February 23, 2020

Two Common Mistakes Policyholders Make with Property Insurance Claims

Posted by Mark Miller

In this blog post, Mark Miller addresses two common mistakes policyholders make with property insurance claims.

To provide context, it is important to understand how corporate property insurance claims are typically handled. Because property insurance claims present a series of complex legal issues, insurance companies typically obtain legal advice on larger property claims from inception. Policyholders, on the other hand, typically do not. Policyholders typically engage an insurance broker or public adjuster to handle claims on their behalf. Brokers and public adjusters know insurance industry custom and practice, and they know how to handle claims in accordance with long-established understandings with insurance companies regarding what insurers will and will not pay. Legal involvement on the policyholder side, if at all, only comes into play down the road when the insurance company refuses to pay what they owe.

It is only at this point, perhaps a year or more into the claim, that policyholders are advised by counsel about the legal implications of their claim, including mistakes that were made. This video illustrates two common mistakes.

Proof of Loss Deadlines

The first mistake centers around proof of loss deadlines. A proof of loss is a sworn statement outlining the loss. Many property insurance policies state that a proof of loss must be filed within a specific period of time, such as 90 days from the date of loss. With complex corporate claims, it is impossible to assess a loss within 90 days, let alone swear under oath that the stated amount is the full amount of loss suffered. Moreover, business interruption and other “time element” losses often continue long after the proof of loss deadline has expired. So, policyholders are faced with an impossible-to-meet deadline.

For this reason, insurance industry custom and practice is to ignore proof of loss deadlines. When asked if a proof should be submitted, insurance adjusters will likely say that there is no need to submit a proof of loss until the loss has been agreed to by the policyholder and the insurer. In fact, if a policyholder offers to submit a proof of loss before they are asked to do so by the insurance company, the insurance company will treat the unrequested proof as a “hostile proof.” The word hostile says it all. In the insurance industry, irrespective of what the policy says, policyholders are instructed not to submit proofs of loss unless and until the insurance company asks them to do so.

The mistake with respect to proofs of loss arises because policy language and industry custom and practice are different. Although most jurisdictions will not require a policyholder to submit a proof of loss in this typical situation, the law is far from uniform. The solution to the problem, as addressed more fully in the video, is really quite simple, request an extension.

Suit Limitation Deadlines

The second mistake that policyholders make is by being lulled into thinking that the insurance company will pay the claim and missing a limitation on filing suit. Many property insurance policies have a limitation on filing suit against the insurance company. Commonly, these limitations are one or two years. Problems arise because complex property insurance claims are not typically resolved in this time period. In fact, in some situations, business interruption losses can continue for two years or more. Hence, it makes no sense for a policyholder to preemptively file suit if the parties are still working out the claim.

For these reasons, industry custom and practice is to ignore suit limitations deadlines. Typically, insurance carriers are negotiating claims, and cutting checks for losses, long after the suit limitations period has expired.

The issue comes up only when the insurance carrier decides they are done paying the claim. At that point, their counsel sends the policyholder a letter stating that the insurance company is finished paying, and that there is no recourse, given that the suit limitations period has expired.

The solution, as addressed more fully in the video, is to obtain a suit limitations extension from the carrier.

Please watch the video to learn more, or Contact us if you have any questions.

We have included a transcript below:

Two Common Mistakes Policyholders Make with Property Insurance Claims

Two common mistakes policyholders make with property insurance claims. So, what’s a property insurance claim? Well, businesses insure themselves usually with all-risk property insurance. Now, an all-risk property policy covers all risk of physical loss or damage to property. So, if a hurricane comes in, or a flood, or a typhoon, or anything happens, and it damages the property, businesses have pretty large expenditures to repair that property. That’s what a property insurance claim is.

What typically happens with a property insurance claim… hurricane hits… destroys a building. The policyholder tenders the claim to the insurance company. These claims are a little bit complicated to put together and get the insurance company the adequate information. They’re very, very document-intensive. A lot of questions will be asked, and a lot of things need to be done. So, typically, a company would hire some sort of outside consultant to do this or they’d rely on their broker to try to help them with the claim.

So, the broker will work on it or the consultant will work on it for some period of time. Then, what will happen is maybe things aren’t getting paid. We’ve seen situations where we’ve been hired one year into it and no money’s been paid at all. There are various reasons for this. Nobody’s necessarily at fault other than the insurance company, but the bottom line is we’re drawn into this to try to see if we move things forward because things haven’t gotten done. So, what we have is sophisticated companies are looking to the brokers, looking to outside consultants to handle these claims.

So, the title of this is Two Common Mistakes. Here’s the two most common mistakes we see. One is honoring proof of loss deadlines. Now, what’s a proof of loss? A proof of loss is one- or two-page document. It just says, “Here’s our loss,” and it gives the number, and it says, “Here’s the policy that it’s under.” It’s signed under oath by someone at the policyholder’s office. So, it’s signed under oath saying, “Our loss is $23 million,” $23,348 whatever. So, it’s going to have a full number of what the loss is, and it has to be substantiated.

Well, what’ll happen is the consultant or the broker will, in some instances, not do a proof of loss. Think, “No big deal.” Well, it might be no big deal, but sometimes the policy says that the proof of loss needs to be done within 90 days of the date of loss. Well, 90 days is pretty much impossible for a large loss because you’ve no idea what the damage is and the damage is still likely continuing.

So, a lot of times what the broker or the consultant will do is make a phone call. “Hey, Joe. We, you know, you weren’t thinking we should file proof of loss, were you?” They like, “Oh, absolutely not. We’ll file a proof after everything’s agreed on.” “Cool. Okay. That’s great here because there’s no reason to file one, right?” “Yeah. No reason to file one. We’re all on the same page.”

This conversation takes place and it usually does, but the problem is the policy says that extensions need to be in writing and there’s no writing documenting that. Now, I’m not saying this is a catastrophe because most jurisdictions look at exactly what happened, what the back and forth was so, at the end of the day, it’s not a problem. But if you’re not doing things pursuant to the policy, it creates an issue. It has to be dealt with by a lawyer. That creates more cost to the policyholder.

So, our point is read the policy. Don’t make the mistake of not submitting a proof of loss or asking for an extension in writing. That’s mistake number one.

Now, mistake number two is a mistake that the courts have tried to fix and most courts have fixed it, saying that they’re not going to let an insurance company walk on this issue, but mistake number two is a suit limitation. Many property policies say a lawsuit has to be filed within one year or two years of the date of loss. So, think about it. A year goes by and nothing’s paid. We get a call. We read the policy. The policy says that if you’re going to file suit, you have to do it within one year. Well, it’s already past a year. We’re too late.

So, what does that mean? As I said, most jurisdictions say that it’s not a problem. We’re not going to enforce that, but there are some jurisdictions that do enforce that. The answer is, in those jurisdictions, potentially, you’re out of luck because you missed the one-year deadline. You can say all you want about how it doesn’t make any sense and it doesn’t make any sense. There’s no possible way that, with a large corporate claim, you can understand the claim and file suit within one year, yet that language still exists in the policy.

So, two things to watch for, corporate policyholders: proof of loss deadlines; read the policy; follow it. And two: suit deadlines; read the policy; understand what they are. All of these things can be easily dealt with if the policy’s read. Ask for an extension… the extension will likely be granted. If it’s not, then an insurance company will not grant the extension at their peril.

Mark Miller discusses property insurance claims
Attorney Mark Miller

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