Tag Archives: property damage

What Coverage Does a Consultancy Need?

Insuring a consulting firm can pose a challenge. Many professionals start a firm today out of necessity — creating their own employment. You take years of expertise and open a consultancy, often out of your home or in an office suite. This means a tight budget.

Insurance is one of the areas where entrepreneurs may try to cut costs, but, to protect your business, you need to have your insurance agent evaluate all the exposures you face and offer solid coverage solutions.

What does the professional liability policy cover?

The consultant and its employees provide a service or offer advice, but what if it is faulty? Any professional consultant needs professional liability coverage, also called errors and omissions.

The professional liability policy may be worded as follows:

“The company will pay on behalf of the insured any loss excess of the deductible not exceeding the limit of liability to which this coverage applies that the insured becomes legally obligated to pay because of claims made against the insured during the policy period for wrongful acts of an insured or because of personal injury arising out of wrongful acts of an insured.”

In addition, the policy may say, “Coverage for allegations of bodily injury, sickness, disease, or death of any person, or damage to or destruction of any tangible property, including the loss of use….”‘

This wording shows the limited scope of the professional liability policy. The intent is to cover only negligent professional or “wrongful” acts. The policy also provides limited protection for personal injury, such as libel or slander, committed by the insured against a third party.

What does the commercial general liability (CGL) policy cover?

The CGL covers bodily injury to a person or damage to the property of others caused by a firm’s negligence. As courts have ruled repeatedly, the CGL policy is not a performance bond. A CGL policy is not intended to cover the quality of a company’s advice or service. This helps constrain the contractor from low-bidding a job, performing poorly and then relying on the insurance carrier to cover that risk.

Look first at CGL policy language under the insuring agreement, the heart of the policy:

“We will pay those sums that the insured becomes legally obligated to pay as compensatory damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.”

Here are a few of the exposures covered under the CGL:

  • Premises and operations liability for persons injured or items damaged while on your business premises or because of your business operations.
  • Additional insured coverage when you sign certain written contracts or agreements such as leases.
  • Tenant’s liability in the event the business operations, for example, accidentally start a fire in rented premises.
  • Host liquor liability if you are not in the liquor business.
  • Defense for covered claims.
  • Bonds and court courts associated with a claim.
  • Limited financial remuneration when assisting your carrier in the defense of a claim.

In addition to bodily injury and property damage, the CGL covers personal injury liability, including libel and slander, as well as advertising injury. The CGL offers consultancies broad coverage and peace of mind. You can run your business knowing that help is available in the event of a broad range of losses.

Althought there is a great deal of uniformity between professional liability forms and commercial general liability forms, all carriers use a variety of forms. Coverage can vary widely from one insurance carrier to another, so an agent should be able to help you determine the coverage differences and help you make a strong choice to protect your growing consultancy.

What are some CGL exclusions?

There are many exclusions under the CGL, and to understand each one is tricky. Forms differ and jurisdictions that hear lawsuits vary greatly. However, here are some general exclusions:

  • Intentional injury — When a business owner acts in self-defense, there is generally coverage. For example, suppose a robber breaks into the darkened firm and brandishes a knife at the owner, who is catnapping. He heaves a computer monitor at the burglar and injures the burglar. Carriers should defend the case unless it appears the insured intended to inflict malicious injury.
  • Care, custody and control of property owned by others — For the consultancy that repairs computers or other equipment, bailee coverage may be necessary.
  • Faulty workmanship.
  • Liability arising from an aircraft, auto or watercraft — If you use any of those conveyances in your business, you’ll require specific coverage to protect your assets. However, if you provide an automobile to an employee who gets in an accident, you may have coverage, depending on the coverage form and the jurisdiction.

While the CGL policy offers the majority of consultancies broad coverage, your agent must evaluate each risk carefully to ensure the CGL adequately protects the consultancy’s unique exposures.

The CGL may still lack scope

As your consultancy grows, the CGL is only part of your coverage solution. The CGL will not cover every exposure you face, especially once you hire employees.

In most states, after you hire either one or a small number of employees, the state mandates workers’ compensation coverage. In addition, employment practices coverage is important in today’s complicated employment arena. There is no coverage under the CGL for most employment exposures like a wrongful termination or a discrimination claim.

Your consultancy may start with only one computer and a printer, but as your firm grows so does its personal property. Don’t forget to insure your personal property, as well.

For firms with even the most trusted employees, crime policies are vital. For example, suppose you hire a bookkeeper to assist with accounting and administrative tasks. Unbeknownst to you, she likes to gamble. Over time, she begins to embezzle funds, and, before you know it, you are short thousands of dollars. Crime coverage is designed to defend and pay these types losses. The Association of Certified Fraud Examiners found that firms with fewer than 100 employees were frequently hit by fraud, accounting for 32% of the incidents they surveyed.

Clearly, the CGL offers broad coverage and peace of mind for any consulting firm, but there are many other risks your business faces that may require specialized coverages. An independent agent can help you sort out the risks.

One easy approach to coverage

If you own a consultancy, you may be confused about your unique coverage needs. The way many agents approach your coverage is to tell every new business owner he or she needs general liability coverage. Then they review the consultancy’s business operations to determine what additional coverage, such as professional liability, employment practices or workers’ compensation are required.

Because most consultants have auto insurance, to some extent you understand liability coverage. The CGL is more complicated, but the general principles of coverage for bodily injury and property damage are similar to the auto policy. For the new consultant, this comparison may be a good starting point to help you understand your company’s need for general liability coverage.

In today’s complex business environment, no consultancy should go without two types of coverage — professional and general liability — at a minimum. An experienced independent agent can help you ensure your business thrives and prospers in the coming years.

 

Another Reason to Consider Cyber Insurance

Here a breach, there a breach, everywhere a data breach.

Verizon’s most recent 2013 Data Breach Investigations Report remarks that “[p]erhaps more so than any other year, the large scale and diverse nature of data breaches and other network attacks took center stage” this year.1 And no organization is immune from a breach. The last two years have seen some of the world’s most sophisticated corporate giants fall victim to some of the largest data breaches in history. It is clear that cyber attacks — including data breaches — are on the rise with unprecedented frequency, sophistication and scale. They are pervasive across industries and geographical boundaries. And they represent “an ever-increasing threat.”2 The problem of cyber risks is exacerbated, not only by increasingly sophisticated cyber criminals and evolving malware, but also by the trend in outsourcing of data handling, processing and storage to third-party vendors, including “cloud” providers, and by the simple reality of the modern business world, which is full of portable devices such as cellphones, laptops, iPads, USB drives, jump drives, media cards, tablets and other devices that may facilitate the loss of sensitive information.

