Trends of Value and Proving Loss Are Important Issues in 2023

A very positive aspect of working at Merlin Law Group is working with a lot of passionate attorneys doing the same area of law. As a result, we get to share ideas about the best methods to handle cases and issues arising in the field of property insurance law. We even have a lawyer who is a licensed attorney, Ruck DeMinico, who does not work on any cases as a primary attorney but is a Knowledge Manager to support other lawyers. We can better spot, research, and make the best arguments for our clients.      

This Wednesday, I will be giving a presentation at the First Party Claims Conference, which will discuss in part the new trends regarding valuation and arguments some insurance companies are now making to escape payment based on policy language. This topic is extremely important to policyholders and public adjusters because these new arguments are leaving policyholders without benefits despite physical damage to the insured property.

An example is a Colorado federal case decided last week.1 American Family Insurance company refused to pay its policyholder, arguing the following:   

Because Plaintiff’s Wood Roofs Were Beyond Their Life Expectancy Before the Alleged Damage, The Actual Cash Value of His Wood Roofs is Zero And His Breach Claim Fails.

Even if the damage was covered, which American Family disputes, the actual cash value of Plaintiff’s aged wood roofs as defined in his policy is zero, and no additional amounts would be owed under the Policy.

This is almost laughable—the insurance company assumes damage happened but owes nothing because the age of the wood shingles is beyond their life expectancy—except the insurance company won.

The court recited the facts in a prior Order on a Motion to Dismiss:

Mr. Morganti renewed his American Family homeowner’s insurance policy at the outset of 2019. Six months later, on June 7, 2019, a windstorm hit Mr. Morganti’s Castle Rock home. Mr. Morganti’s home is in an area with little wind protection, so the windstorm, which averaged 62 miles per hour with gusts up to 112 miles per hour, struck his home at full blast. The woodshingled roofs of the garage and the main structure of the home were severely damaged. Mr. Morganti says the damage was ‘plainly visible’: ‘wood shakes were elevated and staples were dislodged’; and ‘multiple rows or sections of wood shakes [shingles] were simultaneously elevated in a perfectly straight fashion.’

Mr. Morganti notified American Family of the windstorm damage in early October 2019 and explained he intended to make a claim on his policy. American Family assigned the matter to one of its adjusters, Corwin Frey, who inspected the property on October 16.  Mr. Frey took pictures of the damage. Those pictures, according to Mr. Morganti, show damage consistent with the windstorm: whole rows of shingles raised in the same fashion, fresh breaks and splits in the wood; not wear and tear, such as isolated instances of ‘warpage or curvature’ or ‘cupping or bowing.’ The same day Mr. Frey inspected the property, he denied coverage on behalf of  American Family in a denial-of-coverage letter to Mr. Morganti. Mr. Frey wrote that he found no damage from the windstorm in his inspection. The lifted shakes, explained Mr. Frey, were ‘not consistent with wind damage and [were] a result of age, wear and tear or other anomaly.’ Mr. Morganti alleges that Mr. Frey’s conclusions ran counter to both industry standards for wind damage and common sense.

Mr. Morganti sought help from a licensed roofing contractor, Ben Landa, who inspected the property and, contra American Family, concluded that the windstorm caused damage to the roofs. He concluded that the roofs needed to be replaced, costing approximately $81,000. But without benefits from American Family, Mr. Morganti could not pay Mr. Landa. So Mr. Landa recommended Mr. Morganti obtain a second opinion from a public adjuster named Peter Ridulfo. Mr. Ridulfo inspected the property in February 2020 and concluded that the damage to the roofs was the result of the windstorm, not wear and tear.  Mr. Ridulfo sent American Family a sworn proof of loss on May 12, 2020 of approximately $84,000.

Prompted by Mr. Ridulfo’s proof of loss, American Family agreed to reinspect the property.  On May 19, American Family sent two of its adjusters, Dustin Sanderson and Brian Mater, to take a look at the property along with Mr. Ridulfo and Seamus Bradley, a licensed contractor. Mr. Sanderson emailed Mr. Ridulfo several days later to say that, in his opinion, the damage to the roof was the result of wear and tear.

After the lawsuit was filed, American Family’s attorneys made the additional argument that the value of the damaged roof was zero before damage occurred. This was American Familiy’s winning argument:

Plaintiff’s policy provides coverage for wood shake roofs on an actual cash basis. Plaintiff’s Policy’s How We Settle Losses Section states, ‘[w]e will pay the cost to repair or replace … subject to the following: … (5) For any loss to wood roof surfaces, we will pay the least of: the actual cash value, the cost to repair or replace damaged property with materials of like construction; or any policy limit that applies.’

