REPRESENTING INSUREDS IN A CATASTROPHE
Every year people suffer catastrophes from wild fires, hurricanes, floods,
tornados, or earthquakes. Lawyers must be ready to provide the services
their clients, who were prudent enough to insure against the risk of such
losses, need to obtain the benefits of the contract. To do so, it is necessary
that the lawyer understand the duties and obligations of the parties to the
Insurers have paid (or will pay shortly) a record $56.8 billion for 2005
insured property losses from 24 catastrophic events. This is more than
twice the prior record set in 2004, when insurers paid $27.3 billion in
catastrophe claims.1 Five hurricanes accounted for $52.7 billion, nearly
ninety-three percent of the 2005 insured losses covered in nine states. More
than four million personal, commercial, property, and automobile claims
were filed by January 2006 related to these disasters. Five states accounted
for more than eighty percent of those claims and almost half the dollar
i. understanding first-party property insurance
Insurance policies are contracts between an insurer and an insured that are
designed to provide indemnity from the insurer to the insured. They are
considered contracts of personal indemnity. They do not insure property.
A first-party property policy insures people (the insureds) against certain
enumerated risks of loss to real property.
1. Press Release, Insurance Services Office, Insurers to Pay a Record $56.8 Billion in 2005
Catastrophe Claims, available at http://www.iso.com/press_releases/2006/01_27_06.html
( Jan. 26, 2006).
Barry Zalma is a California insurance coverage lawyer and insurance claims consultant.
This article is adapted from Insurance Claims: A Comprehensive Guide and Mold: A
Comprehensive Claims Guide, published by Specialty Technical Publishers, Vancouver,
818 Tort Trial & Insurance Practice Law Journal, Spring 2006 (41:3)
Insurance contracts come in multiple formats with almost an infinite
variety of terms and conditions. It is recognized that an insurance contract
can be written to contain nearly any terms that the parties choose. In State
Farm Fire & Casualty Co. v. Slade,3 the court stated: “insurance companies
and their insureds are free to agree to any terms in a contract so long as
they do not offend some rule of law or contravene public policy.”4 In almost
identical language, the Wisconsin Supreme Court said: “Parties are at lib-
erty to enter into insurance contracts which specify the coverage afforded
as long as the contract terms do not contravene state law or public policy.”5
To understand how to best present an insurance claim, the lawyer must
understand how insurance contracts are interpreted. As Robert P. Dahlqu-
ist said, insurance policies are “notoriously complex” and “full of compli-
cated, almost mystical language.”6 They often contain unusual phrases and
awkward grammar. Indeed, the complaint that a particular insurance policy
provision is “not a model of clarity in legal draftsmanship” can fairly be
applied to many insurance policy provisions.”7
People who are not conversant in insurance and the interpretation of
insurance contracts believe that the insurance policy is difficult to read and
understand. The construction of insurance contracts is governed by the
same rules of construction applicable to all contracts.8 In construing an
insurance contract, its terms are given their “ordinary and generally ac-
cepted meaning.”9 The primary goal of the court “is to give effect to the
written expression of the parties’ intent.”10
Courts must “give legal effect to contracts according to the true intent
of the parties.”11 The Eighth Circuit, applying Louisiana law, noted that
the meaning of a written instrument and the intent of the parties should
be discerned only from the instrument itself, and that extrinsic evidence is
3. 747 So. 2d 293 (Ala. 1999).
4. Id. at 313 (internal quotes omitted).
5. Rural Mut. Ins. Co. v. Peterson, 295 N.W.2d 776, 778 (Wis. 1986); see also Am. Mo-
torists Ins. Co. v. R&S Meats, Inc., 526 N.W.2d 791, 793 (Wis. 1994).
6. Robert P. Dahlquist, Perspectives on Subsidence Exclusions and the Role of Concurrent Cau-
sation in Earth Movement Cases, 37 T ort, Trial & Ins. L.J. 949–50 (2002) (footnote omitted).
7. Id. at 950 (footnote omitted).
8. See Balandran v. Safeco Ins. Co. of Am., 972 S.W.2d 738, 740–41 (Tex. 1998); Nat’l
Union Fire Ins. Co. v. CBI Indus., 907 S.W.2d 517, 520 (Tex. 1995).
9. Security Mut. Cas. Co. v. Johnson, 584 S.W.2d 703, 704 (Tex. 1979).
10. Balandran, 972 S.W.2d at 741; see also Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132,
133 (Tex. 1994).
11. In Re Minn. Mut. Life Ins. Co. Sales Practices Litig., 346 F.3d 830, 837 (8th Cir. 2003)
(quoting Kappa Loyal, L.L.C. v. Plaisance Dragline & Dredging Co., Inc., 848 So. 2d 765,
769 (La. Ct. App. 2003)).
12. Id. (quoting Abshire v. Vermilion Parish Sch. Bd., 848 So. 2d 552, 555 n.5 (La. 2003)).
Representing Insureds in a Catastrophe 819
The following rules govern the construction of contracts of insurance:
1. “If the terms of a promise are in any respect ambiguous or uncertain, it
must be interpreted in the sense in which the promisor believed at the
time of making it, that the promisee understood it.”13
2. “If a written contract is so worded that it can be given a definite or
certain legal meaning, then it is not ambiguous.”14
3. However, if “the language of a policy or contract is subject to two or
more reasonable interpretations, it is ambiguous.”15
Reading and understanding the policy, before disaster strikes, is an impor-
tant early part of preparation for an insurance claim.
ii. preparation for a catastrophe
Since catastrophes are inevitable, certain steps taken before the catastrophe
strikes may make settlement in the eventual claim easier. These steps
1. Prepare a complete inventory of all personal property that includes
a. Date of purchase.
b. Place of purchase.
c. Purchase price.
2. Take photographs of the structure and its contents.
3. Take a videotape inventory of the structure and all of its contents.
4. Review the insurance coverage and ascertain the client has sufficient
a. Replace the structure, new for old.16
b. Replace all of the contents, new for old17
c. Provide indemnity for the types of losses that may result from a ca-
tastrophe such as
i. Earthquake coverage.
ii. Flood insurance.
iii. Coverage for fire storms in brush areas.
iv. Wrap-around or difference in conditions insurance to obtain full
replacement cost coverage in areas where sufficient coverage is
not available in standard markets.
13. Cal. Civ. Code § 1649 (West 1985) (providing an excellent definition of the basic rule
of interpretation followed in most states).
14. Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983).
15. Balandran, 972 S.W.2d at 740.
16. To do so. your client may need to retain the services of a construction consultant or
real estate appraiser to determine the replacement cost and the fair market value of the
17. Depending on the assets of the insured, this may require the assistance of a personal
820 Tort Trial & Insurance Practice Law Journal, Spring 2006 (41:3)
All inventory records, photographs, etc. should be copied, with one in
the home, one off-site, and an extra copy in a bank safety deposit box.
iii. representing an insured presenting a claim
If your client’s property was damaged or destroyed and he had a fire, home-
owners, flood insurance, tenant’s homeowners, condominium, or com-
mercial property policy, you will be dealing with an insurance adjuster or
the insurer’s counsel. Your client will be distraught and concerned about a
future without the family home or commercial property. You may not be
called until after your client has retained a public insurance adjuster whose
activities have failed to reach an acceptable resolution of the claim and the
parties believe their positions are set in stone.
