Wrongly Claiming Residential Supervision / Project Management as a Separate Line-Item in Xactimate Estimates

In the early 2000s in Southern California, several freelance estimators (persons with a general contractor’s license, but who do not operate a construction company), began offering services to general contractors and to public adjusters. What “services”? Preparing significantly inflated repair estimates for use in negotiating insurance claim settlements. The freelance estimator would market the estimate to certain contractors and to public adjusters seeking a bid that would allow them to get as much money as possible from the claim.

The freelance estimator would explain to the contractor or public adjuster that even if some of the inflated or unnecessary items in the estimate were negotiated down or denied, the contractor was still saving on the cost of an estimator (all while claiming 10% or more General Overhead). The benefit to the public adjuster was he or she did not have to prepare his or her own estimate, and they could rely on the freelance estimator to be at the inspection and to defend the estimate.

This process was designed to defraud insurance companies out of more money than a claim is worth. It was done by increasing labor and materials costs, adding more labor hours than are needed to complete the work, as well as using cleaning line-items (for every possible item) versus paying for actual cleaning hours, which is how cleaning jobs are actually paid. Another method commonly used was adding unnecessary or duplicative line-items.

In this article, I will focus only on the last scam, “adding unnecessary or duplicative line-items.” More specifically, I will discuss adding a separate line-item for a project manager or residential “supervision.” This line-item for supervision or a project manager was in addition to any General Overhead for operating costs already included in the estimate.

There is a reason why adding a separate supervision line-item to cover the same supervision or project manager requiring to operate a business has been successful for nearly twenty years. I was even convinced by some of these freelance estimators in the early and mid-2000s, at least until I worked for several general contractors and before I became a Certified Construction Project Manager. That is when I realized the freelance estimators responsible for the supervision scam were lying to everyone who was not familiar with the operational costs of a general contracting business. Therefore, something was needed to help adjusters and insurers recognize the deception.

The reason separate line-item supervision for the same responsibilities required to operate a business is at times convincing is because of a “White Paper” issued as early as 2003 by Xactware, Inc. Back in the 1990s the insurance industry, unlike the construction industry apart from insurance claims, began relying in large part on estimating software including a program by Xactware called “Xactimate.” While Xactimate is a good estimating system if used properly, many dishonest contractors and public adjusters seeking to take advantage of insurance companies also use Xactimate to inflate insurance claims.

For example, many dishonest companies who use Xactimate will pay cleaning workers a low-wage hourly labor cost. Yet, when it comes to submitting their Xactimate estimate to adjusters and to insurance companies, these same companies will take advantage of the Xactimate line-item cleaning costs for every single item in the affected area. Taken together, this often produces triple or even quadruple or more the actual cleaning cost. I will write more about this specific type of fraud in future article, and in a related video.

Another way Xactimate has been abused, as I have explained already in part, is by using line-item supervision where it should not be used. This specific type of fraud stems in large part from an Xactware White Paper titled “Overhead and profit.” This paper has been around since at least 2003, reprinted again in 2011, and most recently in 2020. All three versions of this Xactware paper read the same in the section called, “Job-Related Overhead.” The relevant section of this White Paper reads as follows on page 2:

·        Job-Related Overhead are expenses that can be attributed to a project,

but cannot be attributed to a specific task and include any and all

necessary expenses to complete the project other than direct materials

and labor. Examples (including but not limited to): Project managers,

onsite portable offices and restroom facilities, temporary power and

fencing, security if needed, etc.

 

Including Job-Related Overhead expenses in an Xactimate estimate–Job

Related Overhead expenses should be added as separate line items to

the Xactimate estimate.

Read in isolation from the rest of this paper, and apart from a knowledge of what general contractors are required to provide as part of the company’s operating costs (General Overhead), you can see why this section of the paper may be convincing. It states, “Project managers,” which are equated with supervision in the Xactimate line-item (LAB SUPERR), “should be added as separate line items to the Xactimate estimate.”

