Insurance Claim Help for Property Damage from Hurricanes/Storms/Floods
For Advocates
(Attorneys, Claim Professionals, Public Adjustors, Relief Workers)
General Claim Tips
How Will Homeowners Insurance Litigation After Hurricane Katrina Play Out?
Info re: Claims under policies issued by the National Flood Insurance Program
Recovery Resources in Louisiana
Standard Flood Insurance Policy (download pdf 336K)
Bulletins and updates re: claims under Flood policies
NFIP's bulletin to adjusters on handling Katrina claims (download pdf 196K)
Katrina damage is covered despite insurance industry “spin”
Listing and description of the various types of policies that may offer coverage
A Guide to Insurance Coverage for Losses from Hurricane Katrina (download pdf 284K)
Written by attorneys who specialize in representing the insured
Unraveling Insurance Coverage for Hurricane Katrina: No Big Easy Task
A thorough review of court decisions on coverage for hurricane and flooding
damage under property insurance policies written by an attorney who
specializes in representing insurance companies
Homeowners Wait for Claims To Be Adjusted
Flood exclusions in windstorm policies (download pdf 43K)
Insurance Implications of Hurricane Katrina Lawsuits
General Claim Tips for Homeowners and Businesses
1. NOTIFY YOUR AGENT AND INSURANCE COMPANY PROMPTLY THAT YOUR HOME OR BUSINESS IS DAMAGED AND YOU ARE FILING A CLAIM
Even if you do not carry a "flood" policy, or believe your damage may not exceed your deductible, you should notify your agent/broker and carrier in writing that you have sustained a loss and are filing a claim. Coverage for some flood related losses may be available under certain sections of your homeowners or business policy.
2. IF THE INSURANCE ADJUSTER TELLS YOU THE DAMAGE DOES NOT EXCEED YOUR DEDUCTIBLE – GET AN INDEPENDENT OPINION
The adjuster sent by your insurance company to inspect your home or business after a flood may not know how to look for and identify all flood-related damage. Do not blindly trust your adjuster, especially if he or she tells you no benefits are owed because the damage did not exceed your deductible. Your home and/or businessis simply too valuable for you to rely on one person’s opinion.
3. REVIEW YOUR POLICY CAREFULLY
Look closely at your "declarations" page. This page states your name, address, policy number, categories of coverage, dollar limits, endorsements, lender, etc. Make sure you have the most current, up-to-date copy. Read the "Endorsements" (extras) that apply to your policy. Every endorsement has a code number that matches text in the policy. If you are confused, do not rely solely on your insurance company or adjuster for answers. Consult with professionals who specialize in advising or representing insurance consumers.
4. COVERAGE BASICS:
The same dollar amounts of coverage you have under your homeowners policy should suffice for flood coverage as well. CAUTION: Many homeowners' policies have a provision that increases your coverage above the limits stated on the declarations page under certain conditions. These are called "extended replacement" or "guaranteed replacement" clauses. The FEMA flood policy does not have this provision. Your limits will be exactly as stated on the declaration page. For more information see UP's TIPS ON FIRE CLAIMS.
5. DO NOT BE PRESSURED INTO A QUICK SETTLEMENT AND DO NOT SUBMIT A CLAIM FORM THAT SAYS “FINAL” OR “FULL” UNTIL YOU ARE SURE YOU UNDERSTAND YOUR RIGHTS, YOUR COVERAGE, AND THE FULL EXTENT OF YOUR CLAIM.
Your adjuster may try to rush you into a fast settlement. Unlike other forms of coverage, your insurance company may farm out all policy services regarding flood coverage to companies that do not even specialize in insurance. The person actually adjusting or deciding your claim may not be trained or even knowledgeable about flood coverage. He or she may tell you that damage pre-existed the flood. Don’t be railroaded. Documenting a major loss to ensure a full, fair recovery requires work. Before you know the true amount of your insurance claim, you must get estimates from reputable contractors, and inventory all lost or damaged possessions. This takes time. A licensed structural engineer should fully inspect and tell you the scope of necessary repairs so you can have a reputable contractor provide an estimate based on that scope.
IMPORTANT: Because flooding leaves water in walls and hidden areas, mold, mildew, and fungus may grow inside the house. Some of these can be extremely dangerous. -- You should monitor your house by having a licensed environmental hygienist test the air inside your home.
6. BE AN INFORMED, ASSERTIVE CLAIMANT
Organize all papers related to your claim. A three ring binder with folders is generally the best system. Keep a diary. Record the names, phone numbers, job titles, and supervisor's names of everyone you speak with, and keep detailed notes of all pertinent conversations. Take photos of the damage and keep copies in a safe place.
Communicate with your neighbors, find those insured with your insurance company and meet with them regularly to share information and ideas on securing a fair settlement.
If your adjuster is uncooperative, complain in writing. If you feel your claim is not being handled fairly, contact a qualified attorney or public adjuster who specializes in representing policyholders.
7. BE SURE YOU ARE FULLY COMPENSATED FOR YOUR "ADDITIONAL LIVING EXPENSES" OR "LOSS OF USE"
Keep all receipts for meals, lodging, and purchases to replace damaged items from the time you must vacate your home until it is fully repaired. Policies vary on how long this coverage lasts and how much you can recover.
8. BE EXTREMELY CAUTIOUS ABOUT THE REBUILDING OF YOUR HOME. YOU ARE ENTITLED TO "LIKE KIND AND QUALITY"
Insurance companies may pressure you to accept their contractors’ cut-rate repair estimates or short-cut repair methods. Check with your local Building Department and reputable contractors who have experience repairing flood damage.
If the adjuster tells you there is no damage inside walls or flooring -- get a second opinion. Push for the best inspection methods on your engineer's recommendation. Don't settle for limited testing. (E.g., inspecting walls by drilling holes in them is not as good as actually tearing off the sections of the wall in areas with suspected damaged.)
9. DEMAND THAT YOUR CLAIM BE SETTLED FOR THE AMOUNT OF YOUR OWN CONTRACTOR'S ESTIMATE. YOU DO NOT HAVE TO ACCEPT THE INSURANCE COMPANY'S CONTRACTOR OR ESTIMATES.
- Beware of "lowball" estimates from insurance company adjusters and contractors with whom they have relationships.
- Beware of out-of-state, inexperienced or unreliable contractors without proper insurance of their own.
- If the flood made pre-existing damage worse, you’re covered for the necessary repairs.
- Some flood repairs are expensive, especially hidden damage in walls and floors. Wet and mildewed areas can be potentially hazardous. Monitor your air after any flood, especially if you smell mold, mildew, or musky odors. You may have to fight to get the full amount of policy benefits you paid for.
- Don't be penny-wise and pound-foolish by refusing to pay experts to advise you on the scope of damage and cost of repairs. They will help you prove your claim.
10. DO NOT SIGN "RELEASES" OR WAIVERS OF YOUR RIGHTS OR ALLOW YOUR INSURER TO RECORD AN INTERVIEW WITH YOU WITHOUT CHECKING WITH AN ATTORNEY WHO HAS EXPERIENCE REPRESENTING INSURANCE CONSUMERS, (POLICYHOLDERS)
Read all documents carefully, including both sides of all checks, to make sure they do not contain "final" or "release" language. You should not need to sign a "waiver" or "release" to get monies owed on your claim. Your insurer has the right to take your recorded or sworn statement if it has questions about your claim, but it makes sense for you to check with a lawyer. Signing a final proof of loss prematurely or making a mistake on tape may hurt your ability to fully recover the policy benefits you need to repair your home properly.
11. IF YOUR BUSINESS WAS DESTROYED — ALL THE ABOVE APPLY
How Will Homeowners Insurance Litigation After Hurricane Katrina Play Out?
The Key Dynamics, the Mississippi Lawsuit, and the Courts' Likely Views
by Adam Scales
as posted at writ.news.findlaw.com
This is one in a special series of columns on legal issues arising in the aftermath of Hurricane Katrina. - Ed.
Over a century ago, an insurance executive observed that, "the insurer proposes, but the court disposes." As the nation reels from Hurricane Katrina and its aftermath, insurance companies and policyholders now living in shelters would do well to reflect on this fundamental characteristic of insurance law.
Insurers have moved swiftly into storm-ravaged areas, setting up mobile claims units and dispatching adjusters to meet with policyholders. While prompt customer service is undoubtedly commendable, there is reason for skepticism here as insurers begin choosing which claims to pay, and which to decline.
In this column, I will discuss three key dynamics that are at play here. In addition, I will comment on how they will affect the lawsuit filed by the Mississippi Attorney General last Thursday, September 15, against a number of insurance companies.
Significantly, substantially similar issues have been raised in Louisiana, where the first lawsuits against insurers were filed last week and more are expected shortly.
The Key Dynamics Likely to Affect Insurance Coverage Issues
As insurers have begun to process the hundreds of thousands of property claims, their adjusters are making coverage determinations, often at the very ruins of the homes where still-shaken policyholders once lived. From published reports, it is clear that adjusters are cutting checks not just for short-term living expenses (to which homeowners are entitled) but for the underlying property damage claims as well. While literally hundreds of coverage issues are likely to arise, policyholders and insurers should consider three dynamics at work.
First, a homeowners insurance agreement is one of the most complicated contracts the average person will ever sign. This is partly due to the historical development of homeowners insurance -- which was stitched together in something like its present form just a few decades ago, from various strands of the law of insurance contracts, which developed over centuries.
Unsurprisingly, given the complexity of these contracts, individual policyholders do not bargain over the terms of their contracts; with rare exceptions, they have neither read their contracts, nor would understand them even if they did. Almost every word in a modern insurance policy has acquired meaning through a cycle of drafting, legal challenge, and redrafting. Indeed, these repeated cycles have often bestowed upon insurance terms not simply a single meaning, but multiple meanings.
Relatedly, courts have long treated insurance as a special sort of contract, recognizing both the complexity of such contracts, and the central importance of insurance in people's lives. For at least 150 years, courts have struggled to match the typically stark and restrictive language of insurance policies with the messy and wide-ranging needs of typical policyholders.
Two complementary doctrines have emerged: First, insurance contracts are construed, wherever possible, to provide coverage. If a word or clause is ambiguous, that doubt is resolved in the policyholder's favor, and against the insurer. This makes sense, as the insurer drafted the contract, and had every chance to make it clear.
Second, courts will honor the "reasonable expectations" of a policyholder even where a "painstaking" reading of the contract (a task invariably left until after a loss has occurred) would reveal the absence of coverage. This reflects the fact that insurers know a great deal about what people (perhaps subliminally) expect from their insurance contracts; it would be wrong to permit insurers to reap the benefit of those expectations (in the form of premiums), while subtly eliminating the very coverage the policyholder thinks he is buying.
Two caveats: These doctrines are not magic wands that point inexorably to coverage, though they do tend to favor the policyholder.
