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MacKinnon & Higgins - Property Loss Attorneys - Terms

Frankly, most attorneys are unfamiliar with insurance law, its nuances and terminology. Even attorneys need attorneys in our legally complex society. As experts in the field, however, MacKinnon & Higgins has assembled this list of terms commonly used in property damage claims as a handy reference for you. It will help you to understand the complicated language of your policy, as well as that of the insurance adjusters with whom you must deal.

ACTUAL CASH VALUE (ACV) - One of the most commonly used terms in the claim adjustment process, ACV is generally defined as replacement cost less depreciation. However, moving from the adjustment process into the appraisal or judicial forum, the insurance company will attempt to argue the broad evidence rule suggesting that other factors such as market value, assessed value, rental value and repair cost are also relevant in determining ACV in order to try to minimize the payout to you.

ACTUAL CASH VALUE POLICY - As the forgoing term implies, the insurer is only required to pay the insured the actual cash value of the loss up to the policy limits of coverage. A replacement cost or repair cost policy provides greater coverage than an actual cash value policy.

AGENT - One who acts on behalf of another person. The “another person” is the principal. In an insurance context, the agent who sells you insurance may, in the eyes of the law, and depending on circumstances, be regarded either as your agent or as the insurance company’s agent. If a mistake was made by the agent, in many instances, your rights as an insured will vary greatly depending on whether the agent is deemed to be your agent or the agent of the insurer.

ADDITIONAL LIVING EXPENSES – Homeowners policies typically provide coverage for additional living expenses (ALE), i.e., expenses over and above those which would have ordinarily been incurred had the home not burned (e.g. temporary housing, laundry, dining out, additional mileage, etc.). See also Loss of Rent, Extra Expense and Lost Profit. Usually, ALE is limited in time and is capped in amount.

ALL-RISK POLICY - As the name implies, all causes of loss are covered, except those that may be specifically excluded or limited by the terms of the policy.

ANTI-CONCURRENT CAUSATION CLAUSE - In essence, a clause that states that in the event that a loss is caused by more than one peril, in whole or in part, the insurer is not obligated to pay if one of the perils is an excluded cause.

APPRAISAL - A statutorily mandated proceeding or process usually set forth in the insurance policy that provides a mechanism for the resolution of disputes between the insured and the insurer over the actual cash value or the amount of the loss. See Appraiser, Umpire, Insurance Adjuster and Public Adjuster.

APPRAISER(S) - Competent and independent person(s), one of whom represents the insured and the other who represents the insurer. Disagreements as to value are submitted to a competent and impartial umpire who will agree with one appraiser or the other appraiser on the value of items in dispute. It is possible that the appraisers will agree as to values and that there will be no need to appoint an umpire.

BINDER - A written document to prove that insurance is in place. The binder is effective pending issuance of the insurance policy.

CLAIM (MAKING A CLAIM, SUBMITTING A CLAIM) - The formal process of putting the insurance company on notice that a loss has occurred and that you may be making a claim on the insurer for insurance proceeds under the insurance policy. Putting the insurer on notice of the claim in a timely fashion is required under the terms of most policies. The failure to do so in a timely fashion could jeopardize or even nullify the claim.

CO-INSURANCE CLAUSE - These clauses are more commonly found in insurance policies which insure commercial property. The purpose, from the insurer’s perspective, is to cause the insured to insure property to something close to replacement cost, typically 80 percent. The failure to insure the value will cause the insured to incur co-insurance penalties on a loss (in accordance with a formula stated in the policy). The co-insurance penalty will increase in amount the greater the extent to which the property is underinsured.

CONTRADICTION - This is the mother’s milk of the legal profession. An insured or witness who says one thing on one occasion and says something different at another time is in potential trouble when facing a skilled investigator or attorney for the insurer. Never guess without saying you are guessing. Never answer more than is being asked. If the accurate answer is reflected in a document, say you would have to refer to the document to be sure of your answer. It is human nature to mentally fill in gaps and to state things positively. These are mental shortcuts which we all employ in everyday life, but if you do these shortcuts at an Examination Under Oath you may pay the price.