While data breaches and other types of cyber risks are increasing, laws and regulations governing data security and privacy are proliferating. In its most recent 2013 Cost of Data Breach Study, the Ponemon Institute reports that U.S. organizations spend on average $565,020 on post-breach notification alone.3 Companies may also face lawsuits seeking damages for invasion of privacy, as well as governmental and regulatory investigations, fines and penalties, damage to brand and reputation and other negative repercussions from a data breach, including those resulting from breaches of Payment Card Industry Data Security Standards. The Ponemon Institute’s recent study reports that the average organizational cost of a data breach in 2012 was $188 per record for U.S. organizations ($277 in the case of malicious attacks) and that the average number of breached records was 28,765, for a total of $5.4 milion.4 The study does not “include organizations that had data breaches in excess of 100,000” records,5 although large-scale breaches clearly are on the rise. In the face of these daunting facts and figures, it is abundantly clear that network security alone cannot entirely address the issue; no firewall is unbreachable, no security system impenetrable.

Insurance can play a vital role in a company’s efforts to mitigate cyber risk. This fact has the attention of the Securities and Exchange Commission. In the wake of “more frequent and severe cyber incidents,” the SEC’s Division of Corporation Finance has issued guidance on cybersecurity disclosures under the federal securities laws. The guidance advises that companies “should review, on an ongoing basis, the adequacy of their disclosure relating to cybersecurity risks and cyber incidents” and that “appropriate disclosures may include” a “[d]escription of relevant insurance coverage.”6

While some companies carry policies that are specifically designed to afford coverage for cyber risk, most companies have various forms of traditional insurance that may cover cyber risks, including Insurance Services Office (ISO)7 standard-form commercial general liability (CGL) policies. There may be significant coverage under CGL policies, including for data breaches that result in disclosure of personally identifiable information (commonly termed “PII”) and other claims alleging violation of a right to privacy. For example, there is significant potential coverage under the “Personal and Advertising Injury Liability” coverage section (Coverage B) of the standard-form ISO CGL policy, which currently states that the insurer “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘personal and advertising injury.’”8 “Personal and advertising injury” is defined to include a list of specifically enumerated offenses, which include “[o]ral or written publication, in any manner, of material that violates a person’s right of privacy.”9 Coverage disputes generally focus on whether there has been a “publication” that violates the claimant’s “right of privacy”—both terms are left undefined in standard-form ISO policies, and courts generally have construed the language favorably to insureds and have found coverage for a wide variety of claims alleging misuse of customer information and breach of privacy laws and regulations.10 There may also be coverage under the “Bodily Injury and Property Damage” section of the standard CGL form (Coverage A), which states that the insurer “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’” that “occurs during the policy period.”11

As courts have found coverage for various types of cyber risks, however, ISO has added limitations and exclusions purporting to cut off CGL lines of coverage. For example, in response to a number of cases upholding coverage for breach of the Telephone Consumer Protection Act, the Fair Credit Reporting Act and other privacy laws, the current ISO standard form contains the following exclusion, which is applicable to both Coverage A and Coverage B:

This insurance does not apply to:

Recording And Distribution Of Material Or Information In Violation Of Law

“Personal and advertising injury” arising directly or indirectly out of any action or omission that violates or is alleged to violate:

  1. The Telephone Consumer Protection Act (TCPA), including any amendment of or addition to such law;
  2. The CAN-SPAM Act of 2003, including any amendment of or addition to such law;
  3. The Fair Credit Reporting Act (FCRA), and any amendment of or addition to such law, including the Fair and Accurate Credit Transactions Act (FACTA); or
  4. Any federal, state or local statute, ordinance or regulation, other than the TCPA, CAN-SPAM Act of 2003 or FCRA and their amendments and additions, that addresses, prohibits or limits the printing, dissemination, disposal, collecting, recording, sending, transmitting, communicating or distribution of material or information.12

Insurers have raised this exclusion, among others, in recent privacy-breach cases.13

More sweepingly, as part of its April 2013 revisions to the CGL policy forms, ISO introduced an endorsement, titled “Amendment Of Personal And Advertising Injury Definition,” which entirely eliminates the key “offense” of “[o]ral or written publication, in any manner, of material that violates a person’s right of privacy” (found at Paragraph 14.e of the Definitions section of Coverage B):

With respect to Coverage B Personal And Advertising Injury Liability, Paragraph 14.e. of the Definitions section does not apply.14

And the latest: ISO has just filed a number of data-breach exclusionary endorsements for use with its standard-form primary, excess and umbrella CGL policies. These are to become effective in May 2014. By way of example, one of the endorsements, titled “Exclusion – Access Or Disclosure Of Confidential Or Personal Information And Data-Related Liability – Limited Bodily Injury Exception Not Included,” adds the following exclusion to Coverage A:

This insurance does not apply to:

Access Or Disclosure Of Confidential Or Personal Information And Data-related Liability

Damages arising out of:

(1) Any access to or disclosure of any person's or organization's confidential or personal information, including patents, trade secrets, processing methods, customer lists, financial information, credit card information, health information or any other type of nonpublic information; or

(2) The loss of, loss of use of, damage to, corruption of, inability to access or inability to manipulate electronic data.

This exclusion applies even if damages are claimed for notification costs, credit-monitoring expenses, forensic expenses, public relations expenses or any other loss, cost or expense incurred by you or others arising out of that which is described in Paragraph (1) or (2) above.15

The endorsement also adds the following exclusion to Coverage B: This insurance does not apply to:

Access Or Disclosure Of Confidential Or Personal Information

“Personal and advertising injury” arising out of any access to or disclosure of any person’s or organization's confidential or personal information, including patents, trade secrets, processing methods, customer lists, financial information, credit-card information, health information or any other type of nonpublic information.

This exclusion applies even if damages are claimed for notification costs, credit-monitoring expenses, forensic expenses, public relations expenses or any other loss, cost or expense incurred by you or others arising out of any access to or disclosure of any person's or organization's confidential or personal information.16

ISO states that “when this endorsement is attached, it will result in a reduction of coverage due to the deletion of an exception with respect to damages because of bodily injury arising out of loss of, loss of use of, damage to, corruption of, inability to access, or inability to manipulate electronic data” and that “[t]o the extent that any access or disclosure of confidential or personal information results in an oral or written publication that violates a person's right of privacy, this revision may be considered a reduction in personal and advertising injury coverage.”17 While acknowledging that coverage for data breaches is currently available under its standard forms, ISO explains that “[a]t the time the ISO CGL and [umbrella] policies were developed, certain hacking activities or data breaches were not prevalent and, therefore, coverages related to the access to or disclosure of personal or confidential information and associated with such events were not necessarily contemplated under the policy.”18 The scope of this exclusion ultimately will be determined by judicial review.

