Issues Public Adjusters Face
There are two issues that Public Adjusters are facing today. The first is, what happens
when you follow all of the proper rules in your attempted adjustment of a loss and either the loss
is underpaid and/or denied by the insurance company and your insured has to hire an attorney?
What is the legal status of your fee on the final result? As a general rule, the attorney is using
your work product in dealing with the insurance company. Now the attorney achieves a result
which also includes extra contractual damages even though most insurance companies in a
settlement will not so label them.
There is no settled law on the right of the Public Adjuster to get a fee on the additional
funds obtained by the attorney. Joseph Khoshlesan has handled two of these cases. In the first
case, he convinced the trial judge to not only award the Public Adjuster a fee on the additional
sums obtained on the structure, but also to collect his fee on the extra contractual portion
obtained by the insured’s attorney. Unfortunately, the insured never appealed our victory so
there is no appellate decision one way or the other. From the feedback we received, the trial
judge did not like the insured and perhaps that is why he awarded the Public Adjuster a fee on
the extra contractual damages.
Another trial judge in the same courthouse had a different opinion. Her opinion was that
the Public Adjuster was only entitled to a fee on the portion of the settlement that solely related
to the property damage and not any extra contractual amounts obtained either in settlement or
trial. Again no appeal, so no quotable authority.
Another area of contention that has come up recently is the interpretation of Cal. Code of
Civil Procedure Section 1282.2 regarding whether the procedure in an Appraisal is formal or not
formal. Insurance Code Section 2071 sets forth that it is informal. The dispute arises under
Section 1282.2(2). There are insurance companies that are taking the position that since all
appraisals involve more than $50,000.00 that changes the proceeding from an informal to a
formal proceeding. That position is wrong. When you read the first sentence of 1282.2 it
provides “Unless the arbitration agreement otherwise provides”. Insurance Code Section 2071
is the agreement and it “otherwise provides”. The Appraisal provision in 2071 is not voluntary
on the part of either the carrier or the insured. The provision is part of the Code and is standard
in every policy. Therefore, that provision governs the course of the Appraisal. The confusion
comes in because our State has a fulltime legislature and every time a case comes down and if it
deems proper, it adopts a new code provision. There was a property insurance case where one of
our appellate courts held that Appraisal is a form of Arbitration. However, since the Appraisal
Panel can only decide actual cash value of the loss, the formal provisions of discovery do not
Illegal Growing Operations
Lately, in California, many innocent landlords come to find that their tenants have been
operating illegal marijuana growing operations in and on the premises rented to them.
In order to convert a premises for the cultivation of marijuana significant changes are made to
a property’s structural, electrical and HVAC systems. Structural alterations and damage to a
premises are usually extensive and include holes in walls, floors, ceilings and roofs, and large
electrical panels and wiring is mounted in the property and boards nailed on the ceiling.
Extensive damage is also found in the bathrooms and to air ducts as well. Aside from the
obvious structural damage, toxic mold may also be present from the excess moisture introduced
into the building due to irrigation systems used to provide water to the marijuana plants and
increased humidity due to the number of plants. The structural and electrical alterations along
with the possibility of water damage and toxic mold may make the premises unsuitable for
human habitation unless proper repairs and remediation are undertaken. If the necessary remedial
measures are not taken the premises may be permanently damaged and property value of other
homes in the area may be lowered. Needless to say, major remedial measures are required to
make the premises structurally sound and safe for occupants.
In such situations, landlords look to their insurance carriers to get the property back to normal.
Unfortunately, lately, many landlord policies contain language specifically excluding vandalism
for “illegal growing operations.” Under such language, many landlords are finding their claims
for vandalism as a result of a tenant’s acts of illegal growing operations on the property are not
covered, leaving upwards of hundreds of thousands of dollars unpaid for repairs and policies
rendered useless for the unsuspecting landlord.
However, for those policies in which “illegal growing operations” are not specifically excluded,
such claims are, or at least should be, covered under the peril of Vandalism. This is especially
true if the policy does not contain a specific definition for Vandalism, in which case the plain and
normal definition would be used and would be interpreted broadly, protecting the objectively
reasonable expectations of the insured.
Lastly, if for whatever reason insurance benefits cannot be obtained for repairs for such
vandalism, the landlord should also be mindful that the tenant is a source of recovery for their
wrongful conduct and should be pursued
This month’s topic is “innocent co-insureds” and the court decision establishing that
policy exclusions for intentional or criminal acts of “any insured” in fire insurance policies are
inapplicable to innocent co-insureds. Such was the ruling in Century-National Ins. Co. v. Garcia,
et al., (2011) 51 Cal.4th 564, which was argued before the California Supreme Court by our very
own Stephen M. Losh, Esq.
The California Supreme Court held that an exclusion in a fire insurance policy precluding
coverage for losses caused by the intentional or criminal acts of “any insured” did not apply to
innocent co-insureds, because it impermissibly provided more narrow coverage than that
statutorily mandated for fire insurance policies under the California Insurance Code.
