Local attorneys successfully sue Chap. 380 mutual

Consumers insured by a county, town or farmer's mutual property insurance company can't complain to the Missouri Department of Insurance if a claim isn't paid.

"The law doesn't allow us to intervene on behalf of consumers like it would if it were a traditional mainstream insurer like State Farm or American Family," said Randy McConnell, public information officer for the state Insurance Department.

"These are the least-regulated of insurance entities operating in the state. People who buy these policies should understand that," McConnell added.

If a person has a complaint about how any of the 130 small mutual companies in Missouri has treated his claim, "he has to go to court," McConnell said.

Or settle for less than what is owed, said local plaintiff's attorney Michael Pivac, of Hearne & Pivac.

"Chapter 380 (Revised Statutes of Missouri) mutual companies are exempted from all the penalty statutes" to which larger companies are subject, Pivac said. What makes it hard for the insured is that many of the policies issued by Chapter 380 companies are so small it's hard to get an attorney interested in taking the case if a claim is denied, he added.

Exempt from law

On any insurance claim, the insured can sue for breach of contract if a claim is denied, Pivac said, but if the failure to pay the claim is unreasonable, there is no penalty assessed against the insurance company for vexatious refusal to pay, nor are any attorney fees assessed against the defendant insurance company if it's a Chapter 380 mutual.

"They can say to you, yes, you have a valid claim, your policy is in force, you've paid your premiums, it's a covered loss, the money is owed, but we're just not going to pay it. Do something about it. Hire yourself an attorney. The attorney will take one-third. So, now do you want to negotiate the amount?'" Pivac said.

"And don't think it doesn't happen," added his partner, Thomas Hearne.

They know because as plaintiff's lawyers who sue insurance companies, they've had plenty of experience. One of their cases against a local mutual insurance company, Overcast vs. Billings Mutual Insurance Company, was ruled on by the state Supreme Court in February 2000. In that case the verdict for more than $1 million damages was reinstated in a 7-0 decision.

The Chapter 380 mutuals also are exempt from the valued policy statute. Dickering on what to pay on a claim isn't a choice for mainline insurance companies, Pivac said, because Missouri insurance laws require that they pay the full value of the policy when a home is destroyed, for example, by fire.

"The valued policy statute was put in force so insurance companies couldn't write you coverage for $100,000 then have you out on the street and totally dependent on them for any kind of sustenance and have them say Take $50,000.'"

That law was in place before 1939, Pivac said, to "keep insurance companies from using their advantage at times of crisis to cheat you out of money. If you're going to take premiums for $100,000, you're going to pay $100,000 if it's a total loss."

Policyholders also may not know they only have one year from when the claim arises in which to sue on a breach of contract against the mutuals if they deny the claim. The normal statute of limitations on a breach of contract is 10 years.

Mutual history

"Mutual" means the company is owned by the policyholders, McConnell said, but not all companies with "mutual" in their names are Chapter 380 mutuals. He advised policyholders to call 800-726-7390 to ask the Department of Insurance if their company is a 380 mutual.

Those companies "are descendants of small county mutual companies of a hundred years ago set up and given exemptions just so there would be insurance in some of those rural areas," Pivac said. "That need doesn't exist any more."

Hearne said the mutuals are reinsured by the major insurance companies of the world. "They have at risk maybe $5,000, $10,000, $30,000 not much more than that. It's a myth that these are some little companies that are just barely struggling to stay alive. They are extremely profitable companies, and most of their risk is passed on to others."

McConnell said the general philosophy for the mutuals is that "they are very small, they operate locally and can't support corporate infrastructure that a traditional insurance company can," so they are exempted from the rules.

"They are expected to operate locally and as such the state never applied the same requirements that in the late 70s and early 80s were applied to other insurance companies," McConnell said.

The theory is that they are "a cooperative, mutually owned by policyholders who tend to be friends and neighbors and officers of the corporation, so there is little need for the kinds of requirements that apply to other insurers that don't have anybody on the ground here, are licensed to sell here but are based out of New York," for instance.

Because the companies may have less than a few hundred policyholders, the expense of hiring personnel, such as attorneys, to advise them of the regulations can be prohibitive, McConnell said.

But, he added, "Disputes have arisen, and some (mutuals) are operating well away from their home area." One company he received a complaint on wrote policies 200 miles away, and when claims came in for hail damage, it refused to pay. His department could do nothing because it didn't have any jurisdiction, he said.

"The philosophy is that these are your friends and neighbors, so that the officers of the insurance company are going to be more likely to give you a just settlement. There's always exceptions to any rule. The outlet is you can go to court."

Some mutuals, like Billings, are extended legally and can sell outside of their own county or adjoining counties. Unextended mutuals can only sell in their county or neighboring counties

Some mutuals are better organized or run than others. "The level of sophistication (of the companies) can actually vary quite broadly in this group," McConnell said.

