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By James W. Holbrook, III
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The number of lawsuits arising from hail-damage claims to residential and commercial properties has increased dramatically over the past few years. Indeed, since 2012, hundreds of lawsuits alleging underpayment of hail-related roof damage claims have been filed in Texas alone. As this onslaught of cases progressed through the courts in 2014, state and federal judges addressed a variety of issues commonly presented by hail-damage disputes, ranging from the timeliness of the insured’s claim submission to the proper scope of discovery. In doing so, the courts provided much-needed guidance on certain recurring issues, while injecting uncertainty into others.

Timeliness of Claim Submission

Most property insurance policies require an insured to provide its insurance carrier with prompt notice of a loss. The application of this common contractual requirement to hail-damage claims yielded inconsistent results in 2014.

In Hamilton Properties v. The American Insurance Company, the U.S. District Court for the Northern District of Texas dismissed an insured’s hail-damage lawsuit on late-notice grounds, holding (as a matter of law) that the insured’s 19-month delay in reporting its claim: (1) contravened the “prompt notice” requirement imposed by the applicable insurance policy; and (2) “compromised the reliability and availability of evidence necessary to investigate” the claim, thereby prejudicing the defendant insurance carrier.[1]

The insured met a similar fate in Alaniz v. Sirius International Insurance Corporation, in which the U.S. District Court for the Southern District of Texas concluded that the insured’s approximate 10-month delay in notifying its insurer of alleged hail-damage claim breached the insurance policy’s prompt-notice provisions as a matter of law, relieving the insurance carrier of its contractual duties under the policy.[2]

However, in FA Management Inc. v. Great American Insurance Co. of New York, the U.S. District Court for the Northern District of West Virginia held that the reasonableness of an insured’s nine to 12-month delay in reporting its hail-damage claim and the extent of any resulting prejudice to the insurance carrier presented fact questions for the jury.[3]

These disparate holdings show that the timeliness of an insured’s claim is a case-specific inquiry and the legal impact of an insured’s late notice may vary dramatically by jurisdiction.

Scope of Appraisal

This year also yielded divergent holdings on the scope of appraisal in hail-damage disputes.

Citing (in part) the Texas Supreme Court’s watershed opinion in State Farm Lloyds v. Johnson,[4] the Iowa Court of Appeals significantly broadened the authority of appraisers in disputed in hail losses. In North Glenn Homeowners Association v. State Farm Fire & Casualty Company, the parties disputed whether (and to what extent) the insured’s alleged hail-damage loss was subject to appraisal.[5] The insurance carrier in North Glenn opposed appraisal, arguing that such a process would require the appraisers to address causation and coverage issues reserved for the court — specifically, whether the insured’s claimed roof damage resulted from a hail storm during the applicable policy period or from events that predated the policy.[6]

Recognizing that the insured’s claim presented “a mixed issue of coverage and causation,” including questions regarding “what caused damage to the roof and whether that damage [was] covered under the policy,” the North Glenn court noted that no Iowa courts had fully considered “[w]hether an appraiser has the authority to determine causation or issues of coverage.”[7] Resolving this matter of first impression, the Iowa Court of Appeals held:

As part of the appraisal process, appraisers must determine what the amount of “loss” is, which often requires consideration of causation. ... Causation is an integral part of the definition of loss, without consideration of which the appraisers cannot perform their assigned function. During the appraisal process, the appraisers must consider what damage was caused by hail, and what damage was not, or damage with which they are unconcerned, such as normal wear and tear.[8]

[T]o hold otherwise, the North Glenn court concluded, “would improperly limit the appraisal process to situations where the parties agree on all matters except the final dollar figure.”[9]

The U.S. District Court for the District of Minnesota reached a similar conclusion in Creekwood Rental Townhomes LLC v. Kiln Underwriting Ltd., holding that the “allocation of damages [between a covered hail event and noncovered pre-existing damage] is part of ‘the causation question’ and in turn part of the binding ‘amount of loss’ determination” reserved for the appraisers, not a legal question for the court.[10]

By contrast, in Lam v. Allstate Indemnity Company, the Georgia Court of Appeals held that a dispute regarding the extent of wind and hail damage to an insured’s roof was a coverage matter beyond the proper scope of appraisal.[11] In Lam, the insurance carrier conceded that there was wind and hail damage to the insured’s roof and agreed to pay for it, but “the parties could not agree upon the extent of the damage — how much of the roof was damaged by the wind.”[12] Noting that “‘an appraisal clause can only resolve a disputed issue of value,’”[13] the court held the parties’ dispute “was over coverage, which is not a proper basis for an appraisal.”[14] Allowing appraisers to decide how much of the insured’s roof was damaged would impermissibly “convert[] the appraisal clause into an arbitration clause, which is the type of clause that would [customarily] be invoked to address such broader issues.”[15] The court of appeals thus affirmed the trial court’s dismissal of the insured’s suit to compel appraisal of its wind and hail damage loss.

