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Insurance Law360
August 3, 2016
An alarming trend is emerging in the first-party insurance claims process. This new approach attempts to dispose of the traditional claims process in favor of an abbreviated process (if any) followed immediately by litigation. The intent all along is to get the claim into litigation.
This is unfortunate.
An insurance claim is intended to be a collaborative process between the policyholder and the insurance company. The policyholder promptly notifies the insurance company as soon as a loss occurs and provides information concerning its claimed loss. The insurance company then promptly investigates the claim and makes payment for the undisputed actual cash value of the claimed damage. If the policyholder disagrees with the valuation, it advises the insurance company of the disagreement. Like in any dispute, the insurance company and the policyholder thereafter work out their differences and come to a resolution of the claim. Give and take is common. If needed, one of the parties requests the appraisal process. Ultimately, the claim is amicably resolved.
Millions of claims are resolved every year across the United States through this collaborative process. In fact, historically, the property insurance industry amicably resolves over 98 percent of all claims through this process.
This collaborative process obviously fails if the policyholder enters the claims process with the preconceived intent to drive the matter into litigation. Or, worse yet, the policyholder files a lawsuit before even submitting a claim. What is there to litigate if a claim has not even been submitted?
Unfortunately the insurance industry is seeing an increase in claims where the first notice of claim is the filing of a lawsuit. Similarly, a large number of claims are first reported to the insurance company by a lawyer. One Florida insurance company reports that 40 percent of the claims it receives now involve first notice from a lawyer. In Texas, lawyers are hanging advertisements on homeowners’ doors with the message: “Hail Damage? Call us before you call your insurance company.”
Insurance policies contain various “Duties In The Event of Loss.” These duties attempt to ensure that the policyholder cooperates in the submission and adjustment of a claim, with the obvious common goal of arriving at a claim measure that accurately reflects the insured’s covered loss. These duties contemplate the insured providing information in support of its claimed damage, with the insurance company properly investigating the claim and reaching a determination of covered damage. Working cooperatively toward an agreement as to final claim measure is the common objective — indeed, the common obligation.
But this model fails when there is no adjustment process or the process is simply a sham as there is a predetermined plan to move the matter into litigation.
Lawsuits cannot replace the adjustment of an insurance claim. A lawsuit should be the last resort only after the parties are unable to resolve the claim following a complete adjustment.
Sadly, though, this appears to be where we are headed. Fortunately, courts have also observed this trend and are taking action.
Response from the Courts
The alarming trend of lawsuits being filed before a claim has been fully submitted has not been lost on the courts. Several courts in Texas and Florida have recently addressed the importance of the claims process and completing the adjustment before a lawsuit is commenced.
United States District Court Judge Micaela Alvarez from the Southern District of Texas has tackled this issue head-on in several opinions issued over the last year. In her most recent ruling on the issue, Judge Alvarez found as follows:
The fact that Plaintiffs are dissatisfied with the damages paid is not the result of State Farm’s failure to fulfill a Policy obligation; instead, it results from Plaintiffs’ knowing failure to even submit damages to State Farm prior to filing this lawsuit. By way of Mr. Fregoso’s affidavit, the Court observes that Plaintiffs now claim they were not satisfied with the inspection or the amount paid to complete repairs on their property. However, Plaintiffs have provided no summary judgment evidence that they filed a supplemental claim or took any steps to request additional payment. Plaintiffs could have supplemented their claim when Ms. Fregoso called to request claim-related paperwork in February 2013, yet they failed to do so. In the absence of any evidence that Plaintiffs performed as required under the Policy, Plaintiffs cannot prevail on the breach of contract claim. In turn, because Plaintiffs have failed to raise a genuine issue of fact, Defendants’ motion for summary judgment as to Plaintiffs’ breach of contract claim against State Farm is GRANTED.[1] (emphasis added)
Two Florida courts made similar findings when deciding the issue in the context of the appraisal process. In United States Fidelity & Guar. Co. v. Romay,[2] the court found that “[i]t is therefore axiomatic that an arbitrable issue exists between parties whose agreement provides for appraisal when there is a disagreement in the dollar amount of the loss being claimed.” The court recognized that by the simple terms of the appraisal provision the “disagreement necessary to trigger appraisal cannot be unilateral.” The court further held:
As expressly indicated in the parties’ agreement, the failure to agree must be between the ‘you’ and the ‘we.’ In other words, by the terms of the contract, it was contemplated that the parties would engage in some meaningful exchange of information sufficient for each party to arrive at a conclusion before a disagreement could exist. (emphasis added)[3]
The court concluded by finding that “[n]o reasonable and thoughtful interpretation of the policy could support compelling appraisal without first complying with the post-loss obligations. If that were so, a policyholder, after incurring a loss, could immediately invoke appraisal and secure a binding determination as to the amount of loss.”