Moreover, as one might expect, courts differ in the zeal with which they apply these doctrines when interpreting insurance contracts. Judges do not like to appear to be rewriting the terms of contracts "freely" entered into. However, most courts do approach the task of interpretation with a pragmatic grasp on the profound limitations policyholders typically bring to the purchase of insurance. Judges generally understand the realities I mentioned above: policyholders who aren't lawyers (and even some who are) simply do not read or understand their contracts.
Whether courts mention them explicitly or not, the doctrines mentioned above exert a strong gravitational effect on the legal meaning of insurance terms - causing courts to bend words, wherever plausible, towards the maximization of coverage.
Third, once the meaning(s) of insurance terms are settled in accordance with the rules described above, it remains to apply them to the facts. But "facts" are rarely determined by judges alone. Rather, courts set wide parameters within which juries are empanelled to find the operative facts that will determine the outcome of a case.
Suppose that each afternoon, an office worker walks across the street to a café to get coffee, often taking requests from his co-workers. On the way back to the office one day, he is hit by a car. Is he covered by workers' compensation - even though he's not in the office, and was getting coffee for co-workers, not the boss? Probably.
Workers' compensation insures against injuries "arising out of, or in the course of, employment." This phrase has been given a broad meaning. A jury could find as a fact that the employee acted for the convenience of the employer (and his fellow employees), and therefore was covered.
The same process is at play whenever a homeowner contests an insurer's claim that damage to the home was caused by an excluded peril (such as flood), rather than an included peril, such as a windstorm. If the jury can find in favor of the policyholder, within the parameters of the judge's instructions, it typically will do so.
Mississippi's Allegations Against Homeowners Insurance Companies
With these observations in mind, consider the lawsuit filed by the Mississippi Attorney General last Thursday. The suit named as defendants insurance companies doing 70% of the homeowners business in that state.
In its complaint, Mississippi makes a number of allegations. It contends that insurers are ignoring the interpretive rules applicable to insurance contracts and taking advantage of homeowners ignorant of their rights under the law. It also contends that the contracts are so complex and beyond the comprehension of the average person as to be "unconscionable," and thus void.
It also alleges that the standard exclusions for "water damage" and "flood" are ambiguous in the context of a homeowners policy. And it alleges that insurers have illegally engaged in unfair trade practices by representing that their homeowners insurance contracts provide "full and comprehensive hurricane coverage" when the policies, in fact, contain substantial exclusions limiting liability.
Mississippi claims that, as a result of such practices, vulnerable homeowners are being pressured into accepting partial payments and signing away their rights. Accordingly, Mississippi is asking a court to order the companies to stop paying less than full value on claims under the policies, and to hold that the water and flood exclusions are unenforceable.
Assessing the Mississippi Suit: Causation Issues Will Be Crucial
On its face, the Mississippi complaint is rather broad. In response to it, insurers suggest the suit is nothing less than an attempt to rewrite contracts after the fact. They note the irony that Mississippi regulators earlier approved the very agreements now claimed to be "unconscionable."
Although it is unlikely that all of its claims will be upheld, Mississippi has a strong chance to blunt the force of the flood exclusion. For at the core of this dispute is the legal doctrine of "proximate cause."
Proximate cause has long been the bane of law students required to learn it, and lawyers and judges required to apply it. Needless to say, it is an object of singular delight to law professors.
Proximate cause describes a relationship between events sufficient to trigger a legal consequence. So suppose a car accident leads to a rather unusual injury. The driver (and his insurer) may be liable if a court finds the injury to have been "proximately caused" by the driver's negligence. Or suppose the "proximate cause" of a loss is something firmly excluded from insurance coverage; then the insurer is not liable.
But what kind of causes count as "proximate"? Simplifying grossly, the damaging consequence must have a sort of thematic connection to the antecedent event that is claimed to be its "proximate" cause. Only then does the law speak of the consequence as having been "legally caused" by that event.
Why "Legal Causation" Will Play a Large Role In Mississippi and Louisiana
Centuries ago, insurance policies were very simple documents with few exclusions. But over time, as policyholders became more creative in their claims, insurers added ever more exclusions.
That caused an important wrinkle for courts: Many policy-excluded perils had some relationship to policy-included perils. But which was the "legal cause"?
Sometimes excluded and included perils act in tandem. For instance, suppose a house is destroyed by a combination of earthquake and flood, when there is a flood exclusion, but no earthquake exclusion.
Or, one peril might cause another, in a way that requires coverage. In the standard homeowners policy, which contains a flood exemption, an explosion that destroys a house is covered, even if the explosion is caused by a flood (imagine an explosion resulting, for instance, from a ruptured gas line).
In some cases, insurers redrafted their policies to preserve coverage, but in others, insurers have tried to make certain exclusions more definite with respect to causation. These exclusions purport to deny coverage for losses "directly or indirectly" caused by, "contributed to" by, or otherwise linked with, an excluded peril.
The contours of the problem in Mississippi and Louisiana will differ, neighborhood by neighborhood. First, there are entire neighborhoods that are simply gone, leaving only a sludge of forensic questions behind. Whether these homes were destroyed by flood or wind is, at present, a matter of speculation.
In contrast, with respect to identifiable shards of former homes, event reconstruction is certainly possible. But few homeowners can evaluate the evidence without professional advice.
I am a great admirer of insurance companies, but all things being equal, they would rather pay less than pay more. With insured losses estimated to be as high as $60 billion (incredibly, this is merely a fraction of total direct losses), insurers have every incentive to construe what evidence there is in their own favor, rather than in policyholders' favor.
Arguments For a Literal Reading of Insurance Contracts Will Probably Fail
These facts alone would counsel caution, but there is a larger issue that implicates the observations above.
As noted above, it is common for excluded perils to play some role in an otherwise insured loss. What of the houses already weakened by flooding (or rain) and subsequently blown away by wind? Such losses are undeniably caused at least "indirectly" by flood, and thus excluded under the literal terms of policies that use the "directly or indirectly" language quoted above.
But the law is unlikely to accept any literal view of the policies. In Mississippi, and elsewhere, courts have frequently held that where a covered cause (in our example, wind) contributes in some significant way to the loss, then there is coverage even though an excluded cause also contributed to the loss. After all, it is in the nature of things for events to have multiple causes; certainly hurricanes can be expected to inflict both wind and water damage concurrently, or in sequence.
To the extent that insurers insist on a literal and restrictive reading of their policies, the core claim of the Mississippi lawsuit is sound.
Insurers should not be surprised by that, because this result is consistent with the interpretive doctrines described above. When courts hold that there is coverage for flood-related wind damage, or for a wind-damaged home that might have remained intact had its roof been perfectly maintained, they do no more than honor the reasonable expectations of the average policyholder.
Conversely, denying coverage under a flood exclusion where, for example, water was only minutely responsible for the loss would likewise frustrate the average person's understanding of his insurance contract.
It is for these reasons that a court is likely to find the terms "water damage" or "flood" ambiguous in the context of loss caused in conjunction with other, plainly covered causes - and thus to construe these terms in the policyholder's favor.
Finally, one must recall that these causal speculations are ultimately questions of fact to be resolved by the jurors. And Mississippi and Louisiana jurors are likely to have a keen appreciation for the effects of wind in these cases - as well as an intense sympathy for the policyholders who lost so much, and thought they were protected.
Of course, no juror or court should disregard the duty to faithfully apply the law, even where both natural sympathy for hurricane survivors and the regrettable antipathy towards insurance companies are at their zenith. But no court or juror need do so, in many cases, in order to decide in favor of the policyholder. Where there exists genuine doubt regarding the cause of losses, the legal system allocates the burden of that doubt to the insurer. As insurers assess their costs and estimate their coverage in the wake of Katrina, they must take that reality into account.
Leasehold Improvements Insurable under Building Coverage
as posted at cms.nationalunderwriter.com
please also visit UP's buying tips and www.femainfo.us
The U.S. District Court for the Middle District of North Carolina ruled that a tenant could recover under the building coverage of a Standard Flood Insurance Policy for flood damage to leasehold improvements in Studio Frames LTD v. Standard Fire Ins. Co., NO. 1:01CV0876, 2005 WL 1993511 (M.D.N.C. Aug. 16, 2005).
The Studio Frames art gallery leased spaced at a shopping center owned by Federal Realty Trust Investments, Inc. After suffering flood damage as a result of Hurricane Fran, Studio Frames received a loan from the Small Business Administration, which required the company to carry flood insurance to cover its leasehold improvements and the contents of its gallery.
Studio Frames bought a Standard Flood Insurance Policy (SFIP) from the Standard Fire Insurance Company. The policy contained the standard language written by the Federal Emergency Management Agency (FEMA). To cover its interest in the leasehold improvements, Studio Frames bought building coverage in the amount of $194,700, as well as contents coverage in the amount of $287,200.
A subsequent flood caused severe damage to Studio Frames' contents and leasehold improvements. An adjuster from Standard Fire learned that Studio Frames leased its building from Federal Realty, which also maintained a flood policy.
The insurer said that Studio Frames was not eligible to receive payment under the building coverage portion of the policy because a tenant is not allowed to purchase building coverage. The adjuster said that Studio Frames could, however, make a claim for the leasehold improvements for an amount equal to 10 percent of the contents coverage.
Standard Fire attempted to refund the premiums that Studio Frames paid for the building coverage, but Studio filed a breach of contract claim against Standard.
Standard Fire asserted that because tenants can insure some leasehold agreements under the contents portion of the policy, the improvements cannot be insured under the building coverage portion. The court did not agree, stating, "Nowhere in the SFIP does it state that a tenant cannot purchase Building Coverage for its property interest in leasehold improvements."
Standard Fire further argued that a tenant whose landlord already carries SFIP insurance cannot purchase it as well under the policy's prohibition of duplicate policies. The court pointed out, however, that the policy stated that the same property may not be insured under more than one policy, but not that a building cannot be insured under more than one policy.
The court stated, "A landlord and a tenant can, and in this case do, have different property interests and different insurable interests in the different components of a leased building."
Standard Fire's final argument was that the National Flood Insurance Act barred insurance coverage of more than $500,000 on a single structure. The court refuted the argument, saying that "the statute is ambiguous in expressing Congress' intent," and that "FEMA's reasonable interpretation of [U.S. Code section] 4013(b)(2) also supports a finding that [U.S. Code section] 4013(b)(4)'s text was not intended by Congress to serve as an aggregate limit of Building Coverage."
Thus, the court found that Standard Fire repudiated its flood insurance contract with Studio Frames, and Studio Frames was entitled to recover damages for its leasehold improvements.
