Insurance Claims - Bad Faith
No Good Deed Goes Unpunished
Barry Zalma | Zalma on Insurance
November 17, 2014
Duty of Good Faith Is Mutual
Plaintiffs’ counsel have no problem suing insurers for breach of the covenant of good faith and fair dealing. Their clients see a legitimate insurance claim as an opportunity to profit from the claim by acting in a manner that will lead an insurer to deny the claim so that they could later claim the tort of bad faith.
As a justice of the California Supreme Court once said, “The problem is not so much the theory of the bad faith cases, as its application. It seems to me that attorneys who handle policy claims against insurance companies are no longer interested in collecting on those claims, but spend their wits and energies trying to maneuver the insurers into committing acts which the insureds can later trot out as evidence of bad faith.” [White v. Western Title Ins. Co., 40 Cal. 3d 870, 710 P.2d 309, 221 Cal. Rptr. 509 (Cal. 12/31/1985)]
In Shifrin v. Liberty Mut. Ins., — Fed.Appx. —-, 2014 WL 5840732 (C.A.7 (Ind.) 11/12/14) Brian and Melanie Shifrin appealed a trial court’s grant of summary judgment for Liberty Mutual Insurance in their diversity action asserting breach of contract and negligence with regard to their homeowners-insurance coverage.
FACTS
After a tornado damaged their barn and the roof of their house, the Shifrins filed an insurance claim. An adjuster from Liberty promptly inspected the damage, and a contractor hired by the insurer installed tarps over the house’s damaged roof. The adjuster determined that the cost to repair the damage to the barn likely exceeded the building’s coverage, so Liberty paid them $14,226 (the policy limit) for the barn’s damage. The adjuster also advised the Shifrins that they needed to replace their house’s roof immediately to protect the house from further damage.
About six weeks later, the adjuster re-inspected the property (at the Shifrins’ request) and saw new water damage. He again told the Shifrins that their policy required them to repair the roof to protect the house from further damage. He estimated the cost to repair the damage to the house at $22,713, though he acknowledged that there were “some open items” including “the remediation of the premises once the roof is replaced.” Liberty issued the Shifrins a check in the estimate’s amount.
The Shifrins disputed the amount of that payment because it did not include damage to their house’s foundation. In response to the Shifrins’ contention, Liberty had the property inspected by an engineer, who determined that the tornado had caused some cracks in the foundation—damage that was covered by the policy. Liberty agreed to pay to repair those cracks once the Shifrins selected a contractor to do the work, but the Shifrins disputed the engineer’s determination that only some of the cracks were caused by the tornado.
Liberty suggested that they hire their own engineer to evaluate the damage and advised them that under the terms of their policy, they were entitled to an appraisal if they disputed the report of Liberty’s engineer. Over the following months, the Shifrins and Liberty continued to disagree about the extent of the house’s tornado-related damage and the necessary repair costs, and the Shifrins learned that Liberty would not renew its policy after its expiration.
Eventually Liberty’s adjuster met with a contractor whom the Shifrins had selected, and both men agreed on the cost of the work to repair the damage to the roof and inside the house. The adjuster revised his estimate to $36,950.94, and Liberty issued the Shifrins a supplemental payment of $14,237.25 (the difference between the earlier estimate and the revision); Liberty reminded the Shifrins that “we will afford coverage for water remediation when the work has been performed” but that the work “can only take place once the roof has been replaced.” The parties continued to wrangle over the amount of loss. After the Shifrins insisted that there was additional damage to the roof, siding of the house, and the chimney, Liberty arranged for another engineering inspection. The Shifrins objected to the new report, and Liberty decided to initiate an appraisal process, as provided in the Shifrins’ policy; the Shifrins refused to participate. The roof still had not been repaired.
The Shifrins brought suit. The district court granted Liberty’s motion for summary judgment. The court agreed with the insurer that the Shifrins had breached the policy by failing to have the roof repaired. The court also concluded that Liberty properly invoked—and did not waive—its right to an appraisal, and that the Shifrins’ refusal to participate in the appraisal process was another instance in which they did not comply with their policy’s conditions.
The Shifrins appealed, essentially challenging the trial court’s conclusion that they breached their insurance contract by refusing to repair the roof. They assert that they were not obligated under the policy to repair the roof because Liberty had agreed to repair it and the repairs would have been too expensive relative to the house’s value.
DECISION
The appellate court concluded that the Shifrins breached their policy by not repairing their roof after the tornado. Under the policy, any loss required them to “protect the property from further damage” and, if repairs were required, to “make reasonable and necessary repairs to protect the property.”
A contract provision requiring the insured to complete certain duties after a loss is not optional, and non-compliance is a breach of the contract.
The Shifrins also challenge the district court’s denial of their motion for summary judgment and maintain that Liberty breached the contract and acted in bad faith by not repairing the roof or the interior water damage.
But as the district court stated, the Shifrins didn’t identify any part of the contract requiring Liberty to repair the roof; Liberty paid them $36,950.94 (the estimate of the cash value of the damage) before any repair or replacement was performed and agreed to pay for moisture remediation after the roof was repaired. Liberty also demanded appraisal and the Shifrins refused to participate, a second breach of the contract of insurance.
ZALMA OPINION
Insurance promises to indemnify an insured. It does not promise to repair it only promises to pay the money required to repair. Under full replacement cost provisions the insured is required to actually do the repair before the difference between actual cash value and replacement value. In this case the insured attempted to create a bad faith case out of a simple wind loss. They failed because they intentionally refused to comply with material policy conditions even after the insurer bent over backwards to satisfy them, hired engineers and expanded their estimate to comport with the estimate created by the insured’s contractor, only to have the insured do nothing to repair their property and then sue the insurer for bad faith damages.
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SOURCE: zalma.com