Commercial property insurance and duties in the event of a loss
In the event of damage to covered property, the ISO Building and Personal Property Coverage Form, CP 00 10 06 07, describes several things that the insured must do. Often, fulfilling such duties may be time-consuming and expensive. Here, we describe and analyze the duties of the insured, citing legal decisions to help the insured understand his contractual obligations.
The CP 00 10 lays out these duties for an insured after a loss:
"a. You must see that the following are done in the event of loss or damage to Covered Property: (1) Notify the police if a law may have been broken.
(2) Give us prompt notice of the loss or damage. Include a description of the property involved.
(3) As soon as possible, give us a description of how, when and where the loss or damage occurred.
(4) Take all reasonable steps to protect the Covered Property from further damage, and keep a record of your expenses necessary to protect the Covered Property, for consideration in the settlement of the claim. This will not increase the Limit of Insurance. However, we will not pay for any subsequent loss or damage resulting from a cause of loss that is not a Covered Cause of Loss. Also, if feasible, set the damaged property aside and in the best possible order for examination.
(5) At our request, give us complete inventories of the damaged and undamaged property. Include quantities, costs, values and amount of loss claimed.
(6) As often as may be reasonably required, permit us to inspect the property proving the loss or damage and examine your books and records.
Also permit us to take samples of damaged and undamaged property for inspection, testing and analysis, and permit us to make copies from your books and records.
(7) Send us a signed, sworn proof of loss containing the information we request to investigate the claim. You must do this within 60 days after our request. We will supply you with the necessary forms.
(8) Cooperate with us in the investigation or settlement of the claim."
b. We may examine any insured under oath, while not in the presence of any other insured and at such times as may be reasonably required, about any matter relating to this insurance or the claim, including an insured's books and records. In the event of an examination, an insured's answers must be signed.
A breach by the insured of any of these contractual duties may be cause for an insurer to deny a claim and to try to make the entire insurance contract voidable.
The duty to cooperate
Although it is the last of the items required of an insured when presenting a property claim, the duty to cooperate permeates the whole process. All of the other items in the list represent different ways in which the insured must cooperate with the insurer. According to Couch on Insurance, "cooperation" in the first-party insurance context is largely ensured by means of such specific duties as that the insured provide adequate notice and proof of loss, that the insured submit to an examination under oath...and the like."
However, while the insured must cooperate with the insurer in its investigation of any claim, just citing "failure to cooperate" is not enough for an insurer to deny a claim. Appleman, Insurance Law and Practice says, "Non-cooperation must be material. Prejudice must be shown by the insurer." That view was upheld by the Indiana Supreme Court in Miller v. Dilts, 463 N.E.2d 257 (Ind. 1984), when it said that "an insurance company must show actual prejudice from an insured's noncompliance with the policy's cooperation clause before it can avoid liability under the policy."
Notification of authorities
The first duty is that the insured must notify the police "if a law may have been broken." The court in Lambrecht & Associates, Inc. v. State Farm Lloyds, 119 S.W.3d 16, (Tex. App.-Tyler 2003) examined the issue. Lambrecht and Associates, an employment agency, concluded that a virus had been introduced to their computers from the outside.
Lambrecht did not call the police to report the introduction of the virus.
State Farm denied the claim, partly based on Lambrecht's failure to notify the police that a "law may have been broken." It was the insurer's contention that this clause is a condition precedent to payment of a claim. However, the court disagreed, saying,
"Conditions precedent to an obligation to perform [under a contract] are those acts or events, which occur subsequently to the making of a contract, that must occur before there is a right to immediate performance and before there is a breach of contractual duty...The interpretation of an unambiguous contract, including whether a contractual provision creates a condition precedent to performance, is a question of law for the court...We hold that this provision in the policy does not create a condition precedent because it does not condition payment of a covered loss on contacting the police if a law was broken."
Prompt notice of loss
Property policies require prompt notice of loss to an insurer so that it may immediately begin to investigate the loss and so that evidence does not become lost or tainted. In Taricani v. Nationwide, 822 A.2d 341, (Conn. App. 2003) the insureds were suspected of arson after their business burned. Due to the ongoing police investigations, the Taricanis cited their constitutional right against self-incrimination and refused to undergo examination under oath. It wasn't until ten months after the fire that they were cleared of the arson charges. At that point, they sought payment from Nationwide, who denied based on lack of cooperation and lack of a timely notice.
The trial court held for Nationwide, and that judgment was affirmed in the appeals court. The Taricanis contended that even if they had delayed being questioned, such a delay had not harmed the insurer and that they had the right to invoke the fifth amendment while the investigation was being conducted. However, the appellate court rejected that contention, saying that "constitutional immunity from self-incrimination does not justify or excuse the obligation of an insured to cooperate in the prompt investigation of the event on which a claim of insurable loss is based."