Hurricane Season and Insurance Coverage
as posted at cms.nationalunderwriter.com
Last year, the words hurricane and Florida seemed synonymous. Today all eyes are on the Gulf states of Louisiana, Mississippi, and Alabama as Hurricane Katrina made landfall near New Orleans. According to a mid-morning public advisory issued by the National Weather Services National Hurricane Center, the center of Hurricane Katrina was again moving ashore near the Louisiana-Mississippi border. The hurricane continued to pound southeastern Louisiana and southern Mississippi (http://www.nhc.noaa.gov/text/refresh/MIATCPAT2+shtml/291438.shtml).
A hurricane warning continued in effect for the north-central Gulf Coast from Morgan City, Louisiana, to the Alabama-Florida border. New Orleans and Lake Pontchartrain were the center of attention.
As of today, probable flooding caused by torrential rains and the hurricane\storm surge were of greatest concern as residents remained evacuated from the city of New Orleans and surrounding areas.
In most of the coastal states, damage caused by windstorm will be covered by the various states’ windstorm or beach pools. Flood-related damage will fall to FEMA and its National Flood Insurance Program. But, how do the standard homeowners policies or commercial property policies apply in this situation? What about business interruption and other consequential losses? How is debris removal to be paid for, and how are property policy deductibles to be applied?
These and other questions are being asked by property owners and business owners throughout the areas that were struck by the hurricanes. This article by the FC&S staff will try to answer the coverage questions.
Homeowners Coverage
Some homeowners, particularly those in a high-risk area, may find they have three policies in force—a standard homeowners policy that covers all but hurricane damage, a windstorm policy that covers damage caused by a hurricane, and a flood policy that covers tidal overflow or the runoff of surface water from the torrents of rain. In other states with a coastal exposure, windstorm pools (also referred to as beach plans) offer windstorm coverage. Binding authority is normally suspended within a certain timeframe when any named storm is approaching. For example, the Florida site of Citizens Property Insurance Corporation, which serves the needs of homeowners in high-risk areas and others who cannot find coverage in the open, private insurance market, (http://www.citizensfla.com) had suspended binding coverage Tuesday night, August 23, in the path of Katrina.
The windstorm Web site for Louisiana, www.lacitizens.com, was unavailable today because of the storm.
Not all windstorm coverage is the same, so in any area offering this coverage the policy should be reviewed. South Carolina’s Wind and Hail Underwriting Association offers a standard dwelling policy that covers direct physical damage to the dwelling, other structures (but not pool screens, fences, greenhouses, etc.), personal property (within a building and with limitations on such items as golf carts), additional living expense or fair rental value (subject to a 10 or 15 day deductible)—but the only covered cause of loss is wind or hail. Even “wind or hail” is limited; the peril does not include “ice (other than hail), snow or sleet, whether driven by wind or not. Those familiar with the ISO “windstorm or hail” named peril will recognize its counterpart: “We will not pay for loss or damage to the interior of any dwelling or other structure, or the property contained inside the dwelling or other structure, caused by rain, snow, sand, or dust whether driven by wind or not, unless the direct force of wind or hail damages the dwelling or other structure causing an opening in a roof or wall and the rain, snow, sleet, sand or dust enters through this opening.”
Citizens Property windstorm insurance (Florida) was much like South Carolina’s, but the policy has recently been broadened so that coverage B applies to fences, detached pool screens and the like. Coverage A now applies to the dwelling and attached structures such as pool screen cages. Fair rental value has been added to coverage D. Limited fungi, wet or dry rot coverage resulting from windstorm has been added.
Windstorm deductibles vary by state. The South Carolina policy described above offers a choice of deductibles: 1% of the limit of liability as shown on the declarations page, but no less than $250 nor more than $25,000; or 2% but no less than $500 nor more than $50,000. The deductible is, however, applied separately to each dwelling, each other structure, and personal property in each dwelling or other structure on the policy.
Under Florida law, hurricane deductibles are applied on a calendar year basis. If multiple hurricanes occur in one calendar year, the deductible amount must be fulfilled only once by the homeowner. The Louisiana hurricane deductible, however, applies in full to each and every hurricane.
There is no coverage for trees, plants, shrubs, or lawns for damage caused by wind under these policies. But if a tree is blown onto a dwelling, causing damage, then the cost to remove the tree should be covered as part of the cost of repair. Unlike standard homeowners forms, there is typically coverage for debris removal of covered property only. Since trees are not covered property, there is no coverage to remove them if they simply blow over and do not damage covered property.
Coverage for ordinance or law varies by state; read the policy carefully.
And of course, not all damage in the course of a hurricane is wind-related. Much damage results from the large amounts of rain and the ensuing flooding. Although windstorm policies cover damage to personal property caused by rain entering a dwelling when the roof has blown off, they will not cover damage caused by water flowing under a door. That is the province of the National Flood Insurance Program. However, there is a thirty-day waiting period for new applications (they become effective at 12:01 A.M local time on the thirtieth calendar day after the application date and the presentment of premium, which must accompany application). There will be no coverage for any flood damage caused by Ivan unless a policy is already in place.
There is often damage caused by a blackout, even when there is no direct physical damage caused by a hurricane. Some of the damage is insurable; other damage is not.
Damage to a building—in this case, a home—is unlikely simply because of a blackout. It is possible for a consequential loss to occur, such as a burglary because an alarm system did not function. A loss such as this should be covered. Although the standard homeowners forms exclude coverage for loss resulting from power failure off premises, the exception is that if the failure results in an insured peril, that ensuing loss is covered. Although the alarm did not function to warn the homeowner or authorities that a burglary was in process, the actual cause of loss is burglary—not power failure.
However, there is a situation that could arise for the homeowner that may involve some property damage. Say, during the blackout, there are severe thunderstorms and water run-off that would normally cause a sump pump to operate; but in this case, the pump fails. Is there coverage for sump pump failure caused by a power outage? We believe there is if the insured has purchased water back up and sump overflow coverage. The power outage exclusion, as we mentioned, gives back coverage for an insured peril on the insured premises. Purchasing sump coverage effectively means the insured has purchased an additional peril, and so the loss from the inoperable sump pump would be covered.
Damage to personal property could well occur. Lack of air conditioning and the resulting increase in heat and humidity could affect some personal property. Some artwork is particularly susceptible to dampness in the atmosphere. There is no coverage for this, unless the artwork is scheduled. Of particular concern, is the rapid growth of mold. We do not see coverage for loss resulting from mold that grows because air conditioning units are not functioning. Again, damage from power failure occurring away from the insured premises is not covered unless the failure results in a covered cause of loss. Mold is not a covered cause of loss unless it is in itself the result of a covered cause of loss. That is not the case here.
Food spoilage will impact many people. Some standard homeowners forms automatically provide an amount of coverage, usually $500 worth. Other forms do not cover food spoilage unless it is added by endorsement. Bottom line, many people will not have coverage for this loss.
The next items of personal property that could be damaged are those that sustain a power surge when power is restored. Although standard homeowners forms cover loss from artificially generated electrical current, the forms add that damage to electronic circuitry or components that are part of electronic apparatus (home computers, appliances, etc.) is not covered. And, although computer coverage is available by endorsement, two endorsements examined each excluded loss caused by off premises power failure.
The issue of additional living expense may also be raised. Suppose an insured with severe asthma was driven from the home by the heat and lack of air-conditioning and drove 100 miles to a city not affected by the blackout, incurring hotel expenses. Would this qualify for reimbursement under the homeowners form? As additional living expense is triggered by damage to the insured premises, no coverage would be available.
Subscribers to the FC&S Bulletins can find more information by referring to The FC&S. See “Homeowners Exclusions,” Personal Lines volume, Dwellings section, “Sump Overflow and Power Failure,” (Q&A 1284) and see “Power Outage and a Motorhome’s Refrigerator” (Q&A 1301).
Auto Policies
Personal Autos
Autos certainly do get damaged when hurricanes sweep through an area. Vehicles can be damaged by wind, water, and collapsing structures. So, how does the auto policy respond to the damage?
The standard personal auto policy pays for direct and accidental loss to the covered auto or any nonowned auto (a defined term), including their equipment. There is no question that a hurricane and its effects cause direct and accidental loss to autos. The important thing is for the insured to have the proper coverage on the auto. For example, if the insured only purchased collision coverage and the auto was damaged by wind or flood, the insured would have no coverage for the damage to his auto. Faced with the fact that living in a hurricane-prone area is likely to result in wind and water damage to the covered auto, the insured should purchase other than collision coverage as well as collision coverage.
This advice applies to autos owned by the named insured as well as to autos not owned by the named insured, but in his custody or being operated by him—for example, a rental car. Many people fly south on vacation and then rent cars for use on a short term basis. The standard personal auto policy provides physical damage coverage for the rental car, but again, the insured has to have purchased the appropriate coverage under his auto policy, namely collision coverage and other than collision coverage.
If an insured’s car is damaged and cannot be driven, the personal auto policy will also respond to that type of loss. Temporary transportation expenses incurred by the insured in the event of a loss to a covered auto are paid, without application of a deductible. So, if the insured’s car is wrapped around a tree by a hurricane, the auto policy will pay the costs of renting a temporary substitute auto; the standard coverage does not exceed $20 per day for the substitute auto, up to a maximum of $600, but some insurance companies may offer higher amounts.
If the insured (pre-hurricane) has rented a car for his vacation, he has most probably signed a contract whereby he will be legally responsible for loss to and loss of use of that rented car. The standard auto policy provides coverage for the loss of use expenses involved. For example, if the car rental company claims it has lost revenue due to the loss of use of its car, and the insured is legally responsible for that lost revenue, the auto policy will pay that claim. However, the most the policy will pay for any expenses for loss of use is $20 per day (again, some insurers may offer a higher amount).
The insured should also be aware that the transportation expenses are paid only after the covered auto or the rented auto is withdrawn from use for more than a certain period of time—usually twenty-four hours.
The standard auto policy, like any other insurance policy, has exclusions that may affect coverage for a loss caused by a hurricane. For example, if the insured drives away from the expected storm and the car breaks down, mechanical breakdown is not a covered cause of loss. Or, if the insured owns a motor home or a camper body but it is not shown on the declarations page of the auto policy, and hurricane winds severely damage the motor home or camper, loss to such vehicles is not covered by the auto policy. Or, if the hurricane damages custom furnishings or equipment that the insured has in his pickup truck, these items are excluded from coverage under the auto policy. So, the insured should read the exclusions that are on the auto policy to be aware of the losses that are not covered.
One final note on the personal auto policy. One of the duties of the insured after a loss is to take reasonable steps to protect the covered auto or nonowned auto and their equipment from further loss. If, for example, a hurricane damaged the insured’s car or rented car and the car is immobile, the insured should have the car towed to prevent further loss, whether it may be loss by theft or another hurricane. The insurer will pay reasonable expenses incurred by the insured to prevent another loss.
Business Autos
The business auto policy, like the personal auto policy, provides physical damage coverage for loss to covered autos. This would include loss caused by windstorms and floods.
