Do you know the historical origins of a property insurance policy’s proof of loss requirement? I love my fellow property insurance coverage nerd readers of this blog. One of them, attorney Tom Hamrick, wrote a comment to Insurance Company’s Two-Year Claims Handling Waives Proof of Loss Requirement:

There’s a good deal of confusion as to the purpose of a proof of loss. Most courts (as was done in this case) cite Couch on Ins. § 186:22 (afford the insurer an adequate opportunity to investigate, to prevent fraud and imposition upon it, and to form an intelligent estimate of its rights and liabilities before it is obliged to pay). Critically, few courts actually read later sections in Couch. Specifically, 13 Couch on Ins. § 189:4 (More so than the notice of loss, the contents of proofs of loss tend to vary by type of insurance. The common thread to proofs, of course, is that the information supplied must establish that the loss falls within the coverage terms of the policy.”) The issue becomes: once an insurer has investigated and extended coverage, claiming a proof of loss is required (for purpose of establishing coverage) seems indefensible. See Weiser-Brown Operating Co. v. St. Paul Surplus Lines Ins. Co., 801 F.3d 512 (5th Cir. 2015)(Final proof of loss (in many cases) does not require information regarding the extent of loss, only information proving that a loss occurred). Just a thought.

I agree that there is a good deal of confusion. The case discussion in the Weiser-Brown matter cited by Hamrick 1 involved Texas statute § 542.056 – Notice of Acceptance or Rejection of Claim:

(a) Except as provided by Subsection (b) or (d), an insurer shall notify a claimant in writing of the acceptance or rejection of a claim not later than the 15th business day after the date the insurer receives all items, statements, and forms required by the insurer to secure final proof of loss.

The policyholder won the breach of contract portion of the case. The discussion concerned the “proof of loss” mandated under the bad faith statute. Regarding that phrase in that statutory context, the court noted:

We affirm the district court’s factual finding that these few additional items did not operate to nullify application of § 542.056. By November 6, 2009, Weiser–Brown had repeatedly answered St. Paul’s numerous requests, providing information that established that an actual loss occurred, when, where, and how it occurred, as well as $4.5 million dollars of supporting invoices. St. Paul’s expert assessed this information to conclude that the loss was not covered by the insurance policy, a position that St. Paul never communicated as notification of rejection of Weiser–Brown’s claim yet pursued into the lawsuit as its reason for denying the claim, which the jury rejected. Not only was information alleged to have been missing not requested in communications from St. Paul—notably, ‘checks evidencing an out-of-pocket loss’ and ‘documentary evidence of owners opting in or out of the insurance’—this information also was not determinative of St. Paul’s position refusing Weiser–Brown’s claim. Accordingly, based on the facts in this case, we hold that the district court correctly found that the fifteen-day deadline under § 542.056 began to run on November 6, 2009.

St. Paul’s reliance on Kachnik’s trial testimony does not change our conclusion. At trial, Kachnik claimed that St. Paul did not have enough information from Weiser–Brown until after the lawsuit was filed. Kachnik stated: ‘[A]gain, it takes that back and forth between the adjuster and the oil company to sort out any questions. That hadn’t taken place. So, we weren’t in a position to come to any kind of final numbers on it at that point.’ Kachnik’s testimony underscores why St. Paul’s argument is flawed. There had been no ‘back and forth between the adjuster and the oil company’ to sort out a final loss amount because St. Paul concluded, and maintained, based on items of information requested and received, that the event was not covered. Such negotiations and finalization would have been futile in the face of Watson’s position that there was no coverage, which is a chronology that may underlie the jury verdict finding that St. Paul waived the policy ‘conditions’ relating to submissions of loss and proof of loss. Indeed, St. Paul offered the waiver question for the jury and suggested to the district court that the jury charge already included the necessary instruction on that point. Moreover, St. Paul acknowledges that it is not the case that the insured must comply with all document requests made by the insurer, no matter how irrelevant. The insurer cannot avoid liability under § 542.056 by pointing after-the-fact to missing information, the absence of which did not affect the insurer’s decision….

