Homeowners Coverage, Repairs, and Replacement Costs

The question before the Supreme Court of New Hampshire was whether the homeowner was obligated to repair or replace his dwelling before he was entitled to replacement costs. The insured argued that the answer was yes and, of course, the insurer objected.

The case is Nicolaou v. Vermont Mutual Insurance Company, 931 A.2d 1265 (N.H. 2007).

Nicolaou's home suffered extensive fire damage and he had a homeowners policy with limits of $223,000 for the dwelling. In addition, the policy included an endorsement providing for replacement cost coverage that stated the coverage would apply “provided you elect to repair or replace the damaged or destroyed dwelling building″, and that the insurer would ″pay no more than the actual cash value of the damage until actual repair or replacement is complete″.

After the fire, the insurer paid the insured the policy limits. Nicolaou sought the additional payments of the replacement cost coverage even though he had not undertaken to repair or replace the dwelling. The insurer declined to pay this and Nicolaou filed a lawsuit. The insured argued that state law entitled him to full replacement costs and that the policy contained ambiguities that should be construed in his favor to provide replacement cost coverage. The trial court sided with the insurer and said that the insured was barred from recovering full replacement cost without making repairs or replacing the property. This appeal followed.

The court noted that Nicolaou's first argument relied on a policy value statute. The purpose of the statute was to guarantee a policyholder payment of the dollar amount stated in the policy without having to defend against insurance company claims that the property was actually worth less than the stated limit of liability when the primary evidence, the property itself, has been destroyed.

The court saw no conflict between this statute and the policy provisions requiring the insured to repair or replace his house before the insurer was obligated to pay him the difference (if any) between the stated limit of liability and the replacement cost of his house. Moreover, the court viewed the insurer to be in full compliance with the statute since it paid the policy limits to Nicolaou.

Nicolaou also had argued that the term ″specified amount″ in the policy valuation clause may reasonably be construed either as the limit of liability listed in the coverage section of the policy, or as the replacement cost. But the court said that, based upon the natural and ordinary meanings of the words ″specify″ and ″specific″, it was not reasonable to construe the policy term ″specified amount″ as referring to the replacement cost of a covered building. As for other arguments that the repair or replacement requirement is of no import when a building is totally destroyed, or that the repair or replacement requirement is unconscionable, the court simply was not persuaded by such arguments.

The insured did present one last argument. Nicolaou said that under the terms of the additional coverage endorsement, he did not have to actually repair or replace the house, but only elect to do so. In his view, once he stated an intention to repair or rebuild, he was entitled to replacement costs but with no obligation to actually repair or replace the house. The court dismissed this argument and declared that allowing a policy holder to recover replacement costs without actually repairing or rebuilding would leave the insured in a better position as a result of the fire than the position he was in before the fire. This is a moral hazard that the repair or replacement requirement is intended to avoid. Furthermore, the court stated, courts around the country have all but unanimously held that actual repair or replacement is a precondition to recovery on a replacement cost policy. This court joined in that holding.

The ruling against the insured was affirmed.

The Purpose of the Appraisal Clause

The insureds brought an action against its insurer alleging a breach of contract and bad faith refusal to pay a claim. The Supreme Court of Alabama eventually ruled in this case, and in so doing, ruled in a matter of first impression, that an appraiser under the homeowners insurance policy appraisal clause was not entitled to determine issues of causation. This case is Rogers v. State Farm Fire and Casualty Company, 984 S.2d 382 ( Ala. 2007).

The insureds' home was damaged as a result of a powerful tornado that swept through the county in 1998. The insureds claimed that the house was a total loss. The insurer disputed this and hired an independent engineer to assess the damage. The engineer concluded that the damage to the brick veneer and the foundation was the result of settlement and not the storm; therefore, the damage was not covered by the homeowners policy with State Farm. The insureds then hired their own engineer who concluded that the damage was a result of stress placed on the house by the storm. This dispute over the cause of loss resulted in a lawsuit being filed by the insureds against the insurer.

The case eventually ended up in front of the Alabama Supreme Court. The court addressed the issues raised by the parties to the conflict, but noted that it was also faced with a question of first impression: what are the duties and powers of an appraiser when he or she sets the amount of the loss under an appraisal clause. The court said that the question was far from an easy one and that no clear answer was presented by the authorities. Rulings from other jurisdictions (Mississippi, California, Maine, Maryland, Michigan, Nevada, New York, Oregon, Texas, Tennessee, and West Virginia ) were examined and discussed by the court.

