The Importance of Insurance Policy “Duties”

In both commercial (business) and residential (homeowner) policies there are certain “duties” which an Insured must fulfill in the event a loss occurs for coverage to apply. Obviously, this makes policy duties extremely important for every insurance claim. They must not be ignored. They should be understood and reasonably followed by the Insured as required by the policy or by applicable state laws.

Where it concerns property coverage, in most residential or homeowner policies an Insured’s duties are listed in a section called, “Conditions.” Here they are listed after a statement such as, “In the case of a loss to covered property, we have no duty to provide coverage under this policy if the failure to comply with the following duties is prejudicial to us.”—Homeowners 3 – Special Form (HO 00 03 10 00), Section 1 – Conditions, B. Duties After Loss.

The use of “prejudicial to us” here makes it clear failure to comply with a policy duty is not alone a sufficient basis to deny coverage. As one California appellate court put it, “an insured’s breach of ... a cooperation clause does not excuse the insurer’s performance unless the insurer can show that it suffered prejudice” (Belz v. Clarendon America Ins. Co., 158 Cal. App. 4th 615, 625, 629 [Cal. Ct. App. 2007]). 

The breach of a policy duty must in some way interfere with and prevent an insurance company from completing its coverage investigation and valuation the claim. To help prevent an unreasonable number of property inspections or requests for duplicative records, most states have in place regulations like the following which provide important investigative standards for insurers:

Every insurer shall conduct and diligently pursue a thorough, fair and objective investigation and shall not persist in seeking information not reasonably required for or material to the resolution of a claim dispute.—California Fair Claims Regulations, section 2695.7(d).

This means if the insurance company has enough information to resolve the claim it must “not persist in seeking” any additional information. Otherwise, it may seem as if the insurance company is avoiding the basis for coverage it has and, instead, seeking a reason to deny the claim. 

However, during a claim often questions arise which require additional inspections or evaluations of the affected property. If an insurer requests more than one or two inspections, if there a good reason for doing so the Insured must cooperate and allow the additional inspections.

In California’s Insurance Code there are eight (8) “duties” associated with fire insurance policies according to section 2071(a). This article will review each one and how they are applied to residential or homeowners claims. Then we will look at two (2) other duties found most often in business or commercial policies:

1. “Give written notice … without unnecessary delay”: More specifically, this requirement states, “The insured shall give written notice to this company of any loss without unnecessary delay.” Essentially, if there is no “unnecessary delay” which prejudices or interfere with the insurance company’s investigation to its detriment, compliance with this duty is usually easy to fulfill.
2. “Protect the property from further damage”: Insureds are to prevent any additional damage to affected property (“further damage”) if possible. This may involve direct action by an Insured or by hiring a third-party such as a restoration or repair contractor who can assist with securing or cleaning affected items. Insureds should not ignore property after a loss, for example, by leaving it entirely to an insurance company when it comes to protecting and securing it. If the Insured can do so for a reasonable cost, it should be incurred and submitted as part of the claim. Insureds at times face the question of whether to remove affected property to protect unaffected property prior to an insurer’s inspection. If an Insured must remove property from a location in order to protect it from further damage, as long as the action was necessary in order to “protect the property from further damage,” an insurer’s right to inspect the property is not likely to be compromised. This leads directly to the next policy duty:
3. “Separate the damaged and undamaged personal property”: Part of ‘protecting the property from further damage’ involves separating damaged items from undamaged property. Rather than leave undamaged property among or next to damaged property or in an exposed condition where it can be further damaged or stolen, Insureds must take all reasonable steps necessary to protect undamaged property, in part, by separating it from damaged personal property. Some personal items might only be slightly or partially damaged, but cleanable. Other items may not clean. The partially damaged property can be cleaned so it is no longer damaged and then kept apart from the damaged, uncleanable property until it is returned to the Insured.
4. “Furnish a complete inventory”: Insureds know their property best. They obtained and maintained it up to the time of the loss. Therefore, after a loss occurs Insureds are to provide the insurance company with a complete list of the involved items. The California Insurance Code, and most policies, also require there to be “quantities, costs, actual cash value and amount of loss claimed” with the “inventory.”
5. “Render … a proof of loss”: A Proof of Loss is a form statement of the claim, including information about the claim along with the interest of the Insured in the affected property. Issuing one to an Insured is not antagonistic on the part of an insurer. Proofs of Loss are formal statements of the claim, signed and notarized, which confirms the Insured’s interest in the affected property as well as other policy and claim-related information. This duty must not be ignored since both the California Insurance Code (section 2071[a]) and most policies require a Proof of Loss within 60 days after a loss, unless the time is extended in writing by the insurer. At times policies will make completion of a Proof of Loss contingent upon the request of the insurer rather than a simple policy requirement. Whether contingent upon the insurer’s request or an explicit policy requirement, Insureds should seek to obtain and to submit a complete Proof of Loss to the insurer as soon as possible, being sure to abide by any policy time limits. Doing so will ensure compliance with a likely policy duty and help establish critical facts and information.
6. “Exhibit to any person designated by this company all that remains of any property herein described”: Regardless of the property’s condition after a loss, an Insured must “exhibit” or present the property for the insurance company to investigate. This is true even if all that remains of the property are piles of debris. The affected property should be contained if it is contaminated and the site should be secured so the company’s adjuster or other inspectors can evaluate the property’s condition after a loss. This duty, as it is presented in the California Insurance Code, states this is to be done “as often as may be reasonably required.”
7. “Submit to examinations under oath”: When an insurer asks an Insured to submit to an Examination Under Oath (“EUO”), it is only “to obtain information that is relevant and reasonably necessary to process or investigate the claim” (California Insurance Code, section 2071.1[a][2]). EUOs are serious, because the information obtained from them often is used by the insurer to determine the next step in the process, including whether to accept or to deny coverage. For this reason, after an EUO demand is issued Insureds tend to retain an attorney to assist them with the process.
8. “Produce for examinations all books of account, bills, invoices, and other vouchers, or certified copies thereof”: The descriptions here involve specific types of documents. “Books of account” include journals and ledgers which record a business’ transactions and transaction summaries. “Bills” and “invoices” are commonly understood terms for sales and purchase documents. “Vouchers” are forms completed once an invoice has been attached to a company’s purchase order. An Insured must “produce” all of these documents “or certified copies thereof” to an insurer investigating a claim.

