What The Hail Is Going On In Texas?

by Zelle LLP
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Law360 - December 19, 2013

Every lawyer knows that most state court lawsuits fall into a few general categories: slip and falls, auto accidents, employment disputes and collection actions. Year after year after year, the majority of state court lawsuits involve one of these disputes.

But 2013 brought a surprising newcomer to the list — one that perhaps surpassed all of the traditional categories in total number of cases filed. What is this hot new area of Texas law?

The hail damage lawsuit.

A subscription service provides a daily listing of every new lawsuit filed in Dallas County. In 2013, nearly every day, the listing contained numerous new lawsuits bearing the same description:

"Insurance action where the plaintiff seeks payment on hail damage claim."

Some actions involved individuals as plaintiffs, indicating the claims involved homeowners' policies. Others involved companies as plaintiffs, indicating that commercial properties were involved.

In July, a well-known Dallas mediator commented on the issue in a marketing email:

Am I crazy or is disputing over hail-damaged roofs the next big thing? I have four insurance claims at the moment where I am the court-appointed umpire in an insurance appraisal process, and I have been mediating three or four hail damage cases every month this year. I am becoming quite the expert .... Despite my expertise, I haven't yet determined whether all of this disputing is the result of an abnormal number of violent storms in recent years, or more sinister forces.

So what is it? More storms? More sinister forces? Or perhaps a little of both?

Every Texas citizen knows that Texas sees its fair share of hailstorms. Texas is the top state in the country for hail events. In 2012, Texas saw 795 hail events, an increase from 557 in 2010.[1]

Not surprisingly, Texas is also the top state for hail claims.[2] Over the past three years, Texas saw more than 320,000 claims (almost triple the next nearest state).[3] This is an increase of 84 percent over previous years.[4]

Because of this significant claim count, hail is the costliest peril to insurance companies doing business in Texas.[5] In 2011, Texas hail damage claims totaled over $1.7 billion.[6]

As a result, for the past several years Texans have paid the highest homeowners insurance premiums in the country — 50 percent greater than the national average.[7] The hail claim, as the costliest peril, is the most significant contributor to these high premiums.[8]

Considering these statistics, there is no disputing that the number of hailstorms and resulting hail damage claims is on the rise. This obviously plays a role in the increasing number of hail damage lawsuits. But does this fact alone explain the dramatic increase?

Also curious is the fact that the vast majority of the hail damage lawsuits filed in Dallas County were not filed by Dallas attorneys. Instead, most of the lawsuits were filed by attorneys from Houston and San Antonio. Why is this? Does Dallas really not have enough attorneys sufficiently competent to handle these matters?

Or is the Dallas mediator correct that “more sinister” forces are involved?

A little history ...

On Sept. 13, 2008, Hurricane Ike struck Galveston Island. It was the costliest hurricane in Texas history — estimated at $20 billion — and the damage was widespread.[9] Contractors, consultants, public adjusters, attorneys, and others with no insurance-related experience whatsoever descended upon the Gulf Coast to become involved in the massive number of Hurricane Ike insurance claims and resulting lawsuits.

Car mechanics became roofing contractors. Sanitation engineers became wind engineers. Personal injury attorneys became insurance policyholder attorneys. A new industry emerged. It was the full employment event.

But more than four years later, the Ike claims have, for the most part, been resolved, leaving this new industry of contractors, consultants, public adjusters and attorneys (who for four years made a living pursuing hurricane claims) with a significant shortage of work. What could they do to stay busy and capitalize on their Ike experience?

The answer — hail claims.

Over the past couple of years, a cottage industry has emerged in Texas of newly licensed public adjusters, individuals acting as unlicensed public adjusters, insurance appraisers, consultants, general contractors, roofing contractors and attorneys, all of whom have become hail damage claim “experts.”

Armed with an endless supply of old, deteriorated roofs and frequent Texas hailstorms, these individuals have found the hail claim business to be a good one, at least until the next hurricane comes along.

All that is needed to identify potential new claims are the high-quality aerial images of Google Earth (to identify old roofs sure to have seen hail at some point in their lives) and a National Climatic Data Center Storm Report listing recent hail events in a particular county (to establish a recent date of loss). Thereafter, the business model is simple — knock on doors and offer to help the building owner pursue a hail damage claim.

The offer is attractive to the building owner, as the contractor agrees to work on a contingency basis, completing the roof repairs with the insurance proceeds. In some cases, the contractor even offers to pay the building owner’s deductible (a potentially fraudulent practice).[10]

Plus, with favorable Texas “bad-faith” law and an appraisal process in disarray since the Texas Supreme Court’s opinion in State Farm v. Johnson, the Texas climate for this business model is very appealing.[11]

Most claims pursued under this model play out the same way. They are initially handled by the contractor, who files the claim on behalf of the property owner. If the insurer disagrees with the scope of damage or cost of repair, a public adjuster is engaged. If the claim cannot be resolved by the public adjuster, appraisal is demanded. Finally, if the claim remains disputed, an attorney (often from Houston or San Antonio) steps in and pursues the lawsuit.