The Alabama Supreme Court concluded that the persuasive authority on the question is the holding that an appraiser's duty is limited to determining the amount of loss, that is, the monetary value of the damaged property, and that appraisers are not vested with the authority to decide questions of coverage and liability. Questions of coverage and liability should be decided only by courts, not appraisers. Therefore, the trial court erred by ordering State Farm and the insureds to submit to the appraisal process issues that involved causation. The judgment of the trial court was reversed and the case remanded for further proceedings consistent with this opinion.

Occurrence, Your Work, and Subcontractors

The insurer sought a declaration that the CGL form issued to a homebuilder did not cover the claim of the homeowner for damages caused by the negligence of a subcontractor. The trial court ruled in favor of the insured and this appeal followed. The case is Auto Owners Insurance Company, Inc. v. Newman, 2008 WL 648546 (S.C.). Note that this opinion has not been released for publication in the permanent law reports and until so released, the opinion is subject to revision or withdrawal.

Trinity Construction completed the construction of a home for Newman in 1999. Shortly after, the homeowner filed a claim against Trinity for breach of contract, negligence, and breach of warranty, alleging defective construction primarily related to the installation of the stucco siding. The homeowner alleged that the application of the siding did not conform to industry standards and this allowed water to seep into the home; this, in turn, caused severe damage to the home's framing and exterior sheathing. Trinity's insurer, Auto Owners, then filed a declaratory judgment action to determine its rights and obligations under it policy for Trinity.

When the case got to the Supreme Court of South Carolina, the court took note of the insurer's argument that the defective work of a subcontractor (the installation of the stucco) did not cause an accident constituting an occurrence. The court disagreed. The court found that, in the absence of a prescribed definition in the policy, the definition of accident is an unexpected happening or event which occurs by chance and usually suddenly, with harmful results, not intended or designed by the person suffering the harm or hurt.

Based on this, the court found that the continuous water intrusion into the home qualified as an accident involving the continuous or repeated exposure to substantially the same harmful conditions. This met the definition of occurrence in the policy.

As to the argument that the defective work of the subcontractor was excluded by the policy language, the court noted that in the 1986 revision of the CGL policy, the insurance industry extended liability coverage for property damage to the contractor's (the named insured) completed work arising out of work performed by the subcontractor. The facts of this case established exactly the type of property damage the CGL form was intended to cover with this 1986 revision. To deny this would mean that any time a subcontractor's negligence damaged any part of the contractor's overall project, the insurer could deny coverage, and this would render the subcontractor's exception to the ″your work″ exclusion meaningless.

Auto Owners also argued that even if the subcontractor's negligent application of stucco resulted in an occurrence coverage was nevertheless barred by an exclusion that prohibited coverage for property damage expected or intended from the standpoint of the insured. The insurer argued that a construction professional like Trinity would expect substantial moisture intrusion from defective stucco to result in these types of damages claimed by the homeowner. In the opinion of the court, in the absence of any evidence otherwise, it was unreasonable to believe that Trinity expected or intended its subcontractor to perform negligently. Therefore,

Trinity could not have expected or intended the resulting property damage.

The final argument put forth by the insurer was that the arbitrator's itemized allowance for replacing and repairing the defective stucco itself constitutes property damage to the work of the insured, and this is not covered by the CGL form. The court found that the existence of the underlying water damage to the home resulted from the defectively applied stucco, and this underlying moisture damage could neither be assessed nor repaired without first removing the entire stucco exterior. Thus, the arbitrator's allowance for replacement of the defective stucco was covered by the CGL policy as a cost associated with remedying the other property damage that resulted from a covered occurrence.

The trial court's decision finding that the CGL policy covered the damages awarded to the homeowner was affirmed.

Intent of the Insured

Liability policies have exclusions that prevent coverage for injury and property damage expected or intended by the insured. Courts traditionally have had no problem with excluding insurance coverage for an insured who blatantly intends to injure somebody or damage some property, such as in a criminal act. However, over the years courts have struggled with the idea of an intentional act as opposed to an intent to injure, or the inference that an intent to injure can be inferred by the nature of the insured's actions. A case from the Supreme Court of Kansas offers a very intense and instructive discussion of the various ways courts today view the intentional injury exclusions found in insurance policies. The case is Thomas v. Benchmark Insurance Company, 179 P.3d 421 ( Kan. 2008).

