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Avoiding Consequential Damages For Failure To Timely Pay First-Party Property Claims

By Morgan A. Godfrey

Introduction

The scenario is not unusual. The insurer has received a first-party property loss claim,¹ in this case involving a fire loss to commercial property, that it considers significantly overstated. Based upon a complete investigation, including an analysis of the claim’s worth, the insurer has made an offer to settle the claim to the insured for a specified amount, subject to a policyholder’s release and a proof of loss in the offered amount. However, the insured will not agree.

According to the insured’s estimates, significantly more is due. In addition, the insured has begun to complain that, due to the delay in payment, it has incurred additional business income loss or other loss from the inability to use the damaged or destroyed covered property.

The result is an impasse and now the insurer finds itself in a quandary. On the one hand, it does not want to make payment without receipt of a release of all claims or a proof of loss in which the insured explicitly agrees that the amount offered is the amount of the loss or damage; based upon the recent position of the insured, a civil claim for additional funds may be forthcoming and any insurance proceeds immediately paid could be used to finance the prosecution of that very claim. In addition, the insurer does not want to institute the appraisal process outlined under the policy as this means additional expense and time before the claim file is closed.

On the other hand, there is no dispute between the parties that at least the amount offered by the insurer is due.

Faced with this dilemma, the insurer puts the file back on the shelf and waits for the insured to make the next move, hoping that, with the passage of time, the insured will eventually agree with the insurer’s determination and accept the amount offered as payment in full. However, such delay can subject the insurer to a civil suit claim for consequential² damages for failing to timely pay an undisputed amount, a claim which, depending on the circumstances, can be very expensive in terms of the cost of defense and damages.³

In this article, we explore a sampling of case and statutory law regarding consequential damages for delay in payment, as well as some practical tips for how to avoid such claims in the first instance.

Olson v. Rugloski

The Minnesota Supreme Court decision of Olson v. Rugloski⁴ provides a good example. There, Plaintiff Olson, the insured, obtained coverage for two trucks used in his business in the amount of $5,000 apiece. Olson requested that his agents seek an increase in coverage in the amount of $10,000 for each truck. This was not done. The trucks were subsequently destroyed by fire on December 24, 1974. The claims representative for the insurer inspected the trucks and determined that each had been damaged in excess of $13,000.

On two different occasions, the insurer offered $5,000 per truck and requested that Olson sign a policyholder’s release as a condition of payment. However, Olson refused, claiming that he had $10,000 in coverage for each truck.

Olson then retained an attorney, who contacted the insurer to obtain the undisputed amount in exchange for a partial release. The insurer found the release unacceptable, but did not seek to modify it. It also refused to make the undisputed payment. Finally, in June of 1976, after the insured filed a motion in court to require payment, a modified release was signed and Olson received the undisputed $10,000.

Olson brought suit against its insurance agents and the insurer for failure to increase the coverage on the trucks, and the insurer for consequential and punitive damages due to the delay in payment.

The trial court found the agents liable for the failure to raise the coverage. It found the insurer not liable for concerning the increase in coverage, but awarded damages against the insurer because it found that it had “willfully, wantonly, and maliciously refused” to pay Olson the sum of $10,000.00 due under the policy.

The appellate court affirmed $7,500 in compensatory damages for lost profits.⁵ In reaching its decision, the court noted, “In the present case we recognize that there was a valid dispute between the insured and the insurer over the increased coverage. There was, however, no dispute that the policy provided coverage of $5,000 per truck and that the damage to each truck clearly exceeded $10,000.” It added that, while a release documents a compromise and settlement or accord and satisfaction of a disputed claim, payment of an admitted liability does not provide consideration for accord and satisfaction or compromise and settlement. Therefore, the insurer was not entitled to a release and, by refusing to pay the undisputed amount unless the insured signed a release, the insurer breached the contract and became liable for all damages that were a natural and proximate result of the breach.

One of the several lessons that can be gleaned from the Olson decision is that obtaining a policyholder’s release for payment of an undisputed amount may not insulate the insurer from further liability, including that attributable to the delay in payment, where it is subsequently determined that additional payment should have been made. The underlying reason is that payment of only what is due under the policy, a contractual obligation that the insurer already has, does not provide the necessary additional consideration to bind the insured to the additional terms of a release.

