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Insurance Law

Homeowner’s Insurance – New Appleman on Insurance Law Library Edition, Chapter 53

By Joseph D. Jean and Gregory D. Miller

Section 53.01 introduces homeowner's insurance generally and discusses the types, processes and coverages available in homeowner's policies.  Section 53.01[1] discusses the general organization and scope of homeowner's policies and tracks the unique features of homeowner's policies as combining multiple lines of insurance protection.

Section 53.01[2] describes the history of homeowner's insurance from its roots in England to the combination of policies in the 1950s to the present day.

Section 53.01[3][a] discusses property insurance as one of the two main branches of the homeowner's policy.  Section 53.01[3][b] discusses the second branch of homeowner's insurance coverage, namely liability protection for the homeowner.  Section 53.01[3][c] provides a general overview of the various types of homeowner's insurance policies available by examining the features of the most popular forms, the HO-2 and HO-3 as well as lesser used forms.  This section describes how the various forms may be more appropriate for different homeowners.

Section 53.01[4] examines how homeowner's insurance may be combined with various other forms of insurance, such as umbrella and excess coverage to provide comprehensive coverage for the homeowner.  It weighs the advantages and disadvantages to the homeowner and its insurers in combining insurance coverage.

Section 53.01[5][a] defines perils as a group and how they are treated under homeowner's policies.  This section discusses perils as a whole.  Section 52.01[5][b] discusses two forms of homeowner's policies, "named peril" and "non-excluded peril" coverage.  Named peril coverage provides coverage only against specifically enumerated disasters.  Non-excluded peril coverage, or "all risk" coverage, provides protection for a homeowner against all perils except those specifically enumerated in the policy.  Section 53.01[5][c] tracks the outgrowth of the New York Standard Fire Insurance policy and its effect on the homeowner's policies of today.

Section 53.01[6][a] begins by discussing the role of the application in the homeowner's effort to obtain insurance.  Section 53.01[6][b] discusses representations and warranties made during the application process.  A homeowner applying for homeowner's insurance must make many representations such as those relating to the quality of the home and the likelihood specific perils might occur.  Section 53.01[6][c] discusses the severe consequences of misrepresentation in these representations.

Section 53.01[6][d] examines how an insurance company may intentionally or inadvertently prevent themselves from exercising various defenses to claims by an insured through waiver and estoppel.  Waiver involves the knowing and voluntary relinquishment of an otherwise valid defense that the insurer has against an insured.  Estoppel results when an insurer is forbidden from exercising a valid defense against an insured because, for example, the insured reasonably relied upon and was prejudiced by the insurer's conduct.

Section 53.01[6][e] discusses the role of the binder.  After an insurer and insured complete an application, but prior to the issuance of a policy, an insured sometimes receives a binder that provides coverage pending the official issuance of the policy.  This section examines whether the binder will be valid and the circumstances in which it provides broader coverage than the policy itself.

Section 53.01[6][f] discusses the role of the certificate of insurance.  The certificate of insurance provides proof of insurance, but by itself will generally not entitle an insured to coverage.  Section 53.01[6][g] examines how the official issuance of the policy will affect coverage for an insured and Section 53.01[6][h] discusses the default terms of a loss when it occurs under coverage but prior to the issuance of a policy.  If issued, the terms of a binder will generally apply.  But if no binder has been issued, the insurer will be held to similar terms and conditions as are normally issued in policies of this type.  Section 53.01[6][i] discusses how vacancy of a property may affect the availability of coverage.  Section 53.01[6][j] discusses how the approval of a lender may be needed before a loss can be paid if the property is subject to a mortgage.