As with the personal auto policy, the insured has to choose what type of coverages he wants. The choices are comprehensive (any cause except collision), specified causes of loss (only those causes of loss that are listed), and collision. To adequately counter against loss by hurricane damage, the insured should have both comprehensive coverage and collision coverage; but at the very least, the insured should have specified causes of loss coverage since that coverage includes loss due to windstorm and flood.
Unlike the personal auto policy, the business auto policy requires the insured to choose what type of auto is to be covered. The business auto policy has symbols to designate covered autos, such as symbol 1 is “any auto,” symbol 2 is “owned autos only,” symbol 8 is “hired autos only,” and symbol 9 is “nonowned autos only.” For the business insured to have proper auto coverage, he must use the correct symbol. For example, if the insured has owned autos only and would never rent a car or use nonowned autos in his business, symbol 2 should be used to designate the covered autos. If the insured chooses symbol 2, rents a car for his business purposes, and a hurricane damages that rented car, the business auto policy would not provide coverage for the damage.
The business auto policy does provide towing coverage. If a hurricane damages the covered auto and the insured wants the car towed, the business auto policy will pay for the tow. However, the amount paid for the tow is limited to the amount that the insured has chosen on the declarations page, and the coverage is only for a private passenger type car. For example, if the insured has a Chevrolet Cavalier and a truck on his business auto policy and both vehicles are damaged by hurricane winds, the auto policy will pay for towing the Cavalier but not the truck. Some insurers may offer towing coverage for all the insured’s vehicles, but the standard policy does not.
The business auto policy provides transportation expenses similar to the personal auto policy, but with a certain limitation. The personal auto policy provides transportation expenses coverage if the loss to the covered auto is caused by such things as windstorm or water; the business auto policy provides such coverage only for theft of a covered auto. So, hurricane damage does not mean that the business auto policy will pay for temporary transportation expenses incurred by the insured.
On the other hand, the business auto policy will pay for the expenses for which an insured becomes legally responsible to pay for loss of use of a rented vehicle. It makes no difference if the loss is caused by theft or hurricane—if the insured has those types of coverages indicated on the declarations page, the business auto policy will pay the loss of use expenses. The insured still has to be legally responsible to pay the expenses, but the loss will be paid.
As with the personal auto policy, the coverages offered by the business auto policy are limited by certain exclusions. There is no exclusion for hurricane damage, but the policy will not pay for loss to tapes or discs or certain electronic equipment. If hurricane winds or hurricane-driven water destroy a covered auto and tapes or discs that the insured had in the auto, the business auto policy will cover the loss to the car but not the loss to the equipment. Individual auto policies may have their own unique exclusions and insureds need to be aware of what their policies will not cover.
There is one more thing that insureds with business auto policies should know. The auto policy has a deductible that applies for each covered auto. Hurricanes can damage many autos at the same time. The auto policy will pay for the damage done to each auto, but the listed deductible will be applied to each auto and not be applied on a per occurrence basis. For example, if the insured has five autos listed as covered autos on a business auto policy with a $500 deductible applying to each of those cars, and a hurricane sweeps in and damages all five cars, the deductible will be applied to each car. It will not be just one $500 deductible applied overall because there was damage caused by just one hurricane; recovery for each auto will be reduced by each auto’s own deductible. This will leave the insured paying a larger portion of the loss than he might have first thought.
Commercial Property Coverage
Hurricanes could produce property losses that may or may not be covered under the provisions of the current version of the ISO CP policy. The commercial property policy promises to pay for “direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.” Of course this promise is subject to the limitations and exclusions contained elsewhere in the policy.
A standard feature of property insurance forms is the coverage for direct physical loss of or damage to covered property caused by or resulting from windstorm.
The windstorm or hail clause found in the covered causes of loss section of the basic and broad forms of the ISO CP policies covers windstorm or hail, but excludes “loss or damage to the interior of any building or structure, or the property inside the building or structure, caused by rain, snow, sand or dust, whether driven by wind or not, unless the building or structure first sustains wind or hail damage to its roof or walls through which the rain, snow, sand or dust enters.”
A common type of claim reached by this exclusion is water damage to walls, ceilings, or personal property that occurs during a windstorm but for which there is no apparent source. Sometimes this type of damage results from seepage around window casings or eaves that are of adequate soundness for ordinary weather but not for hurricanes or similarly violent happenings.
Another consideration for windstorm coverage is the possible application of percentage deductibles that apply only to the windstorm or hurricane peril. ISO provides a Windstorm or Hail Percentage Deductible endorsement, CP 03 21, that modifies the application of the deductible so that a percentage deductible—1, 2, or 5 percent—applies to loss caused directly or indirectly by windstorm or hail. If loss from a covered weather condition occurs, and that loss would not have occurred but for the windstorm or hail, then that loss is considered to have been caused by windstorm or hail and the windstorm or hail deductible applies. Coverage may be on either a specific basis—for example, each building under a separate limit of insurance; or blanket—such as building and personal property in that building under a single limit of insurance.
ISO provides clear examples of how to apply the deductible and states that it is to be based upon the insured value of the building. However, company-specific forms may not be so precise. For instance, we received a question from an FC&S subscriber whose insured received a double dose of damage from both Charley and Frances in 2004. The insured’s policy contained a per coverage, per item deductible in lieu of per occurrence with no definition of what constituted an item or a coverage, and a 2 percent wind deductible that offered no information on how it would be applied if losses occurred at more than one location under blanket coverage. In this situation, we determined that the policy was not clear and was possibly subject to legal interpretation.
The subscriber’s question brought another question to light—are different storms considered separate events with separate deductibles and limits? While we determined that they are, some insurers may view damage to the same area of a building caused by different storms as continued damage from the first storm. Individual policies should be consulted to conclude how the storms should be viewed.
Windstorm is one of the causes of loss that may be removed from coverage of the commercial property program by endorsement. Its removal is made possible to avoid duplication of coverage for insureds that have windstorm insurance through a catastrophe pool or similar facility.
Windstorm or hurricane coverage may not be available to commercial insureds in certain coastal areas. These insureds may be able to turn to Beach or Windstorm plans that are offered in several states, including Florida and Louisiana.
Flooding Concerns with Hurricane Katrina
Windstorm is not the only cause of loss associated with a hurricane. One huge concern with Hurricane Katrina is flooding. Flood is an excluded peril under most commercial property forms, but coverage for eligible properties may be purchased through the National Flood Insurance Program (www.fema.gov/nfip). However, there is a thirty-day waiting period for new applications (they become effective at 12:01 A.M local time on the thirtieth calendar day after the application date and the presentment of premium, which must accompany application). There will be no coverage for any flood damage caused by Ivan unless a policy is already in place. It is important to note that the NFIP coverage does not include provision for business interruption losses. So, if a business is affected solely by flood waters and not by actual windstorm, business income insurance may not be available.
For more information on the National Flood Insurance Program, see the article that is located in this path on FC&S Online: Topics Home > Commercial Lines > Miscellaneous Lines > National Flood Insurance Program > National Flood Insurance Program—An Overview.
Other losses may result from power outages. In the special causes of loss form, CP 10 30, one exclusion states that the policy does not cover loss or damage caused by “the failure of power or other utility service supplied to the described premises, however caused, if the failure occurs away from the described premises.” The failure includes lack of sufficient capacity and reduction in supply. This would appear to apply to any loss of commercial property covered by the standard CP form.
The form gives back coverage for any loss or damage that results from a covered peril. If a fire starts in a business when the power goes out, any damage done by that fire would be covered.
Electronic equipment is especially susceptible to loss under these circumstances. Power that goes out quickly may damage circuits and other electronic equipment. Such equipment may also be damaged when the power is restored. The CP policy will not extend coverage to these types of losses.
It is also possible that businesses such as restaurants and grocery stores might suffer loss to perishables if their refrigerators quit. These losses are indirect or consequential and are covered only if the insured has purchased the appropriate endorsement.
A commercial property insured may purchase an endorsement to cover exposure to loss from an off-premises power failure, CP 04 17, Utility Services—Direct Damage This endorsement covers the CP insured’s property in case a specified utility service suffers direct damage from a covered peril. The endorsement allows the insured to specify a sublimit of personal property coverage for this peril or to choose to have the entire limit subject to this peril. The addition of the endorsement does not increase the limit of liability for the covered property.
It is important to note that coverage may vary greatly from policy to policy and this information is based on standard wording found in ISO policies.
Business Income (Business Interruption) Coverage
General Coverage Considerations
The operations of many businesses may be interrupted by hurricanes and resulting flooding, and many of these businesses will be turning to their insurance carriers with business income insurance claims.
It is important to note that business income insurance involves two aspects of loss: a suspension of business and a resulting loss of business income. One, without the other, will not result in a covered claim. In addition, typical business income (business interruption) coverage is triggered by a suspension of business that is caused by direct physical damage to or loss of property at the premises described in the policy. The damage must be caused by a covered cause of loss. While hurricane (windstorm) typically is a covered cause of loss, flood typically is not.
In general, insurance forms also include additional coverages that address specific loss situations, such as when a governmental entity shuts down premises or when computer operations are interrupted. A prime example of such loss situations is the closing of roads and bridges, as well as forced evacuations of areas that lay in the path of the hurricanes.
The issue of what constitutes “direct physical damage or loss” and whether this damage is caused by a covered cause of loss lies at the heart of all such coverage analysis. There is little doubt that the hurricanes of 2005 will wreak substantial direct physical damage, and coverage would be inferred as long as windstorm is a covered peril on the insured company's business income policy. The direct physical damage would have to happen on the insured's premises in order for a business's primary business income coverage to be triggered. However, auxiliary coverages—such as contingent business income or action of civil authority—may be triggered as long as the hurricane causes physical damage somewhere away from the premises, if the insured business operations are adversely impacted by the off-site damages.
The typical business income deductible is stated in terms of hours of interruption. The business suspension must last longer than the deductible in order for coverage to be available.
A potential issue may arise if flood is deemed the primary cause of business interruption to a property that is not damaged by wind. That may cause questions of fact as to whether the flood—or the originating hurricane—caused the business interruption. Likewise, if power outages, windstorm, and flooding all converge to cause a suspension of business, finders of fact may question whether the suspension should be covered by business income insurance or not. The details of a given situation may have to be studied to determine whether coverage is triggered or not. But, if windstorm can to any extent be determined as the cause of the suspension, coverage should be triggered.
These items are general considerations, but different types of insurance policies address the prospect of business income losses in various ways. The most broadly used forms (the ISO forms) are discussed in this context. Suffice it to say that if a company does not carry windstorm as a covered peril, business income coverage would not be available.
ISO Businessowners Policy (ISO Form BP 00 03 7/02)
BOP policies typically are used to address the insurance needs of small businesses. The current ISO BOP form provides property insurance on a special form perils basis. Business income insurance is built into the coverage form.