Not all insurance policies include a definition of actual cash value and courts have been asked to interpret this phrase. However, here, actual cash value is defined in Plaintiff’s policy – in fact it is the very first term defined in the policy’s definitions section.

Actual cash value. This means the least of the:

a. value of damaged property;

b. change in value of damaged property directly due to the loss;

c. cost to repair damaged property; or

d. cost to replace damaged property less any deduction for:

(1) age;

(2) condition;

(3) obsolescence; or

(4) depreciation;

at the time of loss.

The ACV definition has been in Plaintiff’s policy since 2015 and Plaintiff was notified of the definition in a 2015 Explanation of Changes letter. The 2015 letter also advised Plaintiff that the language in the ‘Actual Cash Value Wood Roof Surface Loss Settlement Endorsement’ previously attached to his policy ‘has been integrated into the base Gold Star Homeowners policy’ under the How We Settle Losses Section. Plaintiff received the letter and produced it. He renewed his policy several times after.

American Family’s retained costing expert, using Plaintiff’s May 2, 2020, estimate as the assumed replacement costs for purposes of his damages calculation, determined the actual cash value under each of the four defined methods as set forth below. Mr. Logan is the only expert in this case to do this. In rebuttal, Plaintiff raised several disputes about Mr. Logan’s methodology for method (d), however because method (b) result in a lower calculation than either methods (a), (c), or (d), and the definition states actual cash value is the least of the four methods, those disputes are not material. Specifically, because the wood roofs were beyond their remaining life expectancy before the June 2019 storm, and remained beyond their remaining life expectancy after, the same depreciation percentage applies, resulting in zero net change.

…

Plaintiff cannot create a genuine issue of fact that additional amounts are owed. Plaintiff did not offer an actual cash value calculation or even acknowledge the wood shake roof surface damage was limited to actual cash value during the claim or in litigation. See also, (presuit replacement cost demands). Plaintiff’s experts did not address the actual cash value language in their affirmative reports. It was not until American Family retained a costing expert to calculate the actual cash value under each of the policy definition’s four methods that Plaintiff even acknowledged the language in the How We Settle Losses Section but continuing to ignore the policy’s definition of actual cash value. While there are disputes about how the depreciation method (method (d)) is calculated, these are immaterial. The definition expressly limits the actual cash value to the least of the four methods and it is undisputed the

depreciation method is not the lowest.

Plaintiff’s ‘evidence’ that the roof was in good condition before the alleged date of loss is conclusory. The undisputed facts establish that Plaintiff has no idea what the condition of his roof was because he never had it inspected and did no maintenance. UF #7, 36. See Gallegos v. Safeco Ins. Co. of Am., No. 14-CV-1114-WJM-MJW, 2015 WL 3526956, at *2 (D. Colo. June 4, 2015), aff’d, 646 F. App’x 689 (10th Cir. 2016) (dismissing breach of contract claim because plaintiff failed to meet his burden of proving exception to wear and tear, and deterioration exclusion to coverage).

The Order granting Summary Judgment agreed, stating:

Applying the contract’s formula for wooden roofs, American Family argues that Mr. Morganti is not entitled to recovery. Its expert witness, Mr. Logan, looking to item b. in the contract’s list, calculated that the ‘change in value of damaged property directly due to the loss’ was $0, which, if true, would preclude any recovery by Mr. Morganti. Mr. Morganti asserts, without elaboration, flaws in Mr. Logan’s analysis, such as alleged use of an outdated estimate, failure to limit his calculation to the wood roof surfaces only, and erroneous assertion that there was no change in the property’s value… Mr. Morganti’s rebuttal consists of unsupported assertions. He does not, as required by Rule 56(f), cite to particular materials in the record that support a contrary conclusion, or show that the materials cited do not establish the absence of a material dispute. I find Mr. Logan’s ACV analysis undisputed for purposes of this motion.

There are lessons from this case I will be going into much greater detail on Wednesday. However, public adjusters are doing policyholders a disservice if they do not read the policy language and then arrive at an actual cash value claim valuation as well as a replacement cost valuation when required to do so.  I can guarantee you that American Family was collecting premium on that roof for a long period of time. It did not exclude the roof from covered property. The defect once the lawsuit was filed was not proving an actual cash value amount of damage.  

While this is a Colorado case, I also noted the need for actual cash value proof in Actual Cash Value Estimates Need To Be Made In Florida—How A Church Lost To Church Mutual.  

I look forward to seeing those who can attend the First Party Claims Conference West in Marina Del Rey on Tuesday and Wednesday.   

Thought For The Day

You must look within for value, but must look beyond for perspective.

—Denis Waitley      

1 Morganti v. American Family Mut. Ins. Co., No. 1:20-cv-03295 (D.Colo. Mar. 21, 2023).