You should recognize that dealing with an insurance adjuster in a catas-
trophe is usually fairly easy because of the number of claims the adjuster
is required to deal with in a short time. However, you should be prepared
to use all your powers of persuasion, as well as to demonstrate citations to
legal authority, to vigorously pursue your client’s interests. Insurers may
not always pay claims that they owe. Meanwhile, insureds may become
preoccupied by visions of new and improved properties, and may be resis-
tant to reason. Such attitudes, without the advice of competent counsel,
can make settlement difficult.
To make the claims process proceed easily, the insured’s lawyer must
understand that both the insured and the adjuster have duties when damage
caused by an insured loss is discovered.18 The most important of the duties
imposed on the insured follow:
18. The New York Standard Fire Insurance Policy, which is used almost universally in the
United States, sets out the basic duties, as follows:
Requirements in case loss occurs. The insured shall give immediate written notice to this
Company of any loss, protect the property from further damage, forthwith separate the
damaged and undamaged personal property, put it in the best possible order, furnish a
complete inventory of the destroyed, damaged and undamaged property, showing in detail
quantities, costs, actual cash value and amount of loss claimed; and within sixty days after
the loss, unless such time is extended in writing by this Company, the insured shall render
to this Company a proof of loss, signed and sworn to by the insured, stating the knowledge
and belief of the insured as to the following: the time and origin of the loss, the interest of
the insured and of all others in the property, the actual cash value of each item thereof and
the amount of loss thereto, all encumbrances thereon, all other contracts of insurance,
whether valid or not, covering any of said property, any changes in the title, use, occupation,
location, possession or exposures of said property since the issuing of this policy, by whom
and for what purpose any building herein described and the several parts thereof were
occupied at the time of loss and whether or not it then stood on leased ground, and shall
furnish a copy of all the descriptions and schedules in all policies and, if required, verified
plans and specifications of any building, fixtures or machinery destroyed or damaged. The
insured, as often as may be reasonably required, shall exhibit to any person designated by
this Company all that remains of any property herein described, and submit to examinations
Representing Insureds in a Catastrophe 821
1. Report the loss promptly.
a. You should be sure there is no unnecessary delay in reporting the
discovery of damage as a claim.
b. However, many states accept the “notice-prejudice” rule that requires
the insurer to be actually prejudiced by a delay in reporting.
2. Cooperate with the claims investigation.
a. You should work with the adjuster to establish that there is no un-
necessary delay in responding to any fire, fire fighting, flood, or
water-related cause of loss.
b. Where there is water, whether from a flood or fire fighting, mold
3. Submit to an examination under oath.
4. Produce documentary evidence concerning the policy and loss.
5. Protect the property from further loss.
6. Your client may receive a reservation of rights letter advising the client
of the duties under the policy, the conditions that apply or might apply,
and the exclusions that may apply to the facts of the loss.
a. Advise your client that a reservation of rights, like a nonwaiver agree-
ment, is only a tool to maintain the status quo and the insurer merely
wants to avoid claims of waiver while it conducts its investigation.
b. Many laypeople are fearful of a reservation of rights because they
think it is a denial of the claim. It is the lawyer’s obligation to relieve
7. Your client must submit a sworn proof of loss.19
The insurer, while conducting its investigation, may ask your client to
sign a nonwaiver agreement. This is common practice and merely main-
tains the status quo ante. You should recommend that your client sign the
nonwaiver after explaining its force and effect.
You or your client can request from the adjuster the identity of respected,
competent, and professional contractors experienced in fire reconstruction
or the drying out of buildings and the prevention or restriction of further
loss, including mold. If your client failed to protect the property from
further loss, the adjuster should remind you, and your client, in writing,
of the failure and how that could affect the claim. The insured’s failure to
protect the property can be costly to him.
under oath by any person named by this Company, and subscribe the same; and, as often
as may be reasonably required, shall produce for examination all books of account, bills,
invoices and other vouchers, or certified copies thereof if originals be lost, at such reason-
able time and place as may be designated by this Company or its representative, and shall
permit extracts and copies thereof to be made.
N.Y. Ins. Law. § 3404 (McKinney 2000).
19. The New York Standard Fire Policy and flood insurance policies require a proof of
loss within sixty days of the loss unless the time is extended. Most modern policies only require
a proof of loss sixty days after it is requested by the insurer. Id.
822 Tort Trial & Insurance Practice Law Journal, Spring 2006 (41:3)
Insurance policies do not provide for advance payments. In fact, the New
York Standard Fire Policy and all insurance policies that grew from it only
require payment after the insurer has accepted the insured’s proof of loss,
an arbitration award, or court order. Regardless, if the adjuster does not
offer an advance payment, you should request advance payments to make
it easier for your client to avoid unnecessary difficulties, so your client will
have a place to live while the house is being rebuilt, can purchase items
necessary to live, and can rent a replacement facility. You can expect, in the
custom and practice of insurers and as an expression of the good faith of
the insurer, an immediate advance of $10,000, $20,000, or some other rea-
sonable amount depending on the value of the property, if it is destroyed.
The advance, in most cases, should be sufficient to carry the insured until
permanent relocation is possible. It will be deducted from the final settle-
ment. You should be prepared to ask, as the money runs out, for further
advances, as needed.
Even if the house was not destroyed or damaged, the insured may be
entitled to additional living expense (ALE) payments or rental value pay-
ments if the insured was ordered out of the house by the state government,
federal government, Homeland Security, or the local fire department. Ad-
ditional living expense coverage does not pay all of your client’s post-loss
expenses. It only pays those expenses over and above your client’s normal
expenses or otherwise limited by the policy wording. For example, in one
case, the Louisiana Court of Appeal held:
Since plaintiff ’s house was declared a total loss, plaintiff was due additional
living expenses during the time required to rebuild the house or to become
settled in permanent quarters, whichever was less. There was no evidence that
plaintiff attempted to rebuild the house; he testified that he left the premises
as they were for over a year after the fire. Thus, the applicable period is the
length of time it took for plaintiff to become settled in permanent quarters.
Plaintiff apparently established permanent quarters in the Bocage Royale
Apartments in April, 1983, and the trial judge’s award to plaintiff of additional
living expenses beyond that time was an abuse of discretion.20
ALE payments are intended as nothing more than a means of indem-
nifying an insured for losses incurred. Many insureds are tempted to claim
additional living expenses while living, at no cost, with relatives. This must
be discouraged, as it can give the insurer a ground to deny coverage or
declare a policy void because of misrepresentation or concealment of a
material fact. It can expose your client to possible prosecution for fraud.
Insurance claims require personal attention to detail by the insured and
his counsel. Counsel, the insured, and the adjuster must meet in person as
20. Clifton v. La. Farm Bur. Cas. Inc. Co., 510 So. 2d 759, 762 (La. Ct. App. 1987).
Representing Insureds in a Catastrophe 823
soon as practical after the loss. To resolve the claim expeditiously and fairly,
you, your client, and the adjuster should establish a personal relationship
and resolve, if coverage is available, the problems caused by the damage to
Once the initial investigation is complete, the insurer is obligated to
conduct a prompt analysis of the policy and the law to determine if cov-
erage exists for the claim. The adjuster is obligated to advise you and your
client of the insurer’s decision promptly and in detail. It there is coverage,
the adjuster must advise your client of the duties and obligations imposed
by the policy to allow him to obtain complete indemnity from the insurer
and to protect the property from further loss.21
iv. the notice of loss
Notice of loss is the first step in the presentation of a claim. If your client
has suffered a loss in a catastrophe and has not yet reported the loss to the
insurer, you must immediately give notice to the insurer. You should call
or write the insurance agent, broker, or insurer immediately (or as soon as
practicable) to report the claim. If the agent or broker is unavailable, you
or your client should send notice to the home office of the insurer.
