What The Hail Is Going On With Texas Insurance Claims?

Texas Law360
November 14, 2014

The onslaught of new hail damage lawsuits does not appear to be ending anytime soon. The docket of every county in which a significant hail event has occurred in recent years sees numerous new hail damage lawsuit filings every day.

And with an increase in lawsuits comes an increase in reported court decisions. District Judge Jane Boyle in the Northern District of Texas appears to have her fair share of hail damage lawsuits and last month she issued another opinion addressing hail damage issues, this time on, among other things, replacement cost coverage.

In Devonshire Real Estate & Asset Management LP vs. American Insurance Company[1], Judge Boyle was asked to address cross motions for partial summary judgment regarding the proper amount to pay following an appraisal. Devonshire claimed it sustained extensive damage to its roof, chimney, carports and windows resulting from wind and hail. American’s adjuster inspected the property and originally estimated the replacement cost of the damage at $391,485.93. After subtracting $99,247.01 for depreciation and $155,841.17 for Devonshire’s deductible, the adjuster concluded that the payable actual cash value of Devonshire’s claim was $136,397.75. American issued a check to Devonshire for that amount.

Devonshire did not agree with American’s measure and hired a public adjuster to prepare an estimate of the damage to the apartments. The public adjuster estimated that the cost to repair the damage to the apartments was $764,987.37. Devonshire and American continued to discuss the claim measure. Ultimately, American agreed to revise its gross measure from $391,485.93 to $507,074.43. Based on this revised measure, Devonshire issued a supplemental payment in the amount of $178,588.50.

After issuing the supplemental payment, American decided to hire Belfor Property Restoration to complete an independent estimate of the claimed damage. Belfor calculated the gross measure to be $610,177.19.

Around that same time, Devonshire submitted a new estimate from Smart Roofing & Restoration claiming the cost to repair the damage was $715,662.47. Based on this new estimate, Devonshire sent a letter to American requesting an additional payment of $99,316.16 based on the Smart Roofing estimate (after applying all prior payments and the applicable deductible).

In response, American advised Devonshire that it was prepared to settle the claim based on the Smart Roofing estimate of $715,662.47, plus an additional $10,008.06 for out-of-pocket repairs. Shortly after receiving that correspondence, Devonshire submitted a supplemental claim for damage to an ice and water shield in the amount of $49,253.61.

Eventually, American paid Devonshire an additional $304,096.72 based on the estimate from Smart Roofing and the additional cost of replacing the ice and water shield, even though it later turned out that Devonshire had not replaced the shield.

But Devonshire was not done. After receiving payments consistent with its measure and supplemental claims, Devonshire again submitted a supplemental claim for damage to certain gutters, downspouts and carports in the amount of $90,938.81.

American was done. It refused to make any additional payments. Devonshire filed suit.

Not surprisingly, after the lawsuit was filed Devonshire increased its claimed damages for the remaining items from $90,938.81 to $164,637.21. American then filed a motion seeking to compel appraisal. Judge Boyle granted the motion in part.

The parties went to appraisal on the issues of the amount of damage to the metal roofs, gutters and downspouts.

The appraisers ultimately issued an appraisal award with a replacement cost value for these items in the amount of $220,725.19, with an actual cash value of $198,308.13, less prior payments. Following the appraisal, American issued a check to Devonshire for $66,905.32 for the additional amounts owed after deducting prior payments, applying an offset for its alleged overpayment of Devonshire’s claim for damage to the ice and water shield, and adding an unpaid cost which was not addressed by the appraisal.

Both parties moved for summary judgment regarding whether replacement cost or actual cash value is the proper measure of damages for several of the claimed damage items. American also filed a motion for summary judgment on several other issues, including whether it was entitled to deduct from its payment of the appraisal award an amount equal to its prior overpayment of Devonshire’s claim for damage to the ice and water shield. Devonshire objected to American’s motion and filed a cross-motion for summary judgment on several of its claims including the claim that American breached the insurance policy.

You got all this straight in your head?