However, this is not what the Xactware paper is saying, nor is it what should be done when you consider the normal job supervisor or project manager responsibilities required for all construction project in California. Consider the following line-item and note from a real, recent general building contractor’s estimate using Xactimate, with a line-item for supervision based on the above-quoted Xactware “Overhead and profit” paper:

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Here there is a reference in the first paragraph under the supervision line-item to “Xactimate’s O&P white pages.” This is a direct, though oddly worded, reference to the previously quoted Xactware White Paper “Overhead and profit.” It is cited here to justify including a separate line-item for supervision or a project manager, even claiming, “Supervision is not covered in Xactimate’s O&P.” The claim here is that the Xactware White Paper justifies a separate line-item for residential supervision or project management in addition to the General Overhead and Profit (“O&P) typically listed as a percentage at the end of the Xactimate estimate.

I will address this estimate’s citation and use of the “Cal. Admin. Code tit. 16 § 823(a)” in this article, but first we need to resolve what the Xactware “Overhead and profit” paper is talking about. To further set up what is at issue, consider one more recent estimate, this one from a Southern California public adjuster who also cites and relies on both the Xactware paper and the same “Cal. Admin. Code tit. § 16 823(a)” cited in the first quote from a general contractor’s estimate:

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Note the similarity in the citation between the earlier note from a contractor estimate and this citation from a public adjuster’s estimate. Both reference the Xactware White Paper and the “Cal. Admin. Code tit. 16, 823(a),” and both contain the oddly worded language “white pages” versus “White Paper.” There is also an error in the citation of the “Cal. Admi. Code,” as I will show.

For now, focus on the use of the Xactware White Paper as justification for the supervision / project manager line-item in these two estimates. Consider what is stated in the same Xactware “Overhead and profit” paper in the section immediately preceding “Job-Related Overhead,” quoted earlier, on page 2 (with my underlining added):

General Overhead are expenses incurred by a General Contractor, that cannot be attributed to individual projects, and include any and all expenses necessary for the General Contractor to operate their business.

Here is a clear description of work considered “General Overhead,” namely, “expenses … that cannot be attributed to individual projects.” This is in direct contrast to how the same Xactware paper defined “Job-Related Overhead” (quoted earlier), that is, as “expenses that can be attributed to a project. 

Before further discussing this important difference, notice how the same Xactware paper further defines “General Overhead” as including “all expenses necessary for the General Contractor to operate their business.” This brings us to the “Cal. Admin. Code,” cited earlier in both the general contractor and public adjuster Xactimate line-item notes, as justification for line-item supervision or project management in addition to General Overhead.

After reading the first quoted Xactimate note for supervision from the general contractor’s estimate quoted earlier, after it refers to the “CSLB” (Contractor’s State License Board) the contractor’s line-item note then cites the “Cal. Admin. Code tit. 16 § 823(a)” as authority (all quotation marks are original to the contractor’s note):

 

Cal. Admin. Code tit. 16, 823(a). “Direct supervision and control” “includes anyone or any combination of the following activities: supervising construction, managing construction activities by making technical and administrative decisions, by checking job for proper workmanship, or direct supervision on construction job sites.

When referring to the “Cal. Admin. Code” (California Administrative Code), which is the California Code of Regulations, Title 16, 823(a), this general contractor puts in quotes, “Direct supervision and control.” However, the quoted material is from sub-section 823(b), not sub-section (a).

It is revealing that both the above-quoted general contractor and the public adjuster notes to this same line-item for supervision include this same citation error, as do these additional, also recent quotes from another general contractors and a different public adjuster, both from different Southern California property claims:

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And:

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Obviously, there is a network of general contractors and public adjusters sharing information they hope will increase their profits and fees through inflated estimates wrongly claiming line-item supervision. This is clear not only from their shared use of the same incorrect understanding of the Xactware paper and the California Code of Regulations. It is clear also from the fact they contain the exact same citation error from section 823(a), rather than citing section 823(b), as well as from the same oddly worded language “white pages” instead of the more correct “White Paper.

