Insurers are starting to deploy adjusters to handle claims from Hurricane Sandy. An article in yesterday’s Wall Street Journal reports that “Disaster-modeling firm AIR Worldwide estimates the industry’s share of losses at $7 billion to $15 billion. At the high end of that range, Sandy would become the third-most expensive storm for insurers in U.S. history.” On Monday, an article in the New York Times by Mary Williams Walsh and an article in PropertyCasualty360 by Chad Hemenway reported that catastrophe modeler Eqecat predicts total economic damages at between $10 billion and $20 billion, with insured losses between $5 billion to $10 billion. The Times reports that the top three homeowners’ insurers in New York are State Farm, Allstate and Travelers.
The reason for the large gap predicted between economic losses and insured losses is that a substantial portion of the damage is caused by flood and is either uninsured or underinsured. Flood insurance is available for homeowners from the National Flood Insurance Program, but many people buy only the amount necessary to cover their mortgage (not insuring their equity) or buy the maximum of $250,000 on a property that has a higher replacement cost (excess insurance above that amount is often available in the private market but expensive). For commercial properties insurance is often available in the private market, and relatively small commercial properties can be insured through the National Flood Insurance Program.
Insurers will be denying claims where flood is not covered by their policies, and segregating damage between wind and flood, similar to the adjustment of claims following Hurricane Katrina. Given that our firm was extensively involved in defending insurance companies in lawsuits from Hurricane Katrina, including the all-important litigation over the flood exclusion, we thought we would offer here some thoughts on what claim executives and in-house counsel might want to focus on now:
- Some states have specific deadlines for certain claim-related activities, which may or may not be extended for catastrophes, and violation of these deadlines sometimes results in automatic penalties. The Louisiana Supreme Court’s decision in Oubre v. Louisiana Citizens Fair Plan, 79 So. 3d 987 (La. 2011) awarded penalties of $5,000 per claim for every adjustment that was not initiated within 30 days in compliance with a Louisiana statute, without any showing of bad faith (for more, see this blog post on Oubre). The verdict against Louisiana Citizens Fair Plan was over $100 million with interest.
- It is not clear yet whether hurricane deductibles can be applied. This often depends on whether the storm constituted a “hurricane” within the meaning of policy provisions that are triggered by a “hurricane.” State insurance departments may offer some guidance on this. We will continue to follow this issue closely on this blog.
- Segregation of wind and flood damage is likely to become a key battleground. The Katrina decisions on this include Leonard v. Nationwide Mutual Ins. Co., 499 F.3d 419 (5th Cir. 2007), Corban v. USAA, 20 So. 3d 601 (Miss. 2009), and Arctic Slope Regional Corp. v. Affiliated FM Ins. Co., 564 F.3d 707 (5th Cir. 2009). For more on this, see our Hurricane Isaac blog post. The new COASTAL Act could also come into play on this, although as far as I can tell FEMA has not yet promulgated regulations under that Act (if you know more about this please let me know so I can keep readers informed). For more on the COASTAL Act, see our prior post about the COASTAL Act.
- Homeowners’ insurers will receive claims for living expenses, power failure-related losses, and tree damage. Often coverage for living expenses applies only if there was damage caused by a covered peril (wind) that makes the insured residence unfit to live in, but coverage will depend on the specific policy language, which varies. Is there coverage for lost food in your refrigerator and freezer when the power goes out? Again, that will depend on how the policy is worded, and sometimes it can depend on whether the power failure occurred on the insured premises or off premises. Is there coverage for a tree that falls down? Often there is no coverage unless the tree hits the residence, but again that depends on the specific policy language.
- For commercial properties, business interruption coverages will be key. Commercial property policies typically cover losses of business income only if the suspension of business operations is caused by damage to the insured property resulting from a covered cause of loss. So this can become a debate over the extent to which damage was caused by wind versus flood, unless the policy covers flood (some commercial properties do). These policies often also provide civil authority coverage where government authorities prohibit access to the business premises, but this coverage also is often limited to circumstances where the prohibition on access results from property damage to adjacent property caused by a covered cause of loss (wind). An evacuation order that results simply from the threat of property damage may not trigger any coverage. Some commercial property insurance policies also provide contingent business interruption coverage. For more on that, see our October 12, 2012 blog post.
- Good customer service helps avoid lawsuits. Adjusters won’t always be delivering good news to insureds following Sandy because many policies do not cover flood and a lot of the damage was caused by flood. How that news is delivered and how people are treated can make a difference in reducing the number of lawsuits your company receives. Insureds who have a more positive experience in their interactions with the company, even when bad news is being delivered, will be less likely to file a lawsuit. Even lawsuits that seem relatively frivolous cost money to defend, and meritless class action suits cost more. And even where a lawsuit is filed, it is always helpful in defending the case when the insured at her deposition and trial admits that Jane Smith the adjuster was so nice and explained things to her so well.
- Start putting a plan together for coordinating the litigation that inevitably will follow the storm. In Louisiana following Katrina, some plaintiffs’ lawyers filed suits in Baton Rouge, including class actions, before the New Orleans courts were even open. I wrote an article with Louisiana lawyer Seth Schmeeckle on “Handling the Flood of Coverage Litigation: Lessons Learned from Hurricane Katrina.” Seth and I spent several years coordinating the Katrina litigation. We talk about several important strategies that can be used, including: (1) establishing coordination among defense lawyers and using test cases for seeking court resolution of critical issues; (2) recognizing the unique issues of judicial ethics that can occur when a widespread catastrophe affects everyone living in the affected area; (3) moving to strike class allegations in putative class actions; (4) using methods to efficiently resolve large amounts of smaller suits, such as establishing a protocol to administratively stay cases, conduct written discovery, and then have settlement negotiations; and (5) taking measures to minimize possible class action tolling of suit limitation provisions in insurance policies.