Although it may take some time for the new (or similar) exclusions to make their way into general liability policies, and the full reach of the exclusions remains unclear, they provide another reason for companies to carefully consider specialty cyber insurance products. Even where insurance policies do not contain the newer limitations or exclusions, insurers may argue that cyber risks are not covered under traditional policies. The legal dispute between Sony and its insurers concerning the PlayStation Network data breach highlights the challenges that companies can face in getting insurance companies to cover losses arising from cyber risks under CGL policies. Sony argues that there is data breach coverage because “[t]he MDL Amended Complaint… alleges that plaintiffs suffered the ‘loss of privacy’ as the result of the improper disclosure of their ‘Personal Information’ [which] has been held to constitute ‘material that violates a person’s right of privacy’.”19 However, the insurers seek a declaration that there is no coverage under the CGL policies at issue, among other reasons, on the basis that the underlying lawsuits “do not assert claims for … ‘personal and advertising injury’.”20 The Sony coverage suit does not represent the first time that insurers have refused to voluntarily pay claims resulting from a network security breach or other cyber-related liability under CGL policies. Nor will it be the last. Even where there is a good claim for coverage, insurers can be expected to continue to argue that cyber risks are not covered under CGL or other traditional policies.

As far as data breaches are concerned, cyber policies usually provide some form of “privacy” coverage. This coverage would typically provide defense and indemnity coverage for claims arising out of a data breach that actually or potentially compromises PII. By way of example, the AIG Specialty Risk Protector specimen policy21 states that the insurer will “pay … all Loss” that the “Insured is legally obligated to pay resulting from a Claim alleging … a Privacy Event.” “Privacy Event”22 includes:

  1. any failure to protect Confidential Information (whether by “phishing,” other social engineering technique or otherwise) including, without limitation, that which results in an identity theft or other wrongful emulation of the identity of an individual or corporation;
  2. failure to disclose an event referenced in Sub-paragraph (1) above in violation of any Security Breach Notice Law; or
  3. violation of any federal, state, foreign or local privacy statute alleged in connection with a Claim for compensatory damages, judgments, settlements, pre-judgment and post-judgment interest from Sub-paragraphs (1) or (2) above.23

“Confidential Information” is defined as follows:

“Confidential Information” means any of the following in a Company’s or Information Holder’s care, custody and control or for which a Company or Information Holder is legally responsible:

  1. information from which an individual may be uniquely and reliably identified or contacted, including, without limitation, an individual’s name, address, telephone number, Social Security number, account relationships, account numbers, account balances, account histories and passwords;
  2. information concerning an individual that would be considered “nonpublic personal information” within the meaning of Title V of the Gramm-Leach Bliley Act of 1999 (Public Law 106-102, 113 Stat. 1338) (as amended) and its implementing regulations;
  3. information concerning an individual that would be considered “protected health information” within Health Insurance Portability and Accountability Act of 1996 (as amended) and its implementing regulations;
  4. information used for authenticating customers for normal business transactions;
  5. any third party’s trade secrets, data, designs, interpretations, forecasts, formulas, methods, practices, processes, records, reports or other item of information that is not available to the general public[.] 

There are numerous specialty cyber products on the market that generally respond to data breaches. A policy offering the privacy coverage will often offer coverage for civil, administrative and regulatory investigations, fines and penalties and, importantly, will commonly offer “remediation coverage” (sometimes termed “crisis management” or “notification” coverage) to address costs associated with a security breach, including:

•     costs associated with post-data breach notification

•     credit-monitoring services

•     forensic investigation to determine cause and scope of a breach

•     public relations efforts and other “crisis management” expenses

  • legal services to determine an insured’s indemnification rights where a third party’s error or omission has caused the problem.

Cyber insurance policies offer other types coverages, as well, including media liability coverage (for claims for alleging, for example, infringement of copyright and other intellectual property rights and misappropriation of ideas or media content), first party property and network interruption coverage, and cyber extortion coverage. The cyber policies can be extremely valuable. But selecting and negotiating the right cyber insurance product presents a real and significant challenge. There is a dizzying array of cyber products on the marketplace, each with their own insurer-drafted terms and conditions, which vary dramatically from insurer to insurer—even from policy to policy underwritten by the same insurer. Because of the nature of the product and the risks that it is intended to cover, successful placement requires the involvement and input, not only of a capable risk management department and a knowledgeable insurance broker, but also of in-house legal counsel and IT professionals, resources and compliance personnel—and experienced insurance coverage counsel.

Claims In A Catastrophe, Part 2

This is Part 2 of a two-part series on claims management in the wake of a disaster. Part 1 of this series can be found here.

Protect All Property From Further Damage
Every policy requires that the insured protect the property from further loss. Therefore, you should turn off any water flow to broken appliances or pipes, arrange to have openings in roofs or walls covered to protect from rain damage, and seek help from the adjuster to further protect your property from losses of all types.

Take any necessary emergency measures to protect the building and personal property from any further damage. Do not throw anything away until permission of the insurance company is obtained in writing and you have documented its condition unless the damaged property presents a hazard to the health or safety of your family or others.

If the insurer delays or refuses to authorize measures to prevent further loss, confirm the insurer’s delay in a fax, email, and a letter, and take whatever reasonable measures you can afford to protect the property. If your loss is covered, the insurance company should also cover the cost of any reasonable emergency measures you took to protect your property. It is not unusual for an insurer to deny coverage for damage resulting after the initial claim on the grounds that an insured failed to comply with the policy condition to protect the property from further damage.

Document The Loss
If you were prudent and prepared, before the catastrophe, an inventory of your contents or took pictures of your contents, provide the adjuster with the inventory and photographs or videotape. Photograph, videotape, and inventory all damaged property after the loss. Make sure you record the date of the photos and videotape. It is important to document the source and the extent of damage whether by fire or water intrusion.

In most states, a material misrepresentation, concealment, or omission made in connection with the claim will give the insurer a valid reason to reject the entire claim. For example, claiming that an item was destroyed that really wasn’t or substantially overstating the value of a damaged item is fraud. In most states insurance fraud is a felony that can place you in state prison if convicted.

No catastrophe is so bad as to cause you to attempt to defraud your insurer to make up for uninsured losses. You should never exaggerate, speculate, or guess about the loss or value of any particular piece of property. Make it clear to your insurer when recollection may not be accurate, when you are estimating value, and the basis for your estimate. For the value of items you are not sure about on a claim presentation, use the phrase “To Be Determined.” If you do 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 members 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 will usually refuse to reimburse you for the costs of hiring an appraiser, but may hire one at no cost to you if asked courteously.