Further in American Capital Assurance Corporation v. Courtney Meadows Apartment LLP, the court rejected a policyholder’s attempt to compel appraisal before the insured submitted anything to support its purported claim, because “granting appraisal of the items of loss in the insured’s cross-appeal was premature as those items had yet to be adjusted.”[4]
The courts get it. These opinions consistently recognize that litigation is not an acceptable alternative for the claims process. The courts recognized the abuse of the process and refused to allow it to take place.
Impact on the “Progressive Claim Syndrome”
Previous Law360 articles written by our law firm address what is now known as the “Progressive Claim Syndrome.”[5] Claims following this model employ a predictable sequence of events:
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Insured submits claim
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Insurer begins investigation and estimates covered damage
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Insured later advises of additional claim components
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Insurer investigates additional claim components
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Insured’s attorney files a lawsuit and adds additional new claim components
Obviously, the model is to gradually increase the claim over time, always with the intent to direct the claim to litigation.
Courts have addressed this issue as well, finding that it is improper to add additional damage components to a claim after a lawsuit is filed. In United Neurology P.A. v. Hartford Lloyd’s Insurance Company,[6] the Fifth Circuit confirmed the Southern District’s opinion in United Neurology P.A. v. Hartford Lloyd’s Insurance Co.,[7] holding that there was no obligation to pay for damage which was not timely included. Similarly, Judge Alvarez in the Southern District of Texas has issued multiple decisions holding that a policyholder’s failure to submit claimed damage components until litigation ensued is fatal to its claim.[8]
Summary
The emerging new model of substituting litigation for the claims process is just simply wrong. Policyholders should comply with their policy obligation to submit all of their damages as part of the claims process. If new damage is discovered after the claim is submitted, the policyholder has a right to supplement the claim and work cooperatively with the insurance company to reach a fair result. If that can’t be achieved, then only at that time is litigation appropriate (or the appraisal process if provided for in the policy).
This process should not be circumvented due to the early involvement of a policyholder attorney who sees some perceived tactical advantage — or perhaps merely a need to justify a 40 percent contingency fee — by prematurely driving a matter into litigation.
The claims process needs to return to the collaborative process that for decades has resulted in the resolution of the vast majority of all insurance claims. This process should remain the norm and not the exception. Fortunately, the courts are seeing the abuse for what it is and taking action.
[1] Fregoso v. State Farm Lloyds, 2016 WL 1170104, No. 7:14-cv-00530 (S.D. Tex. Mar. 24, 2016) (Order on Defendant’s Motion for Summary Judgment, pp. 5-6) (confirming that the insured’s failure to submit damages prior to filing the lawsuit is fatal) (emphasis added).
[2] 744 So.2d 467, 469-71 (Fla. 3d DCA 1999).
[3] Id.
[4] 36 So. 3d 704, 707 (Fla. 1st DCA 2010).
[5] Texas' Progressive Claim Syndrome Is Treatable, Texas Law360, August 22, 2014.
[6] 624 Fed. Appx. 225 (5th Cir. Dec. 11, 2015).
[7] 101 F. Supp. 3d 584, (S.D. Tex. 2015).
[8] Maria v. State Farm Lloyds, No. 7:14-CV-536, 2015 WL 8618435 (S.D. Tex. Dec. 14, 2015); Martinez v. State Farm Lloyds, No. 7:14-CV-534, 2015 WL 7571840 (S.D. Tex. Nov. 24, 2015) (same).