IH 00 83 is not intended to be used for dry products such as grain, but for liquids such as vegetable oil, flavorings, manufacturing and lubricating oils, liquid fertilizer, or other domestic liquids. The article of the month analyzes IH 00 83 and discusses underwriting considerations. See Tank Storage Coverage Form.

Insurable Interest in Foreclosed Property

The insureds, whose claim arising from destruction of a house by fire was denied, brought an action against the property insurer seeking declaratory relief regarding coverage and seeking damages for breach of contract. This case is Rhine v. Priority One Ins. Co., 411 S.W.3d 651 (2013).

The Rhines owned a house and obtained fire and hazard insurance on the property from Priority One Insurance Company. After the house was destroyed by fire, the insurer denied the coverage claim, saying that the policy had been terminated before a claim matured and that at the time of the loss, the Rhines had already lost any insurable interest in the property due to foreclosure. The Rhines sued the insurer and the trial court ruled in favor of the insurer. The insureds appealed.

The Court of Appeals of Texas, Texarkana, noted that the real estate was secured by a mechanic's lien contract with the power of sale originally granted to secure Neatherlin Homes in the payment of a promissory note given for the construction of improvements. The Rhines were delinquent in the payment of at least nine of the note's prescribed monthly installments. The insurer sent a warning to the Rhines concerning apparent vacancy and said that the policy coverage for the dwelling would be suspended effective 60 days after the dwelling becomes vacant, and that the policy would eventually be cancelled. The record before the court did not reflect that the Rhines made any response to this notice from the insurer. Eventually, a trustee's sale foreclosing the Rhines' ownership in the property was conducted wherein the property was struck off to Walter Mortgage Company, the holder of the note and lien. Two weeks after the foreclosure, a fire occurred.

The Rhines argued to the appeals court that the house was still their primary residence. They also claimed that because they could still owe money to the mortgage holder even though a foreclosure had taken place if a deficiency existed between the amount owed and the amount realized at the trustee's sale, they sustained a pecuniary loss from the home's destruction. Priority One simply maintained that the Rhines had no insurable interest in the house due to the foreclosure.

The court said it had to determine whether the Rhines produced any evidence of probative force to raise a fact issue on the questions presented in this appeal. The court noted that the insurer had sent a warning letter to the Rhines about possible cancellation of coverage due to vacancy and that the Rhines did not respond to that letter. In addition, the court said, the Rhines had not made their mortgage payments for over nine months, several letters sent to the house remained unclaimed, and while the Rhines might have considered the house their primary residence, there is no contradiction in the record of the claim that they had moved a substantial part of their personal property from the dwelling prior to the fire.

There was no dispute, the court found, that the Rhines' interest in the property was lost through foreclosure prior to the fire loss. Therefore, the Rhines' status had been reduced to only that of tenants at sufferance as a result of the foreclosure sale. The ruling of the trial court was affirmed.

Editor's Note: The Court of Appeals of Texas rules that a claimant has the burden to prove an insurable interest as a question of law. In this instance, the insureds did not offer any proof to that effect. The record before the court showed a foreclosure, a lack of response on the part of the insureds to warnings from the insurer, and actions by the insureds that contradicted their statement that they considered the house to be their primary residence. Therefore, the ruling of the trial court granting summary judgment to the insurer was affirmed.

Stacked UIM Coverage

This case arose from a motor vehicle accident involving a vehicle driven by April Connolly and one driven by a Thomas Thornton. This case is Connolly v. Progressive Northern Ins. Co., 2015 WL 464877.

Connolly was covered by an automobile insurance policy issued by Progressive Northern Insurance Company at the time of the accident. The policy provided underinsured motorist (UIM) benefits of up to $100,000 per person and $300,000 per accident. Connolly sustained physical injuries in the accident and Thornton's insurer paid its liability limits of $250,000. Connolly then advised Progressive that this tender of Thornton's policy limits did not satisfy the claims arising from her bodily injuries and that she intended to file a UIM claim with Progressive.

The insurer's adjuster tried to contact Connolly and her attorney concerning Connolly's injuries but there was no response. The insurer was provided no medical records or other documentation of Connolly's injuries.