Still, where did this “proof of loss” concept and requirement historically come from?  The problem with insurance law treatises is that they often regurgitate what is written in a case by a judge who knows nothing about insurance law. The next thing one finds is that decades go by with lawyers and judges copying the treatise, which is cited to a decision by a judge who may know much or nothing about the insurance product. Nobody has sought original subject matter material or questioned the original finding because it is far easier to copy a treatise. I suggest that part of the study one should undertake to understand such concepts as a  “proof of loss” is to look for the development of the term in the product itself and carefully examine cases discussing those terms.

A leading scholar in insurance contract interpretation noted the difficulty of interpreting insurance policies as follows:

Determining the proper standards to be applied to the interpretation of insurance policies ranks among the most difficult conundrums in insurance law. The problem stems from the fact that the manner in which insurance policies are written bears no resemblance to the presumptions about contract formation underlying classical Nineteenth Century contract law. Insurance policies are not the memorialization of a ‘meeting of the minds’ following negotiated give and take. Policyholders usually play no role in negotiating policies, usually do not receive the policy until sometime after its effective date, almost never read the policy after receiving it, and, in many cases, could not understand its terms even if they did.

The vary nature of the insurance business both exacerbates the problem and underscores the need for a disciplined and predictable approach to determine their meaning. Insurance involves the transfer of risk of harm caused by future events of unknown nature and origin. The industry’s need to categorize and predict risk has led to the near universal reliance on standardized policy forms. The language of every type of policy, whether issued to a mom and pop corner grocery or a multinational corporation, is virtually identical. Because the insurance policy must cover a myriad of possibilities, a certain amount of ambiguity is inevitable and unavoidable in these standardized policies. While the industry is constantly trying to strike a balance between specificity and generality, the pragmatic business need for a policy that will sell to a vast array of insureds has necessarily resulted in comprehensive policy language, which, in turn, results in uncertainty about the policy’s applicability to specific coverage situations.

One problem with ascertaining the historical answers is that photographs, copying machines, and typewriters were not around in the late 18th century. The limitations of 18th-century document preservation and reproduction create several significant challenges for historical legal research. This is especially true regarding court cases. Since unless the judge or clerk copied the wording in a handwritten decision, there were neither copies of the exhibit nor a typed version to be compared.

Where did the term proof of loss come from? My best educated guess is from the requirements found in maritime practice and insurance at the time property policies were first being developed. I will discuss some of the cases tomorrow, but “a protest,” “sea protest,” or “letter protest” generally requires a notarized statement made under oath by a ship’s Master (captain) after entering port following a challenging voyage or incident at sea. Its primary purpose is to protect the ship’s owner or charterer from liability for damage and to report damage to the cargo, the vessel, and losses caused by perils of the sea. Historically, such a protest must be filed within specific parameters to be valid:

  • It must be submitted within 24 hours of arrival at the first port after the incident
  • It must be made before a notary public, magistrate, or consul
  • The Master must make the declaration under oath
  • Supporting documentation like deck logs and weather reports must accompany the protest

The content and format of a protest could include:

  • Detailed circumstances leading to damage or loss
  • Weather conditions during the incident
  • Position of the vessel
  • Ports of origin and destination
  • Type of cargo being carried
  • Actions taken by the crew during the incident

There are “Extended Protests,” which allow for the full extent of damage to be declared if the loss isn’t immediately apparent. The initial protest must include the phrase “reserve the right to extend the protest at a time and place convenient.” This allows for additional documentation once damage is fully assessed, and the extension must be completed after the necessary surveys are completed.

“Sea protests” have an abundant history in law and practice, Sea Protests in Nineteenth Century Malta, and British Power in the Mediterranean: Sea Protests and Notarial Practice in Nineteenth-century Malta.

In tomorrow’s blog, I will discuss how this term, including “proof of loss,” was used in early American “proof of loss” cases.

And one last point: remember that good ole Steve Badger often shows a PowerPoint during speeches with a bunch of old guys. When Badger says that the old guys were thinking this and meaning that, ask him how he knows. He’ll know you’re also an insurance coverage nerd when you do.

Thought For The Day

The past actually happened but history is only what someone wrote down.
—Whitney Brown

1 Weiser-Brown Operating Co. v. St. Paul Surplus Lines Ins. Co., 801 F.3d 512 (5th Cir. 2015).