The Contractor The Insurance Company Sends In An Emergency: Be Careful What You Sign

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Oftentimes when an insured suffers a loss to their home, like fire or water damage, the insured will make an immediate claim to his or her insurance company.  The insurance company, in turn, will often send a third-party contractor out immediately to address the damages, like a water remediator or personal property repair and storage companies.  These companies can sometimes prove less than competent or ethical, and using them can make a bad situation worse.  Furthermore, they often have an ongoing relationship with the insurance company, and are willing to cut corners on repairs if they believe it will help them continue to receive business.  Policyholders are often surprised to learn that their insurance company often won’t stand behind the work done, or fix damages caused by, the contractors it sends to an insureds property.

What an insurance company is responsible for where a third-party contractor the insurance company recommends is negligent, causes damage, or does faulty work, is an unclear and a highly fact-specific area of the law.  On the one hand , “insurers have a nondelegable duty to timely and in good faith resolve claims by their insureds and to thoroughly investigate a claim.”  (Rattan v. United Services Automobile Ass’n (2000) 84 Cal.App.4th 715, 720.)  Therefore, insurers are presumably responsible for any damage caused “where an insurer has used an agent to determine when to pay benefits.” (Id. at 723.) On the other hand, where a third-party “professional fails to perform adequately” his services, the insurer is not liable for that conduct. (Id. at 717.) In essence, generally speaking, an insurance company is responsible if a third party helps it investigate the loss to determine what to pay, but is not responsible if the third party only performs repair work with the insurance money.  The problem is “the line between decisions which involve payment of benefits and the use of those benefits may in some circumstances be difficult to discern.” (Id. at 723.)

Practically speaking, this means that when something goes wrong with what a contractor has done, the insurance company has room to argue that it is not responsible. This can occur in many situations. Common examples are water losses, where the water remediator fails to adequately dry out, remove or replace the wet areas, mold develops, and the problem becomes worse, and often very serious. The insurance company may disclaim responsibility, taking the position the water remediator worked for you, and if the work was bad, you have to deal with the water remediator. The water remediator, however, often won’t do additional work unless paid additional money.  This puts the policyholder in the position of having an unrepaired home, while the insurance company and third-party remediator point fingers at eachother. Another common example is where a third-party company arrives at the scene of a loss and takes the insured’s damaged personal property to inventory and store. A dispute can often arise with the storage company about the amount of fees, or damage to the property, and the insurer will often claim it has no responsibility.

Because there are grounds for an insurance company to disclaim responsibility for damages caused by contractors in the immediate aftermath of a loss, policyholders have to be extremely careful about what they sign with companies who show up at the scene of a loss.  In the heat of the moment, when the insured is in the throes of distress from the immediate impact of a loss, and someone is saying they were sent by your insurance company and are there to help, it is easy to sign documents without carefully reading or understanding them.  Whether the policyholder has directly contracted with a third-party sent by the insurer can often have a significant impact on your insurance claim.  Policyholders should resist pressure to sign agreements or authorize work unless they understand what is involved

Insurance Coverage In California For Landslides And Earth Movement

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In Los Angeles, during the rainy season, there are often mudslides that damage property.  People who regularly drive the Pacific Coast Highway may be familiar with the phenomena, as traffic is often delayed or backed up due to landslides.  Insurance coverage for property damage relating to landslides and other earth movement can raise complicated issues relating to causation, and application of coverage and exclusion provisions.

Most homeowner’s policies contain an exclusion for “earth movement”, a common example of which will specifically exclude losses for things like “landslide; mudflow; earth sinking, rising or shifting . . .” (Julian v. Hartford Underwriters Ins. Co. (2005) 35 Cal.4th 747, 751.) When a landslide occurs and damages property, the insurance company will often deny the resulting claim on the ground that the earth movement exclusion applies. This may not be correct, depending on what caused the landslide or earth movement.

Landslides are often caused, at least in part, by other events, like fires or floods. Fires can defoliate a hillside. This loss of shrubbery and foliage can decrease hillside stability during the rainy season, and result in landslides. Similarly, excessive water exposure onto a hillside, such as from pipe breaks or other accidental releases, can cause landslides. Fires and accidental pipe breaks are typically covered under a homeowner’s insurance policies. Where a fire, water loss, or other covered event, combine with an excluded event like earth movement, to cause a loss, coverage depends on the “efficient proximate cause” of the loss. (Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal.3d 395, 406-08.)   Under the efficient proximate cause rule, “where there is a concurrence of different causes . . . the one that sets others in motion” determines whether coverage exists. (Sabella v. Wisler (1963) 59 Cal.2d 21, 31-32.)