The covered causes of loss that are insured on the 2002 form are risks of physical loss unless they are excluded or limited in the form. However, some exclusions may affect the availability of business income coverage.
The BOP power failure exclusion states there is no coverage for:
Power Failure
The failure of power or other utility service supplied to the described premises, however caused, if the failure occurs away from the described premises (emphasis added).
But if the failure of power or other utility service results in a Covered Cause of Loss, we will pay for the loss or damage caused by that Covered Cause of Loss.
This exclusion does not apply to loss or damage to “computer(s)” and “electronic media and records.”
Since the power failure exclusion states that there is no coverage if the power failure occurs away from the described premises, a problem could arise if, for example, a business lost power (but was otherwise undamaged by the hurricane) because the hurricane knocked out transmission lines that were not on the insured's premises. However, if the windstorm caused damage to, say, a transformer on the described premises, the exclusion would not apply and coverage could be inferred.
Note, however, that the exclusion does not apply to loss or damage to computer hardware and software. So, if computer operations were suspended, causing a loss of business and lost net profit, coverage might be triggered—again as long as the deductible provision was met.
Business Income Coverage Specific to the BOP
The BOP form does include two auxiliary business income coverage grants that also should be reviewed. These are for business income losses arising from the action of a civil authority and for business income losses arising from dependent properties.
Civil Authority
In order for this coverage to be triggered, the insured must actually incur a loss of business income because civil authority prohibits access to the described (insured) premises. The coverage grant requires there be direct physical loss of or damage to property away from the insured premises as the result of a covered cause of loss.
The forced evacuation of areas of Louisiana and the closing of highways and bridges that lay in the path of a hurricane—which already had damaged property elsewhere—would appear to meet this requirement for coverage. Again, windstorm must be a covered cause of loss on the business's policy, and the business must sustain a loss of business income because it was shut down by the evacuation order.
However, a mere decrease in business because people didn't want to venture outside during a storm, absent a governmental order shutting down access, would not satisfy the criteria for coverage under the civil authority provision.
One other provision of this coverage also would affect coverage. There is a seventy-two-hour waiting period under the civil authority provision. In other words, a civil authority would have to shut down the business for three days before coverage is triggered.
Business Income from Dependent Properties
This BOP coverage grant provides up to $5,000 of insurance for damage to insured businesses that lose business income because one of their “dependent properties” is damaged by a covered cause of loss.
A dependent property is one that delivers materials to the insured, accepts the insured’s products or services, manufactures products under contract for the insured, or attracts customers to the insured’s business.
For example, a restaurant may be in a shopping center that is anchored by a large, prestigious department store. Shoppers might generate the bulk of the restaurant’s business. The occurrence triggering business income coverage for the restaurant would have to occur at the department store in order for coverage to emanate from the dependent properties provision.
Again, there is a requirement for physical damage at one of these properties that arises from a covered cause of loss.
Flood
While flooding caused by hurricanes could lead to business interruption losses, flood is not a covered cause of loss on most policies. Although flood insurance may be available to commercial property insureds through the National Flood Insurance Program, it is important to note that the NFIP coverage does not include provision for business interruption losses. So, if a business is affected solely by flood waters and not by actual windstorm, business income insurance may not be available
ISO Business Income (and Extra Expense) Coverage Form (CP 00 30 4/02)
This is a standard coverage form that is used to insure businesses that are larger than those that qualify for a BOP. It often is used in conjunction with a commercial property coverage form and a cause of loss form but may be written as a separate policy. The causes of loss form dictates what perils are insured. In this case we will review potential coverage as it would flow from a special form cause of loss provision, which insures all risks unless they are excluded or limited on the policy. It is similar to the BP 00 03 discussed previously.
The special causes of loss form CP 10 30 (10/00) includes exclusions that are applicable specifically to business income coverage. As with the BOP form, there is no coverage for:
(1) Any loss caused directly or indirectly by the failure of power or other utility service supplied to the described premises, however caused, if the failure occurs outside of a covered building.
But if the failure of power or other utility service results in a Covered Cause of Loss, we will pay for the loss resulting from that Covered Cause of Loss.
As with the BOP, this exclusion appears to clearly preclude any coverage for business income arising from an off-premises power outage. Coverage may be purchased for off-premises power failure, and if a business purchased that endorsement, coverage could be inferred if a hurricane tore down lines away from the insured premises, causing it to shut down even though there is no direct damage on the insured site.
The dependent properties and civil authority coverage discussed previously in regard to the BOP is similar to that found in the commercial property form.
Insurer-specific and Manuscript Business Interruption Forms
Many insurers have drafted their own business interruption forms, and some large insureds may have successfully negotiated language that would provide coverage in addition to that discussed previously.
However, most would probably still require direct physical loss or damage to some tangible property in some specific place. They also almost undoubtedly would have a waiting period.
Workers Compensation
Workers compensation coverage is available to employees who are injured in employment-related accidents. Therefore, employees who might be injured by a hurricane-related incident while in the course of employment typically would be successful in filing for workers compensation benefits.
Unraveling Insurance Coverage for Hurricane Katrina:
No Big Easy Task
as posted at cms.nationalunderwriter.com
Coverage Issues and Case Law
Summary: This article discusses coverage issues raised by a hurricane loss. Hurricane Katrina is the catalyst for this analysis, but the issues raised are common to any such disaster. Also presented is a summary of case law in which courts have resolved coverage disputes when hurricanes have caused property damage by wind, rain, and flood.
The author of this article is Mr. Randy Maniloff. Randy J. Maniloff is an attorney in the Business Insurance Practice Group at White and Williams, LLP in Philadelphia. He concentrates his practice in the representation of insurers in coverage disputes over primary and excess policy obligations for various types of claims, including construction defect, mold, general liability (products/premises), environmental property damage, asbestos/silica and other toxic torts, first-party property, homeowners, director’s & officer’s liability, a variety of professional liability exposures, including medical malpractice, media liability, community associations, public official’s liability, school board liability, police liability, computer technology liability, managed care and additional insured/contractual indemnity issues. The author expresses his gratitude to Gale White, Anthony Miscioscia, and Ira Bergman, also of the firm’s Business Insurance Practice Group, for their invaluable contributions to this article. The views expressed herein are solely those of the author and are not necessarily those of his firm or its clients.
Introduction
The pictures of destruction and despair caused by Hurricane Katrina are incomprehensible. While each one may be worth a thousand words, no descriptions are adequate to convey the tragic human suffering and loss of life and property that have taken place on the Gulf Coast since Katrina had her way.But as hard to believe as it is, this ravaged region will rebuild. History is full of seemingly impossible comebacks after natural disasters, and the Gulf Coast will eventually make its way to that list. Of course, it will take a lot of time, will, and money to make that happen. One catastrophe modeling firm placed an estimate of the economic losses caused by Katrina at $100 billion, with $35 billion of that amount being insured. But at this infancy stage, catastrophe modeling may be no more accurate that wetting your finger and holding it in the wind. Katrina’s final price tag—even an accurate preliminary assessment—is a long way off.The money needed to rebuild Louisiana, Mississippi, and Alabama will come from several sources—principally government, charity, and insurance. The federal government has initially pledged $10.5 billion in aid. And there will no doubt be a lot more where that came from. Relief organizations are moving heaven and earth to respond, as well as doing a superb job of getting Americans to open their wallets. And, lastly, many of the affected residents and businesses have surely begun to assess to what extent insurance may cover their enormous losses. Indeed, some insurers announced their potential financial exposure from Katrina within days of their appreciation of the extent of destruction.Some might call it selfish or callous to be thinking about insurance coverage at a time when caring for the dead and providing humanitarian relief for the thousands of evacuees are the principal tasks at hand. However, while food, water, medical treatment, and the like are the necessities of short-term humanitarian relief, the most important form of humanitarian relief will ultimately prove to be economic redevelopment. People can’t live in the Astrodome forever. Once the short-term crisis is stabilized, getting people back to their homes and places of work will become the real humanitarian issue. There is no doubt that insurance will play a significant role in that process. The insurance industry has substantial experience handling property losses from hurricanes. Last year alone the industry was required to respond to a hurricane trifecta in Florida—Charley, Frances, and Jeanne—as well as Ivan in Alabama. But Katrina is like no other hurricane. All hurricanes involve damage caused by wind and rain. But in Katrina’s case, this was just the opening act. Many of the claims that are made for property damage caused by Katrina’s destruction will involve a confluence of some of the following additional factors: flood, looting, vandalism, pollution, fire (arson and other causes), power failure, governmental action, mold, further deterioration of property on account of its inaccessibility for weeks, if not months, and the list could surely go on. Katrina will also likely cause far more claims for business interruption than normally results from a hurricane, even a powerful one. Not to mention, the business interruption claims will involve unusually long periods of interruption.[1]Given such a wide variety of causes of loss and that first-party property policies often significantly vary in their terms and conditions, it is difficult to describe a prototypical Katrina claim and what the insurance response may be. What’s more, first-party property claims in general are often complicated by the need to determine the "proximate cause" of a loss—a concept that one legal scholar says has caused more disagreement than any other in the entire field of law.[2] Considering all these factors, it is easy to see that the adjustment of property losses caused by Hurricane Katrina is shaping up to be an arduous and challenging process for all concerned.
