Terra Extraneus

In 1998, our story begins, when the homeowners, the Duensings, felt their kitchen floor get warm. Upon investigation, they theorized they had a leak from their hot water tank plumbing. They promptly shut in their hot water tank and called a leak detection company and their homeowners insurance company agent.

The insurance company, State Farm, arrived on the scene first, and without benefit of the investigation of the leak detection company, concluded there was no homeowners insurance coverage for the plumbing leak or any damage to the kitchen floor that would result from repairing the leak because there was no water damage inside the home. The homeowners policy excluded coverage for plumbing leaks.

Of course, the leak did some damage to the house. It washed out part of the support of the slab, resulting in settling damage to the house. State Farm was again summoned to inspect the house and once again denied coverage in early 1999, this time under an exclusion that refused to cover “earth movement.” State Farm also denied coverage claiming that the “earth movement” could be caused by anything, including a plumbing leak, and the damage would still not be covered.

Of course, this would be funny if it did not involve damage to someone’s home and a breach of trust by the very people paid to preserve the value of the home from peril.

“Earth movement?” Water damage to a home from a sudden plumbing leak is not covered? What is State Farm thinking?

State Farm claimed the insurance policy was “clear.” The Oklahoma court in 2006 that ruled upon this disagreed and held that “earth movement” did not necessarily include wash out of slab fill from a plumbing leak, because it would more likely be read to include earth quakes, volcanoes, sink holes, and subsidence from erosion. These are the kinds of natural calamities that would impact entire neighborhoods and cities and would not be a risk that could be controlled by the insurance company or the homeowner. Such risks have to be dealt with by government. But, damage from a plumbing leak is exactly the kind of risk that both an insurance company and a homeowner can grapple with, and if the homeowner loses the battle, the insurance company is paid to step up and preserve the value of the home.

Four other hard lessons should be noted from this case.

First, it took the homeowners six years to resolve an Oklahoma homeowners insurance coverage claim against State Farm. That by itself should have triggered a regulatory response by the Oklahoma Insurance Commissioner.

Second, the Oklahoma Insurance Commissioner was nowhere to be seen in this case even though the homeowners tried to involve them. The Oklahoma Insurance Commissioner is no longer a viable guardian of the Oklahoma consumer. The agency should be abolished and its function returned to the attorney general’s office. We might not be protected but at least the taxpayers will receive some relief.

Third, engaging a lawyer and instructing the lawyer to practice advocacy by letter did not move State Farm. This is more fallout from Campbell v. State Farm, the United States Supreme Court case in which State Farm obtained limitations under the 8th Amendment, the limitation on cruel and unusual punishment, on the power of juries to award punitive damages. State Farm has no reason to fear the courts or juries, they have been defanged, so mere entreaties by lawyers cannot impact State Farm’s decisionmaking.

Fourth, the court held that State Farm’s position was reasonable, even if it was wrong and even if it was a breach of the insurance contract to refuse to pay the claim, and reversed the awards for bad faith and punitive damages entered by the jury in favor of the homeowners. State Farm’s refusal to pay and insist on its exclusions was reasonable because some courts in other states had agreed with insurance companies that “earth movement” would include a washout out caused by a surprise plumbing leak. The net effect was that the jury judgment against State Farm dropped from $500,000 plus interest to $24,160 plus interest. Thus, after paying their attorneys, the homeowners did not recover enough money to make them whole, and they did not recover enough money to pay their attorneys enough to justify the initial filing of the case six years earlier. In other words, the attorneys lost money handling the case. Indeed, the homeowners recovered about as much as they paid in premiums during the years they were State Farm insureds and the six years the claim was pending with State Farm. Thus, the homeowners lost money on the insurance claim, too.

You can read the well written case decision yourself at www.oscn.net, and find the case at 2006 OK CIV APP 15.

The court’s decision was correct under the law. However, the Oklahoma Insurance Commissioner should be prohibiting Oklahoma homeowners from suddenly finding out that “earth movement” does not mean “earth quake,” but means whatever the insurance company wants to invent. The Oklahoma legislature should impose the “reasonable expectations” doctrine in all consumer insurance (called “personal lines”) policies and extend it to all policy amendments that do not result in a noticeable reduction in premium. Only if the insured sees the premium drop can the insured have any idea of the magnitude of the change. A policy not covered by the “reasonable expectations” doctrine should be a lot cheaper than a policy governed by that doctrine of law.

By now, State Farm and the other insurers active in Oklahoma have also likely amended their policies to make sure “earth movement” now covers plumbing leak washouts. The law of Oklahoma will assume insureds have read their policies and understood. That law may be fair for large businesses that can afford attorneys and professional risk managers to evaluate policy language changes. The Oklahoma Insurance Commissioner, however, should have disallowed such an amendment and should be watching out for consumers. Don’t count on it. Also, the legal system has been defanged, so do not expect any help from that quarter.