California Courts have held that where a fire destroys “the vegetation on the slope,” followed by severe rainfall which causes a landslide, coverage exists if “the fire was the efficient proximate cause of the landslide,” despite the earth movement exclusion. (Howell v. State Farm Fire & Casualty Co. (1990) 218 Cal.App.3d 1446, 1449, 1459.)  This principle applies to any covered loss contributing to a landslide or earth movement – the loss is covered if the covered event was the efficient proximate cause.

Whether a covered or excluded event is the efficient proximate cause for coverage purposes is normally an “issue of fact” for a jury to decide. (Howell, supra, at 1459.)  In addition, to deny the claim, the insurance company has “the burden of establishing that the efficient proximate cause of [plaintiff’s] loss was an excluded peril.” (Alex R. Thomas & Co. v. Mut. Serv. Cas. Ins. Co. (2002) 98 Cal. App. 4th 66, 76.)

Thus, where a home or other property is damaged by a landslide or other earth movement, and an insurance company has denied the claim based on an earth movement exclusion, the cause of the landslide or movement should be carefully examined.  If there is an argument that a covered event caused the land movement, and was the efficient proximate cause of the loss, there may be insurance coverage available.

California Property Damage Claims And The Proof Of Loss Trap

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When you suffer a property damage to your home or business, like a fire or water loss, and make an insurance claim, one of the requirements that standard insurance policies impose is that the insured submit a “proof of loss.”  The proof of loss requirement can often serve as a trap by the insurance company to attempt to shift the burden to investigate the claim to the policyholder, or set up accusations of fraud.  Yet, it is something that needs to be submitted in order to avoid giving the insurance company an excuse to deny your claim.

California law provides that the standard form fire insurance policy, which is the template for homeowners property policies, contain a provision that “the insured shall render . . . a proof of loss, signed and sworn to by the insured” which among other things documents “the time and origin of the loss . . . [and] the actual cash value of each item . . . and the amount of loss . . .” (California Insurance Code §2071.) This can be a daunting burden, as most policyholders are not an expert in evaluating property damage, or the cost to repair.

The first thing to understand about the proof of loss form is that the insurance company – not the policy holder — has “a nondelegable duty to timely and in good faith . . . thoroughly investigate a claim. . .” (Rattan v. United Services Automobile Ass’n(2000) 84 Cal. App. 4th 715, 720.)  Insurance company’s often attempt to shift that burden and cost to investigate the policyholder through the proof of loss form.  They do this by insisting that the insured provide a precise amount they are claiming, and hire an expert to submit an estimate.  The insured does not have to do that.  The main thing an insured needs to do is submit something describing the loss as best they can, and provide a loose estimate of damage which puts the burden on the insurance company to investigate. With respect to the cost, statements that it is “partial” or “known as of today” or “exceeds $X amount,” other language that makes clear the insured is not limiting the claim, with a notation along the lines of “insured is not an expert, and relies on insurance company to investigate and determine extent and cost to repair loss,” should suffice.

Don’t overstate the loss, or say something you do not know, because insurance company’s also often use the proof of loss form to set up a denial based on claimed misrepresentations. Under California law, any “material misrepresentation” in a claim by the policyholder is grounds to deny the entire claim, regardless of the merits of the actual loss suffered by the insured. (Cummings v. Fire Insurance Exchange(1988) 202 Cal.App.3d 1407, 1414-1416.) That is why policyholders must be careful in submitting a proof of loss not to say something they cannot back up.

The good news is that if you submit an honest proof of loss describing the loss to the best of your ability, even if your insurance company continues to pressure you to add more detail, you are probably safe. That is because an insurance company must show “substantial prejudice” from breach of a condition precedent in order to avoid paying the claim. (Campbell v. Allstate Insurance Co. (1963) 60 Cal.2d 303, 305.)  This includes “failure to comply with requirements of . . . proof of loss . . . [and] the burden of showing prejudice [is] upon the insurer.” (Hanover Ins. Co. v. Carroll (1966) 241 Cal.App.2d 558, 569.)

In practice, however, the total failure to submit a proof of loss allows the insurance company more leeway to argue that they were substantially prejudiced. The lesson then, to avoid the proof of loss trap, is to submit a proof of loss, doing your best to describe the claim without overstating it, and being honest about what you do or do not know, and put the burden on the insurance company to pay for the thorough investigation to determine the precise scope, cause, and amount of loss.