| Just Because You Have Insurance Doesn’t Mean You’re Covered Two recent cases spotlight how insurance technicalities matter. The first insurance coverage case is about following the proper procedure set out in the policy. Some policies are “claims made” policies while others are “occurrence” policies. Which type are your policies? Under a “claims made” policy, the insurance policy covers occurrences which may give rise to a claim that comes to the attention of the insured and is made known to the insurer during the policy period. By contrast, an “occurrence” policy covers all claims based on an event occurring during the policy period, regardless of whether the claim or occurrence is brought to the attention of the insured or made known to the insurer during the policy period. CompUSA, Inc., purchased a “claims made” Executive Protection Policy from Federal Insurance Co., covering its directors and officers, for the period December 16, 1998, through December 16, 2000. Sure enough, CompUSA was sued in Texas by COC Services, Ltd., on the basis that CompUSA breached an agreement to form a joint venture to expand CompUSA’s personal computer business into Mexico. CompUSA decided the case had absolutely no merit, and was so convinced of its position that it decided to defend the case without notifying Federal. It should have known something was wrong with its strategy when the trial took several weeks. According to the jury, CompUSA misjudged the value of the case by a mere $90 million for intentional interference with an existing contract, and an additional $175.5 million in exemplary damages. Six days after this verdict, CompUSA’s Executive Vice President and General Counsel (one wonders how he still held his job) wrote Federal a letter to notify them of the COC lawsuit and judgment. The letter requested that Federal acknowledge the notice and confirm coverage under the policy. ” The policy required, by its written terms, that CompUSA give Federal “written notice as soon as practicable of any Claim.” The notice of this claim was sent over 11 months after CompUSA had been sued. And based on that fact, Federal replied “yeah, right” and denied coverage. Then Federal filed a separate lawsuit asking the Court to declare that it was not obligated to indemnify CompUSA and its officers and directors from any loss arising from the COC lawsuit, on the basis that CompUSA failed to provide Federal with notice of the claim as per the insurance contract. As you can imagine, CompUSA lobbed every conceivable argument at the federal trial court in Dallas (Fitzwater presiding). It didn’t matter, they lost on all counts. The rule is this: when a contract says “as soon as practicable” it means “within an reasonable time.” This issue is not for the jury, but is decided by the judge. There is Texas case law specifically holding that taking 11 months to notify an insurer is not “as soon as practicable.” And now there’s one more case. I dare say 11 days may be too long to wait, and certainly 11 weeks would be really pushing it. Eleven months is a no-brainer. To show you the lengths to which CompUSA went, it argued that Federal received actual notice of the COC lawsuit before the case went to trial, because CompUSA had included a blurb about the case in its SEC Form 10-Q which was obtained by a Federal underwriter via the Internet. The Court refused to buy it, saying:
Also, courts always strictly interpret notice provisions in a “claims made” policy. When the language says notice must be in writing delivered to a certain address, the notice must be in writing and delivered to that address. And it better be done in a way the insured can prove delivery, such as overnight mail with a signature, or certified mail, return receipt requested. Well, CompUSA wasn’t satisfied with the trial court’s decision, so it appealed to the 5th Circuit Court of Appeals. It shouldn’t have wasted the paper, because the Fifth Circuit wasn’t nearly as nice as Judge Fitzwater, remarking:
I doubt the case will be appealed to the U. S. Supreme Court. So the moral to this story is to read your insurance policy, make sure you know the claims procedure, and follow it to the letter. Follow the proper procedure. Unfortunately, procedure is only part of the battle. There must be substantive coverage of the claim once you properly notify the insurance company of the claim. Just ask the Norstruds. In 1997 Daniel and Betty Norstrud began building a 3,700 square foot house in Argyle, Texas. They made the unfortunate mistake of hiring their friend, Doug Chaney, to build it. They didn’t have any piers or beams engineered into the architectural plan, but either Daniel, Chaney, or both, decided it would be a good idea to install not just a few, but 45 piers under the house plus 4 more under the garage. These piers were straight shaft piers, meaning they were the same size from top to bottom. The house was apparently completed in late 1997. Cold weather hit in January, so Daniel Norstrud closed off the gate valve to his sprinkler system to keep it from freezing. With the sprinkler system off, the Norstruds received a shocking water bill in February for using 82,000 gallons of water in January. Daniel immediately suspected a water line leak, and checked the property. He checked the water meter’s leak detection dial. Nothing. He called the water company, and they said they’d noticed the increase in usage, and even sent a meter reader out twice to verify the accuracy of the reader. Wouldn’t it have been nice if they had given Daniel a heads up on this? But of course, they didn’t. March came and with it, a thaw. Daniel opened the gate valve and turned on the sprinkler system to water the yard. Everything seemed to work fine. But after the system completed