Statutory Law

The majority of jurisdictions have enacted statutes which contain requirements for insurers to follow regarding claim practices including, among other things, the timing of payments under the policy.⁶

The majority of courts have held that the claims practices statutes do not provide for a private cause of action.⁷ However, there is a significant minority that hold otherwise.⁸ By way of example, Louisiana has taken the additional step of codifying the availability of consequential damages for payment delay.

Louisiana statutes provide:

A. An insurer, including but not limited to a foreign line and surplus line insurer, owes to his insured a duty of good faith and fair dealing. The insurer has an affirmative duty to adjust claims fairly and promptly and to make a reasonable effort to settle claims with the insured or the claimant, or both. Any insurer who breaches these duties shall be liable for any damages sustained as a result of the breach.

B. Any one of the following acts, if knowingly committed or performed by an insurer, constitutes a breach of the insurer’s duties imposed in Section A:

. . .

5) Failing to pay the amount of any claim due any person insured by the contract within sixty days after receipt of satisfactory proof of loss from the claimant when such failure is arbitrary, capricious, or without probable cause.⁹

Statutes, such as that outlined above, underscore the importance for insurance professionals to familiarize themselves with the pertinent statutory and regulatory requirements regarding claims practices, including the timing of payments, for the respective jurisdictions in which they practice.

Avoiding Claims for Consequential Damages

There is no pat answer concerning the course of action the insurer should follow for the overall handling of a given claim. This is because the course of action to take depends on the language of the policy at issue, the statutory or regulatory requirements of the given jurisdiction, and, of course, the facts and circumstances of each case. However, some general guidelines suggest themselves.

The safest course of action to avoid claims for consequential damages for delay in payment is for the insurer to pay at the earliest opportunity for that loss or damage which is known to be covered in the amount within the policy limits that is undisputed, period. Seeking agreement with the insured that the amount offered is the amount due is entirely appropriate. However, where the amount of payment is in dispute, withholding payment unless and until the insured provides a release of claims, or a proof of loss in which the insured attests that the amount due equals the offered amount, can set the table for a consequential damages claim against the insurer.

This does not mean that the insurer must ignore the terms of the policy. For example, standard forms require the submission of a proof of loss within a certain time frame as a condition precedent to payment.¹⁰ The distinction stressed here is the difference between requiring from the insured a proof of loss, which may contain a greater or lesser amount than the insurer has determined is due, versus conditioning payment on receipt of a proof of loss only in the amount that the insurer is willing to offer, when the insured disputes this amount.

Moreover, the standard forms provide that if there is a dispute regarding valuation of loss or damage, either the insurer or the insured may invoke the appraisal clause and process.¹¹ The insurer has the option to pay the undisputed amount and invoke the appraisal clause, or to pay the undisputed amount and invite the insured to institute the appraisal procedure in the event of continued disagreement.

As a practical matter, even if the insurer makes timely payment of the undisputed amount of the claim, the insured can and may bring suit for the additional amount the insured believes is due. In this instance, a carefully documented record in the claims file of timely payment of undisputed amounts within policy limits for covered loss or damage, without attempts to strong arm the insured to settle for only the amount the insurer is willing to pay, will stand the insurer in good stead. Such a record strengthens the insurer’s argument to the court or jury that it was acting in good faith and, conversely, takes away some of the emotional appeal of the insured’s claim. In addition, in the event that the insurer is determined to owe more, the contractual damages for breach or interest on such damages may be reduced.

Conclusion

Where the insured and the insurer are in dispute concerning the amount due for a first-party loss or damage claim, in order to avoid a claim by the insured for consequential damages as a result of a delay in payment, and the associated litigation expense, the insurer should consider immediate payment of undisputed amounts within the policy limits, and without conditioning such payment on a release of claims or a proof of loss in only the amount the insurer believes is due.