Disagreement and confusion on these issues will inevitably continue. Even in jurisdictions that authorize appraisers to resolve questions of causation in making their damage determinations, such as Iowa, Minnesota and Texas, “‘the line between liability and damage questions is not always clear.’”[16] Indeed, it is virtually certain that this already hazy line will only be further blurred as the recent onslaught of hail-damage suits wind their way through the courts, leaving insureds, insurance carriers and appraisers to navigate the appraisal process with varying degrees of uncertainty and doubt.

Segregation of Covered Damage

The U.S. District for the Northern District of Texas left no such doubt in the above-cited Hamilton Properties case, disposing of the insured’s hail-damage lawsuit for failure to segregate covered hail damage from damage caused by noncovered factors.

In that case, the insured sought coverage for damage allegedly sustained by an old and deteriorated roof during a July 2009 hail storm.[17] However, the property also experienced hail storms on three occasions prior to July 2009 and three instances after July 2009.[18] All six of these additional hail events occurred outside the applicable policy period.[19] The insurance carrier thus moved for summary judgment, arguing the insured could not satisfy its burden to segregate damage attributable to a covered peril from damage attributable to noncovered perils.[20]

In a thorough and well-reasoned opinion, the court granted summary judgment for the insurance carrier, stating:

When covered and excluded perils combine to cause an injury, the insured must present some evidence affording the jury a reasonable basis on which to allocate the damage.

                                                            ****

When taken in the light most favorable to [the insured], the evidence ... shows only that the July [2009] Hailstorm contributed to the destruction of the roof and interior of the Property. However, it does not establish [the insured’s] claim that the July [2009] Hailstorm was the lone cause of the harm. Nor does the evidence raise a genuine issue of material fact on this point.

                                                            ****

[The insurance carrier] has adduced evidence to suggest that the damage to the [insured’s] roof and interior could have been the result of noncovered perils, such as a hailstorm from Feb. 10, 2009 or a lack of maintenance.[21]

Because the insured “failed to make a showing sufficient to establish that [it could] allocate damages between the July [2009] Hailstorm and these other risks,” the court concluded that the insurance carrier was entitled to summary judgment on the insured’s breach of contract claim.[22]

The impact of Hamilton Properties is clear — an insured pursuing a hail-damage claim in Texas must be prepared to meet its burden to segregate hail damage allegedly sustained during the policy period from: (1) hail damage suffered outside the policy period and (2) damage attributable to noncovered perils, such as wear and tear, gradual deterioration and cracking or shrinkage of roofs. If the insured cannot carry this burden, its lawsuit is subject to summary dismissal.

Nonfunctional/Cosmetic Damage

Two federal courts, one sitting in Wisconsin and the other in South Dakota, were equally clear in addressing whether hail-related denting or dimpling of an insured’s metal roof triggered coverage under a property insurance policy, even though such denting or dimpling had no effect on the roof’s functionality.

In Advance Cable Co. LLC v. Cincinnati Insurance Co., the U.S. District Court for the Western District of Wisconsin held that “‘purely cosmetic’ denting in [a] metal roof constitute[d] direct, physical and accidental loss or damage as a reasonable insured would understand those terms” and, therefore, was covered by the insured’s property insurance policy.[23]

The U.S. District Court for the District of South Dakota reached a similar holding in Lead GHR Enterprises Inc. v. American States Insurance Company.[24] Because the policy at issue did not define the term “damage,” the court construed “damage” to mean “‘physical harm caused to something in such a way as to impair its value, usefulness or normal function, commonly associated as causing unwelcome and detrimental effects.’”[25] Based on this definition of damage, the court concluded that the insured’s metal roof was damaged, even if the damage did not affect the overall functionality of the roof.[26]

The district court’s ruling in Advance Cable is on appeal to the Seventh Circuit and its long-term impact is currently unknown. However, in the short term, the rulings in Advance Cable and Lead GHR Enterprises suggest that — unless a property insurance policy contains a “cosmetic damage” exclusion or defines the term “damage” in a way that excludes purely cosmetic damage — a property insurance carrier may have difficulty excluding coverage for de minimus, nonfunctional denting of an insured’s metal roof.

Replacement-Cost Provision

Two federal district courts, both sitting in Texas, also confirmed the conditions under which a property insurance carrier must issue a replacement-cost payment on a hail damage claim.