You Must Cooperate With The Insurance Company’s Investigation And Handling Of The Claim
You have a contractual obligation to cooperate with the insurer in its investigation and handling of the claim. However, you never have an obligation to allow yourself to be abused. In most states the insured and the insurance company have a mutual obligation to act in good faith and deal fairly with each other to investigate and process the claim. This means that both should avoid taking any unreasonable position or doing or saying anything that would in any way frustrate each other’s rights under the policy.

The insurer may require one or more recorded statements from you. Always request a copy of the recording and a transcript of the statement to review. You have a right to review and correct the transcript of any recorded statement.

You may also be required to appear for an “Examination Under Oath” (EUO). The insurer may, but is not required to, hire an attorney to take the Examination Under Oath to represent the insured. Since a lawyer is not required, however, the insurer will not pay for the attorney that is representing you. The Examination Under Oath is a contractual obligation and there is usually no clause in the insurance policy promising to pay a lawyer to help the insured make a claim against an insurer. You should not appear for an Examination Under Oath until you understand all rights, the insurance coverage, and the full extent of the claim, or until counsel is retained. Do not refuse to appear at an Examination Under Oath or the insurer may reject the claim because such refusal is a breach of a material condition of the policy. You may reasonably request a delay in appearance at an Examination Under Oath to obtain the services of counsel or a public insurance adjuster.

The insurer may ask you to make available various documents related to the claim, including banking statements, investment reports, receipts, and other personal financial documents. You are required to produce any documentation reasonably related to the insurer’s investigation of the claim that can include tax returns. In some states, tax returns are considered privileged and the insured cannot be compelled to produce them, while in other states the failure to produce tax returns is sufficient cause to deny the claim. [See Barry Zalma, Insurance Claims: A Comprehensive Guide, (Specialty Technical Publishers, 2002): Chapter II-5.]

The insurer can require you to produce these kinds of documents as long as they are reasonably related to its investigation. You should not provide these documents to the insurer until you understand the rights, duties, and obligations imposed by the insurance coverage and the full extent of the claim. You should never refuse to produce documents unreasonably since the requirement for document production is a condition precedent to the insurer’s obligation to provide a defense and/or indemnity to you.

Proof Of Loss Requirement
Most first party property policies require that you submit a sworn proof of loss form to the insurer within a certain amount of time, either after the loss or after being provided the proof of loss form. During a catastrophe, especially when total losses are involved, insurers will often waive this requirement.

Flood insurance policies require the proof of loss within sixty days of the loss and are applied in a draconian fashion. If you cannot produce a proof of flood loss within 60 days of the loss, obtain an extension of time, in writing from the adjuster, or you will lose all rights under the policy to indemnity.

In most states you are contractually obligated to submit the sworn proof of loss within the time limit (usually 60 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 should not submit the sworn proof of loss to the insurer until you understand 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 sworn to 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 sign a sworn proof of loss, even if your lawyer or professional public insurance adjuster prepares it, until you have carefully read every word and are certain that the statements made are true.

Some insurers believe that, at some point, you will refuse to comply with their requests. If you refuse to comply with reasonable requests for a recorded statement, an Examination Under Oath, a sworn proof of loss, or documents reasonably related to the insurer’s investigation, you may give the insurer a valid excuse to deny the claim based on your breach of the duty to cooperate.

If you believe that any requests made by the insurer are unreasonable, ask the insurer to explain the reason(s) for the requests in writing. Err on the side of caution and provide all documents that have some reasonable connection to the policy or loss. Before giving an insurer a reason to deny a claim because of your failure to cooperate, consult with a policyholder attorney, a public adjuster, or the state Department of Insurance before refusing a request that may, in retrospect, turn out to have been reasonable.

Get A Second Opinion
Many insureds believe that insurers make a practice of making inadequate (sometimes called “lowball”) offers of settlement. They are wary of what they think are estimates from insurance-company-friendly contractors. Whether true or not, it is a good practice to get a second, or even a third, written estimate to repair and replace damaged property from reputable, independent professionals that you would hire to do the repairs if there was no insurance.

You are entitled to have the damaged property replaced with “like kind and quality.” This means that you should insist that the amount determined to be the amount of loss is sufficient to replace the property with property of like kind and quality to the damaged property. When you cannot match the remaining undamaged tile, wallpaper, carpeting, or other portions of undamaged property, you are 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 (ACTUAL CASH VALUE) basis, which in some states means either the fair market value of the property at the time of loss unless the policy defines ACTUAL CASH VALUE differently. Many policies will define ACTUAL CASH VALUE as replacement cost less physical depreciation for age and wear and tear.

Some losses are paid out on a replacement cost value (REPLACEMENT COST VALUE), where the insured is paid the difference between actual cash value and replacement cost value after the insured has actual sums necessary to complete the replacement.

You may collect the ACTUAL CASH VALUE loss immediately and advise the insurer you intend to make claim for the difference between ACTUAL CASH VALUE and REPLACEMENT COST VALUE when the structure is rebuilt. If your 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.

When fire and water-damage reconstruction contractors write estimates for insurance companies they always add at the end of their estimate a sum equal to 10% of the basic contract price for “overhead,” and an additional 10% of the basic contract price for “profit.”

This technique is a fiction believed only by contractors and adjusters. Knowledgeable construction people know that no contractor could survive on 10% profit and that contractors build overhead and profit into their basic unit costs (paint, plaster, roofing, etc) and add the “profit and overhead” numbers as a fee for the extra service they provide to insurers.

In recent years, some insurers have attempted to withhold 20%, an amount equal to the contractor’s “profit and overhead” numbers to arrive at an ACTUAL CASH VALUE amount. There is no basis in the policy that allows withholding profit and overhead as a means of calculating ACTUAL CASH VALUE. In fact, ACTUAL CASH VALUE is defined either as the difference in the fair market value of the property before the loss and the fair market value of the property after the loss or the full cost of replacement using like kind and quality, less physical depreciation.

You should insist that any amounts withheld from payment pending completion of the work, be documented in writing and justified by the adjuster objectively. Policyholder attorneys and some insurance regulators have successfully prevented insurers from withholding these amounts.

Investigate Contractors
Thoroughly investigate the qualifications, license, and references of your insurance company’s approved contractor before agreeing to hire them to perform the repairs. The State Contractors Licensing Board will usually provide the consumer, 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. You do not have to use consultants or contractors recommended or approved by the insurer to perform repairs. Approved contractors are typically contractors who have agreed to discount their labor and costs and follow insurer guidelines in exchange for a volume of business from the insurance company. If your insurer promises to guarantee the approved contractor’s work, the guarantee is generally limited to replacing any defective materials or correcting faulty workmanship. The insurer is not insuring against any contractor delays, negligence, or liability. Accordingly, do not use the approved contractor unless it is a contractor that you would independently hire to do the work after a thorough screening. Check that each contractor’s license is valid and for any complaints against the license. Ensure that the contractor is bonded and insured.