The prudent lawyer will follow up the phone call with notice in writing.
If the structure was not destroyed, but a great deal of water entered the
property, you should advise the insurer of the need to get a remediation
team into the property within the first forty-eight hours to begin drying
out the property to avoid additional losses from mold. If you do not know
one, ask the insurer for a referral. This is crucial to prevent or contain
mold growth and to avoid charges of failing to protect against further loss.
As most insurance policies now contain coverage for mold damage, but
limit that coverage to only $5,000 to $10,000, it is essential that mold
21. For example, California regulations provide:
(e) Upon receiving notice of claim, every insurer, shall immediately, but in no event more
than fifteen (15) calendar days later, do the following unless the notice of claim received is
a notice of legal action:
(1) acknowledge receipt of such notice to the claimant unless payment is made within
that period of time. If the acknowledgement is not in writing, a notation of acknowledge-
ment shall be made in the insurer’s claim file and dated. Failure of an insurance agent or
claims agent to promptly transmit notice of claim to the insurer shall be imputed to the
insurer except where the subject policy was issued pursuant to the California Automobile
Assigned Risk Program.
(2) provide to the claimant necessary forms, instructions, and reasonable assistance, in-
cluding but not limited to, specifying the information the claimant must provide for proof
(3) begin any necessary investigation of the claim.
Cal. Code Regs. tit. 10, § 2695.5 (2006).
824 Tort Trial & Insurance Practice Law Journal, Spring 2006 (41:3)
growth be stopped before it gets too expensive to cure within the policy’s
If the agent, broker, insurance company, independent adjuster, or res-
toration company fails to respond promptly, counsel should follow up with
notice in writing confirming the delay and requesting further assistance. If
these efforts fail, it can be useful to send copies of the follow-up letters to
the consumer protection unit of the state’s Department of Insurance. Ca-
tastrophes often bring great political pressure to bear on insurers, and this
can cause coverage decisions to be weighed more in favor of an insured
than they might be in single loss situations.
Instruct your client to take detailed notes of every conversation, includ-
ing the name, company, phone number, address, and job title of every
insurance adjuster, representative, consultant, and contractor he deals with
in the same way that you would document your files. In addition, you and
your client should keep separate logs of all notes and letters and ask for
and keep business cards from everyone involved in the claim. You must
always confirm all agreements in writing and insist that appointments and
deadlines be honored.
The notice of loss should include as much of the following information
as is available to the insured:
1. The client’s full name(s).
2. The location of the property.
3. The policy number.
4. The effective dates of the policy.
5. The date and time when damage first occurred.
6. The type of property damage.
7. The cause or causes of the damage.
8. How the adjuster can contact you and your client(s).
9. That your client needs immediate contact from the adjuster.
10. That your client needs assistance to protect the property from further
11. That your client needs assistance to relocate in temporary quarters
until repairs can be effected.
All is not lost if the notice is given late. Many states apply the “notice/
prejudice rule.” In California, for example, if an insurance company prof-
fers a defense based on the insured’s failure to give timely notice of a claim,
it must show it was prejudiced by the late notice.22 In Campbell v. Allstate
Insurance Co.,23 the California Supreme Court stated that the breach of a
cooperation clause in an insurance contract is only a valid defense where
it is shown that the insurer was substantially prejudiced by the breach.
22. Shell Oil Co. v. Winterthur Swiss Ins. Co., 15 Cal. Rptr. 2d 815 (Ct. App. 1993).
23. 32 Cal. Rptr. 827 (1963).
Representing Insureds in a Catastrophe 825
Mississippi has adopted the notice/prejudice rule.24 The Alabama Su-
preme Court held that even an excess carrier needed to show prejudice to
avoid liability because of late notice.25 North Carolina also has applied the
rule.26 The National Association of Insurance Commissioners (NAIC)
Model Fair Claims Practices Regulations (and those more restrictive reg-
ulations imposed by states such as California),27 require that brokers,
agents, or anyone associated with the insurer who receives notice of a loss
to report it to the insurer immediately but no later than fifteen days after
first knowledge of the loss. Louisiana’s position on the issue appears un-
clear, but one can expect the notice/prejudice rule to be applied if the late
report results from a hurricane-related disability. However, the Louisiana
Court of Appeal has indicated an intent to require notice without a need
to show prejudice.28
The lawyer faced with a client who is submitting a late report of loss
should expect to receive a reservation of rights letter from the insurer. In
addition, many insurers will expect a request for the insured to sign a non-
waiver agreement, which is a mutual agreement, while the letter is unilat-
eral. It is preferable to avoid the need to claim a waiver or to seek appli-
cation of the notice-prejudice rule. By providing the information to the
agent, the broker, or the insurer, your client has fulfilled the first obligation
under the policy: to provide prompt notice of loss to the insurer.
If the insurer is working effectively and has a catastrophe team of adjus-
ters in place, you and your client should receive contact from an adjuster
within twenty-four hours of the notice. The first call should arrange an
appointment to inspect the property, as soon as possible. You should have
the entire property available for the inspection. If emergency efforts are
required, obtain the adjuster’s assistance in doing so to protect against
further loss and to inventory the personal property.
If possible, you should arrange to have one or more contractors present
at the first meeting to determine the extent of the damage. In major ca-
tastrophes, this is difficult because contracting personnel are stretched to
the breaking point. If the damage is extensive, it may be cost-effective for
the client to retain the services of a public insurance adjuster. If you de-
termine a public insurance adjuster would be helpful, it is appropriate to
seek one who is a member of the National Association of Public Insurance
24. Hartford Ins. Co. v. Sheffield, 808 So. 2d 891 (Miss. 2001); Lawler v. Gov’t Emp. Ins.
Co., 569 So. 2d 1151 (Miss. 1990); Harris v. Am. Motorist Ins. Co., 126 So. 2d 870, 874
25. Midwest Emp. Cas. v. E. Ala. Health Care, 695 So. 2d 1169 (Ala. 1997).
26. Great Am. Ins. Co. v. Tate Constr. Co., 279 S.E.2d 769 (N.C. 1981).
27. See, e.g., Cal Code Regs. tit 10, §§ 2695.1–2695.10 (2006).
28. Hawthorne v. S.E. Fid. Ins. Co., 387 So. 2d 26 (La. Ct. App. 1980).
826 Tort Trial & Insurance Practice Law Journal, Spring 2006 (41:3)
Adjusters (NAPIA),29 a professional membership organization. Your client
also may need the services of a construction consultant experienced in
presenting claims documentation for policyholders or insurers in the claims
The public insurance adjuster will expect a percentage of the amounts
paid by the insurer. You must recognize that the public insurance adjuster
will ask for ten percent to fifteen percent of the gross recovery as a fee.
That fee is negotiable. Considering the volume of work in a catastrophe,
you should be able to negotiate a fee between three percent and ten per-
cent, and should never agree to percentages in excess of the amount a public
adjuster can charge by law. The construction consultant will usually bill
for his services by the hour.
v. insurance company response
The insurer should respond to typical catastrophe claims by written or
verbal contact within twenty-four hours of the notice of the claim. The
insurer should share information regarding emergency repairs, additional
living expenses, temporary advance payments, and prevention of further
loss with you and your client. If the insurer does not share the information
with you, as counsel for the insured, you should respectfully request the
information in writing.