Until recently "some of these companies submitted their annual financial reports in pencil," he said.

Annual financial reports and copies of claim forms must be filed with the Insurance Department by the mutuals, according to the statutes that govern them.

The Overcast case

This is how the Supreme Court saw the case:

In 1997, Henry Dale Overcast was at home in rural Billings when he smelled smoke. He felt heat from the bathroom, opened the door, and was briefly overcome with smoke and heat. He finally went to a neighbor's for help.

Together they used a garden hose to try to put out the fire, while the neighbor's wife called 911. The home was destroyed.

Overcast filed a claim on his policy for $50,000 plus $15,000 for the contents. Gayle Cobb, the general manager of Billings, conducted the investigation, partially by hiring Jim Kuticka of Wickizer-Clutter Insurance Claims Adjusters. Cobb had used Kuticka about 25 times before on fire claims.

Cobb knew he would only do a visual inspection of the debris and carpet in the home unless directed to do more. Kuticka pulled debris from the carpet and wrote that "large amounts of flammable liquid had been poured throughout the house" although he didn't test for the presence of flammable liquids, the court wrote in its opinion.

Cobb knew that Kuticka hadn't reviewed the fire department report or spoken to firefighters before concluding that the fire was intentionally set. The report didn't even mention the neighbor.

The court said, "Although Kuticka's investigation was not thorough, Cobb accepted the report and denied the claim," but not before telling Overcast he could clear the site, which destroyed all the evidence. Overcast also wasn't informed he could request an investigation by the state fire marshal. An investigation hadn't been done because the firefighters didn't think the fire was suspicious. In fact, Pivac said, the evidence showed that Kuticka was instructed not to contact the fire marshal.

When the insurance company rejected the claim, it sent a certified letter to Overcast that accused him of setting the fire, but there was no evidence of that, according to Pivac.

On the witness stand, Kuticka admitted he hadn't conducted any chromatography or mass spectrometry tests, nor did he smell any chemicals at the site. The only piece of evidence he took from the site was a terry cloth, which also had no odor. Cobb, his boss, didn't direct Kuticka to conduct tests either, the court said.

The neighbor agreed with Overcast's version of the fire. The neighbor said he didn't smell any chemicals and that the fire started in the bathroom, not the carpeted living room as the adjuster had suggested.

A Christian County jury returned a verdict for Overcast for the entire amount of his claim, plus $500,000 actual damages for defamation and $400,000 punitive damages.

"It was judged by a fair jury. It was just a horrible, horrible set-up job," Pivac said. "And just about anyone else who has heard the facts and circumstances agrees."

Hearne recalled that the insurance company representatives who testified "admitted (Overcast) was a man of good character, had no financial problems and they went out to find information that would be bad and reflect badly upon him and couldn't find anything bad about him, even though they talked to his ex-wife!"

Pivac said that the ex-wife told the insurance company that "Dale is as honest as the day is long."

"Why would an insurance company behave this way?" Hearne said. "Because they are not at risk for the vexatious refusal to pay penalty." Until the Overcast case, "they could deny your claim because I don't like you, and I think you are a liar and you smell bad," Hearne said.

The vexatious refusal to pay statute awards an additional penalty of 20 percent of the first $1,500 of loss, then 10 percent of the loss in excess of $1,500.

"They did all this ... because they felt confident enough of their immunity under the law," Pivac said.

Defamation

The lawyers won the breach of contract portion of the case and were able to increase the damages because the insurance company defamed Overcast with the arson accusation.

Normally to win in a defamation case a plaintiff must show that there was a "publication" of the defamatory remark to a third party, that is, someone else heard or read the remark.

In Overcast's case, the derogatory statement was in the letter denying the claim the arson allegation. What was worse, the publication was by Overcast's own hand: When he applied for new insurance, he had to disclose that he had been accused of arson and that accusation was the defamation.

The Supreme Court, like the trial judge, James Eiffert, thought that refusing to find defamation when the defamer knows the defamed person has to reveal the information was not an appropriate interpretation of the law.

So the high court decided to extend the defamation law to include publication in a new way by the defamed person himself.

Changing the law

People have tried to change the law concerning the mutuals, but with no success, Pivac said.

McConnell said it is up to the General Assembly to change the law if consumers complain about abuses; however, Pivac said the history of such proposed changes is that they die in the insurance committees.

In at least one case, to his personal knowledge, the insurance committee included a representative whose father-in-law was on the board of a Chapter 380 mutual.

The legislator didn't recuse himself from the vote of the committee, said Pivac, who had gone to Jefferson City with Hearne to testify in favor of a bill sponsored by Rep. Craig Hosmer. The bill would have brought the 380 mutuals under the vexatious refusal to pay statute. It died in the insurance committee.