by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
INSURANCE; CASUALTY INSURANCE; REBUILDING CLAUSE: Where insurer, following timely submittal of claim and other information by property owners, delays its offer to pay for fire damage until one month before expiration of policy time limit for rebuilding, insurer's reliance on expiration of rebuilding time limit to reduce amount of coverage is unreasonable. Columbia Mut. Ins. Co. v. Sanford, 920 S.W.2d 28 (Ark. Ct. App.--1996). The owners timely submitted a claim for $64,000, but their insurer made no offer to pay until 11 months following the loss date. A rebuilding condition in the policy allowed the insurer to reduce the coverage by 40% if the home had not been rebuilt within 12 months following the loss date. The appellate court found the insurer's actions to be unreasonable, remarking that "[u]sing [the insurer's] reasoning, an insurer may withhold payment on a covered claim until the 'eleventh hour' - in this case the eleventh month - and thereby force the insured to either comply in merely thirty days or accept a forty percent reduction in coverage."
Comment: Even in commercial situations, as here, the insurer has virtually complete control over the minutiae of policy language and construction. Consequently courts do, and, in the editor's opinion, should view such contracts as subject to extensive reinterpretation in light of the legitimate expectations of the insured.
INSURANCE; CASUALTY INSURANCE; "TOTAL LOSS:" A home damaged by fire is not a "total loss" where the foundation and 15% of the garage remain and there is no evidence that a reasonably prudent homeowner would not use the remnants to rebuild. State Farm Fire & Cas. Co. v. Mower, 917 S.W.2d 2 (Tex. 1995). The homeowners sought to recover $104,000, the payoff on their mortgage, but were offered only $90,000 by their insurer. Their mortgagee informed the homeowners that the mortgagee would accept such offer if they did not. An interpleader action followed. The Supreme Court of Texas, observing that there was not a "total loss" and no evidence that a reasonably prudent homeowner would not use the remnants to rebuild, held that the homeowners were entitled to only $90,000. Interestingly, the insurer's adjuster had originally determined that reconstruction costs would exceed the $175,000 policy limit; he quickly changed his mind when he learned of two sub-$90,000 reconstruction bids obtained by the homeowners.
Comment: The trial court jury had found a total loss, had awarded $50,000 in emotional distress damages and $5 million in punitive damages. The Texas Supreme Court decision results in a total vindication for the insurers. Is Texas finally finding the bottom of the punitive damages "money pit" for good faith and fair dealing cases?
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