Seek Proper Legal Advice
Never sign a release, waiver, indemnity, or “hold harmless” agreement without proper legal advice. If the insurer, adjuster, consultant, or contractor asks you to sign a release, waiver, indemnity, or hold harmless agreement, ask them to explain why in writing. These kinds of agreements can be used to deprive an insured of rights and benefits and may obligate you to pay thousands of extra dollars for issues that arise. Consult a policyholder attorney to determine your rights before signing any such agreement.

Seek professional help, if needed. If you reach an impasse with the insurer, document the dispute fully in writing. Explain your position and why the insurance company’s position is unreasonable. If the dispute does not require legal advice, you may be able to resolve it by calling your state’s Department of Insurance or by hiring a lawyer or public adjuster. If the dispute does require legal advice, contact a lawyer who is experienced and specializes in representing policyholders. There are many consultants who claim to be “insurance claims experts” who do not have adequate training, skill, or experience. Before you retain one, investigate the person diligently by contacting licensing bodies and references.

Be Aware Of Deadlines
Make sure you know all the deadlines that may cut off the right to file a lawsuit. California has a four-year statute of limitations for breaches of written contracts but most insurance policies require suit within one or two years of the loss or the denial of a claim. If your claim is denied, seek legal advice promptly.

In most states the insurance company is required to tell you, in writing, that the claim is denied, and that the limitations clock is running. That is, if you disagree with the insurer’s conclusion to deny your claim you have a limited time to file suit. Make sure you understand all possible deadlines. Consult with a policyholder attorney as soon as possible. The time limitation can be as short as one year from the date the loss occurred and can be put on hold by actions of the insurer. If you wish to sue, it is best to contact counsel as soon as possible before the expiration of the time limit.

Report all Unfair Claims Handling to the Department of Insurance or an Insurance Regulator
The state Insurance Department tracks policyholder complaints about their insurers and compiles the results. Most states have proactive consumer advocates in their insurance departments who will jump in to help you if they believe the insurer is not treating you fairly.

Conclusion
Many insurers involved in catastrophes provide their adjusters with policy limits authority and instruct the adjuster to be generous. If your house was one of those totally destroyed and coverage is available, there is a good probability that you will receive the full policy limits immediately.

If you did not carry sufficient insurance to totally rebuild your house and replace your contents consider the acquisition of a factory built home which can be trucked to your site and completed, with all appliances included, for much less than a conventionally constructed home.
Almost all claims will be handled promptly and fairly. A person knowledgeable about insurance claims can better deal with an insurance company. Don’t take advantage of your insurer and don’t let an insurer take advantage of you. You are entitled to indemnity. You and your insurer should work together to make you whole.

This article is adapted from Barry Zalma’s book, “Insurance Claims: A Comprehensive Guide” and his book “Mold: A Comprehensive Claims Guide” published by Specialty Technical Publishers, Vancouver, BC, Canada; 800-251-0381; http://www.stpub.com.

Claims In A Catastrophe, Part 1

This is Part 1 of a two-part series on claims management in the wake of a disaster. Part 2 in the series can be found here.

Presenting a Claim
If your house was damaged or destroyed by fire, windstorm, or flood as a result of state declared catastrophes and you had a fire, homeowners, flood insurance, tenant's homeowners or condominium policy, you will be dealing with an insurance adjuster. You should recognize that dealing with an insurance adjuster in a catastrophe is usually fairly easy because of the number of claims the adjuster is required to deal with in a short time.

Insurers will be in a very generous mood. They will be seeking good publicity by taking care of victims of the catastrophe quickly and fairly. To make the claims process go easily, the insured person must understand that both the insured and the adjuster have duties when damage caused by fire, windstorm, flood or other insured perils are discovered. The following list outlines the most important of these duties:

  1. You should be sure there is no unnecessary delay in reporting the fact of the discovery of damage to your insurer as a claim.
  2. You and the adjuster should establish that there is no unnecessary delay in responding to any fire, fire fighting, flood or water-related cause of loss where “mold” may result as a natural result of water, warmth, and existence of mold spores in all building.
  3. You may be asked to sign a non-waiver agreement.
  4. You may receive a reservation of rights letter advising you of your duties under the policy, the conditions that apply or might apply, and the exclusions that may apply to the facts of the loss.
  5. You, as the insured, should readily, and without objection, sign the non-waiver agreement or accept the reservation of rights as an expression of the status quo.
  6. The adjuster should remind you, as part of the reservation of rights letter and explanation of the duties of the insured, to preserve and protect the damaged property and to mitigate the loss with due diligence and dispatch.
  7. You 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 growth.
  8. You should follow up regularly with the adjuster to ensure that he or she is meeting contractual obligations since a catastrophe often makes communications difficult.
  9. If you have failed to protect the property from further loss, the adjuster must remind you, in writing, of your failure and how that could effect your claim.
  10. The adjuster should consider advance payments to avoid any unnecessary difficulties so that you and your family will have a place to live while your house is being rebuilt.

    1. If your house is destroyed, you can expect an advance of $10,000 to $20,000 to carry you over.
    2. Even if your house was not damaged, you are entitled to additional living expense payments if you were ordered out of your house by the state government, federal government, Homeland Security, or the local fire department.
    3. Remember that additional living expense coverage does not pay all of your post loss expenses, only those over and above your normal expenses.

Insurance claims require personal attention to detail by the insured. You and the adjuster must meet in person. If the claim is to be resolved expeditiously and fairly, both you and the adjuster should work to establish a personal relationship and to resolve, if coverage is available, the problems caused by the damage to the dwelling or business structure.

Once the rights, obligations, and duties of the insured and the insurer have been stated, and the initial investigation is complete, the insurer is obligated to conduct a prompt analysis of the policy wording and the law to determine whether coverage exists for the damage claimed. Once the investigation is complete and the decision made, it is the adjuster’s obligation to advise you, promptly and in detail, of the decision of the insurer. If coverage is available, it is also the obligation of the adjuster to advise you of your duties and obligations to obtain complete indemnity from the insurer and to protect the property from further loss.

The Notice Of Loss
If you believe that your property was damaged or destroyed by a peril insured by your policy, you should call or write the insurance agent, broker or insurer immediately (or as soon as practical) to report your claim. Follow up the phone call with a fax, an email, and a letter. If the house was not destroyed but a great deal of fire fighting water or subsequent rain or flood water entered the property, try to get a remediation team into the home or business within the first 48 hours to begin drying out the property. If you do not know one, ask your insurer for a referral. This is crucial to preventing or containing mold growth and rot.

