Many insurers recognize this and will frequently advance a portion of the
loss payment at an early date to speed repairs and help the insured recover
from the casualty. This is particularly true in larger losses where there is
less risk that an advance will exceed the ultimate amount of loss.
Some insurers, however, are much less willing to make advance payments, even
where the insured needs the money to begin or complete repairs. In those situations,
the insured business may end up suffering additional and unnecessary losses.
These situations invariably lead to the question of when must an insurer pay a loss? The answer is
not as clear-cut as one might think.
Proof of Loss
The date a loss becomes payable is generally determined by the policy or
state statute or regulation. As with any insurance coverage question, the best
place to start is the policy language. Typical commercial property policy language
is as follows:
We will pay for a covered loss within thirty days after we receive the
sworn proof of loss if:
- You have complied with all of the terms of this policy; and
- We have reached agreement with you on the amount of loss; or
- an appraisal award has been made.
Under this and similar provisions, three things must occur before an insurer
is obligated to pay: (1) a proof of loss must be submitted to the insurer; (2)
ascertainment of the loss or damage must be made by agreement between the insured
and the insurance company or by appraisal or judgment; and (3) 30 days (60 or
90 days under some policy forms) must elapse from the date the proof of loss
is submitted and the loss is ascertained. Usually all three are necessary.
While "proofs of loss" have been used in property insurance claims for over
100 years, different policies have different requirements for what must be contained
in a proof of loss. Most require that the insured provide a sworn proof of loss
stating the time and origin of loss, identifying anyone with an interest in
the insurance proceeds, and the amount of loss. Insurers will frequently reject
proofs of loss if they are for other than an agreed amount of loss or if some
of the required information is missing. However, courts generally require only
substantial, rather than strict, compliance with the provisions for proofs of
loss.
The main impediment in obtaining money from the insurer is usually disagreement
over the amount of loss. Most commercial property policies make no provision
whatsoever for advance payments. Even those policies that do, almost invariably
state that the insurer has complete discretion as to whether it will make an
advance payment. However, most property insurers will timely investigate a loss
and begin the adjustment process by compiling estimates of the cost to repair
or replace the property. In that situation, the policyholder has a strong argument
that, at least as to the amount of the loss calculated by the insurer, there
is agreement between the policyholder and the insurer.
The policyholder should argue to the insurer that as long as the policyholder
submits a satisfactory proof of loss for a partial payment, the insurer's time
within which payment must be made has been triggered. As a practical matter,
therefore, it is very important for the insured and its adjustment team to make
sure that the insurer is moving quickly to investigate and calculate the amount
of loss and that copies of the insurer's estimates are promptly obtained. That
way, even if the insurer is initially reluctant to make an advance payment,
the insured has a strong argument that the insurer has agreed at least to the
amount of loss it has calculated, which should be paid.
On the other hand, some courts have rejected this concept. See, e.g.,Florists'
Mut. Ins. Co. v. Tatterson, 802 F. Supp. 1426, 1437 (E.D. Va. 1992).
The Tatterson court explained that there
is nothing in the policy which required the insurer to make any advance whatsoever.
Unfair Trade Practice Laws
Many states attempt to prevent unreasonable delays by insurers in the payment
of claims with unfair trade practice laws. Conduct constituting unfair claims
settlement practices under these laws include:
- Failing to act reasonably promptly upon communications with respect to claims.
- Failing to adopt and implement reasonable standards for the prompt investigation
and processing of claims.
- Failing to affirm or deny coverage of claims within a reasonable time after proof of loss
requirements have been completed and submitted.
- Not attempting in good faith to effectuate prompt, fair, and equitable settlements
of claims in which liability has become reasonably clear.
- Delaying the investigation or payment
of claims by requiring the insured to submit a preliminary claim report,
and then requiring the subsequent submission of a formal proof of loss,
both of which contain substantially the same information.
- Failing to promptly settle claims
where liability has become reasonably clear under one portion of the insurance policy to influence settlements
under other portions of the insurance policy.
The common issue throughout the various state statutes is whether any delay
in claims handling or payment is reasonable. Only where delay is unreasonable
will an unfair claims settlement practice be found. Of course, many of these
statutes do not provide for a private cause of action. Those that do not offer
no help to the policyholder.
Duty of Good Faith and Fair Dealing
An insurer's delay in payment of a loss is a common basis for bad faith claims.
Reasonableness of the delay is again the key element in determining if there
is a valid cause of action. In most jurisdictions which recognize first-party
bad faith, before an insurer can be found to have acted in bad faith due to
delay in payment of policy benefits, it must be shown that the insurer acted
unreasonably or without proper cause. What is reasonable must be evaluated as
of the time of the insurer's decisions and actions. Damages available for bad
faith delays vary from state to state and often include an award of punitive
damages, attorney fees, penalty interest, pre-judgment interest, and/or consequential
damages.
Delays in the payment of a claim might also lead to the award of consequential
damages. For example, business interruption coverage is typically provided for
a defined period of time, which is considered to be the amount of time necessary
to repair or replace the damaged property. In circumstances where an insurer
unreasonably delays paying a loss, some courts may enlarge the period of restoration
by the time it took for the insurer to begin paying the claim.
Conclusion
Most property insurance claims are paid in a timely fashion and in a manner
which reduces the loss and inconvenience to the insured. However, where there
is unreasonable delay on the part of the insurer, remedies may be available
to compensate policyholders for that delay. The availability of those remedies
also acts as a deterrent to insurers which ignore their responsibility to pay
losses in a timely fashion.