The insurer should advise you and your client of the responsibilities of
the insured under the policy. In those states that have adopted the NAIC
Model Fair Claims Practices Regulations, they are obligated to do so. Many
require their representatives to be at your home within twenty-four to
seventy-two hours of notice of claim.30 If you explain that your client’s fire
or other catastrophe loss is severe, the insurer should attempt to have a
representative at your client’s house within twenty-four hours or less. If
they cannot, because of the extent of the catastrophe, the insurer should
advise you of the problem and when the insurer can get to your client.
The insurer is obligated by statute, state administrative regulations, or
the terms of the policy to determine whether the claim is covered and
provide an initial estimate of damage within seven to fourteen days after
the insurer’s first on-site visit. This first estimate is subject to change.
Within the same time frame, the insurer should attempt to provide you
and your client with a written statement confirming or denying coverage.
29. Detailed information is available at http://www.napia.com. Members of this organiza-
tion are obligated to comply with a professional code of conduct. See Nat’l Ass’n of Public
Ins. Adjusters, Rules of Professional Conduct and Ethics, available at http://www.napia.com/
learn/code-conduct.asp (last visited May 23, 2006).
30. See Ga. Code Ann. § 33–34–6 (2005); La. Rev. Stat. Ann. § 22–658 (West 2003);
Miss. Code Ann. §§ 83–11–501, 83–11–503 (2005).
Representing Insureds in a Catastrophe 827
These time limits are usually waived by the state department of insurance
in catastrophes and may be impossible to meet with regard to major ca-
tastrophes such as those experienced in 2005.
You should expect the insurer to return all phone calls within twenty-
four hours, even though most of the Fair Claims Practices Regulations give
them up to fifteen calendar days. Initial contact may be with the insurance
agent, broker, a claims office, or the toll-free phone number printed on
the policy. Because of the volume of claims after a catastrophe, this time
frame will probably not be feasible.
vi. first contact with the adjuster
Your first contact with the adjuster is usually an informative meeting where
you, your client, and the adjuster discuss the cause of the loss, the type of
loss, and when the loss was discovered, and make an initial effort to agree
on a tentative scope of loss. It is at this time that any problems with cov-
erage will arise. You and the adjuster should be ready to discuss the issues
of coverage professionally.
A scope of loss is an agreement between the insured and the insurer on
the general types of damage, extent of damage, and types of repair needed
to bring the structure back to its condition before the loss. It is the obli-
gation of the adjuster to work with the insured to obtain an agreed scope
of loss at or near the first meeting.
You should anticipate the following, whether there is a coverage issue or
1. The adjuster should ask for a walk-through inspection of the entire
2. You should make every effort at the walk through to point out each item
of damage or suspected damage to assist the adjuster in preparing a
complete scope of loss.
3. You should assist the adjuster in viewing both the damage and the source
of the damage.
4. You should ask your client to submit to a recorded statement to obtain
details about the cause and extent of the loss.
5. You should ask for the identities of each of the insured’s family members
or vendors who can provide information about the loss. Depending on
the facts and the policy coverages, the insurer may ask for the recorded
statements of those persons.
6. You should ask permission to allow the insurer’s experts to inspect the
property and do minor destructive testing to establish the appropriate
methods of reconstruction and repair.
7. You should ask permission to contact others who know information
about the loss and to obtain from those people within your client’s con-
828 Tort Trial & Insurance Practice Law Journal, Spring 2006 (41:3)
trol a detailed recorded statement and documents relating to their
knowledge of the loss and the extent of the loss.
The requests for assistance and cooperation are reasonable and will assist
your client. The insurer may require one or more recorded statements
from your client. You should prepare your client for the recorded statement
as you would for a deposition. You should always be present during the
recorded statement and demand a copy of the tape and a transcript of the
statement to review. When the recording is complete, ask the adjuster to
break out the tab on the tape so nothing can be recorded over the state-
ment. Ask the adjuster and your client to place a signature and date on the
tape label if done in person. Since your client has a right to review and
correct the recorded statement, you should ask that a transcript of any
recorded statement be prepared and make clear to the adjuster that the
statement is not complete until it is reviewed, corrected, and signed.
An adjuster is a person who should have been professionally trained to
assess the damage to your client’s property. Some are better trained and
more knowledgeable than others. The adjuster probably will visit your
client’s property before he is asked to complete any forms. Often when
the losses in the area are total losses, the inspection may be a drive-
through of an entire neighborhood and the need for a joint inspection
will be unnecessary.
The more information you and your client have about the damaged
property, the sooner the claim will be settled. The adjuster generally will
come prepared to do a thorough and complete evaluation of the damage
to the property. If the adjuster is unable to complete a thorough inspection
due to time constraints or the extent of damage, the adjuster will prepare
a scope of loss report and retain the services of experts to help complete
the scope. This is a brief listing of the findings of damage determined at
the initial inspection. The adjuster will ask your client to agree to the scope
of loss. If your client was prepared before the loss, this task will be simple.
If not, it will be difficult and based on memory and the remains of the
property. When your client agrees to a scope of loss, the insured is not
presenting a claim. It should be understood by the adjuster and the insured
that the scope is incomplete and will be modified as new damage is dis-
covered. It is usually supplemented with a second visit after the reports of
experts are received to complete the inspection.
The scope of loss should include a detailed description of, at least, the
• degree of damage;
• each location where damage was observed;
• the adjuster’s and your client’s best estimates of the type of damage observed;
• a list of all personal property damaged or destroyed;
Representing Insureds in a Catastrophe 829
• the quality of the materials and workmanship; and
• measurements needed to calculate quantities, including length, width, and
height of rooms and the number of openings (windows and doors) in each
The scope of loss differs from the finished estimate in two ways. The
scope does not necessarily list any prices, although prices can be used to
describe quality. The scope does not list the calculated quantities; it in-
cludes just the raw counts and measurements needed to calculate quantities
for the estimate. The scope is the outline used by the claims person, and
the contractors and other experts who eventually will bid to do the repairs,
to reach an agreed repair amount.
vii. protect all property from further damage
Every policy requires the insured to protect the property from further loss.
You should advise your client to turn off any utilities to the structure,
arrange to have openings in roofs or walls covered to protect from rain
damage, and seek help from the adjuster to further protect the property.
An insured is obligated, at the expense of the insurer, to take any necessary
emergency measures to protect the building and personal property from
further damage. If such efforts are needed, your client must keep copies of
all invoices, receipts, or other evidence of money spent to do so, in order
to be reimbursed. Instruct the insured to throw nothing damaged away
until permission of the insurance company is obtained, in writing, and your
client and the insurer have documented its condition. If the damaged prop-
erty presents a hazard to the health or safety, an exception exists and the
property being thrown away should be documented with photographs,
video tape, or other evidence.
If the insurer delays or refuses to authorize measures to prevent further
loss, confirm the insurer’s delay in writing, and take whatever reasonable
measures your client can afford to protect the property. It is not unusual
for an insurer to deny coverage for a part, or all, of the damage resulting
after the initial claim on the grounds that an insured failed to comply with
the requirement to protect the property from further damage.
viii. document the loss
If your client prepared an inventory before the catastrophe or took pictures
of the contents before the loss, it will be simple to provide the adjuster
with documentation of the loss. If not, have your client, a private investi-
gator, or public adjuster photograph, videotape, and inventory all damaged
property or debris available after the loss. Be certain that your client or a
830 Tort Trial & Insurance Practice Law Journal, Spring 2006 (41:3)
professional records the date of the photos and videotape. It is important
and essential to document the source and the extent of damage.
