Vol. 55 No. 5

Trial Magazine

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Break Down Disaster Defenses

Insurers use multiple affirmative defenses and policy exclusions to try to evade covering your clients’ property damage when natural disasters strike. Learn how to successfully overcome these challenges through motion practice and discovery.

Soren Gisleson May 2019

Natural disaster cases, in the context of first-party insurance policies, generally involve many and large-scale property damage claims against insurers who try to gain ground by wielding policy terms as weapons and engaging in motion practice built on specious defenses.

Here are three overarching strategies you can use to limit or defeat the insurer’s tactics altogether:

  • Whittle down insurers’ affirmative defenses through offensive motion practice. 
  • Use motions to compel to obtain information about the insurer’s policies and practices.
  • Depose corporate representatives to establish duties and settle factual disputes.   

Counter Affirmative Defenses

Insurers’ answers to petitions and complaints in natural disaster cases often seem to lift affirmative defenses from Federal Rule of Civil Procedure 12 and restate every single policy exclusion. Don’t ignore these defenses no matter how vague they are—in doing so, you miss an opportunity to eliminate these defenses completely or at least demonstrate that an insurer lacks sufficient information to support certain defenses.

Filing a motion to strike defenses under Rule 12(f) or the state equivalent can greatly limit an insurer’s arguments at trial. Inevitably, the insurer responds by quoting or paraphrasing almost every policy exclusion and limitation. Policies often exclude coverage for damages related to a renovation, a preexisting condition, a construction defect, or wear and tear. In addition, insurers attempt to limit coverage by accusing a property owner of fraud, misrepresentation, or failure to mitigate damages; arguing that the claim is not an “occurrence” under the policy; or presenting an alternate valuation of the damages.

You can overcome most of these defenses by challenging their relevance and arguing that they lack factual support. Courts typically consider motions to strike affirmative defenses under a ­standard parallel to a Rule 12(b)(6) motion to dismiss. Courts are not required to accept bare conclusory defenses or ­inadequately pleaded ones.1 An inadequately pleaded defense is one that would fail to give notice under Rules 8 or 9, or both.2 Often, an insurer simply restates the policy exclusion of “failing to cooperate with the claims ­adjustment” without any factual statement that the insured actively obstructed the ­adjustment or failed to do something specific. Challenge these affirmative defenses early to force insurers to respond in court with at least some factual basis for alleging them. You likely will be surprised at how this can streamline issues and limit future discovery fights.

Fraud or misrepresentation. This affirmative defense must be dealt with before discovery. It allows the defendant to bring the insurance application into play and to expand discovery parameters. If the insurer is allowed to include the defense of misrepresentation, then it will use this defense to examine every statement the insured made during the course of procuring insurance, even if the statement has nothing to do with the cause of loss or valuation of damage. Many times the defense is quickly dropped when challenged. Other times the insurer may argue that something in the insurance application that was factually wrong, such as the type of roof or whether there was a sprinkler system, triggers the defense.

Even if an insurer defeats your motion to strike on fraud or misrepresentation because it was able to raise some alleged misrepresentation, you’ll still have a better idea where it is headed and can focus your discovery efforts accordingly.  

Failure to mitigate. If the insurer raises a failure to mitigate defense and defeats your motion to strike based on a new factual allegation (such as the ­plaintiff’s failure to remediate the property for three months), then you can anticipate this and affirmatively address the issue in discovery. You will know to question the corporate representative about the issue, and you can cut off other avenues of inquiry by limiting the insurer to what it represented was the basis in its pleading.

Not an occurrence under the policy. Insurance companies also may argue that the cause of the damage is not within the definition of “occurrence” in the insured’s policy. This is a threshold challenge by the insurer to exclude the cause of loss, whether by alleging that the loss was caused by something not covered under the policy (such as a flood under a wind policy) or by a stated exclusion (such as third-party negligence). 

Challenge this defense to force the insurer to state a specific policy determination rather than restating boilerplate exclusionary language. Occurrence affirmative defenses are raised frequently in mixed cause of loss claims where one cause is covered and another is not.3 For example, a wind insurance policy may exclude water damage, but wind events such as hurricanes or tornadoes often occur contemporaneously with floods. 

