The article of the month discusses this subject, based on the standard ISO building and personal property coverage form, CP 00 10. New construction, newly acquired property, and case law are all noted in this article. See Newly Acquired or Constructed Property.

UIM Contractual Limitations Provision

The insured brought a declaratory judgment action against the auto insurer to reform the policy to provide underinsured motorist (UIM) coverage for an accident that occurred more than six years earlier. This case is Whelan v. State Farm Mut. Auto. Ins. Co., 329 P.3d 646 (N.M. 2014).

Whelan (the insured's father) was in the insured's parked truck when it was hit by a moving vehicle in 2002. Whelan subsequently died from his injuries. At the time of the accident, occupants of the insured's truck were insureds under the terms of a $50,000 liability policy issued by State Farm, providing no UM/UIM coverage.

Having received only the $25,000 liability policy limits from the carrier for the at-fault driver, the insured made a demand on State Farm in 2011 for $25,000 in underinsured motorist coverage to equalize the UM/UIM coverage with the $50,000 liability coverage limits under the State Farm auto policy in effect at the time of the accident. After the insurer refused to equalize the UM/UIM coverage, the insured filed this lawsuit. State Farm argued that the lawsuit was barred by a limitations provision in the policy that required any arbitration or lawsuit to be commenced no later than six years after the date of the accident.

The district court entered summary judgment in favor of the insured, holding that enforcing a time limit that ran from the date of the accident for contract-based UM/UIM claims was unreasonable and unenforceable and that the UM/UIM claim on the policy was not time-barred. This appeal by the insurer followed.

The Supreme Court of New Mexico declared that before it can decide the reasonableness and enforceability of a limitations clause, it had to consider the right that is being limited. The court acknowledged that an insurer has the ability to protect itself from uncertainty caused by prejudicial delays in the assertion of UM/UIM claims by including appropriate time limitations in its insurance contracts. However, the court went on, because the date of the accident is particularly extraneous to actions for specific performance of a contract to arbitrate involving UIM coverage, it would be fundamentally unfair to time-bar an insured from compensation that was bargained for because an insured may not be aware until sometime after the accident that a claim against the UIM insurer must be pursued.

The court decided that while the six-year period in this case was itself unobjectionable, it is the triggering event, that is, the date of the accident instead of the date of the accrual of the cause of action that concerned the court. The court said it could find no reasonable justification for a limitations period that may bar a claim before a lawful cause of action accrues. Therefore, the court concluded that a time-to-sue provision in a UM/UIM contract that is triggered solely by the date of an accident is unreasonable and unenforceable.

However, the court also ruled that a retroactive reformation of a rejection of uninsured motorist and underinsured motorist coverage did not apply to policies issued before May 20, 2004 (based on case law decided by the court at that time). Since the insured made a demand on State Farm for reformation of the policy that was issued in 2002 (so as to invalidate his previous rejection of the UM/UIM coverage and to reform the auto policy to provide such coverage equal to the policy's liability coverage limits of $50,000), the court ruled that the policy was not subject to a retroactive reformation.

The ruling of the lower court was reversed.

Editor's Note: The insured in this case won his point that the six-year period of limitation in his auto policy based on the time of the accident was unenforceable. However, this point was overruled by the finding that his auto policy could not be retroactively reformed to include any UIM coverage. Whelan rejected the UM/UIM coverage when his auto policy was issued in 2002 and the Supreme Court of New Mexico would not allow a reformation of the policy so as to now permit such coverage.

Itemized Estimate of Flood Damage Not Proof of Loss

The insured brought an action against the insurer, challenging the denial of supplemental claims for flood damage under the standard flood insurance policy. This case is Roussell v. Allstate Ins. Co., No. 13-5682, 2014 WL 2740259 (E.D. La. June 17, 2014).

Hurricane Isaac damaged property owned by J.R. Home Investment Services. J.R. Home submitted a sworn proof of loss in the amount of $51,279.86 and Allstate paid this claim. Shortly thereafter, the adjuster for J.R. Home forwarded a supplemental estimate of additional damages to Allstate. The insurer denied coverage and the insured filed a lawsuit.