This case involved an auto policy and the policy's intentional act exclusion. Gutierrez was driving her car in an attempt to escape pursuing police. Reyes and Sanchez were passengers in the car. While exiting a highway at high speed, Gutierrez lost control of the car; it flipped several times and Gutierrez and Sanchez were killed; Reyes survived with several injuries. Reyes and Thomas (natural guardian of Sanchez, a minor) filed a declaratory judgment action seeking determination of the parties' rights under the auto policy issued to Gutierrez. Benchmark, the insurer, denied any coverage due to the intentional conduct of Gutierrez.

The trial court granted summary judgment to the plaintiffs, but the court of appeals reversed that judgment. The case then went to the Kansas Supreme Court.

The court reviewed the policy and noted that it excluded bodily injury caused intentionally be the named insured or any family member. Reyes and Thomas said that, while Gutierrez drove recklessly and at excessive speeds, her loss of vehicle control was not intentional. The insurer argued that the intentional acts exclusion applied because the wreck and injuries were natural and probable consequences of the insured's intentional act of driving at an excessive rate of speed. The court of appeals did apply the natural and probable consequences test in its decision to reverse the lower court's ruling, and in its review, the Supreme Court offered an analysis of this test and other tests that various courts around the country use in order to decide if the injuries and damage claims against an insured can be denied insurance coverage because of the intentional conduct of the insured. The court found at least three different views regarding intent.

One view holds to the idea that the natural and probable consequences of the insured's acts determine intent. That is, if the intentional act by the insured results in injuries or damages that are a natural and probable result of the act, the loss is intentional for purposes of the exclusion and no coverage exists. This approach yields the narrowest coverage and the most pro-insurer results.

A second view (the majority view in the country at this time) holds that the insured must have intended both the act and to cause some kind of injury or damage. Intent can be actual, or intent to cause the injury or damage can be inferred from the nature of the act and the foreseeability that harm would result. It is not essential that the harm be of the same character and magnitude as that intended.

The third approach provides the broadest coverage and the fewest pro-insurer results. This view holds that for the exclusion to apply, the insured must have had the specific intent not only to injure but also to cause the particular type of injury suffered.

The court then analyzed decisions from Kansas, Louisiana, Minnesota, Wisconsin, Mississippi, Pennsylvania, and the 10th Circuit, and concluded that Kansas should follow the majority rule. Under this rule (as noted previously), the insured must have intended both the act and to cause some kind of injury or damage. Based on the facts of this case, the intentional act exclusion on the Benchmark policy was applicable. Gutierrez was driving the wrong way against traffic; she failed to stop at a stop sign; she was driving at 100 m.p.h. through a neighborhood; in short, the nature of her actions foreshadowed the harm that resulted. The decision of the appeals court was affirmed.

What the States Are Up To

Arizona law now declares that the limits of insurance section of the underinsured motorists coverage endorsement must state that an insurer is prohibited from reducing an insured's underinsured motorists coverage based on the insured's receipt of workers compensation benefits.

In Colorado , the law is revised to strengthen penalties for the unreasonable conduct of an insurance carrier. New sections are added pertaining to improper denial of claims and unreasonable delay or denial of benefits.

The provisions of the Georgia Condominium Act have been revised to state that the limits of liability for a policy issued to a condominium association shall not be less than $1,000,000 because of all bodily injury and property damage as the result of any one occurrence. Also, the annual aggregate must not be less than $2,000,000.

Maryland law now requires that notice of cancellation of certain binders or policies of insurance be sent by certificate of mail. Also, the law provides for ten days' notification for cancellation due to nonpayment of premium during the 45 day underwriting period.

A Minnesota court of appeals ruling declares that the family-owned-vehicle exclusion is unenforceable because it precluded an individual's recovery of excess uninsured motorists benefits.

Oklahoma law requires that a child care facility shall maintain liability insurance with limits of not less than $200,000 for each occurrence of negligence.

Pennsylvania law states that a licensed physician assistant and a licensed perfusionist shall maintain a level of professional liability insurance coverage in the minimum amount of $1,000,000 per occurrence.