Now we will consider the difference between section 823(a) and section 823(b). Does sub-section 823(b) of the California Code of Regulations, Title 16, support the quoted general contractors’ and public adjusters’ notes for line-item supervision? Here is the complete quotation of both section 823(a) and (b) with my italics bolding and underlining used to offset the most relevant parts:

 

823. Definitions: Bona Fide Employee; Direct Supervision and Control.

(a) For purposes of Section 7068 of the [Business and Professions] Code, "bona fide employee" of the applicant means an employee who is permanently employed by the applicant and is actively engaged in the operation of the applicant's contracting business for at least 32 hours or 80% of the total hours per week such business is in operation, whichever is less.

 

(b) For purposes of Section 7068.1 of the Code, "direct supervision and
control" includes any one or any combination of the following activities:
supervising construction, managing construction activities by making
technical and administrative decisions, checking jobs for proper
workmanship, or direct supervision on construction job sites. 

Both part (a) and (b) of this section deal directly with “Section 7068” and “Section 7068.1” of the Business and Professions Code (“BPC”). Both part (a) and (b) also involve “an employee who is permanently employed,” an employee actively involved in the “operation of the applicant’s contracting business for at least 32 hours or 80% of the total hours per week such business is in operation.”

Sections (a) and (b) are entirely about a “bona fide employee” involved in a contracting business’ “operation” and the “direct supervision and control” of the company’s “business.” This includes the “total hours per week” the employee works in the “operation” of the “business.” All of this is a part of General Overhead as defined earlier from the Xactware paper under General Overhead, not as Job-Related Overhead.

California Code of Regulations, Title 16, sections (a) and (b) have nothing to do with a specific or individual job or project. Rather, they speak to the operation of the contracting business and about regular “activities” that must be done on every job or project. These regular “activities” involve “supervising construction,” “managing construction,” “making technical and administrative decisions,” “checking jobs for proper workmanship,” and “direct supervision on construction job sites.” These “activities” are the ‘tasks’ specifically excluded in the Xactware “Overhead and profit” paper in the section about Job-Related Overhead.

Notice, too, the permanent or “bona fide employee” of the applicant seeking a general contractor’s license is linked to BPC Sections 7068 and 7068.1. Here is Section 7068, in relevant part, with my underlining added only to key parts, and to which Cal. Admin. / Code of Regulations Title 19, section 823(a) directly refers in the above quotation:

BUSINESS AND PROFESSIONS CODE - BPC

DIVISION 3. PROFESSIONS AND VOCATIONS GENERALLY

CHAPTER 9. Contractors

ARTICLE 5. Licensing

  

7068.  

(a) The board shall require an applicant to show the degree of knowledge and experience in the classification applied for, and the general knowledge of the building, safety, health, and lien laws of the state and of the administrative principles of the contracting business that the board deems necessary for the safety and protection of the public.

. . .

(d) The board shall, in addition, require an applicant who qualifies by means of a responsible managing employee under either paragraph (1) or (2) of subdivision (b) to show his or her general knowledge of the building, safety, health, and lien laws of the state and of the administrative principles of the contracting business as the board deems necessary for the safety and protection of the public.

Section 7068 of the BPC makes it plain we are dealing with an applicant for a license who must personally, or by permanently employing a responsible managing employee, understand “the general knowledge of the building, safety, health, and lien laws of the state and of the administrative principles of the contracting business that the board deems necessary for the safety and protection of the public.

Clearly, the Code of Regulations, Title 16, section 823(a), in its reference to BPC section 7068, is discussing the ongoing operation of the “contracting business,” not a individual project. Now consider BCP Section 7068.1, again in relevant part, referenced in the Code of Regulations (“Cal. Admin. Code”), Title 16, section 823(b) which describes, “Direct supervision and control,” and the “activities” this supervision involves as a part of the business’ ongoing operations (with my emphasis added): 

BUSINESS AND PROFESSIONS CODE - BPC

DIVISION 3. PROFESSIONS AND VOCATIONS GENERALLY

CHAPTER 9. Contractors

ARTICLE 5. Licensing

  

7068.1.  

