Texas Law360
September 17, 2015

Those familiar with the issues faced by insurers in Texas first-party insurance claims, particularly in the realm of hail damage claims, are undoubtedly aware of what has been labeled the "Progressive Claim Syndrome.” In a nutshell, the Progressive Claim Syndrome is the process of systematically increasing the scope and alleged value of an insurance claim during the adjustment, appraisal and even thereafter through the course of litigation.

This calculated procedure starts when the claim is reported to the insurer, with little damage being claimed. The expectation is that a small claim draws less attention, with perhaps the insurer failing to raise certain policy defenses (such as late notice, uncertainty as to the date of loss, other excluded causes, etc.) given the small claim. However, as the claim is being adjusted, the damages and/or types of loss claimed by the insured are gradually increased — this often occurs as new parties who can benefit from a larger insurance payment become involved with the claim, such as contractors, public adjusters and attorneys. While insurance companies and courts alike have been aware of the Progressive Claim Syndrome for some time, they are still toiling with the appropriate way to deal with it.

Different Symptoms Warrant Different Treatments

You may recall USAA Texas Lloyd’s Co. v. Menchaca, No. 13-13-00046-CV (Tex.App. — Corpus Christi July 31, 2014), which has been labeled by many as the earliest Texas case law illustrating Texas courts taking on the Progressive Claim Syndrome. Menchaca involved a residential insurance claim resulting from Hurricane Ike where the insured, Menchaca, initially claimed wind damage to her roof, food damage due to the loss of electricity and damage to a sprinkler system and fence. Menchaca’s insurer, USAA, inspected and found some minor damage to the roof and detached electrical box but no storm related damage to the interior, air conditioning system or fencing — concluding that the claim fell below Menchaca’s deductible. Menchaca filed suit and initially presented an estimate prepared by her consultant, Darrell Quinney, totaling $29,600. Eleven months later, during litigation, Menchaca presented a second estimate prepared by Quinney totaling $38,439. And yet another eight months later, Menchaca presented in the litigation a third estimate prepared by Quinney, adding allocations for interior damages and exterior damages previously not included, totaling $76,348. Ultimately, the case was tried and submitted to a jury. Not surprisingly, the jury was able to see the calculated, progressive claim and awarded Menchaca only $11,350 in actual damages. Thus, in Menchaca, the cure for the symptoms exhibited was the jury — the focus at trial was not only on the ultimate amount Menchaca was claiming, but also how she strategically increased her damages over time to get there. The jury saw right through it.

While Menchaca is often viewed as the earliest reported Texas case clearly depicting the Progressive Claim Syndrome, it was in existence for quite some time before Menchaca. In fact, in Bias v. Standard Guaranty Insurance Co., 385 Fed. Appx. 398 (5th Cir. 2010), the same consultant involved with Menchaca’s progressive claim, Darrell Quinney, was involved with the litigation of another claim wherein the insured submitted an estimate prepared by Quinney totaling $52,414.23. In that case, the insured’s submission of Quinney’s estimate came after two previous estimate submissions by the insured in the amounts of $2,450 and $12,761.80, respectively. Ultimately the trial court in Bias struck Quinney’s testimony and report, reasoning that Quinney’s analysis and conclusions were not based on sufficient facts or data and were not the product of reliable principles and methods. While not abundantly clear, it could be argued that this was the court’s tangential way of dealing with the progressive claim that was apparent in Bias — simply choosing to treat the syndrome with a different medicine in the face of different symptoms.

Bias and Menchaca both show avenues of attack for insurers facing the Progressive Claim Syndrome and the fact that some of the same individuals were involved with both of the otherwise unrelated cases provides further evidence of the intentional and calculated process that makes up the Progressive Claim Syndrome. The methods used to attack the Progressive Claim Syndrome in both Bias and Menchaca, however, were indirect (leave it to the jury or strike the expert). While these approaches may work in some cases, it was clear that at some point a stronger medicine needed to be developed.

Earlier this year, the Southern District of Texas may have found that elixir. In United Neurology PA v. Hartford Lloyd’s Insurance Co., No. H-10-4248 (S.D. Tex. Mar. 31, 2015), the United States District Court for the Southern District of Texas, Houston Division, got fed up with an insured’s calculated, progressive claim and summarily dismissed elements of the claim that were not brought to the attention of the insurer until late in the game.

United involved a commercial insurance claim resulting from Hurricane Ike where the insured, United, initially claimed damage to the roof and interior of two buildings. The insurer, Hartford, concluded after inspection that the claim fell well below the applicable deductibles. United filed suit, which was then removed to federal court. Hartford demanded appraisal. United argued that Hartford had waived its right to appraisal, but the court disagreed and signed an order compelling appraisal that stated “because the [appraisal] binds the parties, if Hartford satisfies the appraisal award, the plaintiff’s breach of contract and bad faith claim will be subject to dismissal.” After Hartford timely paid an award from the appraisal, United, in a clear attempt to salvage its breach of contract and bad faith claims, filed a motion to set aside the appraisal award and thereafter began to exemplify the clinical symptoms of the Progressive Claim Syndrome by designating an expert to provide testimony on its “business income loss” — even though it had never made a claim for lost business income during the submission and adjustment of the claim. United’s expert designation was the first mention to Hartford that United even had an alleged business income loss, more than 32 months after United originally submitted its claim to Hartford and over eight months after United filed its lawsuit.

Hartford filed a motion for summary judgment on the claim for business income loss arguing (1) that the claim was barred by the statute of limitations because United failed to timely plead the claim and, (2) alternatively, that the claim for business income loss was barred because United failed to provide “prompt notice” in compliance with the policy — a condition precedent to coverage. In response, United argued that its original petition sought damages for “every element of damage allowed by Texas law” and that Hartford was placed on notice in accordance with the policy when United made its claim for damage. United maintained that Hartford failed to properly investigate the loss of income and that it should not be penalized for Hartford’s failure to investigate.

The court found the “extremely general and vague statements in the pleadings” insufficient to place Hartford on notice of United’s loss of business income claim. Further, United could not explain the nearly three-year delay in making a claim for loss of business income by way of its expert designation. To top it off, United failed to provide, upon Hartford’s request, sufficient documentation so that Hartford could evaluate the alleged loss of business income, which the court found prejudiced Hartford’s ability to investigate the claim. The court, therefore, held that United had not given Hartford prompt notice of its business income claim and granted Hartford’s motion for summary judgment.

Clearly, the Progressive Claim Syndrome exhibited in United was somewhat different than that seen in Menchaca and Bias. In United, the progressive claim involved the addition of an entirely different type of loss as opposed to the addition of repairs associated with the original claimed loss or an increase in the original claimed cost to conduct such repairs. What these cases exemplify as a whole, however, is that there are different symptoms of and medicines for the Progressive Claim Syndrome. A single method of attack will not be appropriate in all cases, but the symptoms of the Progressive Claim Syndrome seen in each particular case will provide guidance on the course of treatment that should be employed. Nevertheless, it is clear that the courts are now aware of the Progressive Claim Syndrome and in appropriate circumstances are prepared to dispose of such gamesmanship.