In most states, a material misrepresentation, concealment, or omission
made in connection with a claim will give the insurer a valid reason to
reject the entire claim and declare the policy void. For example, claiming
that an item was destroyed that really was not or substantially overstating
the value of a damaged item would constitute fraud. Almost every policy
issued in the United States contains language like that in the New York
Standard Fire Insurance Policy:
Concealment, fraud. This entire policy shall be void if, whether before or after
a loss, the insured has willfully concealed or misrepresented any material fact
or circumstance concerning this insurance or the subject thereof, or the in-
terest of the insured therein, or in case of any fraud or false swearing by the
insured relating thereto.31
In most states, insurance fraud is a crime. No catastrophe is so bad as to
allow an insured to risk loss of all coverage or criminal prosecution to make
up for uninsured losses. It is imperative that counsel warn the client of the
exposure he faces if he tries to inflate a claim or otherwise defraud the
insurer. Counsel should never allow a client to exaggerate, speculate, or
guess about the loss or value of any particular piece of property. If your
client cannot recall or failed to maintain records in a safe place away from
the damaged structure, your client should make it clear to the insurer, in
writing, when his recollection may not be accurate or when he is estimating
value. When your client estimates value, the insurer should be advised
about the basis for the estimate. For the value of items your client is not
sure about on a claim presentation, use the phrase “To Be Determined” or
“To Be Agreed.” If your client does not have receipts to show the price of
an item, information can be found in catalogs, statements from retail clerks,
bank statements, credit card statements, or statements from family mem-
bers or friends. If all else fails, a formal appraisal can be obtained from a
professional personal property appraiser. Save this as a last resort, since the
insurer usually will refuse reimbursement for the costs of hiring an ap-
praiser, but may hire one at no cost to your client if asked courteously.
ix. your client must cooperate with the insurance
company’s investigation and handling of the claim
The insurance policy imposes on your client a contractual obligation to
cooperate in the investigation and handling of the claim.32 You should rec-
31. N.Y. Ins. Law § 3404 (McKinney 2000).
32. Am. Fire & Cas. Co. v. Collura, 163 So. 2d 784 (Fla. Dist. Ct. App. 1964); Emp. Mut.
Cas. Co. v. Ainsworth, 164 So. 2d 412 (Miss. 1964); Trosclair v. CNA Ins. Co., 637 So. 2d
1168 (La. Ct. App. 1994).
Representing Insureds in a Catastrophe 831
ognize that the burden of proof of violation of the cooperation provision
rests on the insurer.33 In most states, there is a mutual obligation to act in
good faith and deal fairly with each other to investigate and process the
claim. Both should avoid taking unreasonable positions or doing or saying
anything that would in any way frustrate each other’s rights under the
Your client also may be required to appear for an “Examination Under
Oath” (EUO). The reason for the EUO is to allow the insurer to cross-
examine, as it were, the documents submitted by the insured in proof of
his or her claim.34 The insurer may, but is not required to, hire an attorney
to take the EUO. The insurer will not pay for your services as the attorney
for the insured. Attorney fees are seldom authorized or awarded unless the
insured can prove that the insurer acted in violation of the covenant of
good faith and fair dealing.35
Your client should not appear for an EUO until you have explained to
him all rights under the policy, the insurance coverage, and the full extent
of the claim. An insured should never refuse to appear at an EUO. To do
so is a breach of a material condition precedent to indemnity and the in-
surer may reject the claim. Your client may request a delay in appearance
at an EUO to obtain the services of counsel or a public insurance adjuster.
You should prepare your client to testify at the EUO as you would for an
adversarial deposition, although an EUO is an investigative, not an adver-
The insurer may ask your client to produce various documents related
to the claim, including bank statements, investment reports, receipts, and
other personal financial documents. Your client is required by the condi-
tions of the policy to produce any documentation reasonably related to the
insurer’s investigation of the claim. Your client should not provide these
documents to the insurer until he understands the rights, duties, and ob-
ligations imposed by the insurance coverage and the full extent of the claim.
You should never allow your client to refuse to produce documents unrea-
sonably since the requirement for document production is a condition pre-
cedent to the insurer’s obligation to provide a defense and/or indemnity.
The New York Standard Fire Policy provides as follows:
The insured, as often as may be reasonably required, shall exhibit to any person
designated by this company all that remains of any property herein described
and submit to examination under oath by any person named by this company,
and subscribe the same; and as often as may be reasonably required, shall
33. Ainsworth, 164 So. 2d at 417–18.
34. Claflin v. Commonwealth Ins. Co., 110 U.S. 81, 94–95 (1884); Hickman v. London
Assurance Corp., 195 P. 45, 47–48 (Cal. 1920) (citations omitted).
35. Brandt v. Superior Court, 693 P.2d 796 (Cal. 1985).
832 Tort Trial & Insurance Practice Law Journal, Spring 2006 (41:3)
produce for examination and copying all books of account, bills, invoices, and
other vouchers. . . .36
Similarly, the 1991 edition of the homeowners policy provides, in lan-
guage that is easy to read:
2. Your Duties After Loss. In case of a loss to covered property, you must
see that the following are done:
f. As often as we reasonably require:
(1) Show the damage property.
(2) Provide us with records and documents we request and permit us
to make copies; and
(3) Submit to examination under oath, while not in the presence of
any other “insured” and sign the same.37
The U.S. Supreme Court explained the EUO over a century ago in
Claflin v. Commonwealth Insurance Co.:
The object of the provisions in the policies of insurance, requiring the assured
to submit himself to an examination under oath, to be reduced to writing, was
to enable the company to possess itself of all knowledge, and all information
as to other sources and means of knowledge, in regard to the facts, material
to their rights, to enable them to decide upon their obligations, and to protect
them against false claims. And every interrogatory that was relevant and pertinent
in such an examination was material, in the sense that a true answer to it was of the
substance of the obligation of the assured. A false answer as to any matter of fact
material to the inquiry, knowingly and willfully made, with intent to deceive
the insurer, would be fraudulent.38
The position taken by the Court in Claflin has been followed by every
court that has considered it to date. In Gipps Brewing Corp. v. Central Man-
ufacturers Mutual Insurance Co., the Seventh Circuit stated:
We think there is no escape from the conclusion that these witnesses pur-
posefully refused to answer questions which were material to the inquiry. We
see no basis for refusal to answer upon the ground that they were controversial
or that the answers thereto might have been used for the purpose of impeach-
ment. Such a limitation would seriously impair and perhaps destroy defen-
dants’ right under this provision of the policy. . . . We would think that defen-
dants had a right to examine as to any matter material to their liability, as well
as to its extent.39
36. N.Y. Ins. Law § 3404 (McKinney 2000).
37. ISO Form HO 00 03 04 91, p. 9 of 10.
38. 110 U.S. at 94–95 (emphasis added).
39. 147 F.2d 6, 13 (7th Cir. 1945).
Representing Insureds in a Catastrophe 833
In Kisting v. Westchester Fire Insurance Co.,40 the federal district court for
the Western Distict of Wisconsin granted summary judgment because of
the refusal of the insured to answer material questions. In so doing, the
court stated: “It is well settled in other jurisdictions that non-compliance
with a provision in an insurance policy requiring the insured to submit to
an examination under oath precludes recovery by the insured.”41 In Hudson
Tire Mart, Inc. v. Aetna Casualty & Surety Co.,42 the insured sought injunc-
tive relief against the EUO provision of the standard fire policy because it
would deprive him of his Fifth Amendment right against self incrimination.
