Claim Preparation and Adjustment Expense: Courts Might Not Get It
November 2009
In any sizeable property insurance claim,
the policyholder incurs significant costs in developing the claim, in presenting
the claim to the insurer, in gathering information requested by the insurer
in response to the claim, and in negotiating the claim.
by Jay M.
Levin
Reed Smith
This frequently requires retention of various consultants, including construction
consultants for building damage, accountants for time element coverages, and
specialists when the claim involves complex or unique equipment or industry-specific
requirements such as clean areas for computer or pharmaceutical manufacturers.
Policyholders frequently hire public adjusters to oversee the claim preparation,
presentation, and negotiation process, and the public adjusters frequently hire
the necessary consultants. In other situations, a sophisticated policyholder
will manage the claim process itself and directly retain consultants. The claim
process is frequently referred to in the industry as the "adjustment" process,
with both policyholder and insurer working toward an "amicable adjustment" of
the claim.
Sophisticated policyholders frequently have coverage for claim preparation
expenses in their policies, although most insurers specifically exclude public
adjuster fees from that coverage. In a complicated claim, this additional coverage
can be worth tens of thousands of dollars. One typical provision reads as follows.
This section covers the reasonable expenses incurred by the Assured for
professional services such as auditors, accountants, architects, and engineers,
except the Assured's own employees or public adjusters, which are required
to present the loss which is covered by this Section.
As is typical in most policy provisions which provide for the insurer to
pay claim preparation expense, public adjuster fees are specifically excluded.
CSX Corp. v. North River Ins. Co.
There have been few cases addressing the scope of this additional coverage.
The most recent case, albeit unreported, is CSX Corp.
v. North River Ins. Co. et al., No. 3: 08–CV–00531–J–25 MCR, M.D. Fla.
(Sept. 25, 2009). CSX arose out of a Hurricane
Katrina claim and the opinion dealt with a number of different issues. In this
article, we focus on the portion of the opinion that dealt with loss adjustment
expenses.
CSX retained Price Waterhouse Coopers (PwC) to assist in the collection and
analysis of data to help prepare CSX's Hurricane Katrina claim. The policy did
not provide for claim preparation expense coverage in a separate paragraph or
in a delineated additional coverage; it simply included "claims adjustment expenses"
as a part of covered loss. CSX claimed PwC's fees and expenses as part of the
claim. The insurers refused to pay, claiming that PwC was not an adjuster and,
therefore, its fees and expenses were not covered.
The court took a very cramped view of "claims adjustment expenses" and held
that it referred only to expenses incurred by an "adjuster." Since PwC was not
a licensed public adjuster, and was not retained by the insurers, the court
held that the expenses CSX incurred to have PwC assist in preparing the claim
were not "claims adjustment expenses." The court cited to a California case
holding that "loss adjustment expenses" generally
means the expense incurred by the insurer to investigate and settle a claim,
citing Woodliff v. Cal. Ins. Guar. Ass'n, 3 Cal.
Rptr. 3d 1, (Cal. App. 2003).
CSX correctly pointed out that "claims adjustment expenses" could not refer
to expenses incurred by the insurer because there would be no reason to provide
coverage for the insurer's expense. However, the court was not persuaded. The
court did not even discuss the alternative constructions of "claim adjustment
expenses." It simply held that the term could only include expenses incurred
by an adjuster. Interestingly, the court in CSX
did not even consider the possibility that the phrase "claims adjustment expenses"
might be ambiguous. It simply construed it against CSX, the policyholder.
In context of the history of this additional coverage, in particular the
fact that insurers universally exclude public adjuster expenses from coverage
under this type of provision, to hold that only public adjusting expenses would
be covered seems bizarre indeed. Given the court's failure to consider the inherent
ambiguity created by its reading of the coverage, and the universal exclusion
of public adjuster fees from this type of additional coverage, the court reached
an obviously incorrect result.
Fountain Powerboat Ind., Inc. v. Reliance Ins. Co.
A more generous and appropriate view of how to construe this kind of provision
may be found in Fountain Powerboat Ind., Inc. v. Reliance
Ins. Co., 119 F. Supp. 2d 552 (E.D. N.C. 2000). There, the policy covered
claim preparation expenses under the following typical provision:
Expenses incurred by the insured or by the Insureds Representatives including
auditors, accountants, appraisers, lawyers, consultants, architects, engineer,
or other such professionals in order to arrive at the loss payable under
this policy in the event of a claim. This provision does not cover expenses
incurred for the services of any public adjuster.
Fountain Powerboat claimed attorneys' fees not only for the cost of preparing
the claim, but also for the cost of the coverage lawsuit. Fountain Powerboat
did not claim the cost of pursuing its bad faith claim. The court found that
the clause was clear and unambiguous and, by its plain language, covered legal
fees incurred in the coverage litigation to determine the meaning of the policy.
Fountain Powerboat had also retained a consultant who provided input regarding
the claim, but did not prepare any of the documents presented to Reliance in
support of the claim. He organized claim data and negotiated with Reliance.
Reliance claimed that he was a licensed public adjuster, although he was not
licensed in North Carolina, where the loss and the loss adjustment took place.
Reliance therefore refused to pay his fees under the public adjuster exception
in the additional coverage. The court held that the individual's actions were
"more in line with a consultant than a public adjuster" because he did not independently
track down information; he simply took information given to him by Fountain
Powerboat and provided professional advice and services. The court therefore
allowed the expenses as claim preparation expenses.
Conclusion
As these two cases make clear, the best way to avoid litigation over claim
preparation expenses, as with most other policy provisions, is to review the
policy and understand the coverage it provides before a loss. It also makes
sense to carefully review the policy once a loss occurs to identify precisely
what coverages are available and the best way to maximize recovery. If claim
preparation expense is covered, the policyholder should confirm that the insurer
is aware of the coverage and should then feel free to retain the necessary consultants.
This should lead to a more complete recovery, if not a smoother adjustment process.
If the policy provides coverage for claim preparation expenses, but excludes
public adjuster fees, the insured should consider directly retaining the public
adjuster's sub-consultants so that the insured can present those expenses and
have them reimbursed, as opposed to having them be part of the public adjuster's
fees. This should also allow the policyholder to negotiate a reduced fee from
the public adjuster. In addition, if there is any ambiguity in the provision,
while it should be read in favor of the policyholder and in favor of coverage,
the CSX case shows that courts do not always
follow that rule. Therefore, it behooves the insured to raise the issue with
the insurer early in the process so that any disputes can be resolved before
substantial expenses are incurred.
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