Valuation of damage. The insurer may dispute all or part of the scope of damage, even if it took a different position during the presuit claims period. Challenge this defense through specific questions for the corporate representative, motions to compel, and motions for partial summary judgment. In the best-case scenario, you can further establish a bad faith case in ­jurisdictions where the insurer’s duty of good faith and fair dealing persists after suit is filed.4 In the worst-case scenario, you will discover what future motion ­practice is likely to focus on.

Policy, Practices, and Procedures

Disaster cases are factually driven, and policy exclusions only apply if supported by facts. You can objectively prove many facts of your case through evidence obtained from your client, such as photographs, testimony, and eyewitness accounts. However, to determine how facts are applied to policy exclusions, look to evidence from the defendant—particularly its employees who have the authority to bind the company, such as those who handle coverage and policy determinations on a broader scale, rather than a single adjuster preparing an estimate.

Internal “policy” and “practices and procedures” typically guide how insurers evaluate claims—and that is crucial to your client’s case. Policy refers to the rules that an individual adjuster must follow in evaluating a claim usually contained in an insurer’s adjusting manual (a collection of written rules for the individual adjusters who draft adjusting reports). You often can obtain an adjusting manual through regular discovery without a motion to compel. Because they are constantly undergoing revisions, request all versions of the manual, including those from before and after the date of loss.

Practices and procedures include how individual adjusters imple­ment the adjusting rules and the ways that upper management typically behaves independent from the individual adjusters. An entire level of decision-making occurs at the managerial level that never finds its way into the adjusting manual, although managerial-level decisions can have a greater impact on the value of a particular claim. Adjusters use rules to uniformly implement managerial decisions, but managers typically are not bound to written rules.

If you are able to go higher into the chain of management (beyond a typical adjuster or adjusting supervisor), you will discover that these managers are unfamiliar with their company’s policy manual and decide issues based on unrealistic measures. For example, an insurer may calculate the value of drywall based on a macro scale and not drywall’s actual cost in the real world immediately after a natural disaster when the prices have skyrocketed. 

Use practices and procedures information to determine the basis for the insurer’s scope of damage and pricing decisions. Managerial decision-making may run counter to good-faith adjusting practices and reveal what the insurer knew, when it knew it, and why it took so long to pay so little.

Practices and procedures usually are more difficult to access than the adjusting policy—you may need to file multiple motions to compel those documents and conduct corporate representative depositions. Demand the records of the insurance company employees who decide how to adjust larger geographical areas, including their email communications, and request information regarding corporate structure. Expect to engage in significant e-discovery negotiations and related motion practice to get what you need. Insurers try to limit discovery to the plaintiff’s property at issue, but you need to understand decisions that were made on a larger level that influenced or controlled the adjustment of your client’s claim.

Depose Corporate Representatives

Insurance companies decide how to adjust claims from the top down, not the bottom up. They create policies at the highest level to determine their universe of risk. A single adjustment decision that a regional manager made may save an insurance company millions but cost individual homeowners money.

Take corporate representative depositions to obtain information about policy interpretations, the facts of the case, and coverage. Initially, the insurer may designate the adjuster or the adjusting supervisor. While this may be OK for some of your areas of inquiry, they likely will not be able to answer specific questions on why the insurer chose a particular adjusting software, how the unit prices in the software were calculated, the insurer’s adjusting rules for specific geographic areas, or what constitutes “satisfactory proof of loss.”

You may want to ask the corporate representative about the scope of damage, cost, pricing, notice, and issues unique to bad faith—such as how quickly a loss should be adjusted, what qualifies as satisfactory proof of loss, or what supporting documents are adequate to satisfy the insurer’s responsibility under the policy. Be sure that the corporate representative you request to depose has knowledge of the areas of inquiry attached to the notice of deposition. As the Fifth Circuit has held, “If the designated ‘agent is not knowledgeable about relevant facts, and the principal has failed to designate an available, knowledgeable, and readily identifiable witness, then the appearance is, for all practical purposes, no appearance at all.’”5

This deposition also can be used to cut off areas of discovery, to forgo unfavorable policy interpretations, and to resolve factual disputes. Corporate representative testimony can be used to defeat many coverage-related summary judgment motions and provide you with bases to file your summary judgment motions. Simply taking the corporate representative through each affirmative defense enumerated in the answer and asking what facts support each one will take you far in defeating a future motion for summary judgment or will become important testimony for a jury to hear.