The court rejected the request and held that
The purpose of the Cooperation Clause is to enable the insurer to obtain all
knowledge and facts concerning the cause of the fire and the loss involved
while the information is fresh in order to protect itself from fraudulent and
false claims. . . . Only after the incriminating question is asked, is he in a po-
sition to assert his immunity and seek a protective order. Consequently at this
stage of the proceedings the dilemma which the appellant attempts to present
is a fictitious one.43
The failure to appear at an EUO was held to be an absolute defense in
Lentini Brothers Moving & Storage Co., Inc. v. New York Property Insurance
Underwriting Assoc.,44 where the court stated: “Compliance with the policy
provisions is a condition precedent to recovery. No compliance with the
provisions as to written proof of loss or sworn examination occurred. Thus,
recovery is barred.”45
x. an examination under oath is a serious and
important part of the insurer’s investigation
The attorney, adjuster, or investigator who takes the EUO will appear to
be taking the role of a litigator without the usual restraints of rules of civil
procedure. Unlike litigation, there are no rules that cover the taking of an
EUO and the insured is obligated to answer the questions posed as long
as they are minimally relevant to the claim or the policy.46 A false statement
as to any material fact during the examination under oath can cause the
policy to be declared void, even if the fact has no relationship to the loss.
40. 290 F. Supp. 141 (W.D. Wis. 1968).
41. Id. at 147.
42. 518 F.2d 671 (2d Cir. 1975).
43. Id. at 674 (citations omitted).
44. 428 N.Y.S.2d 684 (App. Div. 1980), aff ’d, 53 N.Y.2d 835 (1981).
45. Id. at 687.
46. Hickman v. London Assurance Corp., 195 P. 45 (Cal. 1920).
834 Tort Trial & Insurance Practice Law Journal, Spring 2006 (41:3)
In Claflin,47 the false testimony did not affect the amount payable under
the policy. The Supreme Court found that the false testimony, even though
reliance on the testimony would not have affected the claim payment, was
material to the investigation and allowed the insurer to declare the policy
void for fraud. The only restraint on the EUO is reasonableness. Unlimited
questions are allowed. Only totally irrelevant and unreasonable questions
dealing with facts completely outside the policy, its acquisition, or the loss
are not favored. Irrelevant questions are tolerated if there is any possibility
the question may lead to an inquiry about facts relevant to the policy or
The examination under oath is required by an insurer when
• the insured has insufficient documentary evidence or is unable to present
documentary evidence to prove his loss;
• the insured refuses to cooperate;
• the insured needs help proving his or her loss;
• the insurer has no other means of “cross examining” the proof of loss sub-
mitted by the insured; or
• the insurer is reasonably concerned that a claim is fraudulent.
xi. the people subject to examination under oath
The named insured and all those persons who fall within the policy defi-
nition of “insured” are all subject to EUO. Under some policies, employees
of the insured, but not employees of independent contractors, and any
person controlled by the insured can be compelled to testify at EUO.48 A
corporation must produce its officers for EUO. A failure to testify could
be charged to the insured, on general agency grounds.49
The EUO is often linked to fraud investigations. It also is used to sub-
stitute for records destroyed by the catastrophe. Counsel should advise the
client of the purpose of the EUO. If, on the other hand, the insurer has
brought its special investigative unit (SIU) into the claims investigation,
counsel can infer that fraud is suspected. More often than not, the EUO
will cause the insurer to make payment of full indemnity to the insured
since insurers prefer to pay claims than fight with their insureds.
xii. proof of loss requirement
Most first-party property policies require that the insured submit a sworn
proof of loss form to the insurer within a certain time either after the loss
or after being provided the form. During a catastrophe, especially when
47. Claflin v. Commonwealth Ins. Co., 110 U.S. 81 (1884).
48. 5A J. Appleman, Insurance Law and Practice, § 3552 (Rev. ed. 1970).
49. Gipps Brewing Corp. v. Cent. Mfrs.’ Mut. Ins. Co., 147 F.2d 6, 13 (7th Cir. 1945).
Representing Insureds in a Catastrophe 835
total losses are involved, insurers often will waive this requirement. You
should be wary, however, of flood insurance policies issued as part of the
National Flood Insurance Program (NFIP). They require the proof of loss
within sixty days of the loss and apply the condition in a draconian fash-
ion.50 The notice-prejudice rule does not apply to the NFIP policy con-
dition requiring a proof of loss within sixty days of the date of loss. If your
client cannot produce a proof of flood loss within sixty days of the loss, it
is imperative that you obtain an extension of time, in writing, from the
insurer. Failure to do so can cause your client to lose all rights under the
policy to obtain indemnity. As one court said:
We find that the theories of substantial compliance, waiver, and equitable es-
toppel are inapplicable to the facts presented herein. While this result may
seem harsh in light of the Gowlands’ ongoing negotiations with Aetna, we
must remind that the National Flood Insurance Program is federally subsi-
dized and enables consumers to obtain flood insurance which virtually would
be impossible to purchase in the marketplace. Requiring the Gowlands to turn
square corners when dealing with the Treasury “does not reflect a callous outlook. It
merely expresses the duty of all courts to observe the conditions defined by Congress for
charging the public treasury.” 51
On September 21, 2005, the NFIP announced that it was waiving proof-
of-loss requirements for victims of Hurricane Katrina and will instead rely
on claims adjuster reports, aerial photography, and information on water
depths to help expedite the process of paying claims.52
According to the NFIP, information from underwriting files will be used
along with photographic and topographical data to determine where it is
readily apparent that a covered property’s flood damage has exceeded the
amount of coverage purchased. The process would allow claims to be paid
on homes that have been washed off their foundations, have been inun-
dated by standing water for extended periods of time, or where only a slab
or the home’s pilings remain, even where no formal site visit has been
In most states, the insured is obligated to submit the sworn proof of loss
within the time limit (usually sixty days from the date of request), or at
least to substantially comply with the requirement, unless the insurer
agrees to dispense with the sworn proof of loss or extend the time. You
50. Suopys v. Omaha Prop. & Cas., 404 F.3d 805 (3d Cir. 2005); Flick v. Liberty Mut. Fire
Ins. Co., 205 F.3d 386 (9th Cir. 2000); and Gowland v. Aetna, 143 F.3d 951 (5th Cir. 1998).
51. Gowland v. Aetna, 143 F.3d 951, 955 (5th Cir. 1998) (quoting Federal Crop Ins. Corp.
v. Merrill, 332 U.S. 380, 385 (1947)) (emphasis added).
52. Press Release, National Flood Insurance Program, NFIP Announces Simplified Adjust-
ment Process (Sept. 20, 2005), available at http://www.floodsmart.gov/floodsmart/pages/pr_
836 Tort Trial & Insurance Practice Law Journal, Spring 2006 (41:3)
should not submit the sworn proof of loss to the insurer until you under-
stand all of the rights and obligations imposed by the policy, the insurance
coverages, and the full extent of the claim. It is not unusual for an insurer
to consider mistakes in the sworn proof of loss (since they are under oath)
as intentional misrepresentations sufficient to allow it to reject coverage
for a claim. A statement made under oath cannot, by definition, contain
an innocent misrepresentation. Never allow the insured to sign a sworn
proof of loss until you and the client have carefully read every word and
are certain that the statements made are true.
If your client refuses to comply with reasonable requests for a recorded
statement, an EUO, a sworn proof of loss, or documents reasonably related
to the insurer’s investigation, you and your client may give the insurer a
valid excuse to deny the claim based on the breach of material conditions.