If the agent, insurance company, independent adjuster, or restoration company delays the claim, follow up with a fax, an email, and a letter confirming their delay in responding. It would be helpful to send copies of the follow-up letters to the consumer protection unit of the state’s Department of Insurance. Take detailed notes of every conversation, including the name, company, phone number, address, and job title of every insurance adjuster, representative, consultant, and contractor you deal with. Confirm all agreements in writing and insist that appointments and deadlines be honored. Keep a log of all notes and letters and ask for and keep business cards from everyone involved in your claim.

Immediately after the telephone call, write a letter to the broker or agent, with a copy to the insurer, providing the same information. The letter need not be formal. It can be handwritten on any available paper. Make a photocopy.

The notice of loss should include the following information:

  • Your full name.
  • The location of the property.
  • The policy number.
  • The effective dates of the policy.
  • The date when damage first occurred.
  • The type of property damage.
  • The cause or causes of the damage.
  • How the adjuster can contact you.
  • That you need immediate contact from the adjuster.

By providing the information to the agent, the broker and/or the insurer, you have fulfilled the first obligation under the policy: to provide immediate notice of loss to the insurer.

If the insurer is working effectively and has a catastrophe team of adjusters in place, you should receive contact from an adjuster within 24 hours of the notice. The first call should arrange an appointment to inspect the property. You should arrange for inspection as soon as possible and have the entire property available for the inspection if possible. If emergency efforts are required, you should so advise the adjuster so that he or she can help you take emergency measures to protect against further loss.

If possible, you or the adjuster should arrange to have one or more contractors present at the first meeting to determine the extent of the damage. If the damage is extensive, consider retaining the services of a public insurance adjuster [if you determine a public insurance adjuster would be helpful, it is appropriate to seek one who is a member of the National Association of Public Insurance Adjusters (NAPIA), a professional membership organization that seeks to instill professionalism in the trade] or an attorney experienced in representing policyholders in the claims process to represent your interest. The lawyer will usually work on an hourly fee basis while the public insurance adjuster will expect a percentage of the amount paid by the insurer. You must recognize that the public insurance adjuster will ask for a 10 – 15% negotiable fee. Do not hesitate to negotiate with the public insurance adjuster. Never pay the first fee quoted. Considering the volume of work in a catastrophe, you should be able to negotiate a fee between 3% and 10%.

Insurance Company Response
Your insurer should respond to typical catastrophe claims by written or verbal contact within 24 hours of your 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.

Your insurer should, and in California is obligated to, advise you of your responsibilities under the policy. Many require their representatives to be at your home within 24 to 72 hours of notice of claim. If you explain that your fire loss is severe, the insurer should attempt to have a representative at your house within 24 hours.

The insurer is obligated by statute, state administrative regulations, or by the terms of the policy to determine whether your claim is covered and provide an initial estimate of damage within seven to 14 days after the insurer’s first on-site visit. This first estimate is subject to change. Within the same time frame, your insurer should attempt to provide you with a written statement confirming or denying coverage. These time limits are usually waived in catastrophes and may be impossible to meet with regard to Hurricane Katrina event and other massive catastrophes.

You should expect your insurer to return all phone calls within 24 hours. Initial contact may be with your insurance agent or broker or a claims office or the toll-free phone number included in the policy. Because of the volume of claims after a catastrophe like those in the 2005 hurricane season and the 2008 California wildfire season, this time frame will probably not be feasible.

First Contact With The Adjuster
Your first contact with the adjuster is usually an informative meeting where you discuss the cause of the loss, the type of loss, when the loss was discovered, and make an initial effort to agree on a tentative scope of loss.

You should expect the adjuster to do the following:

  1. ask for a walk-through inspection of the entire dwelling or building.
    1. You should make every effort to point out each item of damage or suspected damage during the walk-through inspection.
    2. You, or your representative, should assist the adjuster in viewing both the damage and the source of the damage.
  2. ask you to submit to a recorded statement;
  3. ask you for the identities of each family member or vendor who can give the adjuster information about the loss;
  4. ask for the recorded statements of the persons identified;
  5. ask permission to allow experts retained by the insurer to inspect the property and do minor destructive testing to establish the appropriate methods of reconstruction and repair; and,
  6. ask permission to contact others who know information about the loss and to obtain from those people within your control a detailed recorded statement and documents relating to their knowledge of the loss and the extent of the loss.

First Meeting With The Adjuster
An adjuster is a person professionally trained to assess the damage to your property. He or she will probably visit your home or business before you are asked to complete any forms. The more information you have about your damaged home or business and belongings, the sooner your claim will be settled.

Your adjuster generally will come prepared to do a thorough and complete evaluation of the damage to your property. If the adjuster is unable to complete a thorough inspection due to time constraints or the extent of damage, he or she should prepare a scope of the loss report. This is a brief listing of the findings of damage determined at the initial inspection of the damage. The adjuster should ask you to agree to the scope of loss. Agreeing to a scope of loss is not presenting a claim. It is understood by the adjuster that the scope is incomplete and will be added to as new damage is discovered. 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 the following:

  • degree of damage;
  • a description of each location where damage was observed;
  • a description of the adjuster’s and your own best estimates of the type of damage observed;
  • a list of all personal property damaged or destroyed;
  • 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 room.

The scope of loss, usually referred to by claims people as the “scope,” differs from the finished estimate in two ways:

  • the scope does not necessarily list any prices, although prices can be used to describe quality; and,
  • the scope does not list the calculated quantities — it includes just the raw counts and measurements needed to calculate quantities for the estimate.

This article is adapted from Barry Zalma’s book, “Insurance Claims: A Comprehensive Guide” and his book “Mold: A Comprehensive Claims Guide” published by Specialty Technical Publishers, Vancouver, BC, Canada; 800-251-0381; http://www.stpub.com.

Deny Defense And Lose The Right To Belatedly Control Defense

An Insurer Should Never Deny A Defense Unless Absolutely Certain There Is No Potential For Coverage

The District Court, Northern District of California, granted a motion for summary judgment in favor of KB Home in part against the Travelers in Kaufman & Broad Monterey Bay, et v. Travelers Property Casualty, No. : 5:10-CV-2856 EJD (N.D.Cal. 07/18/2012)

Background
Travelers issued commercial general liability policies to Norcraft Companies, L.P., (“Norcraft”) a cabinet installer. The Norcraft policies provide coverage for “property damage” arising out of an occurrence that takes place in the coverage territory and that occurs during the policy period.