Coverage Issues
Some of the causes of loss that will likely be at issue in Katrina claims are excluded by first-party property policies. For this reason, as claims evolve over the next few weeks and months, expect much discussion in coverage circles of the concepts of "efficient proximate cause" and "anti-concurrent causation" lead-in clauses. In the first-party property context, some courts have adopted the doctrine of efficient proximate cause, which provides that if a covered peril causes an excluded peril, coverage is available even for the damage caused by the excluded peril. This has been a commonly invoked doctrine in mold coverage cases, where sometimes a covered peril, such as a burst pipe, causes an excluded peril—mold.[3] The Louisiana Supreme Court addressed the efficient proximate cause rule in Lorio v. Aetna Insurance Company, 232 So. 2d 490 (La. 1970), a Hurricane Betsy case, but not involving flood damage. On the other hand, an anti-concurrent causation lead-in clause is prefatory language to a policy exclusion that is designed to override efficient proximate cause by precluding coverage for a certain peril, even if caused by an otherwise covered peril. For example, Insurance Services Office’s current Causes of Loss – Special Form (CP 10 30 04 02), accompanying ISO’s Building and Personal Property Coverage Form (CP 00 10 04 02), contains the following anti-concurrent causation lead-in clause to many of its exclusions, including those for flood, power failure, earth sinking, and mold: "We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss."[4] For a recent example of a Mississippi Appeals Court expressly relying on an anti-concurrent causation lead-in clause to preclude first-party property coverage, see Boteler v. State Farm Casualty Insurance Company, 876 So. 2d 1067 (Miss. App. 2004). Compounding the causation complexity is that ISO form CP 10 30 04 02 also contains exclusionary lead-in clauses that do not use anti-concurrent causation language, as well as certain otherwise excluded causes of loss that provide coverage if they result in a defined "specified cause of loss."[5] Examining Katrina claims in lay terms, it has been widely reported in the media that, in the case of a hurricane, private insurance covers damage caused by wind and rain, but that damage caused by flooding is not covered. Instead, flood damage is covered by policies issued by the National Flood Insurance Program. The Wall Street Journal has reported that, according to data from the NFIP, as of June 30, only one-fifth of homes and businesses in Mississippi in the areas most at risk for flooding were covered by flood insurance policies. In the case of Louisiana, the Journal reported that just less than half of such properties were covered.[6] There will no doubt be calls for insurers to simply disregard the terms and conditions of their policies and start writing checks. Recall that in the aftermath of September 11th some politicians sent a Don’t even think about it message to insurers when it came to the potential applicability of the war risk exclusion. The problem with insurers ignoring the terms and conditions of their policies is that they have customers in forty-seven other states to whom they owe an obligation of financial preparedness for their potential losses. Not to mention that the 2005 hurricane season does not end until November. While many property damage claims from Hurricane Katrina are going to be as unique as the storm’s tales of survival, some insight into how these claims may be handled can be had by examining decisions of courts that have addressed coverage for past hurricanes and floods—albeit without Katrina’s many complicating factors. One theme of these past cases—and one that will be prevalent in Katrina claims—is the inter-play between damage caused by wind and wind-driven rain versus flooding. In some cases, this will determine the extent to which damage is covered at all or shared between private insurance and the National Flood Insurance Program. Standard and Poor’s made this point in a statement released in Katrina’s aftermath. The ratings agency said: "Traditionally, water damage from hurricanes is only covered if it is wind driven. In the aftermath of Katrina, however, claims adjusters will find it difficult to differentiate wind-driven water damage from true flooding, so it will remain unclear how these losses will be allocated. The NFIP covers residential flood damage but not hurricane wind-driven water damage. To complicate matters, commercial property policies might or might not cover flood damage, depending on the specific policy. Flood damage, however, is covered under most auto insurance. "[7]
Case Law
What follows is a summary of how some courts, including several in Louisiana, have resolved coverage disputes when hurricanes have caused property damage by wind, rain and flood. Urrate v. Argonaut Great Central Insurance Company, 881 So. 2d 787 (La. App. 2004) Urrate involved coverage for damage to a restaurant caused by Hurricane Georges in 1998. Brunings Seafood Restaurant was doing business in a wood frame building on pilings over Lake Pontchartrain in Jefferson Parrish, Louisiana. Hurricane Georges made landfall near Biloxi, Mississippi and the restaurant was severely damaged, with part of the building being swept away. Brunings was insured by a flood policy issued by Omaha Property and Casualty—which covered damages from flooding and tidal waves—and a property insurance policy issued by Argonaut, which excluded such damage. Each insurer calculated the damage that it believed to be caused by the peril that it insured. Not satisfied with Argonaut’s determination, Brunings filed suit. Following a bench trial, the judge concluded that the glass damage, in excess of $35,000, was caused solely by wind and, thus, covered only by the Argonaut policy. The trial judge also disagreed with Argonaut’s determination that loss of business due to wind damage was limited to $9,500, for three days while electricity in the area was out. Instead, the judge determined that the restaurant suffered a business loss for the last quarter of 1998 of $80,000 and attributed 25 percent of that loss to wind damage. The judge also determined that the restaurant suffered a business loss for 1999 in the amount of $70,000 and attributed 15 percent of that loss to wind damage.[8] The Court of Appeal of Louisiana affirmed the decision of the trial judge:
Based on the manifest error appellate standard of review we cannot find error in the trial court ruling. It was the consensus of the adjusters that the restaurant suffered both wind and water damages. The trial court found that the business loss attributable to wind damage in 1998 and 1999 was 25% and 15%, respectively. A large part of the back of the building was gone, including the window wall across the back. Other windows in the restaurant were also broken. The roof was damaged and part of it was blown back over itself by wind force. The winds reached the 50 mile per hour range during the storm. Upon review of the record, we conclude that the trial court findings concerning the business losses attributable to wind damage are supported by the record. Although it might not have been the factual finding we would have made, we cannot say, based on the record that it was clearly wrong or manifestly erroneous. Urrate at 790-791.
This recent decision from the Court of Appeal of Louisiana demonstrates that allocation of property damage and lost business income between that which was caused by wind versus flood is fact-intensive. While the trial court was no doubt presented with evidence of the damage, and each side’s view of the cause, it is clear that the ultimate decision was far from a scientific certainty. Not to mention, consider how long the process took—nearly six years from the time of the hurricane (or seven and a half when you consider that the court’s decision was appealed—by both sides—to the Louisiana Supreme Court, which denied both Writs of Certiorari. Kish, et al. v. The Insurance Company of North America, 883 P.2d 308 (Wash. 1994) In Kish, the Supreme Court of Washington examined claims by several insureds against several insurers for damage to their homes when flood waters overtopped the protective dikes surrounding the Stanwood sewage lagoon in Stanwood, Washington. Each of the policies at issue contained an exclusion for loss resulting directly or indirectly from water damage, which was defined, in part, to include flood and overflow of a body of water. The coverage case went to trial on the issue of the "efficient proximate cause" of the damage to the plaintiffs’ houses, which the jury concluded was "record breaking rainfall in the Stillaguamish basin." The insurers argued on appeal that the trial court erred in ruling that rain was a distinct covered peril from the excluded peril of flood and, thus, sending the case to the jury for a finding of "efficient proximate cause" as between the two. The Supreme Court of Washington agreed and reversed the trial court. The Washington high court stated that "The efficient proximate cause rule applies only where two or more independent forces operate to cause the loss. ‘When, however, the evidence shows the loss was in fact occasioned by only a single cause, albeit one susceptible to various characterizations, the efficient proximate cause analysis has no application.’" Kish at 311 (citation omitted). The Kish court held that rain and flood are not distinct perils, and, therefore, the trial court erred in sending the "efficient proximate cause" question to the jury. "We believe the average purchaser of insurance would expect that the term ‘flood’ would encompass rain-induced flood. Rain is a well-recognized and common part of a flood." Kish at 312. In reaching this conclusion, the Kish court was also influenced by the fact that the plaintiffs lived on a nationally recognized flood plain and knew that flood would be excluded by any insurance they purchased, as exemplified by the existence of the National Flood Insurance Program. The court noted that one plaintiff had previously had flood insurance, another was advised of its existence, and a third had sued her agent for failing to advise her of the need for flood insurance. [Incidentally, for an example of a Louisiana court discussing an insurance broker’s professional liability for failure to advise of the need for flood insurance for Hurricane Juan, see Durham v. McFarland, Gay and Clay, Inc., 527 So. 2d 403 (La. App. 1988).] Lastly, the Kish court made the following observation concerning its decision: "[A]ny application of the efficient proximate cause to the facts of this case would make it difficult for any insurer to ever exclude flood damage without excluding all rain damage. This would be an unfortunate occurrence for insureds because that could result in less coverage for insureds in this state." Kish at 313. Durkin v. Federal Emergency Management Agency, 1987 U.S. Dist. LEXIS 6894 (E.D. La.) Durkin involved coverage under a Standard Flood Insurance Policy issued by the National Flood Insurance Program for property damage allegedly caused by Hurricane Juan in 1985. The adjusters assigned by the NFIP concluded that the damage to the insured’s two-story structure was not caused by flood. One adjuster testified that he inspected the property sixteen days after the flood and observed extensive deterioration of the structure. He testified that he found no evidence of flood water damage within the house, such as telltale water marks. He also testified that water marks on the structure's piers indicated that water did not enter the house. Another adjuster testified that he too was unable to find any water marks in the structure and that, in his opinion, the water damage was caused by broken windows and missing door frames. The court concluded that the government’s testimony was credible and established as a matter of fact that the insured’s property was in an advanced state of deterioration prior to the flood and that the flood waters did not enter the subject property. In support of its decision, the court made the following interesting observation about the credibility of the government’s witnesses: "The Court places particular weight upon the testimony of both Mr. Deihl and Mr. Paige as both were paid by National Flood Insurance on a rising scale tied to the value of a given claim; that is, the higher the value of the claim, the higher the fee. In the instant case, both received the lowest possible fee for their inspections." Durkin at *5. Southern Hotels Limited Partnership v. Lloyd’s Underwriters at London Companies, et al., 1997 U.S. Dist. LEXIS 8384 (E.D. La.) The Travelodge Hotel in Harvey, Louisiana, a suburb of New Orleans, sustained wind, rain, and flood damage from Hurricane Andrew in 1992. The hotel was insured under a policy covering wind and water damage, but flood damage was subject to a $200,000 deductible (the hotel was insured under a NFIP policy for $200,000). The court was required to determine the availability of coverage for several aspects of damage, noting that the following burden of proof applied: "The plaintiff has the burden of proving both the damage and the causal connection between the damage and the covered cause of loss. This proof must be shown by a reasonable preponderance of the evidence, and with some detail and specificity. A mere possibility of causation and damage are insufficient." Southern Hotels at *16 (citation omitted). The insured sought the cost of replacing the entire roof, which was aged and had preexisting problems. The court concluded as follows:
While it is difficult to segregate the repairs necessitated by the storm damage from the complete roof replacement actually performed, the Court finds a logical starting point for this task in the cost of the roof repairs which were done immediately after the [insured] purchased the hotel in order to remedy leaks and prevent future leaks, which is $15,000. Certainly, as a result of the storm, this work would have been necessary to ensure that the roof membranes were sound and would have placed the roof back in the condition in which it was prior to the storm damage, in addition to emergency repairs. Southern Hotels at *10 - *11.