In business or commercial policies these (8) duties are in large part the same as those we just reviewed for homeowner or residential policies. But there are a few important differences. To the eight (8) duties discussed in this article to this point, most commercial policies add a couple more. Here are two duties in addition to what we find in the Insurance Code and which are included on the 2011 “Building and Personal Property Coverage Form” (CP 00 10 10 12):

1. “Notify the police if a law may have been broken”: Business or commercial losses usually involve items of greater total value than homeowners or residential claims from losses such as theft or vandalism. For this reason, and in case there is any recovery of stolen property by law enforcement, insurance companies require losses to be reported to the police “if a law may have been broken.” Usually there are no other limits, including time limits, associated with this duty. So be sure to check the policy and compare it with any potentially applicable state laws.
2. “Cooperate with us in the investigation or settlement of the claim”: Understandably, insurers want to investigate the cause of damage for each claim and to evaluate the magnitude of the loss in order to reserve their claims against the amount it will likely pay to settle the claim. Cooperation between Insureds and insurance companies is essential for the insurer to access the affected property as often as is reasonably needed, as well as when it comes to the insurer’s investigation into the cause of the loss, including if there is a responsible party.

Always have well in mind what is required in terms of cooperation between Insureds and insurers. The applicable policy’s duties and any applicable state laws and regulations will make this clear. The real importance of the duty to cooperate can be seen in a decision reached by a federal district court in 2011, which found an Insured “breached his duty to cooperate” by failing “to produce the records requested.”—Ram v. Infinity Select Ins., No. C 09-2732, 2011 U.S. Dist. LEXIS 83555 (N.D. Cal. July 29, 2011), *41.

The requested records in this case were viewed as having prejudiced the insurer by “making it difficult if not impossible to determine whether Plaintiff had motive to file a false claim” (Ram v. Infinity Select Ins., *44). The court granted summary judgment to the insurance company, concluding in part, “the insurance policy is void based on Plaintiff’s breach of the duty to cooperate.”—Ram v. Infinity Select Ins., *45.

Compare this with the decision in ASTRA 524(g) Asbestos Trust v. Transport Ins. Co., No. 09 C 458, 2011 U.S. Dist. LEXIS 110272 (N.D. Ill. Sept. 28, 2011), where at *18 the court concludes, “Even were the express words ‘duty to cooperate’ are omitted from the contract, such a duty could reasonably be inferred based merely on the principles of fairness and good faith.”

Every company, independent, and public adjuster should make clear to each Insured the importance of cooperating with insurers, even if “cooperation” is not included in the policy’s language. In good faith, even if there is no specific duty to cooperate with an insurer in the homeowners or business policy applicable to the claim, every Insured should still cooperate as long as the investigation is reasonably necessary for the insurer complete its investigation and to determine coverage.

