Fire and Smoke Damage

By William Pillsbury

A. Common Property Damage Scenarios

In the context of fire and smoke damage claims, there are several common scenarios. The first, and most common, is a fire that destroys or significantly damages the property that is insured. Such a result can be catastrophic, but is also the most straight-forward under most property policies. Succinctly put, damage caused by an accidental fire is covered under standard insurance policies.

The second scenario is the situation where a small fire or limited fire is contained, but the property suffers severe smoke damage. Under many policies, smoke is specifically listed as a “pollutant” and damage from pollutants is not covered. However, most policies also contain what is known as the “hostile fire exception” to the exclusion. An example of common “hostile fire exception” language is: “This exclusion does not apply to bodily injury or property damage arising out of heat, smoke or fumes from a hostile fire.” Under this same policy language, “hostile fire” is defined as: “one which becomes uncontrollable or breaks out from where it was intended to be.” The result of this language is that most property policies will provide coverage for smoke damage from hostile fires, but insurance companies will, and have, aggressively fought back against some forms of smoke damage. For example, smoke damage from a leaking chimney is unlikely to be a “hostile fire” nor is smoke damage stemming from a fire started by a cigarette on a mattress.

The third scenario is where the smoke damage comes from a fire on another property. A similar analysis as the one above applies in this case, but courts have been prone to broadly interpret the “hostile fire exception” in these cases. See, e.g., Maffei v. Northern Ins. Co. of New York, 12 F.3d 892, 898 (9th Cir. 1993) (concluding “hostile fire” includes “any unintended fire in an unintended location” which, in that case, included a drum containing chemicals at a dry-cleaning plant that exploded and released a sulfur-dioxide cloud); Mid-Continental Cas. Co. v. Safe Tire Disposal Corp., 16 S.W.3d 418 (Tex. Ct. App. Ct. 2000) (concluding that hostile fire includes fires on other properties that were intended but become out of control); American Star Ins. Co. v. Grice, 854 P.2d 622, 625 (Wash. 1993) (“hostile fire exception” applied to fires on other properties, not just fires on the insured property). However, the existence of the “hostile fire exception” does not mean that coverage that would not exist otherwise under the policy is created by the existence of that exception to an exclusion. See Great N. Ins. Co. v. Greenwich Ins. Co., No. 05-635, 2008 U.S. Dist LEXIS 39567, at *7 (W.D. Pa. May 12, 2008).

The final scenario is where the predominant damage is caused by water from the putting out of the fire either on your property or a neighboring property. Under most policies, the water damage would be covered, but mold or wet rot that arises from the water would not be covered. In addition, to the extent that the attempt to put out the fire causes other damage (such as roof damage from fire fighters crossing the roof), these losses would also likely be covered.

B. Claim Investigation: Acquiring Fire Damage Evidence and Expert Witnesses

With a fire, there will generally be several categories of damages at issue. For individuals and corporations, those damages will be the damage to the real property and the damage to personal property within the building. Corporations may also have the additional right to business interruption damages. In addition, a fire will likely make a property unusable and many policies include a loss of use provision where the cost of renting a new equivalent home is covered under the policy.

One of the biggest challenges for many individuals or corporations facing a fire, is the loss of records that may be necessary in establishing certain forms of damages. In the context of documenting the damage to the real property, the challenge will be severe if the policy does not provide for replacement cost, but actual cash value. Under actual cash value, a policyholder and insurance company will need to recreate lost records to determine the value of the property and the proper time frame for depreciation. Most property policies provide for replacement cost, so the primary fire damage evidence will be the costs to repair or replace damaged property. Nonetheless, disputes will occur over what is or is not covered and what is considered replacement. For instance, many homeowners may decide that, after a fire, updating the kitchen with better flooring and counters is a good idea. Replacement cost will not include the additional cost of, for example, granite counters. As such, it is important for the insurance company to obtain clear evidence as to the state of the property prior to the fire. The policyholder will have a similar need, especially if he or she is replacing a valuable item that is not common for a home, i.e. a marble fireplace. However, policyholders are entitled to the repair costs, so the decision to upgrade does not mean he or she gets zero dollars, only less than the cost of the upgrade.

