|January 2, 2013|
Hurricane Sandy will require insurers, insureds, counsel and the courts to revisit many of the coverage issues that arose out of the numerous hurricanes that the Gulf States have experienced. As we all know, hurricanes involve high winds, cause water to flood the land, bring extreme amounts of rain and cause power outages to public utilities. The coverage issues involve not only sorting out which of these perils are covered under a given policy, but also what is the efficient proximate cause of a given loss.
The Coverage and Exclusions
Most homeowner policies are fairly standardized by the insurance industry in terms of property coverage. Coverage for the dwelling structure is usually written on an “all risk” basis, meaning damage to the home is covered unless it results from an excluded peril. The coverage for contents or personal property is normally on a “named peril” or a “specified peril” basis, meaning that a loss is covered only if it results from one of the specifically listed causes, and only if no exclusions apply. Some policies utilize this “named peril” approach to the dwelling structure coverage also.
A typical homeowner policy excludes water damage resulting from flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind. Mold is usually excluded no matter how caused. Some insurers afford coverage for mold subject to a special limit. Many policies also exclude loss resulting from acts, or decisions, including the failure to act or decide, of any person, group, organization or governmental body (i.e. levee issues).
The standard ISO Commercial Property policies issued to businesses are written to cover all risks of direct physical loss to covered property unless the loss is excluded or limited by policy provisions. Among the typical exclusions are water, meaning flood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not. The exception is for water that results in fire, explosion or sprinkler leakage. Commercial policies generally cover fire resulting from artificially generated electrical current.
The Coverage Issues
Homes and commercial buildings were damaged by Hurricane Sandy, but that is not a sufficiently specific description of the facts to enable anyone to determine whether a claim is covered. As was the case with respect to insurance claims brought due to Hurricane Katrina, and prior Gulf events, a detailed understanding as to what damage occurred and what caused each item of damage must be undertaken. Not only must the efficient proximate cause be determined when there are multiple causes, but the cause of a particular item of damage may need to be separately determined.
Take for example a single family residence near the New Jersey coast that was insured by a policy that covered loss by wind, fire and rain, but not loss by flooding, surface water, waves, tidal waves, or storm surge. The policy probably would have a typical “efficient proximate cause” provision applicable to the exclusions. Such provisions state the policy does cover an ensuing covered loss unless another exclusion applies. The purpose of these provisions is to give back coverage if a covered peril is the efficient proximate cause of the loss.
The “efficient proximate cause” is the most important cause, in other words, it looks at the main reason how the loss occurred. The efficient proximate cause does not have to be the cause that sets all the other causes in motion. If the main reason why the home was destroyed or was damaged was the wind, fire or rain, the loss is covered even though flooding or storm surge may have contributed to the damage. Additionally, the home may have been damaged by wind before the flooding took place.
Courts in the Gulf States in ruling on claims arising out of hurricanes have applied an efficient proximate cause analysis to determine that insureds’ homes were initially damaged or destroyed by severe winds before any flooding or storm surge reached the homes. In so doing, these Courts have found that because the homes were substantially damaged or destroyed by extreme winds, the flooding and storm surge that occurred later was not the main reason why the homes were destroyed.
In order for an insured to make claim under a property policy, the insured generally need only assert that the loss was due to a covered peril, such as strong wind. The burden to prove that the loss resulted from an uncovered peril or from an excluded peril is then upon the insurer. If the insurer contends the efficient proximate cause was an excluded peril, the insurer has the burden of proving this theory, usually by expert opinion. “Anti-concurrent cause” provisions are disfavored and several states outside of the Gulf region have not allowed such provisions to be enforced. An anti-concurrent cause provision is one that attempts to allow an insurer to exclude coverage for a loss even though the efficient proximate cause was a covered peril.
A typical anti-concurrent cause provision is usually placed either at the beginning of the exclusions section, or it may follow each particular exclusion to which it applies. The usual language is as follows: “This policy does not apply to loss or damage caused directly or indirectly by the following excluded causes of loss. Such loss or damage is excluded regardless of whether any other cause or event contributed concurrently or in any sequence to the loss or damage.”