Section 53.01[7][a] discusses the role of a named insured in an insurance policy.  The named insured is designated under an insurance form and will be the person submitting claims to the insurer in the event of a loss.  Section 53.01[7][b] examines the role of additional insureds.  In addition  to the named insured,  an insurance policy will  usually provide coverage for several other additional insureds under the policy as outlined in Section 53.01[7][c][i]. Section 53.01[7][c][ii][A] begins the examination of these additional insureds.  Members of a named insured's "household" are covered under the policy.  A household includes those residing in the same household as well as family members of the insured.  For family members, this section examines how closely related the family members must be to the insured in order to qualify as a member of the insured's household.  Section 53.01[7][c][ii][B] discusses how  a child's minority or majority may affect coverage under the policy.  Closely related is Section 53.01[7][c][ii][C] that examines how step-children may or may not be covered under the policy.  Section 53.01[7][c][ii][D] and Section 53.01[7][c][ii][E] address cohabitants and their children and whether they are considered family members of the insured for homeowner's insurance purposes.  Section 53.01[7][c][iii][A] discusses how individuals may qualify as a member of the insured's household by "residing" in the same household.  Section 53.01[7][c][iii][B] examines children who are away at school.  Generally children who are attending school are still covered under their parents' homeowner's policy, despite the fact that they reside at another location for several months out of the year.  Section 53.01[7][c][iii][C] discusses whether those temporarily residing within a home are covered by home insurance.  Section 53.01[7][c][iii][D] examines how foster children are usually not considered to be part of the household.  Section 53.01[7][c][iii][E] examines the situation of children of divorced parents and others in joint custody.  Generally, children of divorced parents are considered to be residents of both households.

Section 53.01[7][d][i] discusses the effect of the way ownership or an insurable interest is held.  Section 53.01[7][d][ii] discusses the rights of the mortgagor in relation to obtaining home insurance.  Section 53.01[7][d][iii] explains  loss payable clauses, both in Section 53.01[7][d][iii][A] that discusses the issue for loss payees and Section 53.01[7][d][iii][B] that examines the issues for mortgagors.

Section 53.01[7][e][i] examines the issue of coverage for "innocent insureds."  When several different people are insured by the same contract an issue arises when one of the insureds violates the contract but another insured is harmed.  The issue is whether the innocent insured may collect from the insurance company for the damages caused by the culpable insured.  Section 53.01[7][e][ii] discusses the judicial focus on the language of the clause in the contract.  Slight variations in language may determine whether the insured is able to recover.  Section 53.01[7][e][iii] examines various minority rules and the different criteria for determining if a claim will survive.

Section 53.01[8] explains how coverage is initiated when there is a loss.  Section 53.01[8][a] discusses the features of a claim, both for property loss or damage in Section 53.01[8][a][i] and for a claim based on liability in Section 53.01[8][a][ii].  The procedures for giving notice of a claim for property loss and liability are likewise examined in Section 53.01[8][a][i] and in Section 53.01[8][a][ii], respectively.  Section 53.01[8][b] explains how an insured must give their insurer notice of circumstances that could give rise to a claim even if no official claim has been asserted against the insured.

Determination of the deadline for notifying an insured of a loss is the topic of Section 53.01[8][c][i].  Section 53.01[8][c][ii] examines jurisdictions employing the "as soon as practicable" rule.  Section 53.01[8][c][ii] looks at jurisdictions requiring notice within a specified time period.  The consequences for failure to notify an insurer in time can result in an entire claim being barred as discussed in Section 53.01[8][c][iv].  When an insured's notice is late, most courts will examine whether the insurer was prejudiced and whether the insured has a justifiable reason for the late notice.  In most jurisdictions, if the insurer was prejudiced, the claim is barred.

Section 53.01[9] examines an insured's duties when a loss occurs.  An insured must notify the insurer as well as others when a loss is suffered as described in Section 53.01[9][a][ii] and Section 53.01[9][a][iii].  Another duty of the insured as discussed in Section 53.01[9][b] is to protect property after there has been a loss.  The insured has the duty to minimize losses so that an insurer will not have to pay additional amounts. Section 53.01[9][c] discusses an insured's duty to allow an insurer access to inspect and investigate after a loss.  Without this requirement an insurer would have little way of verifying an insured's claim of loss.

Section 53.01[9][d] discusses an insured's duties with regards to the proof of loss.  In Section 53.01[9][d][ii] the use of forms is discussed.  Section 53.01[9][d][iii] examines when a proof of loss must be provided.  Section 53.01[9][d][iv] discusses what evidence is needed in order to demonstrate proof of loss.  Section 53.01[9][e] explains an insurer's right to take statements under oath after a loss.  Most insurance contracts have a clause allowing an insurer to take a statement under oath following a loss.  This section examines what an insurer can and cannot do when conducting this examination.