The court upheld Nationwide's denial because it had been prejudiced by the delay. The court said that when "an insured fails to give timely notice of loss, although prejudice to the insurer is presumed, a proper balance between the interests of the insurer and the insured requires a factual inquiry into whether, in the circumstances of a particular case, an insurer has been prejudiced by its insured's delay in giving notice." The court also stated that "the burden of establishing lack of prejudice must be borne by the insured."
Protection of property
After a loss, the insured must protect covered property from further loss. While some courts may view this provision as a condition precedent to recovery, the court in Auto-Owners Ins. Co. v. Hansen Housing, Inc., 604 N.W.2d 504 (S.D.2000) said it was a duty bearing on the amount of recovery.
Hansen Housing purchased an abandoned hospital with plans of turning it into a senior citizen housing project. The Hansens insured it through Auto Owners on a BOP for $1.6 million. During the second winter the policy was in force, some pipes froze and burst, causing damage. The insurer denied the claim based on the insured's failure to protect covered property. However, the trial court said this about that provision (and the appellate court agreed):
"In the policy, this provision is under the heading 'Property Loss Conditions' and under the sub-heading 'Duties in the Event of Loss or Damage.' Ten such 'duties' are listed. While a number of these 'duties' are more properly classified as conditions, for example giving the insurer 'complete inventories of the damaged and undamaged property,' and permitting the insurer 'to inspect the property and records proving the loss or damage,' others are more in the nature of duties bearing on the amount of recovery; for example, '[r]esume all or part of your "operations" as quickly as possible.' Requiring the insured to '[t]ake all reasonable steps to protect the Covered Property from further damage,' we believe, falls more properly into the latter category."
Therefore, the trial court correctly determined that this provision did not bar Hansen Housing's recovery, and instead related to the amount of recovery and was for the jury to determine.
The requirement to provide an inventory of the damaged and undamaged property is an important step in settling a property claim. Couch on Insurance points out that "such a provision must be given a reasonable construction, and should not be used to relieve the insurer from liability for loss where literal compliance with the contract has become impossible or the policyholder has been led by the actions of the insurer's representative to believe that performance of the condition is not required."
A case on point is Taubman v. Allied Fire Ins. Co. of Utica, 160 F.2d 157 (4th Cir. 1947). Mr. Taubman owned a chain of auto parts stores. On the day after Christmas 1944 the warehouse that supplied his stores had a big fire with attendant serious water damage. Severe cold after the fire caused much of the inventory to be encased in ice. Almost immediately, the insurers demanded that Mr. Taubman meet the policy conditions--protect the property from further loss, separate the damaged and undamaged goods, and furnish a complete inventory. Mr. Taubman's public adjuster refused this demand, claiming that it was impossible to separate the goods because of the inclement weather conditions or to furnish a complete inventory because of the loss of some of its records.
However, within two days, the public adjuster was able to compile an inventory based on the records of the stores in the chain. The loss claimed was over $92,000. This inventory did not contain an itemized list of the goods insured. Rather, it consisted of lump sum monthly totals taken from the books, and represented the book loss suffered by the insured. The insurers rejected this inventory, stating that they also needed individual invoices for the claimed items.
However, in holding for Mr. Taubman, the court concluded: "The plaintiff, to the extent that it was possible for him to do so, furnished an inventory made up from the books and other information that survived the fire. It contained all the information that he could furnish as to the value of the goods on hand at the time of the fire, and it was received by the adjusters of the companies and submitted to their accountant who verified the insured's figures. It is said, nevertheless, that the plaintiff should have gone further and should have obtained copies of the invoices of the goods on hand from the persons from whom they were purchased so as to supply the details missing from his books of account."
Agreeing that the policy does require that such invoices be provided, the court went on to say that "in this case it [the requirement of invoices] was not invoked. The insurance adjusters, having received a copy of an inventory made up from the books, and having verified it, did not notify or request the plaintiff to produce copies of the destroyed invoices or designate any time or place for their production. The provision in question therefore did not come into play, and the plaintiff was justified in believing that the companies did not insist upon it."
The court concluded that "while the clause does not exact anything unreasonable or impossible, it does require the policyholder to use all reasonable means in his power to comply. But it will be observed that in the pending case the plaintiff furnished to the defendants as full an inventory as possible from the books saved from the fire."
Inspection of property
As is the case with providing inventories, the insurer's right to inspect the property is necessary to the settlement of a claim. However, such a request must be reasonably prompt, as shown in Isaac v. Donegal & Conoy Mut. Fire Ins. Co., 162 A. 300 (Penn. 1932).
If an insured makes repairs to damaged property before the insurer can inspect it, he may be barred from recovery, a concept upheld in Hartford Steam Boiler Inspection & Ins. Co. v. Parker Gravel Co., 153 So. 547 (La. Ct. App. 1934). But a technical breach of this condition should not bar recovery if the insurer can reasonably determine the extent of the loss.
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