Issues of apportioning certain damages to covered and uncovered perils can arise in claims involving hurricanes. As an example, an insured’s roof may have been damaged by high winds, but the water damage to the foundation and interior may have been due to flooding, surface water or storm surge separate from the high winds. The wind damage to the roof may have occurred much earlier, even on a different day, than the flooding damage to the lower portions of the home.
Many homes in New York and New Jersey sustained fire damage when the public utility transformers or power lines were damaged by wind that blew trees into the power system equipment, or simply due to extreme wind force. While most policies exclude loss resulting from failure of utility service to an insured home, these exclusions usually do not apply to loss resulting from damage to power equipment located on the insured premises. Thus, if a transformer and power lines are located on the insured premises, and high winds damage these utilities resulting in a fire to the home, this might be a covered loss.
As was the case with the hurricanes that hit the Gulf areas, issues may arise as to whether the various governmental agencies failed to act to make certain the levees along the New Jersey coastline were sufficient to prevent the storm surge that overran the Boardwalk. Such exclusions may apply to provide a basis for a Court to determine a particular loss is not covered.
Was Sandy a “Hurricane?”
Assuming an insured has sustained a covered loss due to a covered peril arising out of what is commonly referred to as Hurricane Sandy, there may be issues as to whether a special “hurricane deductible” applies. Such increased deductible amounts are fairly common in policies issued to homeowners in areas where such natural disasters have occurred. The deductibles are significantly higher than the normal deductibles applicable to other covered losses.
Several unique issues have already arisen with regard to whether hurricane deductibles will apply, and whether they will be allowed in a particular state. A typical hurricane deductible defines a hurricane to mean a storm system that has been declared to be a hurricane by the National Hurricane Center of the National Weather Service. These endorsements also attempt to set out the duration of a hurricane. An issue may arise as to the applicability of these deductibles due to the fact that when the storm actually made landfall on the East coast, the National Weather Service reported that this was a “post tropical storm” rather than a hurricane.
Possibly because of this description of the storm by the National Weather Service, the governors of New York, New Jersey and Connecticut issued press releases stating that hurricane deductibles will not apply to losses arising from this storm. The governor of Pennsylvania announced that homeowners in that state will not incur these higher hurricane deductibles on insurance claims stemming from damage caused by this storm. The specifics as to how this will be implemented were not provided.
The Coastal Act Formula
In an attempt to solve the wind v. water dispute that arises out of hurricane type losses, the Transportation Bill was enacted that reauthorized the National Flood Insurance Program and included the Consumer Option for an Alternative System to Allocate Losses Act of 2012, known as the Coastal Act. The Coastal Act provides that the FEMA administrator is to develop a standard formula for allocating wind and water losses involving what will be termed “indeterminate losses.”
An “indeterminate loss” is one where there is no factual means to determine the cause of damage to a structure because it has been completely destroyed. In such a loss, because the NFIP adjuster only inspects the loss after the storm is over and the structure could have been destroyed by wind or water, the need for an agreed formula to resolve the issue is clear. The goal is to use storm and weather models based on past events to develop a formula by which NFIP adjusters can determine the cause of damage to a structure.
Due to the complexity of the information required to develop these models, and because of the number of government agencies and private companies that will be participating, the final formula is not expected to be available until the end of 2013. While the stated purpose of the Coastal Act is to enable NFIP adjusters to determine whether a structure was damaged by flooding, the impact of the formula is such that it probably will also enable private insurance adjusters to determine the efficient proximate cause of a loss, whether by wind or water.
Given the involvement of the Federal Insurance Office and state insurance commissioners who are monitoring the development of the Coastal Act formula, it seems clear that the indeterminate loss formula will have an impact on the manner in which insurers and insureds attempt to resolve the coverage issues arising out of Hurricane Sandy and future such storms. Whether the Coastal Act formula will be available to be implemented to resolve such issues in litigation arising out of Hurricane Sandy remains to be seen.