DECISIONAL LAW - The terms of the insurance policy language may have been the subject matter of a judicial interpretation by an appellate court. The effect of the decision may result in an exclusion of a claim from coverage in certain circumstances or an increase in the scope of the persons or interests protected by the policy or a modification of the rights and obligations of the insured or the insurer in any number of ways. Needless to say, the assistance of a competent, qualified and experienced attorney in interpreting a policy in light of decisional and statutory law can result in recovery, even in instances where all appears to be lost on the face of the declaration sheet or by the terms of the policy.

DECLARATIONS (SHEET, PAGE) - That page of the insurance policy, usually listed as “Declarations,” which sets forth the identification of the insured parties; the property covered; the kinds of coverage; the dollar limits that apply to each coverage; the deductible(s); the effective dates of the policy; and the forms, riders and endorsements that apply to the policy.

DEMOLITION COST/DEBRIS REMOVAL - Many policies provide coverage for demolition costs and debris removal. The amount allowed may either be in addition to or included within the building coverages. The terms of the policy must be examined to make this determination. See also Demolition Holdback.

DEMOLITION HOLDBACK - As allowed by statute, many municipalities have enacted ordinances requiring insurers to holdback a percentage of insurance proceeds to pay for the demolition of seriously fire-damaged buildings. The demolition holdback money will be paid to the insured if the building is repaired or privately demolished. (Tip: Demolition may be contracted out by an insured for a lesser amount than the demolition holdback amount.)

DEPRECIATION - The lessening in value due to age, condition or obsolescence. For example, a TV might have a life expectancy of 10 years and will decrease in value 10 percent each year as it ages. Depreciation is deducted from Replacement Cost to determine Actual Cash Value.

DOCUMENTS, BOOKS AND RECORDS - Insurance policies usually contain a provision requiring insureds to produce books, records and other documents upon the request of the insurer. If items are not produced, the insured will possibly be giving the insurer a legitimate reason to deny the claim for that reason alone. Insurance adjusters commonly ask for certain documents, and attorneys hired to conduct an examination under oath of the insured will ask for voluminous documents. Be sure that you make copies of each and every document that you give to an insurance adjuster. Documents have been known to mysteriously disappear.

DUTY TO DEFEND - Liability insurance policies typically impose two duties on the insurer: the duty to defend and the duty to pay. The duty to defend (i.e. providing an attorney to litigate on behalf of the insured) is commonly said to be greater in scope than the duty to pay. See Reservation of Rights.

ECONOMIC PROBLEMS - Bankruptcy, foreclosure, substantial debt, failure to file tax returns, weak or negative profit and loss statements and balance sheets are regarded as “red flags” by insurers. Financial desperation can be claimed by the insurer to provide motive for “friendly fires” and other intentional losses. Some insurers believe everyone is out to score them. Still others seek to exploit any indication of financial weakness as proof positive that a loss was intentionally caused by the insured. When financial vulnerability is coupled with opportunity, such as a locked up building showing no signs of forced entry or evidence of an arson with multiple points or origin, an incendiary (non-accidental) fire as testified to by the insurance company’s hand-picked fire investigator means that the poor insured, even if innocent, will face an uphill court battle to be paid.

ENDORSEMENT - Usually an additional form attached to the insurance policy which changes the insurance policy in some way. For example, a special provision limiting the circumstances under which a business may claim a loss for employee dishonesty or a special provision limiting or prohibiting claims such as those for mold or water damage. Endorsements can also increase the amount of coverage, such as an endorsement stating that loss will be settled on the basis of replacement cost or repair cost.

EXAMINATION UNDER OATH (EUO) - Insurance policies commonly require the insured to appear at an attorney’s office, produce records and answer questions under oath. The oath is usually administered by a court reporter/notary public. The court reporter records the questions asked by the insurance company’s attorney and the answers given by the insured. The process is much like a deposition given in a court proceeding. Since the testimony is being given under oath, the testimony will be admissible if a lawsuit is filed by an insured following a denial of the claim by an insurance company. If the claim process proceeds to the EUO stage, this event definitely signals that the insurer is very suspicious about some aspect of the claim and it senses that it may be able to deny the claim by probing for reasons to support a denial. Be aware that a common basis for the denial of a claim is fraud and false swearing by the insured at the EUO. Having assisted insureds at EUOs and having reviewed the transcripts of hundreds of EUOs, the attorneys at MacKinnon & Higgins are familiar with many of the questions that are typically asked. We are aware of the common traps and pitfalls set by insurance company attorneys. We are able to properly prepare insureds for an EUO. Keep in mind that much is at stake. The insurance company has an attorney for a reason, and so should you. See also Contradiction.

