District Court Figures Out What The Hail Is Going On

by Zelle LLP
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Seeing a significant increase in the number of hail damage lawsuits in her courtroom, it appears Judge Jane Boyle of the United States District Court for the Northern District of Texas has figured out "What the Hail is Going On."[1] And she’s taking strong action in response to such lawsuits.

Many hail claims begin not because there are holes in the roof and water gushing into the building, but when a roofing contractor knocks on the building owner’s door with promises of a free roof.[2] This often occurs months or even years after the last significant hail event in the area. By the time the insurance company is first notified and able to inspect the alleged damage, there may have been additional more recent hail events impacting the roof. And, of course, these are all in addition to the numerous earlier hail events that occurred over the roof’s entire service life. Even assuming there is agreement that the roof is damaged by hail (as opposed to simply being old and worn out), these circumstances lead to obvious questions:

Which storm caused the reported damage?

Who has the burden to prove which storm caused the damage?

The timely notification of a loss is a hallmark requirement of an insurance claim, and most insurance policies contain a provision requiring an insured to timely notify the insurance company when it suffers a loss. In considering this notice requirement, Texas courts have required a showing of prejudice before allowing an insurer to assert a “late notice” defense. So what is “late notice” and what constitutes “prejudice” in the context of a hail damage claim reported months or years after the alleged date of loss?

There is finally some clarity on these issues.

In Hamilton Properties v. The American Insurance Co. et al., Northern District Judge Jane Boyle was presented with the typical Texas hail claims lawsuit — late-reported hail damage to an old and deteriorated commercial roofing system.[3] The insurance company moved for summary judgment, arguing the insured had failed to satisfy its burden to segregate damage attributable to a covered peril from damage attributable to a noncovered peril.

In a thorough and well-reasoned opinion, Judge Boyle granted the insurer’s motion for summary judgment. In doing so, Judge Boyle addressed issues common in hundreds — if not thousands — of pending Texas hail damage lawsuits.

First, Judge Boyle held the policyholder to its burden of segregating property damage caused by a covered peril from damage caused by a peril that is not covered where multiple hailstorms may have contributed to the condition of the roof and where the roof exhibited problems associated with normal wear and tear, deterioration and other excluded perils. Since the insurer provided evidence that a peril not covered by the policy contributed to the damage, the insured was required to segregate its claim between property damage caused by a covered peril and property damage caused by other perils that were not covered. Judge Boyle determined the insured failed to meet that burden as a matter of law.

Second, Judge Boyle determined that first reporting a claim between 19 and 27 months after an alleged loss was not “prompt notice” as required by the insurance policy. A delay of almost two years was clearly not prompt.

Third, Judge Boyle reaffirmed that under Texas law, an insurance company must establish that it was prejudiced by the insured’s failure to provide prompt notice. Although the existence of prejudice is often a fact issue, Judge Boyle concluded as a matter of law that:

Plaintiffs’ lapse in providing notice compromised the reliability and availability of evidence necessary to investigate their claim. In other words, the court determines that AIC suffered an adverse change in position as a result of plaintiffs' delay.

With these three findings, Judge Boyle granted the insurance company’s motion for summary judgment and rendered judgment in its favor.

The facts of Hamilton Properties v. The American Insurance Co. et al. will sound quite familiar to anyone involved in Texas hail claims. The insured reported roof damage to its hotel, allegedly resulting from a July 8, 2009, hailstorm in Dallas County. Hamilton Properties claimed its representatives first noticed problems with ceiling tiles falling and water entering the building shortly after the July hailstorm. Despite these alleged observations, however, a claim was not reported to the insurance company until sometime in 2011.[4]

The insurer, American Insurance Co., investigated the claim. On Feb. 16, 2012, AIC denied the claim based on, among other things, the fact that an engineer had previously inspected the roof of the building only 19 days after the claimed date of loss and no hail damage was noted at that time. The denial was also based on historical weather data, which identified three hailstorms that impacted the building before the claimed date of loss and three hailstorms after that date. Specifically, storms between April 2007 and February 2008 reportedly produced hail between 0.88 inches and 1.75 inches.

There were also three hail events during May 2011 that produced hail between 0.75 inches and 1.5 inches. But because the insured did not report the damage until 2011, AIC argued it could not determine if the damage occurred during its policy period, which ended on Sept. 24, 2009. AIC’s investigation also revealed potential problems with wear and tear, gradual deterioration, latent defect, corrosion, mold, and wet or dry rot.

