No one likes coinsurance fees.1 For policyholders, they can be unpredictable, confusing and costly. For policyholder advocates, they can present a host of legal issues that are difficult and time-consuming to navigate. Some of these issues have been addressed on this blog, including the coinsurance clause, vicarious liability, and valuation disputes.
As a quick refresher, co-insurance clauses essentially penalize an insured for under-insuring their property. Failure to carry full or near-full coverage results in the insured paying a percentage of the loss. In his 2011 blog post, Larry Bache explains: “[I]If a building valued at $250,000 is insured with a policy that contains an 80% coinsurance clause, the policyholder must purchase at least $200,000 in coverage. If the policyholder purchased less than $200,000, he or she would be responsible for a pro rata share of the loss.”;
Whether or not a co-insurance charge applies depends on the value of your property, which policyholders and their insurers often disagree on. When such a dispute arises, who has the burden of proof of the property’s value?
Although there is not an abundance of laws on the subject, there seems to be a majority trend to treat coinsurance as an exception to coverage. This means that when the insured proves that coverage exists under the policy, the burden of proof shifts to the insurer to prove that the coinsurance clause applies. The Fifth Circuit has declared that this burden of proof on the insurer is heavy, stating that coinsurance clauses “are entirely prohibited by law in some jurisdictions, severely limited in others, and subject to strict construction and the requirement of strict proof.”2 This means that courts will review an insurer’s valuation to ensure that it is clearly supported by the evidence. If it is not, or even if the valuation dispute seems like it could go either way, courts will err in favor of the policyholder. My state, Oklahoma, follows this rule, holding that “the insurer has the burden of showing that a loss falls within an exclusion clause of the policy…[and,] in case of doubt, exception . . . be construed strictly against the insurer.”3 The same is true in Texas (“A plea, the effect of which is to reduce an insured’s recovery and in particular the plea of coinsurance, is defensive and the facts supporting such plea must be pleaded and proved by the defendant insurance company.”)4 and Florida (“If the insured succeeds in showing that the loss occurred within the policy period, the burden shifts to the insurer to prove that an exclusion from the policy other than the loss from the policy.”).5
Based on my initial research, Iowa,6 Kansas,7 Louisiana,8 Minnesota,9 and Virginia10 courts have also expressly stated that insurers bear the burden of proving that coinsurance clauses apply. Most other states appear to follow the rule that insurers bear the burden of proof when seeking to apply exclusions, and thus would likely hold similarly with respect to coinsurance clauses.
This rule seems to be pretty common sense – an insurer should not be able to rely on an arbitrary valuation to invoke a co-insurance clause and avoid full payment of a claim. However, we have seen just that, so it is important to know who bears the burden of proof in that situation. If an insurer attempts to enforce a coinsurance clause but cannot back up its valuation with clear and convincing evidence, it appears that most courts agree that the clause does not apply. And of course, should this happen to you or someone you represent, the lawyers at Merlin Law Group are always here to help.
1 Except for insurance companies.
2 Home Ins. Co. v. Eisenson181 F.2d 416, 418-19 (5th Cir. 1950).
3 Country Mut. ins. Co. v. AAA Constr. Ltd. Liab. Co., no. CIV-17-486, 2019 US Dist. LEXIS 115935, at *6-7 (WD Okla. July 12, 2019) with citation Dodson v. St. Paul Ins. Co.1991 OK 24, 812 P.2d 372, 377 (Okla. 1991) (internal citations omitted).
4 For example. City TR Co. v. Am. Equitable Assurance Co., 130 F. Supp. 843, 863 (S.D. Tex. 1955).
5 Transamerica Leasing, Inc. v. Inst. by London Underwriters267 F.3d 1303, 1305 (11th Cir. 2001) (interpreting Florida law).
6 Brown Twp. Bribery. ins. Asso. v. Cress330 NW2d 291, 297 (Iowa 1983).
7 Wenrich v. Emplrs Mut. ins. Cos., 35 Kan. App. 2d 582, 585, 132 P.3d 970, 974 (2006).
8 Doerr v. Mobil Oil Corp.774 So.2d 119, 124 (La.2000); Mt. Hawley Ins. Co. v. Advance Prods. & Sys.Inc., 972 F.Supp. 2d 900 (WD La. 2013) (reversed on different grounds).
9 Anderson v. Conn. Fire Ins. Co.231 Min. 469, 478, 43 NW2d 807, 813-14 (1950); Reinsurance Asso. of Minn. v. Patch383 NW2d 708, 711 (Minn. Ct. App. 1986).
10 Harper v. Penn Mut. Fire Ins. Co.199 F. Supp. 663, 665 (E.D. Va. 1961).