Section 53.01[9][f] discusses the insured's continuing obligation to pay premiums.  Section 53.01[9][g] looks at two ways that an insured may avoid penalties for failing to perform a duty - waiver and estoppel by the insurer.  Courts' treatment of homeowner's policies compared to commercial lines is examined in Section 53.01[9][h].

Section 53.01[10] examines an insurer's duties to the insured after notice of a claim has been filed.  Section 53.01[10][a] discusses an insurer's ongoing duty of communication with the insured.  Section 53.01[10][b] explains an insurer's duty to investigate.  After a loss has been suffered an insurer must examine the property in order to assess the damage.

Section 53.01[11] discusses best practices with respect to insurers' handling of claims.  How and when an insurer may cancel coverage is the subject of Section 53.01[12].  An insurer may not cancel coverage whenever it wishes.  Usually there are statutory guidelines for when an insurer can cancel insurance.  Finally, Section 53.01 [13] discusses the process for renewal of coverage and its interaction with cancellation of coverage.

Section 53.02 discusses the wide variety of real and personal property that the typical homeowner's insurance policy covers.  As discussed in Sections 53.02[1][a], [b], and [c], most homeowner's policies include coverage for the residence itself, other unattached structures, personal property, and loss of use.  The coverage is designed to repair and rebuild the home and other structures, to replace personal property that has been lost or damaged, and to generally put the homeowner into a pre-loss position following a covered loss. Section 53.02[1][e] discusses the various sublimits that insurers frequently impose on various specific types of personal  property including, for example:  money, jewelry, watches, furs, watercraft and firearms.  Section 53.02[1][f] describes the property that is most frequently excluded by the standard homeowner's policies.  Significantly, the standard coverage provided by the homeowner's insurance policy excludes damage to land, dirt, and soil.

Homeowner's policies are typically written in terms of the "perils" or "losses" that they cover.  While these policies often cover a wide variety of perils, the scope and breath of the perils insured against depend upon the type of policy purchased.  As discussed in Sections 53.02[2] and 53.02[3], some policies are written on an "all risk" form while others insure specific "named" perils.  Most notably, however, homeowner's insurance policies do not cover flood or earthquake without a specific endorsement adding the coverage.

Section 53.03 generally discusses supplemental coverages that an insured may purchase for an additional premium.  Coverage for losses falling under these categories are generally excluded from homeowner policies.

Section 53.03[1] examines coverage for loss of use of damaged property. Section 53.03[1][a] identifies what constitutes loss of use, payment of additional living expenses and fair rental value, and limitations on loss of use coverage. Section 53.03[2] discusses the removal of debris following a covered loss.  After a loss occurs that damages or destroys a home, there is usually debris relating to the repairs.  Absent this supplemental coverage, an insured will bear the cost of clean up.  Section 53.03[2][a] discusses what constitutes debris, as an insured and insurer may not agree on whether material is debris and whether coverage exists.  Section 53.03[2][b] discusses limitations which may exist even when the supplemental coverage is purchased.  Section 53.03[2][c] analyzes a recurring situation where a tree falls on an insured's property.  Coverage may depend on whose land the tree fell from, and whether the tree struck the residence in collapsing.

Section 53.03[3] discusses the additional coverage for reasonable repairs.  An insured usually has a duty to mitigate losses by making reasonable repairs.  Absent this supplemental coverage the insured will be responsible for paying the cost of these repairs.  An insured who neglects to make reasonable repairs could be prohibited from recovering at all.

Section 53.03[4] examines the scope of optional supplemental coverage for trees, shrubs and plants.

Section 53.03[5] considers optional coverage for fire department service charges.  When a fire or other peril   necessitates a fire department response, an insured may be charged by the fire department.  This coverage reimburses the insured for any such charges.

Section 53.03[6] discusses property removal coverage.  When a home is damaged, personal property may need to be removed from the residence.  This coverage reimburses the insured for those costs.

Section 53.03[7] discusses credit cards and forgeries as well as what constitute a loss under this coverage and the generally applicable sublimit.

Section 53.03[8] discusses supplemental coverage for loss assessments by homeowner's associations.  This coverage will relieve the insured of at least a portion of that burden.

