This article was first published in Texas Law360
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The first-party insurance claims process has always been pretty simple for the typical insured: call the agent to report a claim, identify and quantify the claimed damage, work cooperatively with the insurance adjuster to support the claimed damage, and hire contractors to repair the damage. It has traditionally been a collaborative process that effectively resolved the overwhelming majority of first-party insurance claims without incident.
With the onslaught of hail litigation in Texas, the traditional model is now changing. And not for the better.
Since 2012, hail claims in some parts of Texas have been increasingly likely to involve attorneys, lawsuit, or public adjusters. Data collected by the Texas Department of Insurance shows that between 2011 and 2012, public adjuster involvement in a claim increased by 900 percent. In that same period, the likelihood of a policyholder to sue an insurer increased by 1,400 percent. Indeed, hail claim litigation has become a burgeoning business in Texas. As a result of the dramatic increase in lawsuit filings, courts have been saddled with sorting out issues such as the improper joinder of adjusters, late notice, concurrent causation and whether claims survive payment of appraisal awards. Litigation concerning these issues continues.
Another issue garnering recent attention in the courts involves a more fundamental aspect of the insurance claims process: the insured’s burden to identify and quantify claimed damage.
The Insured’s Fundamental Burdens
Texas law has always been clear that as the party seeking coverage, the insured has the burden to establish a covered cause of loss during the applicable policy period. The traditional method of claim resolution is consistent with Texas law on this point. The onus is on the insured to contact the insurer and identify and quantify the damage it claims is payable under the insurance policy. The insurer has no burden to actively seek information regarding additional damage when the insured has made no report of such. Yet, as discussed below, a tactic utilized in litigation with increasing frequency seeks to shift this burden to the insurer.
A Developing Trend Seeks To Disrupt The Traditional Claims Model
It is now common in Texas hail litigation for lawsuits to include damage components the insured never previously identified or quantified. Specifically, instead of the traditional claims process described above, the current process follows a pattern such as this: the insured files a lawsuit for breach of contract and a myriad of extracontractual claims following an adjustment process during which there was never any dispute as to the damage identified and quantified. New damage components appear for the very first time in an estimate attached to a presuit demand letter or in a lawsuit filed by the insured.
As an initial matter, this seems to fly in the face of equity. How could the basis for breach of contract be the failure to pay a claim on a damage component that was never presented to the insurer? How could an insurer have even potentially performed a thorough inspection when it never knew the insured expected it to inspect alleged damage? How could it have made a payment for damage the insured never quantified? Doesn’t this trend permit the insured to shirk the fundamental contractual obligation it has when it submits an insurance claim?
League City v. Texas Windstorm Insurance Association
In January 2017, the First District Court of Appeals in Houston agreed that an insured could not recover for breach of contract when it identified property damage components for the first time only after suit was filed. In League City v. Texas Windstorm Insurance Association, the insured made wind damage claims for “various” locations following Hurricane Ike. The insurer paid for identified damage and closed the claim. Instead of making supplemental damage claims, the insured sued for the insurer’s failure to inspect “numerous additional structures.” Upon notice of suit, the insurer requested the insured to identify all damaged locations. The insured did not. The insurer demanded appraisal, but the insured still did not identify all damaged locations. In fact, it did not identify all damaged locations even when the court ordered it to do so. The case proceeded to trial, at which time the insured claimed the insurer failed to conduct a reasonable investigation and make payment for damage to 29 properties. The properties were not part of its original claim, and were not part of the appraisal. The insurer never even knew they were at issue.
