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.
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.
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.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.