Is Cosmetic Roof Damage a "Direct, Physical Loss?"

I recently represented the owner of a commercial property in a hail damage claim in which the metal roof was clearly dented by hail.  Remarkably, the insurance company denied the claim on the basis that the roof was still functional.  In the process of working with the opposing lawyer to obtain payment, I ran across a FC&S Bulletin that was dead on point:

Direct Physical Loss and Cosmetic Loss

Hail stones have created dents to a copper roof. The section of roofing is located over a second story bay window. It does not appear that the hail has compromised the life span of the roof's surface or otherwise affected or decreased its useful lifespan.

Our HO policy provides coverage for direct physical loss. If the roof's integrity was not compromised by the hail stone impact, has a physical loss occurred?

We believe that some carriers view this type of damage as cosmetic and do not provide coverage for replacement of the copper roof. Does FC & S have an opinion?  


Whether or not the dents are cosmetic or affect the roof structure, they are still direct physical loss. The policy doesn’t define damage so standard practice is to go to a desk reference. Merriam Webster Online defines damage as loss or harm resulting from injury to property, person, or reputation. The roof now has dents where it didn't before; that's direct damage. The policy doesn't exclude cosmetic damage, so direct damage, even if it is cosmetic, is covered. It's the same as if vandals had painted the side of the house purple. While cosmetic, it's damage, and is covered. The principle of indemnity is to restore the insured to what they had before the loss, and this insured had a roof with no dents.

This one was fairly obvious to me - - my client had a roof without hail dents before the storm and a roof with hail dents after the storm.  But the insurance company denied the claim anyway.  I shared this article with the opposing lawyer, and the case was resolved shortly thereafter.  I encourage all adjusters, as well as lawyers practicing insurance law, to subscribe to the FC&S Bulletins.  Their industry reference materials are often a great supplement to case law.  

Commas and Sentence Structure are Important After All

The Tennessee Court of Appeals' recent decision in Artist Building Partners v. Auto Owners Mut. Ins. Co. serves as an important reminder in coverage disputes that any ambiguities will be strictly construed against the insurance company and in favor of coverage. Tennessee courts have made clear over and over again that any language in an insurance policy is ambiguous if it is susceptible of more than one reasonable interpretation. Going even further, our courts have held that if a disputed provision has more than one plausible meaning, the meaning favorable to the insured control. The Artist Building Partners case reaffirmed these long-standing principles, and I am not at all surprised at the Court's holding.

It was particularly nice to see the Court cite back to a 1996 Tennessee Supreme Court case that noted that "an insured should not have to consult a long line of case law or law review articles and treatises to determine the coverage he or she is purchasing under an insurance policy." The issue really boils down to one of reasonableness. Is the insured's interpretation reasonable and sensible? If so, the insured will (or at least should) win every single time.

Is Prejudice Required to Avoid Recovery for Failure to Submit to an Examination Under Oath?

 Back in 2009, Parks wrote about the Spears v. TFMIC case and correctly cited it for the proposition that an insured must submit to an examination under oath upon request, and that a failure to do so can bar recovery on an insurance claim.  Notably absent from the Spears opinion was any requirement of prejudice in order to avoid payment.  However, the Spears opinion is muddied a bit by a prior decision from the Sixth Circuit Court of Appeals in Talley v. State Farm Fire & Cas. Co., 223 F.3d 323 (6th Cir. 2000), in which the court held that an insurance company must prove prejudice in order to preclude recovery.

So what's the rule?  Must an insurance company show prejudice to avoid payment of a claim on the basis of a refusal to submit to an EUO?  In 2012, we almost got an answer to that very question in Farmers Mutual v. Atkins, 2012 Tenn. App. LEXIS 184 (Tenn. Ct. App. 2012).  In that case, Judge Stafford noted the potential conflict between Spears and Talley, and seemed primed to rule on this murky issue.  But unfortunately the ruling wasn't meant to be.  In short, the trial court apparently just noted the divergence of opinion on the issue and then granted an interlocutory appeal without ever ruling at all.  Thus, the matter was not ripe for consideration by the Court of Appeals and was remanded.  

This particular topic isn't particularly exciting, but nonetheless should be considered by both insurers and insureds when claims are denied for failure to submit to an EUO.  Depending on how this issue is ultimately decided, an insured's failure to show up just might not put the proverbial "nail in the coffin" of the insured.

TN Court of Appeals Impliedly Recognizes Claim for Common Law Bad Faith

You might recall the 2011 legislation that took away consumers' right to bring claims against insurance companies under the Tennessee Consumer Protection Act, but that same legislation seemed to recognize the existence of a common law cause of action for bad faith in Tennessee.  (click here for a prior post on that topic).  Since that time, I've been tracking a couple of bad faith cases working their way through the Tennessee appellate courts.  Today the Court of Appeals for the Western Section issued its ruling in one of those cases.  See U.S. Bank v. Tennessee Farmers Mutual Insurance Company.