Nevertheless, Connolly filed a complaint initiating this lawsuit. The insured asserted that she was entitled to stacked UIM coverage. The insurer disagreed and said the auto policy did not provide stacked coverage because Connolly's parents (the actual policyholders in this instance) had rejected stacked UIM coverage at the inception of the policy.

The United States District Court, M.D. Pennsylvania, noted that Pennsylvania law clearly provides that once an insured executes a rejection of stacked coverage, there is no need for the insured to obtain a new rejection each time the policy comes up for renewal. In addition, the court noted that Connelly's parents had executed a rejection of stacked UIM coverage. However, the court could not conclude that stacking was unavailable to Connolly at this point since there was a question in the court's mind about whether the subsequent renewals (21) of the policy offered some substantive differences in the policy over time that would preclude a finding that they were merely renewals of the initial policy. In other words, the court was unsure if the policy in force at the time of the accident was identical to the initial policy issued to the parents in which they rejected stacked UIM benefits.

Due to this uncertainty in the record, the court denied the insurer's motion for summary judgment.

Editor's Note: The main point from this case is that the U.S. District Court did not find enough evidence and facts to decide the key question as to whether the insured was entitled to stacked UIM benefits. The court noted that Pennsylvania law clearly provides that once an insured executes a rejection of stacked coverage, there is no need for the insured to newly reject such coverage each time the policy is renewed. But, since the court was not sure if the subsequent renewals of the auto policy had changed UIM coverage provisions, the court would not grant summary judgment to the insurer.

Meaning of Structural Damage to a Building

The insureds commenced an action against the insurer claiming improper denial of their claim for sinkhole loss that had been defined in the homeowners policy as structural damage to the building caused by sinkhole activity. This case is Hegel v. The First Liberty Ins. Corp., 2015 WL 821146.

The Hegels had a homeowners policy with First Liberty for their Florida residence. The policy insured against sinkhole loss as an exception to the policy's exclusion for damage caused by earth movement. Sinkhole loss was defined in the policy as structural damage to the building caused by sinkhole activity, but it did not define the term “structural damage”.

The version of the Florida statute governing sinkhole insurance that was in effect at the time the policy was issued contained the same definition of sinkhole loss contained in the policy and it also did not define structural damage. However, prior to the statute being substantially amended in 2005, sinkhole loss was defined as actual physical damage to the property covered arising out of or caused by sudden settlement or collapse of the earth supporting such property.

In addition, the Florida Building Code provided a detailed, technical definition of structural damage. Structural damage meant a covered building, regardless of the date of its construction, that has experienced interior floor displacement or deflection in excess of acceptable variances, foundation displacement or deflection in excess of acceptable variances, damage that results in listing, leaning, or buckling of the exterior load-bearing walls, damage that results in the building or any portion of the building containing primary structural members, or damage occurring on or after October 15, 2005 that qualifies as substantial structural damage as defined in the Florida Building Code.

The Hegels alleged that on March 2011, they discovered damage to their home, including but not limited to, progressive physical damage to the walls and floors of the residence. They then submitted a claim to First Liberty. The insurer investigated the claim and concluded that the residence did not meet the criteria for structural damage as defined by Florida statutes. Accordingly, the insurer denied the claim and the Hegels filed a lawsuit.

The U.S. District Court for the Middle District Court of Florida granted the insureds' motion for summary judgment and the insurer appealed.

First Liberty argued that the 2011 amendment to the definition of structural damage in the Florida statutes should be incorporated into the insurance policy contractual definition of the term and that the term could not mean simply any damage to the structure. The insureds countered that they had met their burden of proving that the damage to the residence came within the terms of the policy, noting that First Liberty had not submitted any evidence to refute the opinions of the neutral evaluator that the Hegels had hired in order to show sinkhole activity.