The problem got so bad that late last year, the Texas Department of Insurance issued a commissioner’s bulletin reminding roofing contractors that they cannot negotiate insurance claims without a public adjuster’s license.[12]

Further, the Texas Legislature recently enacted new legislation expressly prohibiting roofing contractors from negotiating claims with insurance carriers, stating: “A roofing contractor may not act as an adjuster or advertise to adjust claims for any property for which the contractor is providing or may provide roofing services, regardless of whether the contractor holds a license under this chapter.”[13]

The legislation further provides: “A roofing contractor may not act as a public adjuster or advertise to adjust claims for any property for which the contractor is providing or may provide roofing services, regardless of whether the contractor holds a license under this chapter.”

This statute supplemented the Texas Public Adjuster Licensing Statute, which, since 2003, has stated that only licensed public adjusters may “negotiate or effect the settlement of a claim” and that license holders may not “participate directly or indirectly in the construction, repair or restoration of damaged property that is the subject of a claim adjusted by the license holder.”[14]

Consistent with these authorities, a federal district court in Fort Worth recently declared as “illegal, void and unenforceable” a contract giving a roofing contractor the right to “negotiate” a homeowner’s claim with its insurance company.[15] The matter is presently on appeal to the Fifth Circuit.

So what will 2014 bring? Likely more of the same. While 2013 saw lawsuits mostly from the 2011 storms, there were also significant storms in 2012.[16] The 2012 storms will undoubtedly bring more lawsuits in 2014.

So What The Hail Is Going On? The short answer is that as long as there is money to be made by third parties who involve themselves in the insurance claims process, more hail-damage claims will be filed. Most of the claims will be resolved, but those that are not will continue to appear in the daily new-lawsuit listings.

And with hail a certainty every year in Texas, this pattern will continue until the insurance companies curtail their coverage to the point that it no longer makes sense for these third parties to get involved in the insurance claims process, or greater judicial and legislative attention is brought to bear.[17]

But for the foreseeable future, it appears that hail damage claims will remain an active and growing part of the Texas legal landscape, requiring knowledgeable and experienced counsel.

[1] NCIB Reports Hail Damage Claims in the United States, 2010-2012, July 17, 2013; available at https://www.nicb.org/newsroom/news-releases/hail-damage-claims-in-the-us

[2] Top 10 States For Wind and Hail Losses, April 17, 2013; available at http://www.propertycasualty360.com/2013/04/17/top-10-states-for-wind-and-hail-losses    

[3] Id.    

[4] Number of Hail Damage Insurance Claims Up 84% Since 2010, July 18, 2013; available at www.insurancejournal.com     

[5] Hailstorms Are The Costliest Natural Peril In Texas, Nov. 14, 2012; available at http://www.insurancejournal.com/news/southcentral/2012/11/14/270566.htm   

[6] Id.    

[7] Texas Homeowners Still Paying Nation’s Highest Insurance Premiums, Dec. 18, 2012; available at http://www.dallasnews.com/news/state/headlines/20121218-texas-homeowners-still-paying-nations-highest-insurance-premiums.ece    

[8] In late 2012, the Texas Department of Insurance sponsored its War on Hail Symposium. Materials from the symposium are available at http://www.tdi.texas.gov/commish/waronhail.html.

[9] Texas’ List of Costliest Storms Tells Us Nothing of the Real Risk the State Faces, June 11, 2009; available at http://blog.chron.com/sciguy/2009/06/texas-list-of-10-costliest-storms-tell-us-nothing-of-the-real-risk-the-state-faces/

[10] Better Business Bureau Investigative Summary — Roofing Deductible Assistance Programs: Diagram of A Scheme, August 2012; available at http://dallas.bbb.org/storage/50/documents/Roofing%20Deductible%20Assistance%20Programs.pdf.

[11] The current problems with the Texas appraisal process are another story. For a few articles on the subject, see The Devolution of Appraisal In Insurance Disputes, Oct. 15, 2012; available at http://www.zelle.com/news-publications-196.html, and Scope of Appraisal Continues to be Problematic in Texas, Nov. 6, 2013; available at http://www.zelle.com/news-events-247.html.

[12] Tex. Dept. Ins. Commissioner’s Bulletin #B-0017-12.    

[13] Tex. Ins. Code §4101.251.    

[14] Tex. Ins. Code §4102.

[15] Reyelts v. Lon Smith Roofing and Construction et al., 4:12-CV-0112-BJ, 2013 WL 3870285 (N.D. Tex. July 26, 2013).  

[16] The 2012 hailstorms included the March 29, 2012, storm in McAllen, the April 29, 2012, storm in the Panhandle, and the June 14, 2012, storm in Dallas.    

[17] Changes recently appearing in Texas policy forms include higher deductibles, per-building deductibles, “cosmetic damage” exclusions, actual cash value claim measure for older roofs, and changes to the appraisal process. It is also important to consider the important role that hail resistant roofing materials could play in mitigating future claims. See Corrective Storm Vulnerability: Quantifying the Role of Effective and Well-Enforced Building Codes in Minimizing Missouri Hail Property Damage, November 2013; available at http://opim.wharton.upenn.edu/risk/library/WP2013-08_Building-Codes-in-MO.pdf.

 

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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