Section 53.03[9] examines collapse and its relationship to other perils.  The definition of collapse may determine whether coverage exists under a policy.  An excluded collapse may interact with different covered perils and create opportunities for the homeowner to obtain coverage through other sublimits.

Section 53.03[10] evaluates supplemental coverage for glass and safety material.  This coverage most often arises when the insured suffers a loss to the dwelling.  There may be damage to the windows of the residence which is not covered under a standard policy.

Section 53.03[11] discusses supplemental coverage for loss resulting from ordinance or law.  When a peril destroys a residence there may be additional upgrades required for the new building as a result of building codes.  Undamaged portions of the dwelling might be uninhabitable or need to be torn down to rebuild.  Ordinance or law coverage might be triggered where, for example, only a partial collapse has occurred.  Absent this coverage, the insured will bear the burden of these costs.

Section 53.04 examines the causation issue and the exclusions applicable to all property and property covered under an all risk policy.  Section 53.04[1] sets forth the approaches to causation utilized by various courts.  Section 53.04[1][a][i] discusses the general distinctions between all risk and named peril policies.  Section 53.04[1][a][ii] discusses the ongoing conflict between concurrent causation and proximate causation methods of determining whether a loss is covered, and anti-concurrent causation clauses set forth to limit insurers' exposure. Section 53.04[1][a][iii] looks at how courts interpret ensuing loss provisions to extend coverage to otherwise excluded losses. Anti-concurrent cause clauses and judicial reactions to them are examined in Section 53.04[1][b].

Section 53.04[2] examines the various excluded perils in an all risk homeowner's policy.  .  The most commonly excluded perils are discussed in this section.

Section 53.04[3] examines exclusions applying to all property, real and personal.  This section examines the policy language of the most common exclusions and discusses pertinent cases.

Section 53.04[4] discusses exclusions which permit coverage for ensuing loss.  Damage directly resulting from these perils is not covered under a standard homeowner's policy.  However, ensuing losses which arise as a result of these losses are covered by insurers.

Section 53.05[1] discusses generally the loss settlement provisions of an insurance contract and gives an overview of how these provisions will affect a settlement from an insurance company.

Section 53.05[2][a] focuses on deductibles. Deductibles shift part of the risk to the insured.  Section 53.05[2][b] discusses coinsurance and its impact on the loss settlement process.  Some insurance contracts require the insured to keep the home insured at a minimum percentage of its total value.  Failure to insure at the required level may mean the payout to an insured for damage to the home is proportionally reduced.

In Section 53.05[3] payouts in the form of "actual cash value" are examined.  An insured may elect to receive a payout calculated either by "actual cash value" or, for a higher premium, "replacement cost value."  Actual cash value is frequently undefined in policies and has been calculated in various ways depending on the jurisdiction.  Actual cash value it may be calculated either as replacement costs less depreciation, fair market value, or by the broad evidence rule as further discussed by this section.

Section 53.05[4] examines replacement cost value.  A homeowner may choose to protect a home at replacement cost value instead of actual cash value for a higher premium.  Replacement cost policies reimburse a homeowner for the cost of rebuilding a home as it was prior to the peril.  Unlike actual cash value policies, replacement cost policies cover depreciation.  Replacement cost policies require the homeowner to actually rebuild a home in order to receive the replacement cost benefit of the policies.

Section 53.05[4][a] examines replacement cost policies that limit recovery to "like kind and quality" to the home that was originally damaged.  Generally, homeowners are only entitled to receive a home that is reasonably comparable to the one destroyed.  Section 53.05[5][a] examines policy limits.  Insurers place limits on the recovery an insured can receive to limit their liability.  Section 53.05[5][b] examines sublimits.  In addition to limiting overall liability, insurers place limits on damages recoverable for individual types of property and damages under homeowner's policies.  This limits the recovery payable when a loss to a specific type of property is less than the overall limit, but in excess of the sublimit of liability.

Section 53.05[6] discusses how recovered property and salvage impacts an award received from an insurer.  An insurer deducts the value of property that can be recovered from any loss, as to do otherwise would overcompensate the insured for the loss.