Turning to the claim for replacement of furniture, the court determined that no coverage was available as all such damage was caused by flood or sewer back-up as a result of a power outage originating off the premises, which was also excluded by the policy. "While certainly some water did leak through the roof as a result of high winds, and wet the ceilings, walls, and insulation, there were no walls blown away such that furniture was damage (sic) by wind-driven rain." Southern Hotels at *11. As for the insured’s claim for interior repairs, the court concluded that 35 percent was caused by wind-driven rain, and, hence, covered, while 65 percent was caused by flood and excluded from coverage. "In fixing this amount, there is no mechanical rule which applies with exactitude, but instead the Court fixes the amount based upon the facts and circumstances shown by the evidence at trial." Southern Hotels at *20. Loyola University v. Sun Underwriters Ins. Co. of New York , 93 F. Supp. 186 (E.D. La. 1950), affirmed 196 F.2d 169 (5 th Cir. 1952) In Loyola University, the Louisiana federal court examined coverage for several structures that were damaged when a hurricane struck the Shell Beach–Yscloskey area of St. Bernard Parish in September 1947. Under the policy at issue, the insured was entitled to recover "for all direct loss or damage caused by the hurricane winds and for all loss or damage caused by water or rain to the interior of the property and the contents thereof where such water or rain entered the property through openings in the roof or walls made by the direct action of the wind." Loyola University at 190. The court held that the structures were destroyed by the direct action of the hurricane force winds. It reached this conclusion by determining that, at the time of their destruction, the water in the Shell Beach area, while rising, was still below the elevation of the structures. The Loyola University court set out the following evidentiary rules:
Where the insured produces an eye witness whose testimony proves that the wind, and not the waves, destroyed the insured property, proof is made of damage or destruction coming within the coverage of the policy, but where a witness testifies only to seeing a part of the insured property destroyed by the wind, that is not full proof of destruction of the other property by the wind, but such testimony is evidence to be considered with the other evidence in the case. Ebert v. Pacific National Fire Insurance Co., La. App., 40 So.2d 40; Pennsylvania Fire Insurance Co. v. Sikes, 197 Okla. 137, 168 P.2d 1016, 166 A.L.R. 375; Home Insurance Co. v. Sherrill, 5 Cir., 174 F.2d 945.
If the cause of the damage or destruction by not the direct result of the wind alone, but the damage or destruction by (sic) caused by a combination of wind and water, and the damage by either cannot be separated, then, there can be no recovery under the burden of proving the cause of the damage, and if it fails to make that proof, it cannot recover. National Fire Insurance Company v. Crutchfield, 160 Ky. 802, 170 S.W. 187, L.R.A. 1915B, 1094. Loyola University at 190.
Given that many Hurricane Katrina claims will involve damage caused by both wind and flood, the Loyola University court’s statement that coverage is not available if the damages cannot be separated could be a significant issue in the weeks and months ahead as claims are considered. See also Constitution State Insurance Company v. Werner Enterprises, Inc., 1987 U.S. Dist. LEXIS 6023, *1-*2 (E.D. La.). (Citing Loyola University, the court stated: "If the cause of damage under a windstorm policy is not the direct result of wind alone, but caused by a combination of wind and water, then the insured bears the burden of proof and may not recover unless it proves that the damage can be separated and that the loss or damage was the direct result of wind.") Ludlow Corporation v. Arkwright-Boston Manufacturers Mutual Insurance Company, 317 So. 2d 47 (Miss. 1975) Ludlow involved coverage for personal property that was damaged during Hurricane Camille in 1969. The personal property had been stored in a warehouse. The insured alleged that his losses were approximately $2 million. The insurer argued that the damage was not covered because it resulted from flood, tidal waves, wave wash, or water damage to property situated below the flooded high water mark. The jury returned a verdict in the amount of $108,000. Addressing the evidence that the jury heard, the Mississippi Supreme Court stated:
It was appellant’s contention that rain entered the buildings wherein its property was situated, through openings or holes created by wind damage. Hurricane Camille struck the Mississippi Gulf Coast on the night of August 17, 1969, and was accompanied by high velocity winds. Some of the winds were of near 200 miles per hour in gusts. As a part of this terrible storm, large quantities of water assaulted the buildings in the form of ocean waves and heavy rains. The jury heard testimony that water in the vicinity in question rose to about ten or twelve feet above the floor of the dock and as high as the top of the door of the warehouse. Other evidence heard by the jury indicated the physical conditions of the building after the storm, showing that the water had reached a height of ten to twelve feet above the warehouse floors. During the storm the roof of the transit warehouse was punctured in many places by flying missiles but in a large measure remained intact, although the walls were gone. There was also given the jury expert testimony (that given by Mr. Young, being challenged here) on behalf of the appellee that the walls were destroyed by flood water and that the valuable personal property (jute) which was damaged in the storm was washed out of the warehouse by the surging tide. Ludlow at 48.
While the issues in Ludlow were principally related to evidentiary rulings by the trial court, the Mississippi Supreme Court held that the inadequacy of the verdict, from the insured’s perspective, was a direct result of the failure of the proof to establish an insured loss to the property. "[T]he jury verdict cannot logically be said to be unresponsive to the evidence." Ludlow at 51. State Fire and Tornado Fund of the North Dakota Insurance Department v. North Dakota State University, 694 N.W. 2d 225 (N.D. 2005) In June 2000, a severe rainstorm—seven inches in seven hours—hit Fargo, North Dakota. Water on the surface of the ground outside the FargoDome began cascading through its loading dock doors and more than eight feet of water eventually covered the floors of the Dome. Significant amounts of water from the FargoDome (which is not owned by North Dakota State University) made its way to a NDSU heating plant and computer center through a 4,295 foot-long steam tunnel. NDSU’s insurers disclaimed coverage on the basis that the water damage was excluded by their policies’ flood and surface water exclusions. NDSU challenged these determinations, arguing that the water lost its status as "surface water" when it entered the steam tunnel, heating plant, and computer center. The Supreme Court of North Dakota did not agree. Instead, the court held that "surface water does not lose its character as surface water simply by being artificially channeled underground." North Dakota State University at 233. After examining several courts nationally that have confronted the surface water issue, the North Dakota high court agreed with the lower court’s reasoning:
Similar to the Smith case, this Court finds that the water that entered the FargoDome was surface water. Prior to entering the FargoDome, the rainwater accumulated in the Fargo area without forming a definite body of water. The subsequent traverse into the Steam Tunnel did not change the water’s character by following a defined watercourse, in part because the Steam Tunnel was never meant to carry water, unlike the trenches in Heller. It would be no different than if surface water had entered the first floor of a house and percolated into the basement through a stairwell. It would be absurd to classify a stairwell as a channel, or that the water’s character had changed from surface water to water within a system. In the same fashion water entering the Steam Tunnel did not change the character of the surface water which inundated the FargoDome. North Dakota State University at 232-233.
The North Dakota State University court also approvingly noted a recent decision from the Texas Court of Appeals, holding that the rain from Tropical Storm Allison that rushed into the convention center in downtown Houston, broke through an interior basement wall, flowed into a parking garage, then into the pedestrian tunnel system, and finally into the Bank of America building remained surface water. The damage from water that entered the building’s electrical equipment and forced a law firm to relocate, causing it to seek coverage for lost business income and extra expenses, was excluded by the policy’s exclusion for "losses due to flood, surface water, overflow of any body of water, or from water under the ground surface." See Valley Forge Insurance Co. v. Hicks, Thomas & Lilienstern, LLP, 2004 Tex. App. LEXIS 11301. NDSU also argued that the lower court failed to consider all of the events in the chain of causation leading to water entering and damaging the steam tunnel, the heating plant, and the computer center. According to NDSU, there were four "links" in the "chain of causation:" (1) the "rain;" (2) the "accumulation of surface water that occurred on and around the NDSU campus;" (3) the "water diversion into the basement of the FargoDome, which could not be flood or surface water;" and (4) the "non-excluded water that suddenly entered NDSU's otherwise dry, underground Steam Tunnel." NDSU claimed that a jury should have been allowed to determine which of these events was the efficient proximate cause. North Dakota State University at 234. Citing the Supreme Court of Washington’s decision in Kish, supra that rain and flood are not two separate perils, the North Dakota State University court rejected the insured’s argument that the lower court erred in failing to apply the "efficient proximate cause" doctrine. "The fact that the water took 9 to 10 hours to reach the IACC [computer center] and Heating Plant is irrelevant. The length of time was merely a result of one continuous flowing of the water. *** The undisputed facts establish that surface water, an excluded peril under both insurance policies, was the only cause of water damage to the steam tunnel, the heating plant, and the IACC." North Dakota State University at 235. Morehead v. Allstate Insurance Company, 406 F.2d 122 (5 th Cir. 1969) Morehead is a brief Louisiana federal court decision addressing coverage for a frame dwelling that was destroyed by Hurricane Betsy in 1965. At issue was the applicability of the policy’s exclusion for "loss caused by, resulting from, contributed to or aggravated by *** flood, surface water, waves, tidal water or tidal wave, overflow of streams or other bodies of water ***." The insured argued that the dwelling was destroyed by wind, a covered peril. The trial judge disagreed and the Fifth Circuit affirmed:
After a full hearing in which several "eye-witnesses" and expert witnesses testified, the Court found as a fact that the loss was occasioned by the house having floated from its piers and later having settled on the ground; that there was no evidence that the structure was damaged by wind; that the loss, therefore, was not due to one of the perils insured against. * * *
[W]e are unable to say that the choice which the Trial Court made, namely, that the evidence showed that the loss occurred because of water damage rather than directly as the result of wind damage, is incorrect. Morehead at 122.
Conclusion
It is much too early to say how the principal first-party property coverage issues for damage caused by Hurricane Katrina will play out. A review of past cases addressing coverage for hurricane-related damage, including several from Louisiana, reveals that, when courts are required to allocate between damage caused by flood and that which was caused by wind and wind-driven rain—a task that will clearly be required for Katrina claims—the decisions are highly fact-intensive, are admittedly non-scientific, and sometimes take several years from the time that it stopped raining. Coincidentally, less than one month before Katrina hit, the Louisiana Court of Appeals denied rehearing of its June 2005 decision in Jean Boudreaux and the Victims of the Flood on April 6, 1983 on the Tangipahoa River v. The State of Louisiana, Department of Transportation, et al., 906 So. 2d 695 (La. App. 2005), rehearing denied 2005 La. App. LEXIS 1922 (August 2, 2005), in which it addressed claims for damages brought against the State of Louisiana by a class of individuals whose homes and businesses were flooded in 1983. It was alleged that the State designed and built the Interstate 12 Bridge over the Tangipahoa River in such a negligent and improper manner that it disrupted the natural flood plain, causing the river’s rising waters to flood the plaintiffs’ properties. Just twenty-two years after the flood, the Louisiana Court of Appeals issued a decision addressing and upholding various damage determinations made by the trial court, including for personal property losses, cost of repair, lost wages, psychological damages, depreciation in property value and business interruption. Needless to say, somebody, somewhere, is already thinking about potential litigation over the breaches in the New Orleans levee system.
End Notes
[1] A discussion of business interruption coverage issues is well-beyond the scope of this article. For a Louisiana decision on this subject, following a flood that caused a furniture showroom to be closed for 67 days, see Levitz Furniture Corporation v. Houston Casualty Company, 1997 U.S. Dist. LEXIS 5883 (E.D. La). The Levitz court addressed whether business interruption loss earnings may include sales Levitz would have made in the aftermath of the flood on account of increased consumer demand and whether the period of interruption is limited to the actual period of business closure. The decision also contains some other causation issues, but not related to wind and rain versus flood.