(a) The person qualifying on behalf of an individual or firm under paragraph (1), (2), (3), or (4) of subdivision (b) of Section 7068 shall be responsible for exercising that direct supervision and control of his or her employer’s or principal’s construction operations to secure compliance with this chapter and the rules and regulations of the board.

. . .

(d) The board shall require every applicant or licensee qualifying by the appearance of a qualifying individual to submit detailed information on the qualifying individual’s duties and responsibilities for supervision and control of the applicant’s construction operations.

(e) Violation of this section shall constitute a cause for disciplinary action and shall be punishable as a misdemeanor by imprisonment in a county jail not to exceed six months, by a fine of not less than three thousand dollars ($3,000), but not to exceed five thousand dollars ($5,000), or by both the fine and imprisonment.

This section of the BPC explicitly states an applicant or an applicant’s permanent employee is responsible “for supervision and control of the applicant’s construction operations.” This is not a cost directly attributable to “specific tasks” and, therefore, the cost is not Job-Related Overhead. Rather, the “duties and responsibilities” are a part of the operational “tasks” excluded from Xactware’s White Paper’s description of Job-Related Overhead, and which are included in the business’ General Overhead costs for “the applicant’s construction operations.”

Everything described in the “Cal. Admin. Code” (Code of Regulations) Title 16, section 823(b) as “direct supervision and control” covers what is included in the general contractor and public adjuster notes quoted earlier to justify their estimates’ line-item for residential supervision. 

Here is another example from a recent Southern California estimate submitted by a public adjuster who, though without the specific reference to the Xactware “Overhead and profit” paper or to the “Cal. Admin. Code,” nonetheless claims one-hundred and sixty hours of “Residential Supervision / Project Management” for “activities” or ‘specific tasks’ (the wording of the Xactware paper for what is not Job-Related Overhead):

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Obviously, a lot of money is being wrongly claimed under this line-item and those claiming it are either victims of the errors of other contractors or public adjusters, or they are knowingly committing fraud by claiming thousands of dollars for what is already included in the General Overhead allowance of the same estimate. Note again what the Xactware White Paper says right after defining “General Overhead” and about what is not considered Job-Related Overhead, “expenses that can be attributed to a project, but cannot be attributed to a specific task.” 

After studying the coursework involved in becoming a Certified Construction Project Manager through San Diego State University’s Associated General Contractors’ (AGC) Supervisory Training Program (STP), it becomes obvious there are numerous “tasks” a supervisor or project manager must complete which are not attributable to an individual project. They are a part of a business’ operational activities for every job. These ‘tasks’ include the very things described by the California Code of Regulations, Title 16, section 823(b), namely, “supervising construction,” “managing construction,” “making technical and administrative decisions,” “checking jobs for proper workmanship,” and “direct supervision on construction job sites.”

Many construction companies have more than one project manager or supervisor on staff, who are often involved in the same projects. Each of these supervisors or project managers have similar or different responsibilities involving these very same tasks. Different tasks can also be delegated form one person to another as a part of a business’ operation. 

For this reason, the AGC STP Manual 4, “Contract Documents and Construction Law,” page 5-17, emphasizes the task-awareness of a project manager’s or job supervisor’s role in the company as follows (with my underlining): “Analyze the tasks that you perform. Determine which you perform by virtue of delegated authority and which you carry out because it is your responsibility to do so. This is how you can analyze the limits and the bounds of the daily tasks you are expected to perform.”

In conclusion, since the BPC and the Code of Regulations requires a company to have a supervisor or project manager prior to starting or even signing a specific project, the operational “tasks” paid for under General Overhead to be completed once projects are on the books could not possibly be considered Job-Related Overhead, as defined by Xactware’s “Overhead and profit” White Paper. If there are particular security concerns or extreme location or site issues involved with an individual project and which are not attributable to specific “tasks,” only then should a separate line-item be added to the body of an estimate in addition to the estimate’s General Overhead.