Section 53.05[7] examines the issues raised when multiple insurers are present.  Section 53.05[7][a] considers the manner in which recovery from a peril is paid out across vertical insurers.  Vertical insurance occurs between a primary insurer (who covered the first dollar damage to the property) and the excess insurer, who covers damage beyond the policy limits of the primary insurer for the same peril.

Section 53.06 explores liability policies generally with a specific focus on homeowner's policies.  Section 53.06[1][a] addresses the insurer's duty to defend the policyholder from third-party claims.  The insurer's duty to defend is typically both distinct from and broader than the duty to indemnify.  In most cases, the insurer must defend the policyholder as long as at least one claim is even potentially covered by the policy.  On the other hand, Section 53.06[1][b] explains that the duty to indemnify the insured for sums paid to third parties as a result of judgment or settlement typically does not attach until it is conclusively established (by way of settlement or judgment) that the claim brought against the homeowner falls within the policy coverage.

Section 53.06[1][c] addresses persons covered under the liability portions of a typical homeowner's insurance policy.  In the context of homeowner's insurance, coverage applies to the "insured" against whom a claim is made. "Insureds" include the "named insured" and other persons who qualify as "residents of the household."  The critical factor as to whether an individual is a "resident of the household" is the intent of the party whose residency is at issue.

Section 53.06[1][d] surveys the activities covered by liability coverage, including activities resulting in bodily injury, property damage, personal injury, and advertising injury.  The terms "bodily injury" and "personal injury" are distinct, as "bodily injury" generally refers to injuries to the human body while "personal injury" refers to injuries to the person arising from torts like defamation and false imprisonment.

Section 53.06[1][e] discusses the meaning of the term "occurrence" under liability coverages in homeowner's policies.    This frequently involves a question of whether the insured intended to bring about the damage or harm.

Section 53.06[1][e][i] explains that, with respect to property damage, some jurisdictions require actual physical damage to property for coverage to be triggered, while others find that mere loss of use of the property triggers coverage as well.  Furthermore, Section 53.06[1][e][ii] discusses how some states limit "bodily injury" to physical harm, while others include mental or emotional harm within the definition.  However, many states that recognize mental or emotional harm as falling within the definition require that such harm be accompanied by physical manifestations for coverage to apply.

Section 53.06[2] discusses various exclusions that can typically be found within liability coverage sections of homeowner's policies.  Section 53.06[2][a] explains the pollution exclusion, which is intended to bar coverage for bodily injury or property damage that arises out of the discharge, dispersal, release or escape of pollutants into or upon land, the atmosphere or any water course or body of water.  Most jurisdictions have found this exclusion applicable regardless of whether the insured was an "active" or "passive" polluter.

Section 53.06[2][b] discusses exclusions for intentional acts, including intentional injury and sexual abuse.  Indeed, Section 53.06[2][b][i] explains that the intentional injury exclusion applies where the insured expected or intended the harm, and in some jurisdictions, merely where the insured knowingly endangered others.  Section 53.06[2][b][ii] explains that most jurisdictions, while recognizing the sexual misconduct exclusion, will find it applicable only where evidence exists that the insured actually engaged in the sexual misconduct alleged. Additionally, jurisdictions are split with respect to whether negligence claims that accompany claims of intentional sexual abuse fall within the exclusion.

Section 53.06[2][c] explores the business activities exclusion, both with respect to business pursuits and the rendering of professional services.  Section 53.06[2][c][i] explains the two-pronged test courts generally use in deciding whether an activity qualifies as a "business pursuit": whether the insured (1) engages in  a continued or regular activity for the purpose of earning a livelihood; and (2) has a profit motive or undertakes the activity for a monetary gain.  Relatedly, Section 53.06[2][c][ii] discusses how jurisdictions vary in interpreting the professional services exclusion. Many courts agree that where an act was performed by a non-professional with no professional expertise other than "mere proficiency in the performance of a task," the professional services exclusion does not apply.

Section 53.06[2][e] discusses the automobile exclusion.  While some courts have held that the exclusion does not apply simply because a vehicle is associated physically with a loss, others have held that even a claim that a policyholder "negligently entrusted" a vehicle to another person, who then is involved in a vehicular accident, falls within the exclusion.

