Fisher Law Corporation’s Frequently Asked Questions

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Notice: The information contained in these articles is designed to provide accurate information in regard to the subject matters covered and is made available with the understanding that the information provided does not constitute the rendering of legal or professional services. All information is of a general nature, is specific to California law only, and is not intended to to replace professional or legal advice. Each person’s situation is unique and the information contained herein cannot be applied to any individual’s situation. If legal advise is required, the services of a professional should be sought.

What is an all-inclusive deed of trust? »

What is CERCLA? »

How does a condominium differ from a house? »

What are Covenants that run with the land? »

What is a deed in lieu of foreclosure? »

What are easements? »

What are Encroachments? »

How does escrow work? »

What is fire and flood insurance? »

How do foreclosures work? »

What are the different forms of doing business? »

What do trade terms mean? »

What are liquidated damages in real property contracts? »

What is a Lis Pendens? »

How do loan modifications work? »

What is a Mechanic’s Lien? »

How does a Multiple Listing Service work? »

What is an off-shore trust? »

How do real property taxes work? »

What is Procuring Cause? »

What is a Quitclaim Deed? »

What is RESPA? »

Who bears the risk of loss during escrow? »

What are second deeds of trust? »

What is the Statute of Frauds? »

What is Statute of Limitations on Debts Secured By a Mortgage? »

Does a buyer’s broker have a duty to inspect? »

What is The Parol Evidence Rule? »

What is Adverse Possession? »


Q. What is fire and flood insurance?

A. Introduction. Unexpected torrential rainfall thrusted most areas of California out of the drought after five long, dry years. As quickly and unexpectedly as the rains came, homeowners were equally caught off guard and many suffered physical damages to their properties. As these homeowners dry out and take inventory of their losses, much to their anger and frustration, many are discovering that their fire insurance policies do not provide coverage for their losses. After all, who purchases flood insurance in California?

From the real estate broker’s perspective in traditional real estate closings involving conventional financing, fire insurance is just one of those items in their closing checklist which must be obtained before the loan will fund. Most brokers give little thought to fire insurance, and usually leave it to the purchaser to handle the procurement of fire insurance. While this may be acceptable to the experienced homeowner, for the first time buyer, this may be the first experience the buyer has with homeowner’s insurance. In this latter circumstance, the real estate broker should be prepared to assist the purchaser in selecting an insurer.

Rains and floods force many homeowners who incur losses to open their file cabinets and review their insurance policies. For some, it is the first time they ever read the policy. Every one else should take the time now and review their policies to determine whether they are adequately protected against future losses.

Basic Definitions. In order to better understand fire insurance, here are a few, basic definitions.

* Admitted carrier. A company which has received a certificate of authority from the Insurance Commissioner to transact specified classes of business.

* Agent. A person authorized by and on behalf of an insurer to transact insurance.

* Blanket insurance. Coverage, under on sum, of either one subject of insurance in more than one location, two or more subjects in one location, or two or more subjects in two or more locations.

* Broker. A person who acts for compensation on behalf of another person and transacts insurance with, but not on behalf of, an insurer.

* Pro rata cancellation. Earned premium is determined in proportion to the time the coverage has been in effect.

* Reinsurance. Transfer by one insurer of a portion or all of its liability under an insurance policy to another insurer.

* Short rate cancellation. The earned premium is calculated according to an established table which includes an extra charge over the pro rata premium, to absorb part of the expense which would have been absorbed during the full period of the policy.

* Subrogation. Provision that when the insurer pays a loss, it can require the insured to assign his rights of recovery against third parties who may be legally responsible for the loss, to the extent of the insurer’s payment.

Understanding the Homeowner’s Policy. “Homeowners policies” are a form of fire insurance and are designed to cover all the exposures common to owning a home. As defined by the Insurance Code, fire insurance includes insurance against loss by fire, lightning, windstorm, tornado, or earthquake. Insurance Code section 102. Amounts of insurance on the dwelling building are based upon tables which are generally obtained in multiples of $5,000.00.

The fire insurance policy usually contains two or more sections or divisions of coverage. Section I coverages include real and personal property. Section I coverage is usually further divided into Coverage A: Dwelling Building, and Coverage B, Appurtenant Private Structures, usually in an amount equal to 10% of Coverage A. In addition, there is usually a section entitled Additional Coverages which includes household and personal property and additional living expenses.

The second main division of coverage is Section II, Personal Liability and Medical Payments coverage. This section includes comprehensive personal liability, medical payments, and damage to property of others.

Exclusions from coverage normally include earthquake, sewer and drain backup, flood, landslide, normal settling or expansion of foundations, walls, floors and ceilings. A typical exclusion provision regarding water damage found in most homeowner’s policies follows:

The Company does not insure for loss caused by, resulting from, contributed to, or aggravated by any of the following:

a. flood, surface water, waves, tidal water or tidal waves, overflow of streams or other bodies of water, or spray from any of the foregoing, all whether driven by wind or not;

b. water which backs up through sewers or drains;

c. water below the surface of the ground including that which exerts pressure on or flows, seeps or leaks through sidewalks, driveways, foundations, walls, basement or other floors, or through doors, windows, or any other opening in such sidewalks, driveways, foundations, walls or floors.