For personal property, it will be difficult to reestablish all of the property at issue and the value of the personal property. In addition, most policies do not provide for replacement cost for personal property. As such, it is important that the policyholder provide an accurate and complete list of the items in the house. To the extent possible, reviewing credit card records or similar files for larger purchases can be important in collecting all of the insurance available.

A policyholder should soon after the fire take photographs of the damage as well as a short video or arrange for another person to do so. The policyholder will have the “burden of proof” to establish his or her loss and that items were actually in the home before the fire occurred. In doing this, be sure to take photographs of any items that may be in a dumpster or trash. Anything that is not documented may be hard to prove later on. The inventory of damages should also describe the nature of the damage to each item and should include not just standard personal property, but also items like heaters, walls, tile, and furnishings.

Finally, for businesses to establish business interruption, the loss of records can be a major difficulty. The easiest way to overcome this issue is to obtain former tax records and any accounting documents stored off site. Businesses will want to be able to show not just profit and loss, but establish seasonal trends and similar metrics to ensure a fair business interruption recovery. In addition, it will be essential to obtain an accounting expert to provide business interruption estimates. It is likely that the methodology used by the insurance company and policyholder may differ, dramatically in some cases, so retaining a competent accounting expert could be the difference in hundreds of thousands of dollars of coverage.

In addition, policyholders should consider retaining public adjusters. Public adjusters are knowledgeable of fire losses and can be a great asset in presenting the claim in a way the insurance company will understand. Other experts that may come in handy for damages will be contractors and building experts. It is important to consider retaining experts familiar with the building codes and practices in the area construction is occurring. Insurance companies may apply national estimates to determine replacement costs, but the actual costs may be significantly different depending on the region. For instance, construction in Philadelphia is more expensive than outside the city due to the simple challenge of lack of space to maintain equipment.

C. Arson vs. Accident: Red Flags to Consider

Fire losses have the unique quality of being initially investigated by public officials, who will make a conclusion as to the cause of the fire. The report of the fire marshal or equivalent official is an important first step in determining if the claim is arson or accident. However, a determination of no arson charges does not mean that the insurance company should end its investigation. A criminal charge for arson is significantly different than an affirmative defense denying coverage in a civil case for arson. The report therefore must be read in total and may contain red flags that do not rise to the level of a criminal investigation. Examples of this would be accelerants involved, fire alarms disconnected, or simply the inspector unable to determine a cause.

Additionally, the most critical red flag will likely be the finances of the policyholder. A policyholder in severe financial distress or who benefits greatly from a fire is a red flag. However, the simple fact that a policyholder suffering a fire loss may have financial issues is not proof of arson. Many people suffering a fire loss will be in financial trouble and, in fact, may be more prone to loss from fire due to the inability to add protections and counters that are available to people with means.

D. Proof of Loss Form

A policyholder should provide support for his or her proof of loss, including the items discussed above. Photographs, video recordings, the inventory with the description of damages suffered, and any other supporting evidence should accompany the proof of loss form. A public adjustor can be especially helpful in preparing the proof of loss form in a manner that will be seen as most helpful for the insurance company. In addition, a policyholder should use the form provided by the insurance company. Be aware the proof of loss will be a sworn statement and the policyholder must review and make sure the claim is accurate.

E. Challenging an Appraisal and Requesting a Reappraisal

An insurance company will likely perform an appraisal and come up with estimates as to the cost of repair and the value of the loss. A policyholder should have done his or her own research and be prepared to challenge any appraisal with evidentiary and expert support if the appraisal is too low. A policyholder who challenges an appraisal by simply disagreeing with the insurance company or states that the numbers are too low without any support will not be helping his or her cause. A challenge to an appraisal must be supported by evidence and, to the extent appropriate, expert reports or estimates. If the policyholder is able to produce strong evidence contradicting the appraisal substantially, demanding a reappraisal is a reasonable approach. It is especially helpful in making such a demand if the policyholder can demonstrate material errors, for instance a failure to account for local building costs or a failure to include certain property.