Subcontract And Aldrich Action
On or about January 22, 2003, and February 5, 2003, KB Home and Norcraft entered into subcontracts to furnish, deliver and install cabinets at certain homes within two housing developments in Monterey, California. The subcontracts required Norcraft to name KB Home as an additional insured under its commercial general liability policies.

On October 21, 2008, a number of homeowners commenced a lawsuit in Monterey County Superior Court against KB Home, Aldrich, et al. v. KB Home, et al. (“Aldrich Action”). The homeowners alleged a number of construction defects, including “cabinet and wood trim” defects, that resulted in damage to the homes and their component parts.

KB Home filed a cross-complaint against various parties, including Norcraft, alleging among other things that Norcraft is contractually required to defend and indemnify KB Home with regard to the Aldrich action.

Travelers’ Acceptance, Withdrawal, And This Action
On April 1, 2009, Glaspy & Glaspy, counsel for KB Home, tendered the defense and indemnity of KB Home as additional insureds under the Norcraft policies in the Aldrich action. This initial tender included copies of the original Complaint, First Amended Complaint, KB Home’s Cross-Complaint, a Stipulation and Order of Reference to the Special Master, the Subcontract and additional insured documentation.

On April 6, 2009, Patricia E. Dlugokenski (“Dlugokenski”), a senior technical specialist for Travelers, acknowledged receipt of the tenders and requested additional information, including: a statement of claims or documentation related to the alleged defects and deficiencies, expert investigation reports into defects or damages, current pleadings and any Case Management Order or Pre-Trial Order documents, and the location of any document depository.

On April 6, 2009, in response, KB Home provided an updated Homeowner matrix, the amended complaint, and the dismissal of one of the plaintiffs’ homes. KB also informed Travelers that the Pre-Trial Order had not yet been filed and there was no defect list but that KB Home would forward the defect list as soon as it is received. On July 6, 2009, Dlugokenski noted in the internal Claims Notes that “it is likely some, although minor damages resulted from [cabinet] installation. Damages to the walls or pulling away from the walls could be attributed to installation.” (Emphasis added) Also on July 6, 2009, Dlugokenski issued a letter accepting KB Home’s tender as additional insureds under the Norcraft policies.

The letter also requested information that would assist Travelers in its evaluation of the demand for payment of defense expenses, such as contact information for all carriers who have been provided a tender of defense, their responses, the amounts they have paid, the percentage they agreed to pay, a litigation budget, and an additional insured matrix showing the carriers tendered as well as their responses.

On October 20, 2009, Dlugokenski sent an email to KB Homes’ counsel requesting “documentation of damage caused by our named insured (defect report, etc.)” KB Home’s counsel informed Travelers that no defect list was available to date.

On November 5, 2009, Tom Frazier (“Frazier”), Travelers’ unit manager conducted a review of KB Home’s tenders and found that they lacked documentation of damage or liability arising out of Norcraft’s work. On December 1, 2009, KB Home contacted Travelers about its outstanding balance and requested payment. On December 10, 2009, Dlugokenski responded with a single-sentence email stating, “We will be withdrawing our acceptance.” On February 9, 2010, Hartford Casualty Company (“The Hartford”), another insurance company, accepted KB Home’s tenders of defense and issued a payment of $30,000 for KB Home’s defense in the Aldrich action. The Hartford made no further payments.

On March 9, 2010, Dlugokenski sent a letter to KB Home advising that Travelers was withdrawing from KB Home’s defense.

On May 27, 2010, KB Home filed this action against Travelers. On July 8, 2010, Fred Adelman, counsel for the Aldrich plaintiffs, signed a letter stating that “[t]he plaintiffs in this action are pursuing recovery for damages arising out of the cabinets.”

On August 4, 2010, KB Home provided the Aldrich plaintiffs’ preliminary defect list regarding cabinets, entitled “Aldrich, et al. v. KB Home, et al., Preliminary Defect List.” On December 17, 2010, based on the August 4, 2010 defect list, Travelers sent a letter to KB Homes in which it agreed to participate in the defense of KB Homes as an additional insured from August 4, 2010 forward and that it was appointing Christian Lucia of Seller Hazard Manning Ficenac & Lucia (“Sellar Hazard”) to represent KB Home in the Aldrich action. Travelers added that if KB Home wished to continue to retain Glaspy & Glaspy to provide it with a defense it could do so, but at its own expense.

On January 4, 2011, KB Home sent a letter to Travelers stating that Travelers has forfeited any right to control KB Home’s defense because it breached its duty to defend KB Home. KB Home also stated that Sellar Hazard had “a clear conflict of interest and is currently representing a subcontractor directly adverse to KB Home in a pending construction defect lawsuit and that under no circumstances will KB Home waive the conflict.

On January 28, 2011, Travelers issued payment of $73,654.54 to KB Home as payment for its one-half share of KB Home’s defense fees and costs in the Aldrich action pursuant to its equal shares allocation with The Hartford. On July 19, 2011, Norcraft and the Aldrich plaintiffs reached a settlement in the Aldrich action by the terms of which plaintiffs agreed to an issue release related to all cabinet issues, in exchange for the lump sum payment of $30,000. Travelers claims that, as of August 25, 2011, it had paid in excess of $187,418 in the defense of KB Home in the Aldrich action, which it claims is the amount of all outstanding invoices presented.

On August 26, 2011, KB Home filed its Motion for Partial Summary Judgment. Also on August 26, 2011, Travelers filed is Motion for Summary Judgment or, in the Alternative, Partial Summary Judgment. On September 16, 2011, Travelers filed counterclaims against KB Homes for reimbursement, unjust enrichment, breach of contract, and declaratory relief.

Discussion
KB Home sought partial summary judgment that:

  1. Traveler’s duty to provide KB Home a defense was triggered from the date of tender, April 1, 2009;
  2. Travelers breached its duty to provide KB Home a defense; and,
  3. Belated payment of the costs of the defense in the Aldrich action did not cure Traveler’s breach of its duty to defend KB Home.

Travelers sought summary judgment in its favor on KB Home’s breach of contract claim because:

  1. KB Home breached its duty to cooperate by refusing to accept Travelers’ appointed counsel;
  2. KB Home cannot prove a duty was owed when Travelers denied coverage because Travelers’ duty to defend had not been triggered;
  3. KB Home has not presented any evidence of resulting damages. Travelers also sought summary judgment in its favor on KB Home’s breach of covenant of good faith and fair dealing because:
    1. Travelers never withheld benefits due under the policy;
    2. Any delay in paying benefits was based on a genuine dispute regarding coverage; and,
    3. Travelers conducted a reasonable investigation of KB Home’s tender.