However, most homeowner’s policies do cover losses caused by rain, snow, sleet if the direct force of wind or hail damages the building causing an opening in a roof or wall and the rain, snow, or sleet enters through the opening.

What to do if You Incur a Loss. After reading the above typical clause excluding water damage, you may hastily conclude that any loss occasioned by water is excluded from your policy. However, not all losses caused by water are excluded.

First, read your policy carefully. Remember that insurance policies are governed by a general principal that if coverage is not expressly excluded, it is included. Contact your insurance agent for assistance in preparing a claim against your insurer. Remember that most policies require you to notify the insurer of your claim within a reasonable period of time from the date of the loss. Document your claim well. Take pictures and thoroughly inspect the premises. Discuss your claim with an attorney before submitting it to the insurer if you have reason to believe that your claim may fall within one of the policy’s exceptions from coverage.

In many instances, even if your homeowner’s policy does not provide coverage for the loss, there may be additional sources of insurance coverage. For example, if you live in an condominium, the homeowner’s association should maintain a policy of insurance for common areas. You may have a claim against such insurance. Also, you may have a claim against a developer. Do not overlook these possibilities.

Third Party Responsibility. Even if your own homeowner’s policy does not afford coverage, it is possible that a third party may be held liable for your losses. Recently, the California Supreme Court rendered an opinion which may provide relief to some homeowners who might otherwise not have coverage under their own policy.

In State Farm Fire and Casualty Co., v. Eric Von Der Lieth, 2 Cal.Rptr. 2d 183 (1991), the insureds sued their insurer for breach of all risk homeowner’s policy. The California Supreme Court held that (1) evidence supported determination of the trial court that efficient proximate cause of insured’s property loss was negligence of third parties in failing to take proper measures to preserve mesa, rather than earth movement caused by naturally rising groundwater levels, which was excluded under the policy, and (2) evidence established that third party negligence leading to landslide was negligence in planning, approving and building subdivision on mesa, not negligence in acting to prevent landslides resulting from natural causes.

The Von Der Lieths are homeowners in the Big Rock Mesa area of Malibu, California, an area that has experienced massive landsliding for several years. Their policy contained coverage for “all risks of physical loss to the property ... except for loss caused by ... settling, cracking, shrinking, bulging or expansion of pavements, patios, foundations, walls, floors, roofs or ceilings” and for “loss resulting directly or indirectly from: ... Earth Movement ... Water Damage, meaning; ... (c) natural water below the surface of the ground, including water which exerts pressure on, or seeps or leaks through a building, sidewalk, driveway, foundation, swimming pool or other structure.“

Because the policy did not expressly exclude coverage for losses caused by the negligence of third parties, such negligence was a covered risk under the general principal applicable to insurance policies that a risk not expressly excluded from coverage is included. Under an all risk homeowner’s policy, coverage includes all risks except those specifically excluded by the policy. When a loss is caused by a combination of a covered and specifically excluded risks, the loss is covered if the covered risk was the efficient proximate cause of the loss (“efficient proximate cause” has been defined by the courts to mean the predominating cause).

The Von Der Lieths submitted a claim to their insurer for damage to their house. State Farm paid some money for damages, but informed the insureds that the payment did not include damages for soil work or stabilization work. The Von Der Lieths demanded their policy limits based on their position that the entire mesa required stabilization before they could stabilize the ground under their home.

State Farm asserted that under the terms of the policy, damages caused by earth movement were specifically excluded, and thus denied the insureds’ claim. The Von Der Lieths filed suit.

At trial, the Von Der Lieths asserted that third party negligence was the efficient proximate cause of their damages. They assigned negligence to several individuals and entities, including the State of California for removing a portion of the Big Rock Mesa mountain slope to construct the Pacific Coast Highway, and the developer of the property for failing to provide needed protection from landslide activation. The insureds also blamed the local homeowner’s association for its failure to maintain its drain systems as well as individual homeowners who failed to maintain their septic tank systems so that the systems did not affect the groundwater level.

The California Supreme Court held that the Von Der Lieth’s claim against the insurer was proper and should have been paid.

The principal to be extracted from the Von Der Lieth case is that in certain situations, loss occasioned by third party negligence may be an indemnifiable loss even where one of the causes of loss is an excluded risk. For example, in Davis v. United Services, 223 Cal.App.3d 1322, 273 Cal.Rptr. 224 (1990), the Court of Appeal held that coverage existed under an all risk homeowner’s policy for property loss caused by the excluded risk of settlement that, in turn, was caused by a contractor’s failure to properly prepare the soil on which the house was constructed.

Conclusion. Many homeowners suffer losses occasioned by rains. Many of these homeowners will submit claims to their insurers who, undoubtedly, will deny their claims under the terms of the policy.

Before acquiescing to the insurer’s denial, the homeowner should determine the exact cause of the damage. If the cause is not readily determinable, a water damage specialist, soils engineer, structural engineer, or other expert should be retained to determine the cause of the loss. Keep in mind that most insurance adjusters are not experts in water loss damage. If the cause of the damages is not certain, insist that the insurance company retain an expert to determine the cause. In determining the cause of the damage, you may learn that a developer and/or a neighbor’s acts or omissions caused, or contributed to, the loss. If so, a claim against the responsible party or parties should also be made.

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