EXCLUSIONS - Exclusions are exceptions from coverage, i.e., occurrences for which there is no coverage or only limited coverage. For example, in recent years insurers have been excluding mold damage from coverage or severely limiting the amount that will be paid on mold claims. Under certain circumstances, a loss occurring after the property has been vacant for a certain period of time may be excluded. Exclusions, their interpretation and the exceptions to their reach are the subject matter of a great deal of litigation. Qualified and competent counsel should be consulted before an insured simply writes his claim off as a lost cause.

EXTENSIONS OF COVERAGE - Additional discrete coverages found on the Declaration Sheet or within the policy providing additional proceeds for discrete elements of loss (e.g. lost profits, extra expense, claims preparation, loss of data, loss of valuable papers, etc.).

FLOATER - A policy rider with extra premium cost, which insures specific kinds of property for amounts in excess of the coverage provided in the principal policy. Floaters are commonly issued on jewelry, antiques and collections for losses up to many thousands of dollars. Recovery on such items is otherwise limited to $1,000 or $2,500 or some other fairly nominal amount under the terms of a policy unaccompanied by a floater.

FIRE INVESTIGATOR - A specially trained person employed by the insurer or the insured to determine the cause and origin of the loss—usually to determine whether the loss was accidental. For example, faulty electrical devices or intentional arson, as would be indicated from the presence of flammable liquid patterns, multiple points of origin or the presence of hydrocarbons as may be disclosed by the testing of samples taken from the scene.

FIRE REPAIR CONTRACTOR - The term is self-explanatory. However, whether or not the contractor is licensed by the state, insured and is reputable are critical factors from the insured’s perspective. There are many unlicensed, uninsured and disreputable contractors, as well as others who are thieves and forgers. Insurers are apt to “front in” fire repair contractors, who are friendly and dependent upon them, as “preferred contractors” or contractors in their “premier program” or some other program. Be wary when you sign the repair agreement: the fire contractor will become your contractor and not the insurer's. Problems, delays, inadequate and shoddy work will be your problem with your contractor.

INDEMNITY - The principal of indemnity essentially states that an insured should not realize a benefit from insurance greater than the insured’s loss. See also Insurable Interest.

INNOCENT CO-INSURED - A spouse intentionally, and unbeknownst to the other spouse, burns down the house. The innocent spouse may still be able to make a valid claim for insurance proceeds even if the claim of the wrongdoer spouse is denied.

INSURABLE INTEREST - A legally imposed limitation on who may contract for and collect on an insurance policy. Imagine the carnage that could result if persons were able to insure the lives of strangers and collect the insurance proceeds. Increasingly, insurers are attempting to use this limitation not only as a basis for claiming a policy is void, but also as a basis for attempting to limit the amount the insurer will pay and/or to outright avoid the claims of potential claimants. If the corporation is the insured, is the shareholder's interest in the building covered or vice versa? If a $1,000,000 building is insured by a tenant and the mortgage on the building is only 50 percent paid for, how much must the insurer pay and to whom? This question and similar ones are insurable interest questions.

INSURANCE ADJUSTER - A person employed by the insurer to access the loss site and adjust the loss. Many insurance adjusters and many insurance companies will try to minimize the payout to the insured by claiming that items that should be trashed as a total loss are to be cleaned. Inadequate or limited building repair estimates are given. In common parlance, the insured will be “low balled.” Adjusters for the insured are public adjusters. It is quite common for Insurance Adjusters and Public Adjusters to also act as appraisers in appraisal proceedings.

INSURANCE POLICY - The insurance policy is actually a contract between the insured and the insurer for the transfer of risk. The terms of the policy, except as they may be modified, interpreted or contradicted by statutes, regulations and decisional law, govern the rights and duties of both the insured and the insurer with respect to losses and the adjustment of losses.

INTENTIONALLY CAUSED LOSS - A loss caused or procured by the insured, such as an intentionally set fire or explosion (arson) or an intentionally caused escape of water from a plumbing system. See also Occurrence.

INSURED - The named “insured(s)” appear on the Declarations. Oftentimes, others with an interest in the insured property may be deemed to be “insured(s)” by definitional provisions contained in the policy or by decisional law.