its cycle, Daniel again walked the property and this time noticed a large area of ground with water bubbling up to a level one-half inch to one inch above the ground. He located the leak about six feet from the Northwest corner of the house, dug it out, found the fracture in the main feed line, and repaired it. Shazam. The water usage returned to normal. But Daniel’s problems were just beginning. In April of 1998, cracks began appearing in the house. And they grew. No repairs worked. From time to time they could hear the house pop, creak, groan and move. The weight of the roof settled down and put too much pressure on the living room walls. Finally Daniel got Builder Chaney involved again, and Chaney diagnosed the problem as a “classic water leak,” suggesting that Daniel get an engineer to take a look at it. Ah, too little, too late. The Norstrud’s engineer, Esam Jarwan, concluded in an October 17, 1998, report, that the sprinkler leak caused the fine particles of the soil to wash out, decreasing on the west side of the house and causing the foundation to sink on that side. The Norstruds filed a claim for damages with their homeowners insurance company on October 23, 1998. There was no issue with timely notice or improper procedure in this case. Sounds like an open and shut case. Sprinkler system leaks, ground moves, foundation settles, cracks appear, expert agrees. A very reasonable, rational, probable cause and effect. But Trinity Universal Insurance Company wasn’t impressed, and denied the claim after its investigation. With no other option, the Norstruds filed suit against Trinity to force them to pay the claim. The case went to a jury. Trinity’s investigator, Dr. John Bryant, took into account 6 things:
Dr. Bryant had recently patented his “resistivity imaging technique.” Since electricity flows through water faster than it does through rocks, sand or other ground material, he tests for water by placing electrodes along the top of the ground, runs electricity through the electrodes, and determines the water concentration of an area of ground by the electrical conductivity of the ground. Pretty high falutin’ stuff. The result of all of the data Bryant looked at was devastating. Everything pointed to the same problem. The Norstruds had built their house on two very different types of soil. On the North side, the soil was Callisburg fine sandy loam soil; while on the South side, the soil was Wilson clay loam soil. Apparently Wilson clay and Callisburg sand get along like the Hatfields and McCoys, with or without water, and they react very differently to water. The bad news just kept coming. Dr. Bryant noticed that some of the rakers in the attic, designed to support the roof, were missing, causing too much load to be put on the living room walls. And so the Norstruds had a builder liability claim against their friend Chaney for at least some of their loss. Not exactly the remedy they were looking for. As if that wasn’t enough, it seems the Norstruds had only themselves to blame for yet another problem. Remember those 49 piers they wanted, the ones no one bothered to engineer? They ended up making the foundation problem much, much worse instead of better. For one thing,, they were straight shaft piers. When the soil on the South got wet and expanded, the water in the soil would make the piers move up. Had the piers been engineered, the plans would have called for “belled piers” that are wider and heavier at the bottom, so they don’t rise even if the soil does. And we’re still not through with these piers. As constructed, the piers under the northwest portion of the house were spaced wider apart than those under the western portion, so the Norstruds had different numbers of piers all moving different distances. It’s a wonder the house stayed up at all. I can just imagine how bored the jury was to hear all this expert testimony about soil composition. But in the end, they bought Trinity’s experts’ conclusion that the foundation problem had everything to do with bad soil, and missing roof supports, and nothing to do with the sprinkler system leak. Not only did the Norstruds suffer great loss in the value of their house, they also had the pain of paying their experts and lawyers. Anytime you deal with experts you have to know, or at least suspect, that the expert knows the answer before he starts his work. The expert’s goal is to support and explain the answer desired by the party who hired him. Trinity wanted an expert to find a cause for the Nortstrud house’s foundation movement that fell outside of policy coverage. At trial it was simply a battle of experts. But in the end, Trinity succeeded. The Norstruds had insurance, but they built their house in such a manner as to make foundation shifts a non-covered claim. More and more, insurance companies are reading their own policies very carefully, and looking for ways to deny coverage. This means that, more often, a business’s lawyer must get involved in the early stages of evaluating the claim and presenting it to the insurance company. Newer policy forms contain different, and sometimes much larger, exclusions from coverage. When something happens, it is wise to let your business lawyer read the policy, investigate the claim, and write the first letter to the insurance company notifying them of, and explaining, the claim. The lawyer can help you maximize the probability that the insurance company will accept the claim and pay it, or accept the claim and defend the lawsuit. Be prepared to negotiate with the insurance company about whether the claim is, or is not, covered. And remember that just because the insurance company denies a claim does not mean the claim is not covered.
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