Thoughts on Advances
If you're a reader of insurance blogs, I'm certain you've read the recent warfare between Parks Chastain and Chip Merlin. They both make good points on the issue of advance payments (see their posts here and here). The truth is that there really is very little law in Tennessee concerning advance payments. Even so, Tennessee's Unfair Claims Settlement Act of 2009 provides some guidance:
- An insurer must adopt and implement reasonable standards for the prompt settlement of claims arising under its policies (T.C.A. 56-8-105(3)). This would seem to necessarily require that an insurance company have standards in place for advances as to undisputed portions of a claim. Even an insurance company would have a hard time making the argument that it doesn't have an obligation to pay a few thousand dollars to its insureds after a fire to ensure that they aren't sleeping on the street until the claim is resolved in full.
- An insurer must attempt to effectuate prompt, fair, and equitable settlement of claims submitted in which liability has become reasonably clear. (T.C.A. 56-8-105(4)). In other words, an insurance company has an absolute obligation to promptly pay undisputed portions of a claim.
- When making a payment, an insurer must indicate the coverage under which payment is being made. (T.C.A. 56-8-105(10)). Certainly an insurance company is entitled to a credit against the policy limits of the applicable coverage when it makes an advance, but this provision makes it mandatory that the insurance company let the insured know the coverage under which an advance is being made.
Policyholder's Advocate's Blog Questioning Misconceptions on Advances Shows Extent of Misconceptions, and the Reasons Why They Are Problematic
William F. "Chip" Merlin, Jr., of the Merlin Law Group, wrote a blog in which he derided (a nice word) the blog I posted on August 18, entitled “Advances-Common Misconception.” Mr. Merlin is a Plaintiff's/Policyholder's Attorney. (www.merlinlawgroup.com). His website describes him as “The Policyholder’s Advocate.” His advocacy is evident as his comments concerning advances misunderstand the very points I was making, misconstrue the true nature of advances, evidence a misreading of the actual blog I posted. Check out his commentary at:
Chip missed the point, and also missed the reason the blog was posted. He asks:
Why do insurance company attorneys tell their insurance company clients that they can abuse their policyholders with legal immunity?
Did you see anywhere in the blog where I suggested advances should never be made? Of course not, as most who read it could tell. Even Brandon, my worthy usual adversary and co-author of this blog, has not “taken me to task,” as Chip purports to do. My point was to educate and prevent misconceptions from arising. Here are Chip’s two biggest mistakes – let’s call them continued “misconceptions” – although one wonders how someone with his experience could unintentionally misunderstand statements made in the blog:
1. He cited to some policies that do require advances. The exact wording of my blog posted August 18 states:
Generally speaking, most insurance policies do not require the insurance carrier to make an advance
That did NOT say that no policy exists which may not require an advance.
2. He then says we have an obligation to pay the undisputed portion of the claim – and I agree. But any knowledgeable reader knows that is not what an advance is – an advance is money paid before an investigation is complete. If it is complete, we know the undisputed portion. Based upon that analogy, he argues that payments could wait years, and violate applicable laws. Obviously, that is an incorrect assessment. If you start with a bad premise (i.e., the advance is the really the “undisputed portion”), you must reach a faulty conclusion, as Chip has done.
Anyway, thanks to Chip for pointing out exactly why we needed to clear up misconceptions. His blog demonstrates my point exactly, although I really had not thought that anyone would have these misconceptions.
And, let me add this, my blog notes that some carriers do make advances and some do not. It is not a condemnation of advances, but rather an attempt to clear up misconceptions to which some policyholder attorneys contribute. These misconceptions evidenced by Chip’s posting cause a problem, when the attorney for the policyholder convinces the insured that a company is treating them unfairly by not making advances. The insured often decides to become adversarial, to the benefit of the policy holders attorney, when it is often not necessary. If attorneys would be objective in their assessments as to policy obligations, much litigation could be avoided.
I enjoy the challenge of litigating with lawyers who know the rules, and understand the issues involved. When I deal with lawyers new to coverage litigation, I find that they have many of the same misconceptions I have set forth, and perhaps those that Chip has evidenced. In many cases, the companies I have represented have made advances, but the insured claimed they were not enough. The policyholder’s attorney usually writes a letter demanding an advance, copies to his client. That creates a perception it the mind of the policyholder that an advance is required, when it may not be. Things are never the same after that, as the policyholder is convinced the carrier has failed to do something required. In most cases, nothing could be further from the truth.