The Eleventh Circuit Court of Appeals agreed with the insurer that the plain meaning of structural damage cannot be simply any damage to the structure. The court went on to state that damage to the structure would encompass any physical damage to a building, even if only cosmetic, whereas structural damage would exclude damage to a building's decorations or fittings. Any structural damage would necessarily encompass damage to the building, but the opposite is not necessarily true, that is, many types of lesser damage to a building would not be structural damage. To equate structural damage with any damage to the structure is thus untenable. The court concluded that the phrase “structural damage to the building” means damage that impairs the structural integrity of the building.

The ruling of the district court was reversed and the case remanded for further proceedings consistent with this opinion. This opinion required the district court to decide if a genuine dispute of material fact exists regarding how much, if any, structural damage to the Hegels' house is due to sinkhole activity. The district court's determination on this issue will in turn lead to either a new grant of summary judgment for the appropriate party or to a trial on the merits.

Editor's Note: The U.S. Court of Appeals held that the insured's view that structural damage meant simply damage to the structure was facially unreasonable. After reviewing state statutes and building codes and case law, the U.S. Court of Appeals held that structural damage to the building caused by sinkhole activity in an insurance contract meant damage to the structural integrity of a building.

Appraisal and Insurance Coverage Issues

Following the insurer's agreement to an appraisal of wind damage to the roof, but refusal of an appraisal for hail damage to the roof, the insured sought a declaratory judgment requesting a determination of coverage issues and seeking an order for appraisal. This case is North Glenn Homeowners Association v. State Farm Fire & Cas. Co., 854 N.W.2d 67 (2014).

North Glenn is an association of property owners in Iowa. North Glenn submitted a claim under a policy issued by State Farm for hail damage sustained to a roof. The claim, in excess of $125,000, was paid. North Glenn did not repair all of the damage, electing instead to use some of the money to make other repairs and improvements to the property.

In 2011, a second storm hit the development and the insured filed another claim with State Farm for wind and hail damage. The insurer inspected the property and determined the hail damage was from the previous storm and was not covered. The wind damage was estimated to be less than the policy deductible. North Glenn made a demand for appraisal as provided for in the policy. State Farm agreed to an appraisal of the wind damage but refused an appraisal of the hail damage.

North Glenn filed a petition for declaratory judgment, seeking an order for appraisal. The district court granted the motion and the insurer appealed.

The Court of Appeals of Iowa decided that the dispute is whether causation and coverage issues are to be determined by the appraisers or by the court, and if by a court, should those issues be determined before an appraisal is ordered.

Whether an appraiser has the authority to determine causation or issues of coverage has never been fully considered by the courts in Iowa, said the court, but several other states have considered the issue, reaching different conclusions. After a review of the opinions of various state courts, the court of appeals decided that, as part of the appraisal process, appraisers must determine what the amount of loss is, which often requires consideration of causation. The court said that causation is an integral part of the definition of loss, without consideration of which the appraisers cannot perform their assigned function. During the appraisal process, the appraisers must consider what damage was caused by hail and what damage was not, or damage with which they are unconcerned, such as normal wear and tear. The court said it was convinced that to hold otherwise would improperly limit the appraisal process to situations where the parties agree on all matters except the final dollar figure.

As for the coverage issue, by law and under the specific terms of the appraisal clause, the court went on, once the appraisers conclude their work, the issue of coverage may be further litigated by the insurer and then determined by the court. This process gives force to the appraisal process but reserves to the courts the authority to decide coverage questions.

The appeals court then addressed the question of whether the district court should have ordered the appraisal process to begin before the coverage disputes were resolved. The court decided that where a party has demanded an appraisal, the process should go forward with other judicial determinations waiting until after the process has been completed. The plain language of the appraisal clause in this case supported this conclusion. Additionally, the clause specifically reserves the right of State Farm to challenge the coverage after the appraisal process is completed. So, the court found that the judicial determination of coverage need not be made before an appraisal is conducted. The ruling of the trial court was affirmed.

Editor's Note: The Court of Appeals of Iowa agreed with the insured in this dispute that the appraisal was a condition precedent to any further action in the matter. The insurer contended that a judicial determination of coverage should be made before an appraisal is conducted, but the court did not agree. The court relied on rulings from several states (Florida, Alabama, Mississippi, Minnesota, Delaware, Texas, Louisiana, and Virginia) to arrive at its conclusion.