Allstate claimed that no further benefits are payable to the insured because the insured failed to comply with the statutory regulations of filing a supplemental proof of loss at the time of filing a claim for supplemental damages. The insurer argued for strict adherence to the conditions precedent. J.R. Home asserts that an itemized estimate prepared by its public adjuster served as a supplemental proof of loss.

The United States District Court of the Eastern District, Louisiana, noted that the requirements for an insured to recover for flood loss under the National Flood Insurance Program are strictly enforced. A participant in the flood program cannot file a lawsuit seeking further federal benefits under the flood program unless the participant can show prior compliance with all policy requirements, one of which is that the insured must provide a signed and sworn proof of loss within 60 days after loss or within any extension authorized by FEMA.

In this instance, while J.R. Home argued that furnishing Allstate with an itemized estimate for its supplemental claim was sufficient, the district court said that the insured did not fulfill the statutory requirements. The court noted that the Fifth Circuit had already ruled in other cases that the submission of such documentation cannot substitute for the submission of a sworn, complete proof of loss. Accordingly, the district found that the itemized estimate and/or any like documentation related to J.R. Home's supplemental claim could not have fulfilled the proof of loss requirement. The court said the documentation furnished on behalf of J.R. Home is insufficient to satisfy the proof of loss requirement and so, the motion by the insurer for summary judgment was granted.

Editor's Note: This is another ruling making the point that the requirements for an insured to recover for flood loss under the National Flood Insurance Program are strictly enforced. The program requires a complete, sworn proof of loss by the insured and the failure to submit such proof is fatal to the insured's claim for flood damage.

Other Structures Coverage

The insured property owner brought an action against the insurer after the insurer denied coverage for certain losses after a wildfire. This case is Adamo v. Fire Insurance Exchange, 219 Cal. App.4th 1286 (2013).

Adamo filed a claim under his homeowner policy after a wildfire damaged his avocado grove, a 10,000 gallon water tank, irrigation system, culverts, two woodsheds, and landscaping on his property. The insurer, Fire Insurance Exchange, paid for various damaged property, including the policy limit of $53,100 under coverage B for other structures. Adamo filed a lawsuit, asserting that he was entitled to additional benefits for damage to the water tank, the irrigation system and the culverts associated with his avocado growing operation under coverage A for structures that are attached to his dwelling and under other provisions of the policy.

The trial court ruled in favor of the insurer and this appeal followed.

The Fourth District Court of Appeal noted that the policy covered damage to the dwelling and structures attached to the dwelling under coverage A, and damage to other structures separated from the dwelling by a clear space under coverage B. Coverage A and coverage B have different coverage limits and sub-limits. The insurer paid the insured for his damages under both coverages and the payment under coverage B exhausted that policy limit. So, the question for the court to decide was whether any available coverage remained, specifically for the damage to the water tank, the irrigation system, and the culverts.

Adamo asserted that coverage A provided additional coverage for any structure or equipment that is physically attached to the dwelling and absolutely necessary for its use. He also claimed that, even though coverage B covered other structures separated from the dwelling by clear space, there was nothing in the policy to preclude concurrent or additional coverage for the same property under coverage A. Fire Insurance argued that items such as the water tank, irrigation system, and culverts were not attached to the dwelling so there was no coverage available under coverage A. The insurer also pointed out that the coverage B policy limits were exhausted through payment of the claim.

The Court of Appeal said that the coverage under coverage B for other structures was the only coverage available for Adamo's water system. Coverage B for other structures applies to the water tank, the irrigation system, and culverts because coverage B defines other structures as those separated from the dwelling by clear space. And, although the policy does not define the phrase “clear space”, it has a plain meaning based on common understanding; it refers to an open area. Since coverage B's $53,100 limit was fully paid, there was no additional coverage for other structures. The court said there was simply no more available coverage under the policy since the limits of liability had been paid.

Adamo also argued that both coverage A and coverage B should apply to the same loss suffered as to the same property. The court disagreed. The court said that where multiple coverages are afforded, they are read as covering different, separate items. The court said that Adamo with his argument was asserting that when the applicable coverage limits have been exhausted, payment should be made under another inapplicable coverage. The plain language and physical relationship between coverage A and coverage B dictate that the two coverages are mutually exclusive and not compounded; that is, property is covered under either coverage A or coverage B, not both.

The ruling of the trial court was affirmed.

