Fires and substantial loss: how to ensure you’re insured

By Robert Erven Brown, Esq. with Matthew Mason, Esq.

Every day, five churches are damaged by fire in the United States. At that rate, a church in your state would catch fire every 10 days! It happened 1,800 times last year, causing more than $98 million in damages to religious properties.
When was the last time you and your senior staff sat down and considered a contingency plan for a fire which seriously damages your church?

In our conversations with church leaders, we find an overwhelming sense of denial about fire losses in churches — even though substantial fire losses aren’t just possible, but probable.
Not having a contingency plan is bad enough; not having appropriate fire and casualty insurance is even worse. Adding insult to injury, many church administrators don’t have the training and background necessary to adequately protect their churches’ rights as an insured when a fire loss occurs.
Without a basic understanding of how — and when — to file the right claim and damage information, your church could find itself in the unfortunate situation which befell one Kentucky church. In this situation, the insurance company paid only $48,358 of the church’s $209,000 loss.

How it happened
On June 15, 2010, a fire caused substantial damage to the church. On Aug. 12, 2010, the church submitted a Proof of Loss to its insurer — a local company, not one of the national, church-focused carriers. The insurer then conducted an arson investigation to determine whether it owed coverage. Ultimately, the insurance company determined that it did.
The church’s policy provided for the church to be paid its “actual cash value” or “replacement cost value.” The senior pastor and insurance adjuster exchanged multiple emails. The adjuster sent an email setting actual cost value at $48,358 and replacement cost value at $112,923. However, the email stated that receipt of the replacement cost coverage was subject to policy conditions.
The senior pastor replied to the email. “We’ve looked at your preliminary figures, and we accept those as the undisputed amount,” he wrote. “As you know, there will probably be more questions along the way as we decide if we’re going to rebuild or etc.”
On May 31, 2011, the insurance company cut a check in the amount of actual cost value, and the church cashed it. However, two months later, the church submitted an amended Proof of Loss showing actual cash value at $209,465. The insurance company denied coverage on the amended Proof of Loss. The church failed to rebuild within the allotted timeframe provided by the policy, and the insurance company also denied coverage for the additional replacement cost — a $64,565 loss.
Litigation ensues
The insurance company filed a lawsuit against the church asking the court to resolve its dispute about valuation in a “declaratory action.” That’s right: The church’s own insurance company filed a lawsuit against it.
Adding insult to injury, on May 15, 2014, the judge ruled against the church finding that:
The email exchange between senior pastor and insurance adjuster was an offer and acceptance of the actual cash value of $48,358.
Because the actual cash value was accepted by the church, the insurance company was not required to cover the amended Proof of Loss of $209,465.
The church did not comply with the insurance policy by beginning to rebuild within a certain amount of time.
Because the church did not comply with the
policy, wit was not entitled to the $64,565 replacement cost coverage.
The church was left with $48,358 to compensate for $209,465 in losses.

What can you learn from this?
Here are a few takeaways for your own church.
Arson coverage. If the insurance company found proof of arson, the company would have completely denied the church’s claim and paid nothing! So, check your policy for arson coverage.
Market / actual value versus replacement value. Insurance policies use differing methods for determining loss: market value (or “actual cost” value), replacement cost value, or a combination of both. The policy itself might define the terms. Generally, market value or “actual cost” value is the value of the property if it were sold at auction today. Often, the actual value or market value of personal property, or even a building, is less than the replacement value. This is where the term “fire sale” originated. In the case of the church referenced in this article, the replacement cost was higher because rebuilding the facility cost more than the market value of the existing facility.
You should check your policy for the method of determining loss and speak to your insurance company regarding their method of determining loss.
You should obtain appraisals of your church personal  property and real estate.
You should have your policy evaluated by other insurance providers who might be more likely to spot holes in the coverage of your existing policy.

If disaster strikes:
Don’t just take the insurance company’s word for it. Have an independent estimate of loss prepared by an expert.
Before agreeing to accept loss payments, consult a lawyer. This way, you understand your losses, your right to recover, and timetables for recovery.
Set a calendar. This helps ensure you don’t miss a response date required by the insurance policy.  CE

Robert Erven Brown, Esq., is an attorney licensed to practice in Arizona. He and his nonprofit practice group work with nonprofits and churches, helping them manage key operations connected with their missions, visions and causes. As permitted by local Rules of Ethics, they collaborate with attorneys who are licensed in states other than Arizona.  He is the author of Legal Realities: Silent Threats to Ministries, which describes his Campus Preservation Planning© initiative — a comprehensive program designed to manage the wide array of risks facing non-profit organizations. 
Matthew Mason, Esq., is an associate attorney at Ridenour Hienton PLLC in Phoenix.
Footnotes were omitted.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. “From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations.” Simply reading this material this does not create an attorney / client relationship with Brown, as this article is general legal information, not legal advice. A formal attorney / client relationship will not be established until a conflict check is completed and an engagement letter has been signed by both the attorney and the client. No “informal” legal advice will be provided by telephone. Simply sending an e-mail to Brown will not create an attorney / client relationship.


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