[2] See In re Estate of Eliasen, 668 P.2d 110, 119 (Ida. 1983) (Describing proximate cause as "exceedingly complex and difficult," the Idaho Supreme Court went on to cite a leading scholar on the subject: "There is perhaps nothing in the entire field of law which has called forth more disagreement, or upon which the opinions are in such a welter of confusion. Nor, despite the manifold attempts which have been made to clarify the subject, is there yet any general agreement as to the proper approach." W. Prosser, Handbook of the Law of Torts, at 236 (4th ed. 1971).
[3] Bowers v. Farmers Insurance Exchange, 991 P.2d 734 (Wash. App. 2000) is a classic example of a court's use of "efficient proximate cause" to find coverage for damage caused by an excluded cause of loss. In Bowers, the insured sought coverage under a Landlord's Protection policy for mold damage to her home that resulted when tenants converted the home into a marijuana growing operation. The policy at issue provided coverage for vandalism and malicious mischief, but excluded coverage for mold. The insured argued that while mold growth was the immediate cause of her loss, the "efficient proximate cause" of the loss was not the mold, but the vandalism of her tenants. The court agreed, holding that when the insured can identify an insured peril as the proximate cause, there is coverage, even if subsequent events in the causal chain are specifically excluded from coverage. The Bowers court concluded that, "It was the tenants' acts, which 'in an unbroken sequence … [produced] the result for which recovery is sought[.]'" Bowers at 738.
[4] Dahlke v. Home Owners Insurance Company, 2003 Mich. App. LEXIS 3424 provides a clear illustration that insurers are free to contract around the "efficient proximate cause" doctrine. In Dahlke, homeowners sought coverage for mold damage caused by melting snow and ice that leaked into their house. The insureds argued that, despite the mold exclusion, coverage should be afforded because the mold damage was caused by an otherwise covered event. The Dahlke court rejected this argument, on the basis that the policy language did not support it. The court stated: "In our opinion, this interpretation is contrary to the clear and unambiguous terms of the insurance policy which excludes losses caused 'directly or indirectly' by any of the named conditions or events, 'whether or not any other cause or event contributes concurrently or in any sequence to the loss.' The language of the exclusion is typically referred to as 'anticoncurrent causation' because it expressly excludes coverage for losses directly or indirectly caused in whole or in part by one of the listed causes of loss. As applied in this case, the 'anticoncurrent causation' language of the policy excludes coverage for damage resulting from mold even though the mold itself may have formed as the result of a covered event." Dahlke at 10.
[5] ISO's Causes of Loss – Special Form (CP 10 30 04 02) defines "Specified Causes of Loss" as "Fire; lightning; explosion; windstorm or hail; smoke; aircraft or vehicles; riot or civil commotion; vandalism; leakage from fire extinguishing equipment; sinkhole collapse; volcanic action; falling objects; weight of snow, ice or sleet; water damage [as the result of the breaking apart or cracking of a plumbing, heating, air conditioning or other system or appliance located on the described premises]."
[6] Theo Francis, "Many in Areas Hit by Flooding Lack Insurance," The Wall Street Journal, August 31, 2005, at A5.
[7] "S&P Says Insurers Face Post-Katrina Uncertainty," September 1, 2005 Statement of Standard & Poor's, reported in Insurance Newscast, September 2, 2005, available at www.insurancebroadcasting.com.
[8] The Urrate court also found that Argonaut lacked a good faith basis to deny coverage and awarded penalties of double the insured loss. The penalties were reduced by the Court of Appeal to $10,000— $5,000 for the breach concerning the glass damage and $5,000 concerning the business income.
Homeowners Wait for Claims To Be Adjusted
Industry Chokes on Volume of Work Views
by Dean Starkman and Albert B. Crenshaw
Washington Post Staff Writers
as posted at washingtonpost.com
Thursday, September 29, 2005; D01
WIGGINS, Miss. — Brenda Manning, whose home in Escatawpa, Miss., was nearly submerged by Hurricane Katrina, is resigned to the idea that her insurance policy probably won't cover much of the damage. Her homeowner's policy, like many, excluded flood coverage.
But the 34-year-old mother of two needs to know for sure before she can move on with her life. Before she can apply for help through the Federal Emergency Management Agency, she must demonstrate that her insurance company has investigated and denied the claim.
"I'm still waiting to hear from them," she said yesterday.
The one-two hurricane punch of Katrina and Rita has strained the insurance industry's ability to answer phones, investigate claims and get money into the hands of shattered survivors of the storms.
Some 10,000 insurance adjusters are deploying in the Gulf Coast region to handle more than 1 million claims expected to result from Katrina and Rita. But their progress has been slowed by their inability to inspect houses in inaccessible sections of the disaster areas and by the sheer bulk of the claims.
Katrina-related claims are expected to total between $35 billion and $60 billion — an industry record even on the low end — and Rita claims could reach $7 billion.
Many policyholders will pick up a major share of costs for their uninsured losses, and down the road, insurance premiums are likely to be higher — for less coverage — particularly in the regions where the hurricanes hit.
An insurance industry spokesman said it was too soon to know the extent of rate increases. J. Robert Hunter, a former Texas insurance commissioner who heads the insurance section of the Washington-based Consumer Federation of America, said premiums in some parts of Florida rose between 10 percent and 25 percent after last year's four hurricanes.
But for now, claims-handling is the most pressing issue for policyholders. While some homeowners report prompt service under difficult circumstances, others complain of busy signals, unreturned calls and dangling claims waiting for an insurance adjuster's visit.
Irate homeowners have flooded insurance departments with complaints about claims denied on the basis of the flood exclusion. "I'm just getting killed about it," George Dale, Mississippi's insurance commissioner, said three weeks after Katrina hit. "I'm the messenger, and I'm the one they shoot."
And Mississippi Attorney General Jim Hood has sued insurers, asking a state court judge to stop, among other things, what he described in a statement as "unscrupulous" adjusters from requiring policyholders to waive flood-related claims to receive immediate living expenses.
Robert Hartwig, an economist for the Insurance Information Institute, a New York-based trade group, said insurers had already fielded hundreds of thousands of claims and adjusted "large numbers" of them under extraordinarily difficult circumstances.
"It's proceeding smoothly," he said. "Everyone gets through, eventually."
Consumer groups, however, report hearing a range of complaints from policyholders. Among them: that insurers are sending inexperienced claims adjusters who are too apt to deny claims.
"They're hiring anyone with two legs," said Amy Bach, executive director of United Policyholders, a San Francisco-based consumer group. "Of course, they're going to err on the side that things are not covered."
Insurers are not required to disclose how quickly they investigate claims or how many they deny. And totals of Katrina- and Rita-related complaints to state regulators are not yet available, making it hard to judge the extent of problems.
But claims-handling problems have cropped up, for instance, at the Louisiana Citizens Property Insurance Corp., a state-owned carrier of last resort managed by a unit of American International Group Inc.
Victoria Glodd, 64, whose New Orleans home was submerged by Katrina, tried for weeks to get living-expense money she says is owed under her homeowner's and flood policies before getting a call back on Tuesday. Glodd lives in a motel room in Laplace, La., with a daughter and granddaughter and her 85-year-old husband, Leander, who needs heart medication. The Red Cross pays for the room for now, she says, while the family relies on a local church group for clothes.
She said that when she called Louisiana Citizens, the line was busy or a receptionist took a message that was not returned.
"Terrible, terrible, terrible," she said on Monday, sobbing. "I have a claim number, but that's all I have is a claim number."
On Wednesday, she picked up a $1,500 check, already made out in her name, at a desk set up in a shopping center parking lot in Baton Rouge.
AIG had been managing claims for Louisiana Citizens under a contract that expired Sept. 16. Charles R. Schader, AIG's senior vice president for claims, said that before Katrina hit, the AIG unit had halved its staff in anticipation of the contract's end. He said the unit agreed to stay on, bringing in additional staff members and housing them in recreational vehicles. The unit is processing 60,000 new claims, following 15,000 to resolution and referring the rest to new vendors taking over the contract. The new vendors may have mishandled some claims, he said.
"Everyone is scrambling to throw all the resources we can at it," he said.
Louisiana's insurance commissioner, J. Robert Wooley, said the company was working to solve the problems and urged homeowners to have patience. "This is a marathon, not a sprint," he said.
Gulf-area residents are getting a crash course in collecting homeowner's insurance, which can be arduous even in normal times. Insurance companies generally require policyholders to fill out a claim form, also called a "proof of loss" form; make an inventory of damaged items; and keep receipts from temporary repairs.
Some insurers pay small advances to displaced homeowners for living expenses even before they are able to inspect the property. State Farm Insurance Cos. says it sent out tens of thousands of $2,500 checks to policyholders who were subject to mandatory evacuation and were not able to return quickly to their homes. Lexington Insurance Co., an AIG unit, says it sends living expenses — $1,500 or so — via Western Union to all policyholders making a claim regardless of whether it turns out to be valid.
But for benefits to start flowing, insurance companies usually require a visit to the property by an adjuster, or claims investigator, who estimates the total damage amount, makes a ruling on the cause and sends the paperwork back to the home office for a final decision.
Insurers have dispatched platoons of adjusters to the region, housing them in private homes, recreational vehicles and even ships docked in the gulf. State Farm, which has more than 25 percent of the market in much of the Gulf Coast region, moved 3,100 employees to Mississippi, Louisiana and Alabama to add to the 3,000 it already had in those states, a spokesman said. Plans for beefing up the Texas operation aren't set, he said.
Whether the extra troops are enough is a question.
Randy Lanoix, who owns an independent agency in Lutcher, La., near New Orleans, says most of his 3,500 customers have been able to contact their insurance company, but it is not clear when their claims will be investigated.
"If the companies had their wish, they would certainly take a lot more" adjusters, he said. "They got their bodies spread wide and thin."
Edward T. Whiting, an independent adjuster based in Eatonton, Ga., who is working for three major insurance companies on Katrina-related claims, said the physical obstacles have slowed the pace of his work, from adjusting as many as seven claims a day to two or three. On a recent Thursday, for instance, he drove from Mississippi to adjust a claim in Harahan, La., only to be turned back by authorities because of concerns about Hurricane Rita.
Whiting said he expects to be working in the area for a while. "Put it this way: I rented an apartment for six months," he said.
Starkman reported from Mississippi and New York. Crenshaw reported from Washington.
United Policyholders is a non-profit organization founded in 1991 and dedicated to educating the public on insurance issues and consumer rights. UP publishes educational materials and serves as a resource for individual and business policyholders and residents of communities with insurance problems. UP’s Amicus Project provides information to courts of law to support policyholders’ legal rights. UP unites policyholders and their advocates by sharing information. Write to UP at 110 Pacific Ave., PMB 262, San Francisco, CA. 94111, call us at (510) 763-9740, or visit our website at www.unitedpolicyholders.org.
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