Claim Adjusters, Insurance Policies, and State Insurance Laws

Staff adjusters, independent adjusters, and public adjusters usually are not licensed attorneys. It is no surprise, therefore, adjusters do not typically research case law for claim adjustment purposes, nor do we hold ourselves out to the public as those who offer legal services typically provided by a licensed attorney. We adjust claims according to the applicable policy and in the light of any relevant state laws and regulations.

What if a provision or the language of a specific policy is different from the wording of state laws? Is one automatically to be preferred over the other, regardless of the policy or peril involved in the loss? For example, consider the wording of the following California insurance law for the dispute resolution process known as “appraisal”: 

In case the insured and this company shall fail to agree as to the actual cash value or the amount of loss, then, on the written request of either, each shall select a competent and disinterested appraiser and notify the other of the appraiser selected within 20 days of the request. Where the request is accepted, the appraisers shall first select a competent and disinterested umpire; and failing for 15 days to agree upon the umpire, then, on request of the insured or this company, the umpire shall be selected by a judge of a court of record in the state in which the property covered is located.—California Insurance Code, section 2051(b).

Notice the difference in wording regarding the same process of appraisal from the 2000 edition of the Homeowners 3 – Special Form (HO 00 03 05 01) policy by ISO Properties, Inc., which can be found in the same or similar form today in many California policies: 

If you and we fail to agree on the amount of loss, either may demand an appraisal of the loss. In this event, each party will choose a competent and impartial appraiser within 20 days after receiving a written request from the other. The two appraisers will choose an umpire. If they cannot agree upon an umpire within 15 days, you or we may request that the choice be made by a judge of a court of record in the state where the "residence premises" is located.

The California insurance statute’s language appears to make ‘acceptance’ of the appraisal “request” contingent on the other party’s willingness to proceed. By contrast, the ISO 2000 Homeowners 3 – Special and other, similar policy forms appear to require the process once it is ‘demanded’ by the other party and after "receiving a written request." 

Now consider the difference between many policies’ “Loss Settlement” provision and this state’s law concerning covered personal property losses. First the 2000 ISO Homeowners 3 – Special Form language: 

Covered property losses are settled as follows: 1. Property of the following types: a. Personal property . . . at actual cash value at the time of loss but not more than the amount required to repair or replace.”

Here it is stated personal property items are settled at “actual cash value” with replacement cost (“the amount required to … replace”) used as the ceiling amount or highest possible settlement for the actual cash value of the contents. But this language does not say whether to pay the lesser or greater of the two, should they differ, leaving it an open question in terms of the policy. By contrast, in the California Insurance Code, modified as recently as 2019 and effective January 1, 2020, we read (with underlining added): 

Under an open policy that requires payment of actual cash value, the measure of the actual cash value recovery, in whole or partial settlement of the claim, for either a total or partial loss to the structure or its contents, shall be the amount it would cost the insured to repair, rebuild, or replace the thing lost or injured less a fair and reasonable deduction for physical depreciation based upon its condition at the time of the injury or the policy limit, whichever is less.—Section 2051(b).

Since the HO 3 Special Form's wording appears more favorable to insureds than the language of the applicable statute, those policies with the same wording as the 2000 HO 3 Special Form will not likely be able to pay the "lesser" of the actual cash value and cost to repair or replace the contents if the values differ. But this appears to be true in California only with respect to one peril, fire. Note the following section from California’s Insurance Code: 

All fire policies on subject matter in California shall be on the standard form, and, except as provided by this article shall not contain additions thereto. No part of the standard form shall be omitted therefrom except that any policy providing coverage against the peril of fire only, or in combination with coverage against other perils, need not comply with the provisions of the standard form of fire insurance policy or Section 2080; provided, that coverage with respect to the peril of fire, when viewed in its entirety, is substantially equivalent to or more favorable to the insured than that contained in such standard form fire insurance policy.—Section 2070 (underlining added).

Licensed adjusters should reasonably be able to determine whether the policy language applies or whether to use language from an applicable statute. Company or staff adjusters can determine this in association with the insurer's best practices for coverage analysis. 

All adjusters can locate state insurance laws online and then compare relevant sections with the policy. Obtain an insurance attorney’s opinion if assistance is needed in understanding which statutes apply, what they mean, and how to follow them correctly in the adjustment of a specific claim.

Where state insurance laws and underlying regulations do not apply, the policy contract governs the settlement of an insurance claim. When there is a clear difference between policy language and an applicable insurance law in California, at least when it comes to the common peril of fire, the coverage provided must be “substantially equivalent to or more favorable to the insured than that contained in such standard form fire insurance policy.”