The District Court considered both motions and ruled against Travelers and in favor of KB Home in most parts of its motion. It reasoned about the various issues:

Breach Of Contract
For an insurer, the existence of a duty to defend turns not upon the ultimate adjudication of coverage under its policy of insurance, but upon those facts known by the insurer at the inception of a third party lawsuit. Hence, the duty may exist even where coverage is in doubt and ultimately does not develop. The defense duty is a continuing one, arising on tender of defense and lasting until the underlying lawsuit is concluded or until it has been shown that there is no potential for coverage.

The Norcraft policies provide coverage for “property damage.” The Norcraft polices do not cover property damage to Norcraft’s work arising out of it or any part of it.

Travelers argued that the complaint does not allege that other property was damaged as a result of the cabinets. Specifically, Travelers argues that the Aldrich complaint only alleges the existence of cabinet and wood trim defects at the homes and that the cabinets were installed so as to interfere with the cabinets’ useful life.

Travelers’ reading of paragraph 17, however, appears to consider only the final sentence of the allegation which list the defects, including cabinet and wood trim defects, to which the rest of the paragraph makes reference. The immediately preceding sentence states that the “defects … have resulted in damage to the homes and their component parts. Thus, the complaint alleges that cabinet and wood trim defects caused damage to the homes and their component parts, which potentially includes parts of the homes other than the cabinets.

The District Court concluded that as a result of the Aldrich complaint tendered on April 1, 2009, Travelers was required to defend KB Home unless and until Travelers could demonstrate, by reference to undisputed facts, that the claim cannot be covered. KB Home’s motion for partial summary judgment that Travelers owed it a duty to defend as of April 1, 2009 was granted.

Travelers failed to present evidence showing a genuine issue of fact regarding whether, at the time of its March 9, 2010 withdrawal, there was no potential for a covered liability.

To be excused from its duty to defend by KB Home’s alleged breach of the duty to cooperate, Travelers must show prejudice that resulted from KB Home’s withholding these documents. Travelers has not identified any related prejudice, much less provided evidence upon which a reasonable jury could find prejudice. KB Home, however, has pointed to evidence that Travelers was not prejudiced by these documents because, even if these documents had been produced earlier, Travelers would have acted no differently.

Travelers’ expert, Gene Irizarry, declared that “even though KB [Home] did not provide the Lot Files to Travelers, had it done so, no duty to defend would have been triggered.” This evidence indicates that, with or without the documents, Travelers still would have determined that it did not have a duty to defend. Thus, assuming that KB Home withheld these documents, Travelers has not raised a genuine issue of fact regarding whether Travelers was excused from its duty to defend as a result.

The undisputed facts demonstrate that Travelers breached its duty to provide KB Home with a complete and immediate defense of the Aldrich action when it withdrew from KB Home’s defense on March 9, 2010. Therefore the District Court granted KB Home’s motion and denied Travelers’ motion.

Whether Travelers Cured Its Breach By Its Belated Payment
KB Home also moved for summary judgment that Travelers’ belated acceptance of its duty to defend does not cure its prior breaches. In opposition, Travelers argued that KB Home has not provided any evidence of damages. KB Home sought judgment that Travelers’ failure to take up KB Home’s defense when its duty was triggered is not cured because Travelers did so after KB Home filed this action.

A belated offer to pay the costs of defense may mitigate damages but will not cure the initial breach of duty. KB Home’s motion for summary judgment that Travelers did not cure its breach by its belated payment for KB Home’s defense was, therefore, granted by the District Court.

“The insurer’s right to control the insured’s defense extends to the right to select legal counsel.” Travelers Property Cas. Co. of America v. Centex Homes, No. 11-3638-SC, 2012 WL 1657121, at *4 (N.D. Cal. May 10, 2012). However, “[w]hen an insurer wrongfully refuses to defend, the insured is relieved of his or her obligation to allow the insurer to manage the litigation and may proceed in whatever manner is deemed appropriate.” Eigner v. Worthington, 57 Cal. App. 12 4th 188, 196 (1997).

Here, the Aldrich action was tendered to Travelers on April 1, 2009 and triggered Travelers’ duty to defend. On March 9, 2010, Travelers declined to participate in the Aldrich defense. Travelers, however, agreed to defend KB Home on December 17, 2010, after KB Home had provided Travelers with a defect list from the Aldrich plaintiffs on August 4, 2010 and after KB Home filed this lawsuit.

Duty To Defend Arose Immediately Upon Tender
Since Travelers’ duty to defend arose immediately upon the April 1, 2009 tender, Travelers’ withdrawal and delay in providing KB Home with a defense divested it of the right to control KB Home’s defense. Thus, Travelers failed to demonstrate that the undisputed evidence shows KB Home’s rejection of Travelers’ chosen counsel was a breach of the cooperation clause.

During the time the insurer had rejected the tender of the defense, the insured arranged and paid for its own defense. The belated tender did not fully remedy the harm caused by the insurer’s refusal to defend by later paying the insured’s attorney fees, though this belated decision unquestionably mitigated its damages.

Breach Of Duty To Investigate
An unreasonable failure to investigate amounting to such unfair dealing may be found when an insurer fails to consider, or seek to discover, evidence relevant to the issues of liability and damages. Based on KB Home’s initial tender, on July 6, 2009, Travelers’ Claim Notes document Traveler’s decision to accept KB Home’s defense because of a likelihood of covered damages.

An insurer’s early closure of an investigation and unwillingness to reconsider a denial when presented with evidence of factual errors will fortify a finding of bad faith. KB Home, therefore, presented evidence sufficient to create a genuine issue of fact regarding whether Travelers acted in bad faith in refusing to defend KB Home.

Conclusion
For the reasons discussed above, the District Court ordered as follows:

  1. KB Home’s motion for partial summary judgment that Traveler’s duty to provide KB Home a defense was triggered from the date of tender, April 1, 2009;
  2. Travelers breached its duty to provide KB Home a defense; and
  3. belated payment of the costs of the defense in the Aldrich action did not cure Traveler’s breach of its duty to defend KB Home.

Travelers’ has been found to breach its duty to defend in two cases in California because of its failure to thoroughly investigate upon tender of defense and that, when it had second thoughts and agreed to defend, found it had lost its right to control the defense.

If, as in KB Homes, there is a small potential for coverage, a defense should be provided promptly subject to a reservation of rights. Withdrawing that defense when there is no additional investigation or new facts is not within the custom and practice of Commercial General Liability insurers in California and most of the country.

Travelers then added insult to the injury caused by its withdrawal of defense by coming back and offering to defend with control of counsel and the defense and ignoring the conflict of interest between it, its chosen counsel, and the additional insured. In addition, had it done a thorough investigation, it could have accelerated the settlement negotiations and resolved the Aldrich case for less than the amount of defense costs.