Finally, Section 53.06[3] discusses the insurer's ability to limit the time within which policyholders may file suit on a claim.  While the jurisdictions do differ, many states permit a contractual suit limitations provision which requires a policyholder to file suit in as little as one year from the date of loss, or risk forfeiting coverage entirely.

Section 53.07 begins by surveying various mechanisms for resolving coverage disputes between the insured and insurer, including declaratory relief actions and alternative dispute resolution.  While Section 53.07[1] explains that declaratory relief actions have become popular because they allow either the insured or insurer to take control of the litigation, Section 53.07[2] catalogs non-judicial processes such as appraisal, mediation, and arbitration that may serve as a less costly and more efficient means of resolving coverage disputes.

The appraisal process affords the parties an opportunity to select third parties to help determine an agreed-upon value of losses sustained by the insured.  Additionally, mediation affords the parties the expertise and neutrality of a third party to help facilitate settlement negotiations between the parties.  Arbitration, on the other hand, allows the parties to refer the insurance dispute to one or more persons by whose decision they may agree to be legally bound.  Finally, mediation-arbitration, conciliation, and mini-trials serve as other available, but less widely used alternative dispute mechanisms for resolving coverage disputes.

Section 53.07 examines certain causes of action that insureds may bring against insurers, both in contract and in tort, and the damages that may be available under those causes of action.  Section 53.07[3] explains that an insured may bring a breach of contract claim against an insurer for failure to provide coverage, with all of the usual contract claim elements applying.  Section 53.07[4] explains the insurer's duty of good faith and fair dealing that is implied in every contract of insurance.  This implied covenant obligates the insurer to make a thorough and prompt investigation of the insured's claim for benefits and not to unreasonably delay or withhold payment of benefits.  Section 53.07[5] explains that while the insured may be able to recover general contract damages, as well as consequential damages, stemming from an insurer's breach of the insurance contract, punitive damages are generally not recoverable, even in the case of bad faith breach of contract.  The law among the different states varies on recoverability of consequential and bad faith damages.  Section 53.07[5] addresses the  major differences.  Additionally, while under the American rule, attorney's fees are generally not recoverable by a successful insured, some states have expressly provided for recovery of such fees by statute or common law.

Section 53.07[6] addresses possible statutory penalties for an insurer's breach of the insurance contract, including recovery of attorney's fees and other costs.  Finally, Section 53.07[7] covers the tort cause of action for bad faith conduct on the part of the insurer. While damages for a breach of the duty of good faith and fair dealing are generally limited in a contract claim, a tort claim against the insurer for bad faith bridges the gap in bargaining power that often exists between the insured and insurer, potentially allowing the insured to recover both emotional distress and punitive damages in many cases.  Again, Section 53.07 identifies the major differences among the states.

Section 53.08 describes the subrogation rights that an insurer has against third-party tortfeasors after the insurer has paid a homeowner's claim for damages that were caused by the third-party tortfeasor.  When an insurer pays a homeowner's claim, the insurer becomes subrogated to the rights of the homeowner.  This means that the insurer can then pursue recovery from any third party that caused the homeowner's loss.  Subrogation, whether by contractual or statutory right, is a creature of equity designed to achieve the substantial ends of justice and public policy.  Subrogation shifts the loss so that a loss is ultimately paid by the party that ought to pay it.

Section 53.08[1] identifies and discusses the two most common forms of subrogation - conventional and legal.  Express contract provisions create what is known as "conventional" subrogation because the insurer's rights derive from a "convention" or agreement between the parties.  Most courts seek to enforce conventions as written, but some seek to serve the ultimate loss shifting goals of subrogation and of the particular jurisdiction.

In some states the maxims of equity apply regardless of whether there is an agreement or not.  And, if the parties have no agreement, equity will usually create one.  As discussed throughout this section, subrogation actions can be fact intensive with the outcomes differing from case to case.

Statutes can also create subrogation rights.  Because statutory rights of subrogation do not generally arise in the context of homeowners' insurance claims, this section does not discuss them except to note that where a statute provides the right to subrogation, the statute's terms and conditions govern those rights.

