August 30, 2007
The "Insurance Hoax" -- Insurers Paying Too Little and Too Late
Bloomberg recently published a hard-hitting piece decrying the property-casualty industry's claims-handling practices. Insurers perceive that the article to punches below the belt, as this response from the Insurance Information Institute shows. The III piece is interesting to me because of its immoderate tone, something at odds with most of the writing that comes from III, which is a great source of financial statistics in particular on the performance of the P-C insurance industry. While the III is certainly right that insurers pay claims every day, the III and the rest of the industry need to recognize the wide-spread perception that at the point of claim insurers adopt an adversarial posture. Experienced, thoughtful observers of the industry have written about this at length (and the linked article is I think the most important thing ever written on the P-C industry), and the point of first-party insurance bad-faith law in part is to counterbalance the power imbalance that insurers hold over their insureds at the time of claim -- at the time their insureds are most in need and dependent on their performance, which explains the emotional oomph that typifies through-the-eyes-of-insureds' reporting on insurers' claims-paying (or claims-denying) practices.
I agree with the III that the Bloomberg story is too facile, and it is inappropriate to leap from the observation that an insurer paying less than what the policyholder wanted ineluctably means that the insurer is paying less than what the policyholder deserved. I recently suffered a major homeowners' loss when a (crazed) intruder broke into my home and caused huge amounts of damage; our insurer was fantastic in dispatching someone to board up a broken door, arrange for a contractor to do repair work, and reimburse us for other loss (including paying the vendor of our choice on some home electronics). So I know first hand that insurers can ride to the rescue, treat their customers with "good hands," and live up to their advertising slogans. On the other hand, I bring suits against insurers on behalf of clients when I think amounts are owed and unpaid, and I am kept busy by wrongful denials by insurers inflicted against my corporate clients (both large and small). At a time when respected news outlets like Bloomberg (and CNN and PBS) feel comfortable producing pieces that seem well suited to the Fight Bad Faith Insurance Companies website, the insurance industry should look deep into its practices and understand the perceptions of consumers and businesses to ensure that insurers' historic mission of helping their insureds, being "there" in the time of need, is embraced and, more importantly, put into practice every day in paying claims.
Posted by Marc Mayerson at 1:06 PM | Comments (6) | TrackBack
August 2, 2007
A Man, A Plan, A Canal -- A Flood
No one should be surprised that the United States Court of Appeals today reversed the decision of the Louisiana District Court on whether losses occasioned by rising water in New Orleans was the result of a "flood" and thus excluded from coverage under several different forms of "flood" exclusion. The case, In Re Katrina Canal Breaches Litigation (5th Cir. Aug. 2, 2007), centered on whether the negligence in the design and construction of the levees that allowed water to escape from the protective flood-control system should be considered to be the operative event for insurance purposes, such that the water damage resulting cannot be said to have arisen from a "flood." The Fifth Circuit ruled that "even if the plaintiffs can prove that the levees were negligently designed, constructed, or maintained and that the breaches were due to this negligence, the flood exclusions in the plaintiffs' policies unambiguously preclude their recovery."
Under first-party property policies that provide coverage for all risks of physical loss -- known as "all risk" or "open peril" policies -- it is well established that "third party negligence" is a covered cause of loss. In other words, if damage to the insured's own property occurs as a result of the negligence of a third party, the insured's own insurance will apply, subject to whatever rights of subrogation the insurer may have (standing in the shoes of its insured/tort victim). But even if one has a covered cause of loss and covered property damage, coverage can be barred by the express terms of an exclusion, which is what the Fifth Circuit found in the Katrina Canal Breaches case. Allstate's policy form in the case stated, as an example: "We do not cover loss to [insured] property . . . . consisting of or caused by: . . . Flood, including, but not limited to surface water, waves, tidal water or overflow of any body of water, or spray from any of these, whether or not driven by wind."
Arguing that the term "flood" was ambiguous when considered in the context of third-party negligence that released water, the policyholders contended that the various flood exclusions should not apply, i.e., a man-made flood does not a "flood" make. The issue has considerable importance given that a decision in the policyholders' favor would have rendered nugatory the flood exclusion in the bulk of New Orleans' losses. (Put differently, should the costs of the loss be transferred to insurers via private market mechanisms or should they be transferred to the government through public mechanisms (the flood insurance program or the tax system), or should they not be transferred at all and thus the victims should bear the losses?)
The court followed a Colorado case in finding that a "large-scale inundation of water [is] a 'flood.'" See Kane v. Royal Ins. Co., 768 P.2d 678, 681 (Colo. 1989). See slip op. at 33-35. The Fifth Circuit distinguished cases involving inundations from a water-main break as being something different in kind from the failure of a levee.
Finally, the court did not enter into the "efficient" or "concurrent" cause debate that has been central in the Mississippi litigation where questions have been presented whether a particular loss there was from wind, water, wind-driven rain, or some combination thereof, with one or more of those causes being covered and others, not. In this instance, the only cause of loss was water from the failure of the levees, which the court held was excluded by the flood exclusion.