As with all stages, the policyholder must be thorough and persistent. It is likely that some dispute will occur regarding the value of the claim and the policyholder who has documents his or her claim fully will meet with greater success than one left to the mercies of the insurance company. Finally, if the insurance company’s appraisal is rife with errors and a reappraisal is denied, the policyholder should be prepared to put the insurance company on notice of his or her intent to file a bad faith claim.

F. Identifying Conflicts and Proving Bad Faith

Policyholders must be aware that many of the companies retained by insurance companies, if not all, have ongoing business relationships with the insurance company and will want to continue that relationship. In the worst case scenario, insurance companies have dismissed appraisers or investigators who have provided reports that do not meet with the insurance company’s estimates. While that is an extreme example, the reality is that the people retained by the insurance company have a financial interest in siding with the insurance company. As such, policyholders should be aware of these conflicts of interest, even if the contractor or appraiser is claiming to be independent. Furthermore, these conflicted individuals will likely be witnesses involved in any bad faith case, so it is important to document their actions and statements to be able to respond to any changed positions.

Recognizing these conflicts also is important in determining if the insurance company is acting in bad faith. Some delays or problems can be caused by third parties, but persistent issues with the insurance companies’ retained parties, or its agents, are evidence of bad faith. Bad faith in Pennsylvania is a statutory remedy under 42 Pa. C.S. § 8371. Bad faith is a somewhat nebulous concept, but has been defined by the Pennsylvania Supreme Court as “those actions an insurer took when called upon to perform its contractual obligations of defense and indemnification or payment of a loss that failed to satisfy the duty of good faith and fair dealing implied in the parties’ insurance contract.” Toy v. Metropolitan Life Ins. Co., 593 Pa. 20, 41, 928 A.2d 186 (Pa. 2007). The Pennsylvania Superior Court notes two elements that must be shown to prove bad faith: “(1) that the insurer lacked a reasonable basis for denying benefits; and (2) that the insurer knew or recklessly disregarded its lack of a reasonable basis.” Booze v. Allstate Ins. Co., 2000 PA Super 112, 750 A.2d 877, 880 (2000). Other jurisdictions have varying requirements, but in almost all jurisdictions proving bad faith is a high burden.

Under this context proving bad faith requires more than showing a disagreement, but requires a demonstration that the insurance company has denied benefits and is doing so knowingly or without a reasonable basis for denying. In proving this fact, the policyholder must be able to not only dispute the position of the insurance company, but demonstrate that it provided the same evidence contradicting the insurance company’s position and the insurance company ignored this approach. In other words, it is essential to prove a bad faith claim by gathering evidence, documenting all communications with the insurance company, responding to all insurance company communications including providing all supporting evidence, and cooperating with the insurance company. It is not enough to simply disagree with the insurance company’s position.

G.  Seeking Punitive Damages

Generally speaking punitive damages are not available in the insurance context. However, most bad faith laws allow for some form of punitive damages. In Pennsylvania, the bad faith statute specifically allows for the awarding of punitive damages. 42 Pa. C.S. § 8371(2). Therefore, for a policyholder to obtain punitive damages, it will be necessary to prove bad faith in the first instance.

If you have any questions or would like more information on insurance claims due to fire and smoke please contact Mr. Pillsbury at:

wpillsbury@offitkurman.com | 267.338.1321

Mr. Pillsbury is a principal and member of Offit Kurman’s Insurance Recovery Practice Group. He represents businesses in a wide range of litigation issues, including efforts to recover money owed to them from their insurers. His clients include state transportation agencies, hotels, restaurants, nursing homes, bio-tech firms, school district joint insurance funds, and individuals.

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