Legal Brief                                                      Page 9


Navigating Insurance Payouts

in a Storm Aftermath



On June 5, 2010, Lake High School in Wood County, Ohio, was decimated by an EF4 tornado that tore through the area killing seven, including the father of the senior class valedictorian. By all appearances, the school was destroyed.

The superintendent and board of education immediately began working with police, fire department officials, local political officials, community leaders, contractors and insurance adjusters to address the extensive damage to the school. The superintendent and the insurance company soon reached an impasse over whether the damaged school should be repaired or replaced. When no agreement could be reached, the superintendent hired attorneys experienced in insurance-coverage issues.

These principles guided our work with the district’s leadership in resolving the dispute.

Insurance policies are legal contracts governed by their express terms. Almost all school property losses involve insurance in some manner. Before a loss, school district officials typically deal only with insurance agents or brokers responsible for selling insurance policies. Superintendents, or their school business directors, and insurance agents rarely discuss the exact terms of a policy, even though it is a legal contract. Indeed, most insurance is purchased in advance of the delivery of the written insurance policy to the customer.

After a loss, superintendents and their boards may find themselves rudely awakened when they discover the recovery process and funds paid out for a loss are governed by the actual terms of the insurance policy and not by the logic and desires of the district’s leaders. Payment for the loss will be made according to the insurance policy terms, which will not give the administrators a blank check to do whatever they wish.

The interpretation of the insurance policy’s terms is subject to legal rules. The superintendent and board may find the use of an attorney with knowledge of the legal rules governing insurance policies to be beneficial during the recovery and rebuilding period. Because policies normally are written by insurance companies and not subject to negotiation with the insured, legal rules in most states require the courts to construe ambiguous policy language in favor of the insured. If the school district administrator reasonably reads the policy terms in the school’s favor, and the insurance adjuster reasonably reads those same terms in the insurance company’s favor, the district will prevail.

Generally, the courts broadly construe the coverage provisions of a policy to give maximum coverage to the policyholder, while narrowly construing exclusions that remove coverage from the policyholder. Depending on the policy terms and the factual circumstances, the superintendent may be able to make a credible argument that because the school district is the policyholder, it is entitled to broad coverage and replacement of the entire school building instead of repairs to selected areas.

Make sure the policy limits are adequate. Because a catastrophe may require replacing an entire school building, the superintendent and the board must ensure the policy limits are adequate to cover such a significant cost. This means getting up-to-date estimates of construction expenses for a new building incorporating the latest technology. These estimates should be used as guidelines for the amount of coverage to be purchased. Too often, policies are renewed year after year with the same coverage limits. Changing circumstances may render the outdated limits inadequate.

Similarly, limits for all types of coverage should be reviewed annually. Limits should reflect a thoughtful analysis of risk, not a “this is what we always have done” attitude.

The community was bursting with pride when its new, $25.5 million,     state-of-the-art, high school building opened for the 2012-13 school year for 525 students. The insurance company paid $19.1 million toward the cost.

Rebuilding damaged school property involved engineers, architects, construction managers and others. Because their activities were governed by the terms of the insurance policy, the school system’s insurance-coverage attorney was likely to be the district’s best friend.


Steve Smith is an attorney with Connelly, Jackson & Collier LLP in Toledo, Ohio. E-mail: ssmith@cjc-law.com. Janine Avila, a partner at the firm, assisted with the column.


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