For a video presentation of much of this same information, see my "Supervision Fraud in Property Claims Using #Xactimate (#Xactware)," Property Insurance Claims Fraud Review (October 12, 2020):

Using Hydroxyl Generators for a Wide Variety of Odor-Only Property Claims

If you have a property insurance claim involving odor from wildfire smoke, mold or mildew, or any other malodor, use hydroxyl generators. They are superior to other methods of odor control such as thermal fogging, sealing, painting or a combination of these. Hydroxyl generators are also less expensive overall when handling smoke claims.

Even if a house's attic framing is cleaned and sealed after smoke exposure, complaints may later arise about lingering odors. This is particularly true during hot months. However, this can all be avoided by using hydroxyl generators instead of thermal fogging or other masking agents, since they "produce hydroxyl radicals that break apart odor molecules."—"Hydroxyl Generators: The Definitive Guide."

Hydroxyl generators also involve far less hassle for property owners, and they are much less expensive for their effect than any other traditional method that has been used. Further from the article, "Hydroxyl Generators: The Definitive Guide":

It is a relatively simple process compared to other popular odor removal methods as it does not require additional intervention by masking agents, chemicals, oils, and so on. There is also no fogging, spraying or wiping. Hydroxyl generators work simply by being strategically placed throughout an odor-impacted property and turned on. While it will likely take a few days for full results, most people notice the malodor being knocked down within the first few hours. The best way to ensure an odor removal job is complete is by inspecting and smelling porous items throughout the space – where odors would be embedded and take the longest to be remediated.

It is also important to understand how to properly place hydroxyl generators at a loss site. This is explained in part by Tom McArdle, "Hydroxyl Generators: Top Tips for Easy Deodorization" (September 26, 2016):

Hydroxyl generators are easy to use, but proper placement on each project is important. A baseline for the coverage area of each machine is the first step. When treating the moderate to severe odors encountered in the disaster restoration industry, typical coverage area for the most powerful machines is 1,000 to 1,500 square feet with normal ceiling height up to about 20 feet. This estimate is based on significant field experience and feedback.

McArdle also remarks on the value of using hydroxyl generators to address a variety of common property loss conditions. These include:

The strength of the hydroxyl radicals will break apart any odor they may come across – fire and smoke, CAT 2 & 3 water losses, chemical fumes, fuel oil, skunk, curry, VOCs, trauma, etc. – while at the same time not harming anyone or damaging sensitive materials like rubber, plastic, leather, electronics, artwork, wet items, etc.  

If you are worried about the tested quality of hydroxyl generators, don't be. Plenty of creditable testing has been done to ensure hydroxyl generators are not only effective in eliminating odors and VOCs ("volatile organic compounds"), but which also shows they are safe to use in occupied spaces. This means in most claims occupants of odor-impacted homes do not have to vacate the property. To quote once more from "Hydroxyl Generators: The Definitive Guide":

Testing has been performed over the years by reputable third-party companies such as Underwriters Laboratory (UL), Lovelace Respiratory Research Institute, the FDA, Comparative Biosciences, and Wonder Makers Environmental. This research shows how many hydroxyl radicals are produced, and how much ozone is produced, proving the machines’ safety. Plus, one major hydroxyl generator brand has had its technology approved by the FDA as a Class II medical device for use in occupied areas. In addition, a 13-week toxicity study on rats following FDA GLP guidelines showed no adverse effects. Wonder Makers Environmental, a firm that operates heavily as consultants for remediation contractors across the U.S., also conducted their own testing that showed a dramatic reduction in VOCs in addition to odor elimination while running a hydroxyl generator in a space affected by fire.

This means homeowners who previously might have had to leave the property while the remediation work is being done, can remain on-site. It also means content pack-outs and temporary housing will be greatly reduced if not eliminated altogether by using hydroxyl instead of the older, less effective methods such as ozone and thermal fogging. 

To learn more about the use of hydroxyl generators and how they can help you with odor-only claims, watch our video, "Odor 'Damage' Fraud in Property Claims." 

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.”