The insured argued the insurer would have known of the damage if it had adjusted the loss properly. The jury disagreed, finding the evidence showed the insured breached the policy’s prompt notice provision and the insurer was prejudiced because lack of notice prevented it from conducting a reasonable investigation and making a timely payment. The court agreed. It noted that without communication, the insurer could not have known whether the insured expected further investigation, adjustment or payment, or if it agreed with the adjustment and payment that had already been made. The court observed that in order to avoid coverage, the insurer must show that 1) the insured failed to comply with the prompt notice provision, and 2) the insurer suffered prejudice as a result. In this case, the notice was wholly lacking. To this end, the court held:
When an insured’s failure to comply with a prompt-notice requirement causes prejudice to the insurer, it defeats coverage. [The insurer] established that [the insured’s] failure to comply with the prompt-notice requirement caused it prejudice. This negated [the insured’s] breach-of-contract claim and resolved the issue of coverage in [the insurer’s] favor.
Ultimately, the insured’s breach of contract claim failed.
League City addresses the problematic situation that arises when an insured accepts a claim payment without dispute, files suit without first attempting to resolve a problem, and then complains that various other property damage components were never addressed. It is consistent with other emerging Texas precedent on this issue. League City, as well as the cases noted below, suggest that Texas courts running up against this gross misuse of the claims process, see through the ruse.
Other Texas Courts Also Reject The New Tactic
Given its blatantly obvious nature, it is not surprising that iterations of the tactic in League City have been called out before. In 2015, the Fifth Circuit refused to accept the insured’s argument that general statements in a pleading, without more, constituted notice of an additional claim. The court agreed that prompt notice was required as soon as practicable, and determined that when notice was not given until more than two and a half years after a hurricane, and until after appraisal had taken place, the insurer was prejudiced as a matter of law. This was because the insurer was at least substantially deprived of the right to investigate the loss.
Additionally, Judge Micaela Alvarez in the United States District Court for the Southern District of Texas has now addressed this issue three times. In 2015, she twice addressed the situation in which the insured accepts a claim payment, fails to identify additional damage and then simply files suit for breach of contract. Both times, she noted that the insurer has no general duty to pay claims when it receives no notice of damage. Failure to notify the insurer of the claimed damage is a breach of the policy’s prompt notice provision.
Similarly in 2016, Judge Alvarez determined that insureds could not support a suit for breach of contract when they accepted a payment for recoverable depreciation and did not dispute the amount of recovery or advise the insurer of further damage prior to filing suit. She held: “The fact that Plaintiffs are dissatisfied with the damages paid is not the result of [the insurer’s] failure to fulfill a policy obligation; instead, it results from Plaintiffs’ knowing failure to even submit damages to [the insurer] prior to filing this lawsuit.”
Some Legislative Help
The Texas Legislature is presently considering Senate Bill 10, which is specifically directed at addressing many of the common abuses taking place in Texas hail damage claims. One aspect the legislation seeks to remedy is the increasingly common abuse of adding new damage components for the first time in litigation. Senate Bill 10 creates a requirement that the insured provide meaningful prelitigation notice to the insurer, including identifying and quantifying damage components it seeks to recover in litigation. While this does not excuse the insured’s failure to comply with its burden to identify and quantify damages during the actual claims process, the Senate Bill 10 requirement would at least provide the insurer with additional information before a lawsuit is filed, affording the insurer an opportunity to resolve legitimate disputes prior to years of litigation.
It is time to return the traditional insurance claims model to the Texas claims process. The legal manipulation of the process, as witnessed in League City and similar cases, must be curtailed. These cases make clear that accepting payment, staying silent, dropping a lawsuit out of nowhere, and then complaining that more damages are owed is a practice which grossly departs from what the claims process was intended to be. Further, the current practice wholly disregards the insured’s burden under the policy while simultaneously obliterating the insurer’s ability to comply with the law. But — the jig is up. In light of League City and other recent decisions, attorneys who continue to manipulate the claims process by adding damage components for the first time in litigation now do so at the peril of having such claims dismissed in their entirety.
Perhaps, these attorneys instead will tell potential clients (typically referred by roofing contractors, public adjusters and other case solicitors) to first call their insurers, present the additional claim components and try to resolve claims amicably without the need for attorneys and litigation.