In Century-National Ins. Co. v. Garcia, et al., Jesus Garcia and his wife incurred damage to
their home when their adult son set fire to his bedroom. Mr. Garcia was the named insured under
the insurance policy issued by Century-National, under which his wife and son also qualified as
insureds. Century-National denied the Garcias’ claim and sought a declaration of no coverage
from the trial court based on a provision excluding coverage for the intentional act or criminal
conduct of “any insured.” The Garcias filed a cross-complaint for breach of contract, breach of
the implied covenant of good faith and fair dealing, and reformation. The trial court granted
Century-National’s demurrer to the cross-complaint. The appellate court affirmed. The
Supreme Court reversed.
Under the Supreme Court’s analysis, the coverage dispute turned on the question of whether
Century-National’s use of the phrase “any insured” within its intentional acts exclusion meant
that if any one insured committed an intentional or criminal act, coverage would be precluded for
all insureds, including any innocent co-insureds who did not participate in the excluded conduct.
With that backdrop, the Supreme Court stated that under California’s Insurance Code, carriers
providing fire insurance must utilize the standard forms set forth under section 2071 or provide
“substantially equivalent” coverage.
While the Court acknowledged that the statutory forms contain no express exclusion for
losses caused by an intentional or criminal act, it reasoned that Insurance Code section 533 is
statutorily read into every California insurance policy (including the 2071 statutory fire form)
and precludes coverage “for a loss caused by the willful acts of the insured.” However, in
reviewing the exclusionary language of section 533 and the statutory fire form, the Court found
that each consistently used the phrases “an insured” or “the insured” as opposed to “any
insured.” As such, the Court reasoned that the Legislature’s choice in wording represented an
“intent to ensure coverage on a several basis and protect the ability of innocent insureds to
recover for fire losses despite neglectful or intentional acts of a coinsured.” In so reasoning, the
Court stated that when viewed in its entirety, the fire protection contained in Century-National’s
policy, which purported to deny coverage to innocent insureds when a co-insured intentionally
sets fire to their home, provided markedly less favorable coverage to insureds than that provided
in the 2071 standard fire form. Consequently, the Court held that the Century-National exclusion
was to that extent invalid.
Property Damage, Public Improvements & Drain Backups…
We wanted to take this opportunity to discuss property damage caused by public
improvements and drain backups.
Nothing is more distressing than a sewer or drain backup in your home; that is
until you find out that your Homeowners Insurance Policy does not cover your
loss. Insurance companies have gradually reduced coverage for this type of
problem. Originally, no insurance company would cover a backup from the public
main sewer line, however, they used to cover backups from the lateral lines often
caused by tree roots getting into the system. That came to an end after too many
claims were filed and paid on these types of losses. Coverage now in most policies
has become so restrictive that even backups out of kitchen sink drains in
condominiums that are shared by more than one unit are not covered.
So what can you do? Our office has recently gone after governmental entities
that are in charge of the sewer mainlines under various legal theories. These
entities are now insisting that private citizens have back flow valves in their lateral
sewer lines to prevent these backups. There are various ways around this
depending on the facts. One favorable fact is if your property is on a higher
elevation than the sewer main line. A sewer mainline is a public improvement that
falls in a broad category of infrastructure projects, financed and constructed by a
public entity, i.e. the City of Los Angeles, for recreational, employment, and health
and safety uses in the greater community. If a public improvement, such as a sewer
mainline, causes damage to private property, it may have occurred because the
public entity failed to adequately construct, design, inspect, maintain and/or repair
the improvement thus causing the public improvement to fail to function as it was
intended. If this happens, the private property owner may have recourse against the
public entity under the following causes of action: dangerous condition of public
property; nuisance; negligence; trespass; and, most importantly, inverse
In the condominium situations, we always look to the maintenance of the
common area drain lines by the HOA. HOAs are often the target as they often fail
to realize that you have grease substances going down these lines and that they
require constant maintenance as a result.
A new service we are offering is to read your policy and determine if you have
proper coverage. We often find that the limits are not high enough, certain
exclusions apply, or the carrier is not one we would recommend. Occasionally, we
find that the coverage itself is improper, such as a residential policy being used for
a rental property. That can have serious consequences such as vacancy provisions
in the policy
What Has Changed…
A lot has happened since we opened our new office in Beverly Hills. While our office
concentrates primarily on first and third party real property insurance cases, we are also handling
suits against Homeowners Associations, the City of Los Angeles, and some collections work.
Many of you may not know it, but we changed the law in California when we were able to
convince the California Supreme Court that each individual insured in a homeowners insurance
policy has the right to be judged by their own conduct and not that of a co-insured in making a
claim. In that case, the insureds had a mentally disturbed adult son who burned down their home.
Their insurance company decided that they should not be paid because the acts of their son are
attributed to them based on the policy language. The Supreme Court ruled that the parents were
innocent co-insureds and were innocent of any wrongdoing in the cause of the fire and were
entitled to have their home fixed and that the language of their policy was improper.
We also have several cases against Homeowners Associations. The root cause is usually the
same: the Homeowners Association is reluctant to take responsibility for a common area caused
loss to an owner’s unit. In an interesting twist, we also have several cases pending against the
City of Los Angeles resulting from sewer backups and city pipes causing property damage.
Lastly, once in a while, we handle cases against insurance agents or brokers. Those cases are
tougher as the law tends to give these professionals more protection than you would expect. If
your problem is with the agent, then usually its principal, the insurance company can pick up
liability. If your problem is with the broker, then your recovery can only be against the broker.
The problems we see in this area are either under-insurance coverage or the wrong coverage for