Hamilton Properties filed a state court lawsuit against AIC in October 2012. AIC removed the matter to federal court. After completing discovery, AIC filed a motion for summary judgment on the basis that Hamilton Properties had not met its burden of segregating the damage caused by a covered peril from the damage caused by perils that were not covered under the policy. AIC also moved for summary judgment based on Hamilton Properties’ failure to provide prompt notice of its loss.[5]

Hamilton Properties claimed all of the damage it was seeking was caused by the July 2009 hailstorm. After reviewing the evidence in the light most favorable to Hamilton Properties, Judge Boyle determined AIC had met its burden of showing the lack of evidence to support Hamilton Properties’ contention. Because Hamilton Properties was unable to allocate damages between the July 2009 hailstorm and those damages that were caused by other perils not covered under the policy, Judge Boyle granted AIC’s motion for summary judgment.

Acknowledging that summary judgment on the concurrent causation issue was dispositive, Judge Boyle also addressed Hamilton Properties’ failure to provide timely notice to AIC and the resulting prejudice. In addressing whether the notice was timely, Judge Boyle first focused on when the alleged damage occurred. Relying on the Texas Supreme Court’s decision in Don’s Building Supply Inc. v. OneBeacon,[6] Judge Boyle acknowledged property damage occurs when actual physical damage to the property occurs, not when the damage first manifests or is discovered.

There was no dispute that Hamilton Properties alleged its damage occurred on July 8, 2009, the key date for determining whether or not notice was timely. Although there was a dispute regarding whether notice was provided in February 2011 or October 2011, Judge Boyle determined as a matter of law that notice was not timely regardless of whether Hamilton Properties waited 19 or 27 months before reporting the loss.

Next the court determined whether the late notice prejudiced AIC’s ability to investigate the claim. AIC claimed it did not have an opportunity to investigate the loss site in close proximity to the claimed date of loss and was denied access to “critical evidence.” AIC also claimed it lost the opportunity to quantify the damage close to the claimed date of loss or to interview the other residents of the hotel who may have known the prior condition of the roof and the impact of the July 8 event.

Judge Boyle noted the “purpose of the timely notice requirement is to enable an insurer to investigate the circumstances of an accident while the matter is fresh in the minds of the witness so that it may adequately prepare to adjust or defend any claims ...”[7] Thus, “prejudice from failure to notify timely arises from inability to investigate the circumstances of an occurrence to prepare adequately to adjust or defend any claims, not merely to prepare for trial.”[8]

The court determined the condition of the roof and other portions of the building changed considerably over the period of 19 to 27 months. Ultimately, the court concluded Hamilton Properties’ “lapse in providing notice compromised the reliability and availability of evidence necessary to investigate their claim. In other words, the court determines that AIC suffered an adverse change in position as a result of plaintiffs’ delay.”[9]

Judge Boyle also granted summary judgment to AIC for Hamilton Properties’ claim that AIC violated the Texas Insurance Code, breached its fiduciary duty and made misrepresentations to Hamilton Properties. Because Judge Boyle granted summary judgment to AIC on all claims asserted by Hamilton Properties, she dismissed all claims with prejudice.

With the Hamilton Properties decision, Judge Boyle has provided much-needed guidance to insurers faced with investigating hail damage claims reported two, three or more years after a storm event. Judge Boyle recognized that insurers should have an opportunity to timely inspect reported hail damage to confirm it occurred on the reported date of loss and that the reported damage is actually the result of hail and not simply general deterioration commonly present with old roofing systems. If a claim is reported immediately, the insurance company can promptly inspect the building and determine if there is actual hail damage resulting from the reported recent hail event.

Otherwise, for claims reported years after the hail storm, the insured (or whoever is advocating the claim on its behalf) better now be prepared to meet its burdens to both 1) segregate the alleged hail damage from ordinary aging and 2) demonstrate that the alleged damage occurred on the reported date of loss as opposed to the many other hail events occurring over the life of the roof.

Texas courts are starting to see "What the Hail is Going On" with these claims and holding insureds to their burdens.

—By Brett A. Wallingford, Zelle Hofmann Voelbel & Mason LLP

Brett Wallingford is a partner in Zelle Hofmann's Dallas office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] See “What The Hail Is Going On In Texas? Law360, Dec. 19, 2013, http://www.law360.com/articles/497082/what-the-hail-is-going-on-in-texas; and  The Emerging Hail Risk: What The Hail Is Going On? Claims Journal, May 2, 2014, http://www.claimsjournal.com/news/national/2014/05/02/248354.htm

[2] See “Roofing Contractors, Don’t Mess With Texas Insureds!Texas Law360, Nov. 15, 2013, http://www.law360.com/articles/489103/roofing-contractors-don-t-mess-with-texas-insureds

[3] Hamilton Props. v. Am. Ins. Co., No. 3:12-CV-5046-B, 2014 WL 3055801 (N.D. Tex. July 7, 2014).

[4] Id. at * 2

[5] Id. at * 7

[6] Don’s Bldg. Supply Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20, 24 (Tex. 2008).

[7] Hamilton Props at * 9 (citing Blanton v. Vesta Lloyds Ins. Co., 185 S.W.3d 607, 611-612 (Tex.App.-Dallas 2006, no pet.).

[8] Id.

[9] Id. at * 10

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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