If you believe that any requests made by the insurer are unreasonable, ask
the insurer to explain the reasons for the requests in writing. Err on the
side of caution and provide all documents that have some reasonable con-
nection to the policy or loss. If you are unsure, consult with an insurance
claims expert or claims consultant, a professional public adjuster, or the
state department of insurance before refusing a request that may have been
xiii. determining the amount of claim compensable
Many insureds believe that insurers make a practice of making inadequate
offers of settlement. Whether true or not, it is a good practice to get a
second, or even a third, written estimate to repair, replace (or both) dam-
aged property from reputable professionals that the insured would hire to
do the repairs if there were no insurance. The insured is entitled to have
the damaged property replaced with “like kind and quality”: that the
amount paid for the loss be sufficient to replace the property with property
of like kind and quality to the damaged property.54 When it is impossible
to match the remaining undamaged tile, wallpaper, carpeting, or other por-
tions of undamaged property, the insured is usually entitled to have the
entire “line of sight” replaced to match. For example, if a broken water
pipe destroys the hardwood floor in a kitchen and does no damage to the
contiguous hardwood floor in the adjoining family room, the insurer is
required to replace both the damaged and undamaged floors so that they
match as long as they are in a continuous line of sight.
Some losses are paid on an actual cash value (ACV) basis, which in some
states means the fair market value of the property at the time of loss, unless
the policy defines ACV differently. Many policies will define ACV as re-
54. Littleton v. Colonial Pac. Leasing Corp., 818 So. 2d 283 (La. Ct. App. 2002).
Representing Insureds in a Catastrophe 837
placement cost less physical depreciation for age, wear, and tear. Some
losses are paid out on a replacement cost value (RCV), where the insured
is paid the difference between actual cash value and replacement cost value
after the insured has spent money to complete the replacement. The in-
sured may collect the ACV loss immediately and advise the insurer he
intends to make claim for the difference between ACV and RCV when the
structure is rebuilt. If the policy has a time limit for rebuilding, be sure to
get a written extension of time since, after a catastrophe, the rebuilding
process is often severely delayed.
Insurers, working without legislative or judicial direction, created a
working definition of the term “actual cash value:” “the cost to replace with
like kind and quality less physical depreciation.”55 They recognized that
“actual cash value” in a fire insurance policy was designed to establish a
dollar value for items of destroyed property that were not new at the time
of loss. Since the insurers had no easy means to establish the used value of
property, in many policies actual cash value was paired with the option of
repairing or replacing property with property of like kind and quality less
This did not always provide the complete indemnity contemplated by
the insurers and by the various legislatures, but was eminently practical. A
burned-out shell of a house only leaves clues as to what its actual cash value
was before the fire. A house washed away in a flood or blown away by
hurricane-force winds leaves no clue as to actual cash value. With minimal
investigation, the cost of actually rebuilding can be readily ascertained. If
the insurer paid to its insured the full cost of replacement (since the number
was easy to compute), it would violate the traditional concept of indemnity.
Payment of replacement cost puts the insured in a better position than he
was in before the loss. Deducting from the replacement cost a reasonable
percentage representing the physical depreciation comes as close as pos-
sible to providing the insured with true indemnity for the loss.
Rather than “depreciation,” experienced adjusters prefer to refer to the sum
deducted from the full replacement cost as “betterment.” This concept is
easier to explain to a layperson. Most insureds understand that payment of
replacement cost betters the insured’s property by replacing old with new.
The concept of physical depreciation is more difficult to explain. The con-
cept of “betterment” is not always an accurate measure of the true value
of a structure. It is, however, a logical concept that can be calculated to an
55. Jefferson Ins. Co. of N.Y. v. Superior Court, 3 Cal. 3d 398 (1970).
56. State Farm Mut. Auto. Ins. Co. v. Mabry, 556 S.E.2d 114 (Ga. 2001).
838 Tort Trial & Insurance Practice Law Journal, Spring 2006 (41:3)
almost exact amount. Every physical item has a finite life span. It was
reasoned that if a percentage of the life span has elapsed, it would be fair
and reasonable, in computing actual cash value, to simply subtract from
replacement cost that percentage of the replacement cost that had already
been expended by use. It is a logical method that a property owner can
understand. Replacement cost less depreciation became widely accepted in
California as a means of determining actual cash value.
This method does not provide an absolutely accurate determination of
“value.” A two-week-old sofa would incur no physical depreciation, but its
market value declines by almost fifty percent the moment it is delivered.
On the other hand, a 100-year-old sofa may have used all of its anticipated
life and have no value after depreciation but, because of its antiquity, might
have a very high market value. The rule of thumb was, however, a fair and
reasonable method of providing indemnity to the insured as long as the
adjuster was given the opportunity to amend it to provide indemnity as
facts required. Because the meaning of “betterment,” although grounded
in calculations of life spans of property, became, in practice, a subjective
test applied irregularly by adjusters across the states, the adjuster and the
insured were able to allow for consideration of mitigating facts. With such
mitigating factors to consider, the insured and the insurer were able to
adjust their differences until they were both satisfied that the insured was
indemnified for the loss.
In 1962, courts began to struggle with the working definition of “actual
cash value.” Injustice was perceived to have been imposed on insureds by
the working definition, and the courts attempted to cure what was felt to
be a wrong. The struggle in California is instructive to lawyers in any state.
Referring to the lack of the words “with proper deduction for depreci-
ation” in the California Standard Fire Insurance Policy,57 but not most
policies that insure against the risk of loss of real property, the California
Court of Appeal concluded:
[T]he standard clause contained in the majority of insurance policies limits
liability to “actual cash value, with proper deduction for depreciation.” Since
appellant chose to omit this provision from its policy, the logical assumption
would be that it intended to limit its liability to actual cash value without de-
duction for depreciation.58
The “choice” to which the court refers was the exclusion of this language
from the standard fire insurance policy.
57. The California Standard Fire Insurance Policy is almost identical to the New York
Standard Fire Policy and has been adopted in many states.
58. Hughes v. Potomac Ins. Co., 18 Cal. Rptr. 650, 651 (1962) (quoting J.A. Tyler, An-
notation, Test or Criterion of “Actual Cash Value” Under Insurance Policy Insuring to Extent of
Actual Cash Value at Time of Loss, 61 A.L.R. 2d 714 n.3 (1958)).
Representing Insureds in a Catastrophe 839
The Tenth Circuit Court of Appeals was asked to decide whether the
costs associated with the removal of damaged shingles or the labor costs
incurred in installing new shingles were properly subject to depreciation
under the actual cash value provision of a dwelling policy.59 The court
certified questions on these issues to the Oklahoma Supreme Court and
was told that the cost of labor to install new shingles was depreciable, while
the cost to remove damaged shingles was not.60 The opinions of these
courts reflect the difficulty in applying the solution adjusters used for de-
cades in reaching actual cash value settlements by taking betterment from
the full cost of replacement. Since the cost of building a roof includes labor
to both remove old and replace with new, it is strange to allow depreciation
of the labor to install the new shingles but not the cost of labor to remove
It is the adjuster’s job to convince you and your client that the application
of depreciation is fair and, if agreement cannot be reached, to propose a
fair settlement. To allow such a minor matter to go to suit for damages,
including bad faith tort damages, is a mark of a failure of the adjuster’s skill
or the greed of the insured or counsel for the insured. When such an
impasse arises, prudent counsel will suggest mediation before commencing
In New York, several homeowners sustained storm damage to buildings
on their properties. They filed a class action against their insurer, State
Farm, alleging the exclusion of profit and overhead expenses of a general
contractor in calculating the actual cash value of the plaintiffs’ damaged
property was bad faith.62 The policies issued by State Farm agreed to pay
the cost to repair or replace the damaged property. The insured could only
collect actual cash value until they actually replaced the property. The trial
court granted summary judgment for plaintiffs on their breach of contract
claims and certified the proposed class.
