that is intended to eliminate coverage for any loss that's partially caused by an excluded peril. -->The clause is normally located in the exclusions section of a property policy.

Sufficient Interest Recognized as an Insurable Interest

Legal Ownership - allows recovery of all what you have a legal interest in a.) Fee simple ownership b.) Partial Interest c.) Long term loan/obligation to buy property Contract Rights

Anti-Concurrent Causes - Jurisdictional Split

Majority Rule (Bongen): Obligations of insurers are generally determined by the terms in their policies, thus if one cause is excluded, coverage is excluded Minority Rule: Efficient Proximate Cause - If the efficient proximate cause (dominant cause of the concurrent causes) is a covered peril then the insurer must pay

Increased Risk - Moral Hazard Exclusion

Moral hazard does not mean that the insured deliberately caused their loss -->Rather, it represents the worry that without this exclusion people won't take care of their property as well as they otherwise would Very common exclusion is vacancy -->Don't have to show absolutely occupied or abandoned -->Vacancy is somewhere between the two Vacancy is an increased risk because the property is more likely to be vandalized

When must the insured obtain an insurable interest in the property?

Old Rule: At the time of insurance contract formation and at the time of loss New Rule: Just need an insurable interest at the time of loss

Additional Exclusions

See outline for list

Burden of Proof in Concurrent Cause Cases - Broussard v. State Farm (D argued that it was not obligated to cover loss of P's personal property and residence occasioned by Hurricane Katrina because its homeowner's policy excluded losses caused by water damage. P suggested it was the result of wind.)

Takeaway: Once an insurance company advances evidence to prove that a peril is excluded from insurance-policy coverage, the burden does not shift back to the insured to prove that the damage was not caused by that peril. Although the insured might be required to introduce some evidence as part of the prima facie case that the damage was caused by the peril, the burden does not shift to the insured to also prove that the damage was not caused by an excluded peril

Subrogation Rights - Great Northern Oil Company (Great Northern entered into a construction agreement with Litwin, which contained an exculpatory provision (relieves one party of liability). Insured released tortfeasor liability of third party contract in exculpatory clause with third party contractor prior to loss)

Takeaway: An insured must not waive an insurer's subrogation rights. However, exculpatory clauses entered into prior to the time of any loss do not violate the insurer's rights, unless explicitly contracted for otherwise In general insures are willing to pay extra for insurance to cover exculpatory agreements because these agreements promote business and commercial activity

Subrogation rights with limited interests in property - Althauser (Insurer paid the mortgagee (bank) for the loss of the house that burned down. Later, the policy is void because the homeowner D's made material misrepresentations concerning the fire.)

Takeaway: An insurer is subrogated to a mortgagee's rights if: (1) the insurance policy held by the insured was nullified, because the insured made a material misrepresentation, and (2) the insured's mortgage was paid by the insurer under the policy. Bank can still be paid the extent of their interest in the property even though the homeowner's coverage is void - same language in our sample policy (outline shows additional scenarios when loan is paid off or there is no coverage)

Vacancy Exclusion: Langill v. Vermont (Someone caused the house to catch fire which plaintiff was renovating by means of arson and plaintiff attempted to recover under insurance but was denied coverage based on a statutory exclusion in the policy prohibiting recovery for loss caused by fire if the residence has not been occupied for 60 consecutive days.)

Takeaway: Exclusions can be statutory States are allowed to regulate insurance based on public policy Insurance companies likely lobbied for this exclusion Essentially, court is stating that the statute is equivalent to an unambiguous exclusion in the policy, and contra proferentum is not required to construe in favor of the insured

Subrogation: Landlord Tenant - Alaska Ins. v. RCA Communications

Takeaway: If want to preserve right to subrogation in a lease, then must explicitly reserve that right - stating that the tenant will be liable to the LL is not enough

Ensuing Loss: Case: Russell v. NGM Insurance (Homeowner's property insurance policy had an exclusion for faulty workmanship, but had covered peril for mold. Homeowners water intrusion that caused mold in their home due to faulty workmanship and lost use of property for one year)

Takeaway: Takeaway: Generally courts agree that wen a workmanship exclusion is triggered, an ensuing loss clause applies only when there is significant attenuation between the direct result of the workmanship defect and the ultimate loss for which coverage is sought, usually due to an independent or fortuitous intervening cause. -->As such, to be covered under an ensuing loss provisions, the damage that falls under the exclusion and the ensuing damage must be separable evens in that the damage and the ensuing loss must be different in kind not just degree. -->If the ensuing damage from the exclusion is distinct and separable from the exclusion, then the insured may recover

Determining whether contingent or regular business interruption: Zurich American Insurance (9/11 Cleaning Company Case)

Takeaway: When determining whether the regular business interruption or contingent business interruption insurance applies ask whether the insured owned, leased, or had use and control of the insured premises

Reasoning for direct physical loss or damage requirement to trigger coverage

The policy is not designed to cover prevention - only when danger is imminent -->This would transform the policy into a maintenance contract -->Conscientious property holders don't want to be in the same pools as bad property holders who don't maintain their property

Ensuing Losses

The term ensuing loss means a loss caused by a covered peril that occurs as a consequence of a loss caused by an excluded peril. That is, an excluded peril causes property damage, which triggers a covered peril that causes other property damage. (sample policy page 212) To recover under an ensuing loss provision, the damage must be distinct and separable from the exclusion - in other words, the ensuing loss provision precludes coverage of the normal results of defective construction

Insufficient Interests

Value of Investment ->Expectations of what your investment will be do not count i.e. what you expect to get after flipping a house

Measure of Recovery Generally

a)Remember Need Insurable Interests & Indemnity - Not allowed to be made better off than you were before, had the loss not occurred b)Policy coverage does not kick in until deductible is met -->Reason for deductibles: Small losses are much more likely than catastrophic losses and deductibles screen out small claims c) When receiving recovery, insured can typically choose what to do with the proceeds

Period of Restoration

does not provide coverage indefinitely, but does not require actual restoration; a subjunctive question à you get coverage for the period where you lost income until the point when the property would have been rebuilt Extended coverage: period of time for business to get up to speed once rebuilt