LAND CONTRACT VENDOR - The seller of a property on land contract. The vendor should appear under a “contract of sale clause” or as a mortgagee on the policy declaration sheet. The vendor should not be listed as a loss payee. See and compare Loss Payee and Mortgagee and you will understand why.

LIABILITY - Means legal responsibility. First party liability claims are those between an insured and an insurer. A third party liability claim involves a loss to a stranger to the insurance contract seeking damages for a loss caused by the negligent or other blameworthy conduct of a person or entity. Most homeowner and commercial policies provide liability coverage for third party claims, subject to specified exclusions. Insurers may also try to duck responsibility for those third party liability claims. See Reservation of Rights.

LIABILITY COVERAGE - Insurance coverage insuring a business or person(s) against claims for which the insured may be legally responsible, i.e., damage caused to a third person. For example, a slip and fall injury on the front sidewalk or a loading dock, caused by some defect on the insured premises, may give rise to a liability claim. Liability policies usually require the insured to provide reasonable assistance and cooperation to the insurer in defending the claim. See Duty to Defend and Reservation of Rights.

LIMITS (POLICY LIMITS/LIMITATIONS) - The maximum amount that may be claimed under a particular coverage. For example, assume the existence of building coverage of $250,000 in replacement cost coverage. Even if the building would cost $300,000 to rebuild, the most the insurer is obligated to pay is $250,000. In the context of a third party liability claim, what can be done if the liability coverage is $100,000, but the injured plaintiff is seeking $250,000?

LOSS OF RENT - A common policy coverage on commercial buildings and rental premises.

LOSS PAYEE - A person or entity that may be entitled to claim a portion of any insurance proceeds that are payable. However, a loss payee is deemed to "stand in the shoes" of the insured. If the insured's claim is justifiably denied, the loss payee may be denied coverage by the insurer. Compare this result with the result for a Mortgagee.

MARKET VALUE - For most purposes, the market value of a building has no relevance in determining the replacement cost or the actual cash value of a loss. For example, many very large and stately homes can be found in the inner city, and considering their construction (i.e., brick, wet plaster, ornamental detail, leaded glass, etc.), their replacement cost could be $500,000. However, the market value could be $50,000 or less. If there was $500,000 in building coverage and there was a total loss, then up to $500,000 in insurance proceeds could be claimed under the policy on a replacement cost basis, not just the $50,000 in Market Value. See also Replacement Cost Holdback and Demolition Holdback.

MORTGAGEE - A lender typically named in the declarations. A property insurance policy may be deemed to be two policies--one between the insurer and the insured and another between the insurer and the mortgagee. Even if the insured breaches the policy, for example, by committing some excluded act such as arson, the mortgagee may still successfully make a claim for insurance proceeds.

OCCURRENCE - A fortuitous (unforeseen, accidental) event causing a loss that will trigger insurance coverage. Examples are damages caused by lightning, third-party vandals, or an electrical malfunction. An intentional loss caused or produced by the insured would have been foreseen by the insured, and would neither be accidental nor fortuitous, and would not constitute an occurrence.

PENALTY INTEREST PROVISION - A statutory provision requiring an insurer to pay a relatively high rate of interest (12 percent) on claims for which payment is overdue.

PERIL - A specific cause of a loss such as fire, vandalism, lightning, hail, windstorm, etc.

PROOF OF LOSS - A formal document, formally entitled as a sworn statement in proof of loss, which makes a specific claim in a specific amount of policy proceeds and is furnished by the insured to an insurer following a covered loss. The proof of loss is a critical document in the claim process. The failure to file or the late filing of a proof of loss, after an insurer makes written demand, may very well result in the denial of the claim. The importance of preparing and timely filing of a proof of loss cannot be overemphasized. The filing of the proof of loss triggers time limits within which the insurer must pay the claim, or risk facing penalties that would otherwise not be triggered. Again, the critical importance of filing a timely proof of loss cannot be overemphasized.

PUBLIC ADJUSTER - An adjuster who represents the insured. Legitimate public adjusters are licensed by the state. An "insurance adjuster" or "company adjuster" is an adjuster for the insurance company. Many insureds mistakenly believe that the insurance adjuster assigned by the insurer to handle the claim is their adjuster and is looking out for them. Public adjusters can legally by statute charge the insured up to 10 percent of the insurance proceeds paid on the claim. If the loss is a very large loss, some public adjusters may be willing to adjust the loss for a lesser percentage than 10 percent. Public adjusters vary in experience, knowledge, negotiating skills and perseverance. Some public adjusters are incapable of effectively adjusting large commercial losses.