An insurer's subrogation rights are not without limit.  Indeed, most jurisdictions limit an insurer's subrogation rights to amounts that the insurer actually paid to satisfy the homeowner's claim.  Where, for example, the insurer paid only part of the homeowner's claims, many jurisdictions hold that the insurer's subrogation rights are subordinate to the homeowner's rights to be made whole.  This issue arises when part of the homeowner's claim is excluded under the policy, if the homeowner did not purchase enough limits to cover its claim, or if the homeowner settles the claim for less than its full value.

Because a subrogated insurer "steps into the shoes" of its insured homeowner, the insurer's rights are no greater than the homeowner's.  Thus, insurers are subject to all of the same legal and equitable defenses that the third party might have against the homeowner in addition to those that the third party might have specifically against the insurer.  For example, if a homeowner fails to assert a compulsory cause of action or fails to abide by a statute of limitations, the homeowner can extinguish its insurer's subrogation rights against the tortfeasor.  And if a homeowner lacks standing or is otherwise unable to sue, the insurer's claims also fail.

Because an insurer's rights are no more than the homeowner's rights, homeowners are generally charged with preserving their insurer's subrogation rights.  This often arises in situations where a homeowner has impaired the insurer's subrogation rights by, for example, contractually waiving them or releasing the tortfeasor as part of a settlement.  Most jurisdictions will allow a homeowner to waive its insurer's subrogation rights before a loss has occurred.  But that is generally not true after a loss has occurred.  Indeed, most insurance policies specifically limit the homeowner's ability to impair the insurer's subrogation rights after the loss has occurred.  And most jurisdictions will not recognize such a restriction of the insurer's subrogation rights.  This is particularly true where a homeowner and a tortfeasor collude to prejudice the insurer's rights by releasing all of the tortfeasor's claims.  In that case, most jurisdictions will allow the insurer to proceed against the tortfeasor or the homeowner regardless of the release.  In those situations, the insurer will often be allowed to seek reimbursement from the homeowner if it paid the claim or deny the claim if it had not yet been paid.  In all of these situations courts usually put the insurer in a superior position of equity.

In some situations, however, the homeowner can argue that the insurer was not prejudiced by the settlement because the insurer's subrogation rights had no value.  Courts are split on this issue.  Some evaluate the assets of the tortfeasor against the damages suffered by the insurer while others look to other issues such as the merit of the underlying claims.  In still others, courts assume that the insurer suffered prejudice and require the homeowner to rebut it.

If an insurer has improperly denied the policyholder's claim, most courts allow the homeowner to settle with the tortfeasor - even if doing so abrogates the insurer's rights.  Courts are reluctant to allow an insurer that breached its contract to hide behind the very same contract to the homeowner's detriment.  In these cases, the homeowner is in the superior equitable position because "one who comes into equity must come with clean hands" and "one who seeks equity must do equity."

Many defenses to an insurer's subrogation claims have developed over time.  Section 53.08[5] discusses the most significant of them for the homeowner:  (1) the "anti-subrogation rule;" (2) the "made whole doctrine;" and (3) the "volunteer rule."

The "anti-subrogation rule" is the most common and important defense for the homeowner because it bars an insurer from subrogating against the homeowner for a claim arising from the very risk for which the homeowner purchased coverage.  Disputes over the anti-subrogation rule frequently involve who qualifies for its protection, including implied co-insurers, contractors and sub-contractors.

Another significant defense is the "made-whole" doctrine, which is an equitable defense to subrogation requiring that the homeowner must be fully compensated before the insurer can recover.

The "volunteer rule" is another subrogation defense frequently employed by tortfeasors.  This rule stems from the well-established maxim that "equity will not aid a volunteer" and provides that subrogation is not available to one who voluntarily pays the debt of another.

* * *


Joseph D. Jean, Esq., a partner in the Insurance Recovery Group at Lowenstein Sandler P.C., represents only policyholders.  Gregory D. Miller is the Co-Managing Director of Podvey, Meanor, Catenacci, Hildner, Cocoziello & Chattman, P.C. and represents insurers.  Daniel Thiel, Esq., an associate at Lowenstein Sandler P.C. and Daniel Janow, Esq., an associate at Podvey, Meanor, Catenacci, Hildner, Cocoziello & Chattman, P.C., assisted in the preparation, research, and drafting of this chapter.

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