Editor's Note: The Court of Appeal for the Fourth District of California rules that coverage under coverage A and coverage B is separate and distinct. The insured sought to extend the policy limits of coverage A to the damaged property that was clearly covered under coverage B. This the court would not allow.

Vandalism and the Vacancy Exclusion

The insured and the insurer have a dispute over whether the commercial property policy covers a vandalism claim. This case is Travelers Cas. Ins. Co. of America v. Wild Waters, LLC, No. 2:12-cv-00481-CWD, 2013 WL 4710271 (D. Idaho Aug. 30, 2013).

Wild Waters operated a water park in Coeur d'Alene, Idaho. Wild Waters leased the building from the Lavin Family Trust. Mr. Stacey Lavin was the person responsible for the park operations. Wild Waters' operation was seasonal and it closed during the fall, winter, and spring months. The park was insured under a Travelers commercial property policy. Lavin worked with Warner, an insurance broker to obtain the Travelers policy which was renewed on a yearly basis.

In the spring of 2010, Lavin determined that the park would not open that summer due to weather problems that prevented necessary preparations and maintenance. In May of 2011, the decision was made not to open for the 2011 summer season, again due to weather problems. During this time, the Travelers policy was in effect.

Lavin became aware of vandalism damage to the property in September of 2011. The vandalism claim was delivered to Travelers but the insurer denied coverage under the vacancy clause in the policy. That clause precluded coverage for vandalism damage to the building where the building has been vacant for more than 60 consecutive days before the damage occurs. The insurer filed a motion for summary judgment seeking a declaration that it had no obligation to provide coverage since the policy excluded the damage claim.

The United States District Court for the district of Idaho noted that the policy when taken as a whole is not ambiguous; both parties agreed on this point. Rather, the parties were arguing about whether Wild Waters was conducting its customary operations, which operations include being closed, such that Wild Waters was not vacant under the terms of the policy for sixty days prior to the loss. Travelers asserted that, because the park was closed during a time when it customarily would be open, and had not operated as a water park for two summer seasons, the park was vacant at the time of the loss and for the sixty day period prior to the loss. The insurer cited four cases to support its contention.

The insured argued that Travelers knew the park was seasonal and that from the inception of the policy, Wild Water never changed the nature and character of its use as a water park. Rather, it had simply not opened to admit customers because of inclement weather, but the activities of preparation and maintenance had continued and the park was actually ready for seasonal opening.

The court did not agree with the insured's argument. The court said that the loss did not occur during its customary closure period, but rather during the summer when it normally would be open to the public. Wild Waters could certainly have periods of closure and Travelers had to have known of that fact. However, the court said that the loss occurred after the park was supposed to be open and the park had not been operated as a water park for two consecutive summers. The mere incidental performance of occasional maintenance did not constitute customary operations.

Wild Waters also argued that Travelers either waived or should be estopped from applying the vacancy clause to deny coverage because Warner, knowing that the park would be closed periodically, had procured a policy and a renewal of that policy each year. Therefore, the insurer knew that the park's customary operations included not being open for the public's use. Travelers countered that Warner was an insurance broker and not an agent of Travelers and so, his knowledge and statements cannot form the basis of an estoppel claim.

The court found that the record was not clear whether Warner was a broker or agent and whether his knowledge of the park's closure should be attributed to Travelers. Travelers did renew the policy through Warner's efforts and the court found that Travelers did not meet its burden of proof. By renewing the policy after a summer season when the park should have been open, the vacancy provision presumably would have operated to preclude coverage from and after the policy renewal date. Under these circumstances, the insurer should not benefit from renewal of its policy when the disputed facts raise an inference that it knew the park had been closed prior to renewal, and the vacancy clause may be immediately operable such that coverage for the entire policy period was precluded under the vacancy clause.

The court commented that when an insurer issues a policy with full notice of all the facts in the case and has received a party's money under circumstances leading the insured to suppose he is receiving indemnity, the insurer is estopped from repudiating the contract. Therefore, the insurer's motion was denied.

Editor's Note: In this case, the U.S. District Court found that although the vacancy clause was not ambiguous, the insurer had not met its burden of demonstrating the absence of a genuine issue of material fact on every essential element of its claim. The insured did establish that a genuine issue of material fact existed regarding its defense of estoppel or waiver and so, the insurer's motion for summary judgment could not be granted.