RELEASE - A legal document furnished by the insurer to the insured for the insured's signature which grants the insurer consent to perform some act. For example, a release may allow a fire investigator to enter the insured premises for an inspection and to conduct an investigation, or to obtain documents relating to the insured or the insured premises such as bank records and utility billings.

REFORMATION - A legal remedy that may be available to provide relief if the Declarations do not accurately reflect the agreement for coverage between the insured and the insurer. An example may be a renewal policy which mistakenly dropped the name of a person or entity or amount of coverage previously insured under the policy.

REPLACEMENT COST POLICY - A policy that, by its terms, requires the insurer to pay the cost of repairing or replacing property. However, as required by Michigan law, an insurer initially pays the insured the actual cash value of the property and is not required to pay the insured the replacement cost (holdback), until such time as the insured actually replaces the damaged or destroyed property. Beware that there are usually time limits placed on replacement.

REPLACEMENT COST HOLDBACK - By statute and by policy conditions following the statute, insurers are initially required to pay actual cash value and not replacement cost. The difference between replacement cost and actual cash value is commonly referred to as the replacement cost “holdback” or "recoverable depreciation." The holdback is paid to the insured when the insured actually replaces or repairs the damaged property. For example, assume that the replacement cost of a five-year-old machine is $150,000. The depreciation taken and holdback amount is $50,000. The insurer initially pays the insured the ACV of $100,000. When the machine is timely replaced for $150,000, the insurer is obligated to pay the $50,000 holdback to the insured.

REPAIR COST POLICY - A policy which provides a little less coverage than a replacement cost policy but more than an actual cash value policy. Generally, the contract provides the insurer will pay for using substituted materials for repair (e.g. drywall and not wet plaster, P.V.C. and not copper, etc.).

RESERVATION OF RIGHTS - A letter from the insurer informing the insured that even though it will honor its duty to defend a liability claim and provide a defense, the insurer is reserving its right not to pay on the claim for a particular reason. It is imperative that the insured retain competent, qualified and experienced counsel to protect the insured's interests in that situation.

SPECIFIED PERILS POLICY - Unlike an all-risk policy, the cause of the loss under this policy must be a specific peril such as fire, lightning, wind, etc. It is common to see specified perils coverage for personal property, even if all-risk coverage applies to the building coverage.

STATUTE OF LIMITATIONS - That period after which a claim grows stale and can no longer be sued upon. Insurance policies typically contain very abbreviated statute of limitations provisions (e.g. “within one year after the loss”). Statutes and regulations modify and increase the amount of time within which a lawsuit may be brought, but be aware that after a denial letter is issued, you must act quickly in commencing a lawsuit.

SUBROGATION - In effect, a partial assignment, set forth in the insurance policy, of a right to recovery by the insured to the insurer. For example, assume a vehicle collides with an insured building causing $10,000 in damage. To the extent that the insurer pays insurance proceeds to its insured to cover the loss, the insurer has a legally enforceable right to sue and collect the amount of its payment from the vehicle (driver and owner) which caused the damage. The insured may also be entitled to recover losses from the party responsible for the loss, if the insured has suffered any additional losses for which there is no insurance coverage or which exceed the coverage limits.

SWORN STATEMENT IN PROOF OF LOSS - See Proof of Loss.

TAPED STATEMENT - It is quite possible that an insurance adjuster or fire investigator may ask to take a taped recorded statement from an insured. Questions asked and the answers given by the insured will be tape recorded. If you give a taped statement, make sure that you also tape record the statement or have the investigator agree in writing at the time of the statement to provide you with a copy. If you tape the interview there can be no doubt about what was actually said, especially if the investigator's tape “disappears” after a supposedly accurate transcript has been made or if you want to avoid the risk of relying on the insurer to voluntarily provide you with a copy of your statement at a later date (which some insurers may refuse to do).

VALUED POLICY - A policy wherein the insurer promises to pay a fixed amount in the event of loss.

VOID AB INITIO - Insurers sometimes claim that the insured made misrepresentations when applying for the insurance policy. The insurer then claims that it is not obligated to honor the policy as it was void from the beginning (i.e. ab initio). Insurers may also claim that a policy is void ab initio based on some other act allegedly committed by the insured during the policy period.

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