In Central Mutual Insurance Co. v. White Stone Properties Ltd., the U.S. District Court for the Western District of Texas held that a standard replacement-cost provision was unambiguous on its face and did not require an insurance carrier to make a replacement-cost payment until: (1) the insured actually repaired or replaced the hail-damaged property; and (2) the amount actually spent by the insured exceeded the actual cash value amount tendered by the insurance carrier.[27] Accordingly, the computer-generated damage estimate prepared by the insured’s purported general contractor — which did not reflect (and far exceeded) the insured’s actual costs of repair — had no bearing on the insurance carrier’s replacement-cost payment obligation.[28]

The U.S. District Court for the Northern District of Texas reached a similar conclusion in Devonshire Real Estate & Asset Management LP v. American Insurance Company, rejecting an insured’s contention that its insurance carrier was required to make a full replacement-cost payment on the insured’s hail-damage claim upon the insured’s repair of only 50 percent of such hail damage.[29] Like the court in White Stone Properties, the Devonshire Real Estate court held that the policy’s replacement-cost provision unambiguously required the insured to make actual repairs to its hail-damaged property before claiming (and receiving) replacement costs.[30]

In tandem, White Stone Properties and Devonshire Real Estate make it clear that an insured is not entitled to receive any portion of a replacement-cost holdback under a standard replacement-cost provision unless (and until) the insured actually incurs costs above and beyond the actual cash value payments tendered by the insurance carrier. Computer-generated damage estimates and partially completed repairs are not sufficient to trigger an insurance carrier’s obligation to make such a replacement-cost payment.

Scope of Discovery

This year also brought much-needed clarity on the proper scope of discovery in hail-damage disputes. In In Re National Lloyds Ins. Co., the Texas Supreme Court held that discovery regarding the claims and claim files of an insurance carrier’s other policyholders will almost always be considered impermissibly overbroad.[31]

After suing its insurance carrier for alleged underpayment of two hail-damage claims, the insured in In Re National Lloyds Ins. Co. sought to discover the file materials for all claims that two independent claim adjusters had handled for the insurance carrier in the insured’s city of residence arising from the two hail storms at issue. The insured claimed she needed the requested files to establish a customary and presumably good-faith pattern of claims handling for other policyholders’ claims, which (by comparison) would show the insurance carrier had mishandled her claims.

The Texas Supreme Court rejected the insured’s argument, stating that “[s]couring claim files in hopes of finding similarly situated claimants whose claims were evaluated differently from [the insured’s was] at best an ‘impermissible fishing expedition.’”[32] The court thus vacated the trial court’s overbroad discovery order, sending a clear signal that discovery of claim files for other policyholders is not permissible.

—By James Holbrook III, Zelle Hofmann Voelbel & Mason LLP

James Holbrook III is a partner in Zelle Hofmann Voelbel & Mason's Dallas office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] No. 3:12-CV-5046-B *7-11 (N.D. Texas July 7, 2014).

[2] No. 7:14–CV–215 (S.D. Texas Dec. 9, 2014).

[3] No. 5:13-CV-25 (N.D. West Virginia June 4, 2014).

[4] 290 SW3d 886 (Texas 2009).

[5] 854 N.W.2d 67, 70 (Iowa Ct. App. 2014).

[6] See id. at 70.

[7] Id. at 70.

[8] Id. at 71.

[9] Id.

[10] 11 F. Supp. 3d 909, 926-27 (D. Minn. 2014) (quoting Quade v. Secura Ins. Co., 814 N.W.2d 703, 707 (Minn. 2012)).

[11] 755 S.E.2d 544, 545-46 (2014)

[12] Id. at 546.

[13] Id. (quoting McGowan v. Progressive Preferred Ins. Co., 637 S.E.2d 27 (2006)).

[14] Id.

[15] Id. (quoting McGowan v. Progressive Preferred Ins. Co., 637 S.E.2d 27 (2006)).

[16] North Glenn, 854 N.W.2d at 70 (quoting Quade, 814 N.W.2d at 706-07).

[17] Hamilton Props. v. Am. Ins. Co., No. 3:12-CV-5046-B (N.D. Texas July 7, 2014).

[18] See id. at *2.

[19] See id. at *1-2.

[20] See id. at *3.

[21] Id. at *4-6.

[22] Hamilton Props. at *7.

[23] No. 13-cv-229 (W.D. Wis. March 12, 2014).

[24] No. 12-5056-JLV, Memo Op. [Doc. 82] at 3-5 (D.S.D. Sept. 30, 2014).

[25] Id. at 4-5 (quoting and adopting Magistrate Judge’s Report and Recommendation [Doc. 64] at 21).

[26] Id. (citing and adopting Magistrate Judge’s Report and Recommendation [Doc. 64] at 21).

[27] Civ. Action No. A-12-CA-275-SS (W.D. Texas March 19, 2014).

[28] See id. at *9.

[29] Civ. Action No. 3:12-CV-2199-B (N.D. Texas Sept. 26, 2014).

[30] See id. at *8.

[31] No. 13-0761 (Texas Oct. 31, 2014) (per curiam) (orig. proceeding).

[32] Id. at *2.