The following is an opinion article from Eric A. Kreuter, Ph.D., CPA, CGMA, CFE Partner, Marks Paneth LLP New York, NY. The views expressed within the article are not necessarily reflective of those of Insurance Business.
How to assess intentionality in an insurance claim
The quandary of intentionality
Covered perils, such as fire, can be devastating, leaving the insured vulnerable. The carrier, in most cases, will come to the immediate aid of the insured and provide financial relief under the policy, but sometimes controversy arises, and claims are disputed, leaving the insured in a quandary. One such controversy concerns the intentions of the insured.
Filing the insurance claim then delays
Once resettled in temporary shelter, your immediate concern is filing a claim for recovery under your homeowner’s insurance policy. You report the claim and the process begins. You engage with the carrier to have all the claim elements considered. Eventually, some claims are accepted, processed and paid. Others are rejected. Your negotiations with a proposed home builder leads to time-consuming and costly additional steps for the rebuilding project to commence so the claim can be considered. You reconsider the sensibility of rebuilding the house, worrying if you can do so within the allowed time.
Your decision to rebuild changes to pursue replacement
With the high cost of construction, you realize that the reasons for rebuilding the house are mostly emotional. Eventually, you decide to consider purchasing a replacement property rather than rebuilding.
The law in New York State requires carriers to provide additional time to rebuild or replace property lost to insurable peril beyond what used to be 180 days to rebuild or replace—an impractical period. The law now mandates the acquired property, or the replacement property be completed or purchased within two years of the date of loss. Sometimes this is insufficient when facing hurdles, such as:
- Delays caused by multiple investigations of the origin of the fire
- Delays in processing the claim for structural damage
- Arguments over specific aspects of the claim
- Delays caused by changes in building code for various issues
Even though the insured communicates these concerns to the carrier, there is not, typically, an extension of time granted beyond the statutory two years provided in which to demonstrate replacement of the lost property. This is only problematic in cases where the policy provides for an extended limit of coverage conditioned on replacing the lost property where recoupment is completely dependent on completion of either the rebuild or the purchase of a bona fide replacement property. It is this extended limit portion of coverage that leads to problems for the insured who faces delays and other unforeseen obstacles to recover all the insurance for which premiums have been paid for many years.
Complications when choosing to replace lost property
Most policies contain a provision that the homeowner has the option of replacing the lost property by acquiring a suitable or bona fide replacement property - however, these policy provisions rarely are written in sufficient detail to allow the insured to fully understand their options.
A larger dilemma can occur in the case where the owner of a destroyed four-bedroom home is replaced by a two-bedroom condominium. The policy language may be silent as to what constitutes a bona fide replacement home.
Intentionality becomes germane
It is possible the carrier may deny a claim for reimbursement of extended limits coverage on the basis that the intention of the insured is to move into the newly acquired property only temporarily while the former property is rebuilt, then move back and resell the other property, thus cleverly sidestepping the two-year dilemma. This can be viewed as the intent of the insured or his intentionality. But how is the intent (or the mindset of the insured) determined? Take, for example, the case where the insured takes many steps to rebuild the damaged home only to find completion frustrating or the time remaining insufficient to complete the project. This frustration could lead to a change of heart and a new decision to abandon the plans to rebuild and, instead, to forge ahead with a new plan to relocate permanently. The carrier may argue that the homeowners’ actions justify the denial of the claim, but, in that case, is the carrier invading the mindset of the insured and adding facts not in evidence? If so, how can the insured provide adequate proof that their intention is to live in the newly acquired residence and not rebuild leisurely then relocate back to the former address? It may come down to a case of trust versus mistrust, but is suspicion an adequate and defensible way for a carrier to decline coverage?
In my view, the carrier should be required to accept the insured’s statement of his or her intentions. Absent evidence to the contrary, the claim, otherwise complete and thoroughly documented, should be paid. Evidence that the insured did intend to rebuild and then move back may be seen in the actions of the insured post-relocation to the replacement residence. These actions could be, for example, active construction of a new house on the former property, very immediate relocation back to the former address, or statements made by the insured that they always intended to move back.
However, consider the example of an insured who abandons such active efforts to rebuild, does move into a replacement residence and remains there for a long period of time. Then, even if the insured decides years later to rebuild a house on the former address, perhaps this is done with the intent of flipping the house or, perhaps, to operate it as a rental property, not to game the system. The rights of the insured should not be less than those of any other property owner. However, from the carriers’ perspective, it does make sense that they could question the intentionality of the insured. It is only when the insured does state, clearly, his or her intentions that the carrier could be playing with fire by denying the claim. Such denial could lead to unnecessary litigation filed against the carrier for acting in bad faith by denying coverage.