The opinion itself was rather "ho-hum," and doesn't offer much of any substantive discussion regarding common law bad faith claims, but it impliedly holds that such a cause of action exists.  The issue in the case was whether a mortgage company who is a named mortgagee on an insurance policy has a duty to notify the insurance company of a foreclosure on the insured property.  The Tennessee Supreme Court previously ruled that no such duty exists, but on remand one of the issues to be considered was the Bank's common law bad faith claim.  After hearing proof on the issue, the trial court (Judge Clayburn Peeples) ruled that such a cause of action exists and expressly held that Tennessee Farmers Insurance Company acted in bad faith in denying the Bank's claim for insurance proceeds.  In reviewing Judge Peeples' decision, the Court of Appeals quoted his ruling at length, which stated in part:

US Bank has shown by a preponderance of the evidence the following elements of a claim for common law claim for a bad faith failure to pay:

a.That [Tennessee Farmers] issued a policy of insurance to US Bank and that US Bank made lawful, reasonable claim under that policy;

b. That [Tennessee Farmers] intentionally refused to pay US Bank's claim;

c. That [Tennessee Farmers] had no reasonably legitimate or arguable reason for its refusal to pay the claim; 

d. That [Tennessee Farmers] had actual knowledge of the absence of a reasonably legitimate, debatable or arguable reason for the refusal; and

e. That [Tennessee Farmers] intentionally failed to determine whether it had a reasonably legitimate or arguable reason for refusing to pay US Bank's claim.

In reviewing this holding by the trial court (which was a specific issue on appeal), the Court of Appeals seemingly accepted the elements of a bad faith claim as set forth by Judge Peeples, but then went on to hold that the facts before the Court did not amount to bad faith.  Its a rather odd opinion for such a big issue, but nonetheless is an extraordinary win for victims of insurance bad faith in Tennessee.  The door is now wide open for future common law bad faith claims.

The Law of California Applies to an Insurance Policy Insuring Tennessee Property?

Practitioners should be aware that Tennessee courts generally apply the law of the state where an insurance policy was issued and delivered if there is no enforceable choice of law clause in the policy.  Gov't. Employees Ins. Co. v. Bloodworth, 2007 Tenn. App. LEXIS 404 (Tenn. Ct. App. 2007).  So, for example, if a policy on a property in Nashville is issued and delivered to the owner at his home in California, the law of California would generally apply.  However, the Bloodworth case cited above  noted an exception that provides the an insurance policy is governed by the law of the principal location of the insured risk unless some other state has a more signficant relationship..

But what happens when there is a package policy that is delivered in California but covers properties in various states across the county?  That's when it gets hairy, and there is authority going both ways.  The best answer is probably found inThe Restatement (Second) of Conflicts, 193 cmt. f, which indicates that the court should treat such a case as if it involves multiple policies, each insuring its own individual risk.  So if a house is located in state X were damaged by fire, then the law of State X would apply under this analysis. 

Morrison v. Allen, Part II

Yesterday I wrote about the February 2011 landmark decision of the Tennessee Supreme Court in Morrison v. Allen.  There was one relatively minor point concerning an alleged misrepresentation in an application that grabbed my attention.  In Morrison, the insurance company denied Ms. Morrison's claim for life insurance benefits based on alleged misrepresentations of her husband in his application for insurance.  Specifically, the application asked, "In the past five years, have any proposed insureds been charged with or convicted of driving under the influence of alcohol or drugs or had any driving violations?"  The insured answered, "No."

The alleged misrepresentation arose from the insured's conviction for driving while impaired ("DWI") a couple of years prior to the submission of the application.  On first glance, it might appear clear that failure to disclose the DWI would constitute a material misrepresentation based on the language of the question in the application.  But not so fast.  The Supreme Court affirmed that the insured's response was technically correct because he was convicted of DWI, which is a separate offense from driving under the influence.  

Although this particular issue was literally just a footnote in the very lengthy opinion, it might come in handy one of these days for the unfortunate soul who finds his claim denied as a result of an undisclosed DWI.


Should a Deductible Be Subtracted in the Case of a Total Loss?

Consider this scenario - - Jane Doe insures her home for $100,000, with a $1,000 deductible. Unfortunately, Jane's house burns to the ground and is undeniably a "total loss" within the meaning of Tennessee's valued policy statute (click here for a prior post on when a loss should be considered a "total loss").  After months of investigation, the insurance company decides to pay the claim "in full" and sends a check to Jane for $99,000 (policy limits minus the deductible).  Was Jane inappropriately shorted $1,000.  In my opinion, yes.

Under Tennessee's valued policy statute (T.C.A. 56-7-803), an insurer is liable to the policyholder for the full policy limits if a total loss occurs.  In my view, this statute effectively prohibits an insurance company from subtracting the deductible in total loss cases.  My research reveals only one case addressing this precise issue, and that is Thurston Nat'l. Ins. Co. v. Dowling, 535 S.W.2d 63 (Ark. 1976).  In Thurston, the Arkansas Supreme Court held that an insurance company may not enforce a deductible provision in the case of a total loss when it results in the insured receiving less than policy limits in violation of Arkansas' valued policy law.  There is no logical reason why the same rule of law would not be true in Tennessee as well. 

Should Sales Tax Be Included When Calculating Insured Losses?

Chip Merlin, in his Property Insurance Coverage Law Blog, commented a few days ago about a recent case out of Washington, Holden v. Farmers Insurance of Washington, 2010 WL 3504821 (Wash. Sept. 10, 2010).  The issue there was whether sales tax should be included in insurers' calculations of actual cash value and replacement cash value.  In summary, the court rightly determined that sales tax should be included when determining the amount owed, even when paying actual cash value as opposed to replacement cost value.  

Although sales tax is a minor issue in many claims, it can add up to a lot of money, particularly when viewed from the vantage that an insurer in Tennessee is basically saving ten percent by refusing to pay sales tax.  To view Merlin's full post with a more in depth discussion of the case, click here.