Judge Boyle initially determined that the plain language of the insurance policy dictates that Devonshire may only recover replacement cost once it has completed repairs. Devonshire wrongly attempted to claim that they could recover replacement cost even if they did not repair the property. Devonshire attempted to read the replacement cost coverage language in the policy in isolation and ignored the provision in the policy which explicitly restricts Devonshire’s ability to recover on a replacement cost basis only after repairs were completed. Specifically, the policy contained language that American “will not pay on a replacement cost basis for any loss or damage: (1) Until the lost or damaged property is actually repaired or replaced; and (2) Unless the repairs or replacement are made as soon as reasonably possible after the loss or damage.” The clear and unambiguous language in the policy demonstrated that Devonshire could only recover replacement cost once it had repaired or replaced the lost or damaged property.

Rather than focusing on the language in the Policy, Devonshire claimed: (1) that the cases cited by American were factually distinguishable; (2) that Devonshire was only required to complete 50 percent of repairs in order to receive replacement costs based on an offer of settlement from American; (3) that if the court adopted American’s reasoning then Devonshire may be forced to file a second lawsuit which may be barred by collateral estoppel, res judicata or the applicable statute of limitations; and (4) that Devonshire may elect to recover on a replacement cost value basis regardless of whether it replaced the damaged property based on the doctrine of prevention because Devonshire was prevented from making repairs due to American’s refusal to pay the actual cash value of Devonshire’s second supplemental claim.

Judge Boyle reviewed the various positions asserted by Devonshire and determined that the policy unambiguously required Devonshire to make actual repairs before claiming replacement costs and granted summary judgment for American on this issue.

American also moved for summary judgment regarding whether it could take an offset from its payment of the appraisal award in an amount equal to its overpayment of Devonshire’s claim for damage to an ice and water shield. American previously paid Devonshire the cost of installing a replacement shield based on Devonshire’s representation that the shield had been replaced and later found out it had not been replaced. Based on this misrepresentation, American contended that it was entitled to offset the appraisal award in an amount equal to its overpayment of the ice and water shield. Devonshire’s attorney reportedly told American’s adjuster that Devonshire’s contractor had “completed all the roof repairs, but not the remaining items in the scope of work” and requested that the full amount of the holdback be released.

Because Devonshire had not replaced the ice and water shield, the court held that American was entitled to an offset of the appraisal award in an amount equal to its overpayment of Devonshire’s claim for the damage to the ice and water shield. The court reserved judgment as to the proper amount of the offset.[2] Notably, although not directly on point, this holding by Judge Boyle could also lead to potential offsets following an appraisal award when the appraisal award is for less than the insurance company previously paid.

This case illustrates many of the issues insurers are facing every day with hail claims. In particular, this case illustrates that a claim is almost never wholly presented with the initial measure — there always seem to be additional supplements forthcoming and new allegations of damage in litigation. One would hope that appraisal could be a valuable tool to clean up all of these issues once and for all. Unfortunately, however, not even appraisal could bring an end to the disagreements and confusion in this claim.

Fortunately, Judge Boyle provided clear direction as to when an insurer is required to make a replacement cost payment and how that payment is to be determined. This is at least the third district court in Texas to address the replacement cost issue this year.[3]

With the continued increase in hail claims being filed every day, we can expect more reported decisions related to the issues arising in these claims. With each decision comes clarity of the issues and, perhaps more importantly, an awareness by the courts of What the Hail is Going On? with these claims.[4]

[1] CA No. 3:12-CV-2199, 2014 WL 4796967 (N.D. Tex. Sept. 26, 2014).

[2] Judge Boyle also addressed the parties’ summary judgment motions regarding Devonshire’s claims for the breach of the duty of good faith and fair dealing, violations of Chapters 541 and 542 of the Texas Insurance Code and breach of contract.

[3] See Cent. Mut. Ins. Co., 2014 WL 1092121, at 5, (W.D. Tex. March 19, 2014); O’Quinn v. General Star Indem. Co., No. 1:13–CV–0471, 2014 WL 3974315, at 6 (E.D.Tex. Aug.5, 2014)

[4] See Texas District Court Finds Out ‘What The Hail Is Going On’, published in Texas Law 360.

Originally published in Texas Law360 on November 14, 2014.