The Appellate Division of the New York Supreme Court found that the
term “replacement cost” can reasonably be interpreted to include profit
and overhead whenever it is reasonably likely that a general contractor will
be needed to repair or replace the damage. It held: “we find that the term
‘replacement cost’—as opposed to ‘actual replacement cost’—in defen-
dant’s policies can reasonably be interpreted to include profit and overhead
59. Davis v. Mid-Century Insurance Co., 311 F.3d 1250 (10th Cir. 2002); Branch v. Farm-
ers Ins. Co., Inc., 311 F.3d 1241 (10th Cir. 2002) (companion case to Davis); Branch v. Farmers
Ins. Co., 55 P.3d 1023 (Okla. 2002) (answering certified questions from the Tenth Circuit for
60. Branch, 55 P.3d at 1028.
62. Mazzocki v. State Farm Fire & Cas. Co., 766 N.Y.S.2d 719 (App. Div. 2003).
840 Tort Trial & Insurance Practice Law Journal, Spring 2006 (41:3)
whenever it is reasonably likely that a general contractor will be needed to
repair or replace the damage.”63
It is imperative when applying depreciation to determine actual cash
value that counsel ascertain that the adjuster included all reasonable costs
and depreciated those costs if the policy contains a definition that includes
subtraction of physical depreciation. Taking out the “profit and overhead”
in a contractor’s bid bears no relation to the determination of actual cash
value or the true profit or overhead of the contractor.64
Counsel should recognize that use of arbitrary methods of obtaining
actual cash value, as State Farm did in Mazzocki, is fraught with danger for
the insurer and should be discouraged. If the insurer insists on using such
methods, it may leave the insured with no choice but to file a suit for breach
of contract, and if available in the state, a cause of action for bad faith
seeking extra-contractual damages.
There is no basis for simply withholding profit and overhead as a means
of calculating actual cash value. In fact, modern insurance policies that
actually provide a definition for actual cash value define it as (1) replace-
ment cost less physical depreciation, (2) replacement cost less betterment,
(3) fair market value, or (4) a combination of the various definitions. When
there is no policy definition, courts will apply one or more of the four
xv. investigate contractors
It is almost axiomatic that dishonest, incompetent, or unqualified contrac-
tors flock to disaster sites. Counsel, and the insured, must thoroughly in-
vestigate the qualifications, license, and references of the insurance com-
pany’s approved contractor or any contractor your client calls to bid, before
allowing your client to sign a contract to allow the contractor to perform
the repairs. Most states have an agency that will usually provide the con-
sumer, by telephone or over the Internet, with the contractor’s license
status and history of discipline. At a minimum, the licensing entity and a
reference should be checked before a contract is signed. Your client does
63. Id. at 722.
64. When contractors write estimates for insurance companies, they always add at the end
of their estimate a sum equal to ten percent of the basic contract price for “overhead,” and
an additional ten percent of the basic contract price for “profit.” This technique is a fiction
believed only by contractors and adjusters. Counsel representing an insured whose policy only
pays actual cash value or where the insured needs to collect actual cash value to fund repair
so the insured can later collect the difference between replacement cost value and actual cash
value must recognize this. Counsel also should recognize that, in reality, profit and overhead
are usually incorporated in the unit costs in the contractor’s bid and the twenty percent is a
bonus on top of the profit and overhead built into the basic unit costs. Once this fact is
recognized, the calculation of actual cash value by use of replacement cost less physical de-
preciation should be a multiplier of the total bid.
Representing Insureds in a Catastrophe 841
not have to use consultants or contractors recommended or approved by
the insurer to perform repairs, but may find them the most qualified after
Approved contractors are typically contractors who have agreed to dis-
count their labor and costs and follow insurer guidelines in exchange for a
volume of business from the insurance company. If the insurer promises
to guarantee the approved contractor’s work, the guarantee is generally
limited to replacing any defective materials or correcting faulty workman-
ship. The insurer is not insuring against any contractor delays, negligence,
or liability. Accordingly, do not allow your client to use the approved con-
tractor unless it is a contractor that you or your client would independently
hire to do the work after a thorough screening.
xvi. be aware of deadlines
Make sure you know all the deadlines that may cut off the right to file a
lawsuit. California, for example, has a four-year statute of limitations for
breaches of written contracts, but most insurance policies issued in Cali-
fornia and across the nation contain private limitation of action provisions
that require suit within one or two years of the loss or the denial of a claim.
If your client’s claim is denied, do not limit your research to the statute of
limitations where the loss occurred.65 Read the insurance policy and be
certain to file suit within the time limits set by the policy or extended by
In most states, the insurance company is required to tell you and your
client, in writing, that the claim is denied, and that the limitations clock is
running. Some states assume that you, as a lawyer, know what the law is
and do not require notice to represented parties. Regardless of the law, the
prudent lawyer will not rely on the insurer’s representatives but will pro-
tect the client with actual research and an analytical review of the policy
xvii. report all unfair claims handling to the
department of insurance or the appropriate
The state insurance department tracks policyholder complaints about their
insurers and compile the results. Most states have proactive consumer ad-
vocates in their insurance departments who will jump in to help you if they
believe the insurer is not treating your client fairly.
65. Ellis v. U.S. Auto. Ass’n, 909 So. 2d 593, 597 (Fla. Dist. Ct. App. 2005) (where a traffic
accident occurred in Georgia, a Florida insured’s action against the insurer for uninsured
motorist benefits was controlled by Florida’s statute of limitations).
842 Tort Trial & Insurance Practice Law Journal, Spring 2006 (41:3)
If counsel and the insured present a claim properly and if the insurer is
reasonable and professional, the claim will be settled promptly. Often, your
client will be pleasantly surprised by the speed and generosity of the
Many insurers involved in catastrophes provide their adjusters with
policy limit authority and instruct the adjuster to be generous. If your
client’s property was one of those totally destroyed and coverage is avail-
able, there is a good probability that the claim will be settled without
need for litigation.
If your client failed to carry sufficient insurance to totally rebuild the
property, you may be able to convince the insurer to pay more than its
limits, if you can establish that it or its agent selected the policy limits. In
addition, claims can be made to Federal Emergency Management Agency
for a grant for the difference between the insurance policy limits and the
actual cost to rebuild. If grants are not available, low-interest loans for the
difference will be available from the Small Business Administration.
A lawyer knowledgeable about insurance and insurance claims can better
deal with an insurance company. The insured should be advised to resist
the temptation to take advantage of the insurer in a catastrophe because
insurers and state regulators are highly attuned to the potential for fraud.
No amount of money obtained from a naive insurer during a catastrophe
is worth time in jail, if criminal fraud is exposed. Similarly, the lawyer and
the client insured should never let an insurer take advantage of them in
the claims negotiation.
The insured is entitled to indemnity. Counsel, the insured, and the in-
surer must work together to make the insured whole. However, a claim for
insurance benefits, whether it arises from a catastrophe or not, should not
be regarded as an opportunity to profit.
Litigation should be a last resort. You serve your client best by helping
the client and the insurer reach agreement on the loss. With a prompt
settlement, your client will be able to rebuild and move back into the family
home or the business into its commercial structure. Litigation is slow and
cumbersome. It should only be considered if the insurer acts wrongfully
or if it is the only means of resolution of the dispute between the insured
and the insurer.