The insurer, pursuant to the terms contained in the standard forms, retains the option, if necessary, to invoke the appraisal process to resolve any continuing valuation dispute. In addition, such timely payment can be used as evidence of good faith in the event that suit ensues. In the worst case scenario, such timely payment can reduce damages for breach of the policy terms, or interest on judgment, in the event that a court or jury determines at a later date that additional payment is due.

Notes
¹ First-party insurance has been defined as including: uninsured/underinsured motorist coverage; property insurance; life, health, and disability insurance; employee dishonesty insurance; business interruption insurance; title insurance; surety bonds; and, workers’ compensation insurance. Law and Practice of Insurance Coverage Litigation § 28.1 (First-Party Bad Faith) (West Group & ABA 2000). “First party insurance means that the insurance carrier has directly contracted with the insured to provide coverage and to reimburse the insured for his or her damages up to the policy limits.” Marshall v. Saseen, 192 W.Va. 94, 100, 450 S.E.2d 791, 797 (1994).
² The term “consequential damages” means “losses that do not flow directly and immediately from an injurious act, but that result indirectly from the act.” Black’s Law Dictionary (7th ed. 1999). Various jurisdictions differ on what may constitute consequential damages in the context of insurer delay in claim payment. The term consequential damages has been recognized to include damage for such varied items as lost profits, costs incurred in defending actions by creditors, interest and expense associated with inability to pay bills, attorneys fees, loss of property use, and aggravation and inconvenience shown in the entire claims collection process. See Lawrence v. Will Darrah & Assoc., Inc., 445 Mich. 1, 516 N.W.2d 43 (Mich. 1994) (lost profits); Indiana Ins. Co. v. Plummer Power Mower & Tool Rental, Inc., 590 N.E.2d 1085, (Ind. Ct. App. 1992) (cost incurred in defending creditor actions, interest and expense from inability to pay bills, but not attorneys fees); Miller v. Fluharty, 201 W.Va. 685, 500 S.E.2d 310 (1997) (loss or property use, aggravation and inconvenience, and attorney’s fees).
³ Indeed, the award of consequential damages can, in a particular case, exceed the policy limits. Indiana Ins. Co. v. Plummer Power Mower & Tool Rental, Inc., 590 N.E.2d 1085, 1090 (Ind. Ct. App. 1992) (holding that policy limits restrict the amount the insurer may have to pay in performance of the contract, but not the damages recoverable for its breach). See generally 14 Couch on Insurance § 204:4 (3d ed. 1999).
⁴ 277 N.W.2d 385 (Minn. 1979).
⁵ The appellate court reversed the award of punitive damages as, under Minnesota law, such damages are not available for a breach of contract, unless accompanied by an independent, willful tort, and as a result of insufficient evidence of fraud, oppression or malice. Id. at 388. However, when, and under what conditions, punitive damages may be awarded for insurance payment delay is beyond the scope of this article.
⁶ See Janet L. Brown, Amanda H. Reher, Personal Liability of Adjusters and Other Claim Professionals, Defense Research Institute, Course Book Series at p. 84 (February 2000) (citing thirty nine jurisdictions that have enacted or administratively adopted versions of NAIC amendments regulating insurance claim practices).
⁷ See Id. See also Sherman and Crowl, The Judicial Response to Unfair Claims Practices Laws; Applying The National Experience To The Minnesota Act, 12 WM. Mitchell L. Rev. 45, 55-75 (1986).
⁸ See Janet L. Brown, Amanda H. Reher, Personal Liability of Adjusters and Other Claim Professionals, Defense Research Institute, Course Book Series at p. 84.
⁹ La. R.S. 22:1220 (emphasis added).
¹⁰ See Insurance Service Office, Inc. (ISO) CP 00 10 10 00—Building and Personal Property Coverage Form, E. Loss Conditions 3. Duties In The Event Of Loss Or Damage (a)(7). Appraisal.
¹¹ See Id. at E. Loss Conditions 2. Appraisal.

ABOUT THE AUTHOR

Morgan A. Godfrey is a Senior Associate with the law firm of Johnson & Condon, P.A., Minneapolis, Minnesota, where he practices in the areas of insurance coverage and construction litigation. He received his J.D. from William Mitchell College of Law.

riskVue | The webzine for risk management professionals
June 2004