In addition, when a corporate representative is pushed on a misrepresentation or fraud issue, he or she may equivocate between an intentional and unintentional misrepresentation, try to defer to some other person, or recant altogether. This becomes a sword to be used in motion practice and at trial.

Timing the deposition. In natural disaster litigation, you may have many similar cases against the same insurer, and a corporate representative deposition regarding the application of certain policy interpretations can be used in multiple cases. You can use information obtained through a deposition in an early case to demonstrate an insurer’s bad faith in a later case. You also may be able to amend complaints in earlier cases to include ­bad faith claims when you uncover information through a deposition in a later case. Information obtained through corporate representative depositions also can be used to strike defenses, to support motions to compel in other cases, to file motions for summary judgment, and at trial.

It is important to know when to take this deposition. Take it too early, and you may not be able to question the corporate representative about new matters that arise later in discovery. Take it too late, and you may wind up taking depositions and engaging in motion practice that you don’t need—for example, if the corporate representative agrees with you on various policy interpretations or factual issues.

I generally consider two factors when deciding how to time my depositions: whether the property was damaged as part of a larger catastrophe and whether the property can be objectively determined as a complete loss. If either of these factors is true, I generally take the corporate representative deposition as soon as possible, usually after receiving the claims file and written policies. In these situations, the benefits of forgoing unnecessary depositions and discovery outweigh the unique issues that may arise with a more complicated loss. If the corporate representative concedes coverage, then retaining a coverage expert may not be necessary. 

If the corporate representative concedes that he or she does not have an individual factual basis for how the unit costs in the pricing software were determined, then authenticating the contractor’s expenses should be sufficient. And if the corporate representative gives you a favorable definition of satisfactory proof of loss, then you may not need to depose additional adjusters or claims representatives who handled the claim.

If the property is not part of a larger catastrophic loss and is not a total loss (or the loss is of mixed causes), then it likely makes sense to take the corporate representative deposition toward the end of the discovery period. This will ensure that you are able to question the witness about any idiosyncrasies of the case that you learn about in discovery.

Nonetheless, it is prudent to request a corporate representative deposition early in the discovery process, even if the deposition will not be scheduled until later or until after other depositions are taken. Issuing a notice for deposition, even without a firm date, gives you some security that a summary judgment motion will not be filed until you can take that deposition. Issuing a notice for deposition of a corporate representative’s electronically stored information (ESI) before issuing the merits corporate representative notice is also common. An ESI deposition ensures that you ask the right questions, look in the right places, and obtain the right documents.

By tackling common defenses early on, you can build strong arguments against them to carry your case through trial.


Soren Gisleson is a partner at Herman, Herman & Katz in New Orleans. He can be reached at sgisleson@hhklawfirm.com. 


Notes

  1. See, e.g., Fesnak & Assoc., LLP, v. U.S. Bank Nat’l Ass’n, 722 F. Supp. 2d 496, 502 (D. Del. 2010). State courts generally follow federal courts on these types of procedural issues.
  2. See, e.g., Haley Paint Co. v. E.I. Du Pont De Nemours & Co., 279 F.R.D. 331, 335–36 (D. Md. 2012).
  3. See Brian D. Katz, Soren Gisleson, & Joseph E. Cain, When Disaster Strikes, Know the Drill, Trial 20 (June 2013).
  4. See, e.g., La. Rev. Stat. §22:1973 (2015).
  5. Brazos River Auth. v. GE Ionics, Inc., 469 F.3d 416, 433–34 (5th Cir. 2006) (quoting Resolution Trust Corp. v. S. Union Co., Inc., 985 F.2d 196, 197 (5th Cir. 1993)).