Advances - Common Misconceptions
I want to address some misconceptions about advances under first party policies. By this, I mean a request for money made by an insured before the investigation is complete. While the circumstances of an insured’s loss often place the insured in a difficult financial situation, that situation does not alter the insurance contract. Therefore, let’s debunk some common misconceptions:
1. Generally speaking, most insurance policies do not require the insurance carrier to make an advance. Rather, the policies provide a timeframe for investigation and the insured’s compliance with conditions precedent to recovery. With only a couple of exceptions, there is no right to payment until the policyholder has complied with policy conditions.
2. Therefore, there is no “right” or “entitlement” to an advance.
3. Advance payments do not constitute an admission of liability. I direct your attention to T.C.A. § 56-7-131, a statute that seems to address both first and third party advance payments. To download a PDF copy, click here.
4. If a verdict results in favor of the insured, the advanced amount should reduce the amount awarded to the plaintiff. T.C.A. § 56-7-131.
5. Subsection (c) of T.C.A. § 56-7-131 specifically provides that any payments made by an insurance company shall be deemed to have been made pursuant to the limits of the policy, and shall be credited against the insurer’s obligation to the insured arising from the policy.
6. If an advance is made, and there is no coverage, the carrier should be entitled to recover that advance.
7. The statute also provides, as does most case law, that an advance does not toll any statute of limitations or contractual suit period.
Some carriers make advances, and others do not. Much depends upon the nature of the claim, the status of the investigation, and the situation of the insured/policyholder. When advances are made, there is no right to another advance.
I would just reinforce for all readers that the policy will set forth the requirements imposed upon an insured, and the quicker and more completely an insured complies, the quicker and ore completely the carrier can evaluate the claim.
"Total Loss" Doesn't Necessarily Mean "Burned to the Ground"
Tennessee's valued policy law(T.C.A. 56-7-803) provides that an insurer is liable to the policyholder for the full policy limits if a total loss occurs. As a result, the big "fight" is often over the issue of whether a loss is "total" or "partial" in nature. Back in May, Parks Chastain commented here that the identity test should be used to determine whether a structure will be deemed a total loss. Parks relied on the Laurenzi and Hollingsworth cases to support his contention that the test is whether a building has lost its identity and specific character as a building. I think our courts interpret the valued policy law in a less restrictive manner than Parks suggests is appropriate.
First, let me point out that the Tennessee Supreme Court, with its present composition, would almost certainly adopt the prudent man test if given the opportunity. Such a test would be an alternative to the identity test referenced by the Laurenzi decision. Under the prudent man test, a house could be considered a total loss if a prudent man would not repair the property because the repair costs would be close to or exceed the replacement cost of the structure. Such a test has been widely accepted across the nation.
Second, and more importantly for a present analysis, the Tennessee Court of Appeals has made clear that Tennessee law does not require that a house is necessarily only a partial loss simply because it can still be identified as to its type of structure. King v. Dunlap, 945 S.W.2d 736 (Tenn. Ct .App. 1996). On the contrary, both the King and Laurenzi cases make clear that a building can still be deemed a total loss even when walls are still standing, the foundation is unimpaired, and some parts of the structure are unconsumed. There is no requirement that there be an absolute extinction, or that all materials be physically destroyed. For example, in Mann v. Grange Mut. Cas. Co., 1986 WL 14223 (Tenn. Ct. App. 1986), the Tennessee Court of Appeals affirmed the trial court's holding that a building was a total loss even when the second level of the house, including the roof and walls, were not completely destroyed.
The lesson? Just because the brick is still standing doesn't mean your loss isn't total in nature. Don't get confused by the "total loss" language. At its base level, it really all boils down to whether it would be reasonable to repair a house or not. Even though that's not technically the legal test, its going to result in the same conclusion most of the time. So if an insurance company attempts to argue that a house isn't a total loss even though it is agreeing the home needs to be demolished and rebuilt, don't go for it. You've got a total loss, and you are entitled to the full face value of your insurance policy.