Posted by Marc Mayerson at 3:43 PM | Comments (2) | TrackBack
March 2, 2007
Appraising Appraisers and Appraisals
In many property-insurance policies, a party has a right to demand an appraisal, which is procedure in which the value of lost or damaged property is determined. Typically, an appraisal takes the form of what I call a 1 + 1 + 1 structure – each party appoints its own appraiser, and if the two party-appointed appraisers cannot agree on a number the two together then select an umpire (or a court will select an umpire to decide if the two cannot agree on one). That some form of alternative dispute resolution is used for valuation, however, does not mean that there is no room for judicial intervention in disputes involving insurance policies with appraisal provisions.
As with other forms of ADR, courts say they seek to minimize on review their own scrutiny of appraisal process and outcomes. E.g., Emmons v. Lake States Ins. Co., 284 N.W.2d 712 (Mich. App. 1992). Appraisal proceedings may be joint investigations or follow other informal processes. Litigated disputes concerning appraisal sometimes involve the proper scope of the appraisal proceeding, because appraisers determine only questions of valuation and not questions of “coverage,” Merrimack Mut. Fire Ins. Co. v. Batts, 59 S.W.3d 142 (Tenn. Ct. App. 2001). Within its scope, an appraisal generally is considered to be a final determination of whatever was decided, e.g., Jupiter Aluminum Corp. v. Home Ins. Co., 225 F.3d 868 (7th Cir. 2000), though the "coverage" issues and bad-faith issues may remain. See Darlow v. Farmers Ins. Exch., 822 P.2d 820 (Wyo. 1991).
Some disputes involve whether the appraisal provision has been waived by one side’s dilatoriness in invoking it, J. Wise Smith & Assoc. v. Nationwide Mut. Ins. Co., 925 F. Supp. 528 (W.D. Tenn. 1995), or whether the policyholder invoked appraisal too soon, which was the conclusion of the North Carolina Court of Appeal recently in Hailey v. Auto-Owners Ins. Co. (N.C. App. Feb. 20, 2007). In Hailey, although the policyholder disagreed with the insurer’s valuation and although the insurance company rebuffed commencing an appraisal proceeding – fighting the matter at both the trial court and later on appeal for more than two years – the court held that the policyholder “prematurely invoked appraisal,” since the disagreement between the policyholder and the insurer was only “unilateral” [sic?]. Slip op. at 13. As the court stated, “[w]e hold that the unsupported opinion of the insured that the insurer’s payment was insufficient does not rise to the level of a disagreement necessary to invoke appraisal,” id. at 13-14, even though the carrier offered no more money, issued a blanket denial of coverage for part of the claim, and repudiated any further steps toward appointment of an appraiser! (A more sensible result might have altered the insured's right to obtain prejudgment interest, or its calculation, from the insurer on the ground that the insured failed to fully perfect its right to pursue appraisal. e.g., Airies Ins. Co. v. Hercas Corp., 781 So.2d 429 (Fla. Dist. App. 2001).)
Another type of dispute concerning appraisers centers on whether the appraiser or the umpire met the requirements of the qualifications clause in the policy or was otherwise an inappropriate appraiser (or umpire) for the dispute. It was this last type of dispute – over the appraiser himself – that confronted the Florida Court of Appeals in Citizens Property Ins. Corp. v. M.A. & F.H. Properties, Ltd (Fla. App. Feb. 21, 2007). In this case, after the insurance company tendered an amount approximating one-third of what the policyholder thought it was owed, the policyholder demanded an appraisal. The homeowner-selected appraiser, Mr. Pellet, determined the amount of loss to be nearly $800,000 (three times the amount offered by the carrier). An umpire was appointed, who sided with the homeowner-selected appraiser.
The insurer sought to vacate the award on the ground that Mr. Pellet was inappropriate to serve as an appraiser, for though he had conducted some 1800 appraisals and written articles in the field, the insurer contended that he was unduly biased against it. No doubt he was biased:
1. Pellet was compensated in the case based on the amount of money the policyholder collected from the insurer.2. Pellet seems to have developed a bit of a personal animus against the insurer-selected appraiser and, as will be seen, with the insurer. Pellet sent a letter to the other appraiser reading in part:
“This letter is to inform you that you are expressly prohibited from telephonic contact with my office. ALL COMMUNICTAIONS SHALL BE REDUCED to writing . . . . All matters involving appraisal assignments will result in Court ordered umpire. I have zero intentions of discussing any negotiations, settlement, scope or unit costs with you EVER! . . . . Is there any part of this you are unclear about?”3. Moreover, Pellet had his own personal lawsuit against the insurance company pending before the appraisal at issue, in which he was represented by the same attorney who represented the homeowner in the present case.
Finding that Pellet has “unquestionable personal bias” against the insurer, the Court of Appeal however rejected the challenge to his suitability to serve. The insurance policy’s qualifications clause (that is, the clause that identifies the characteristics of a suitable appraiser) required the appraiser to be “competent.” Compare Auto-Owners Ins. Co. v. Allied Adjusters & Appraisers, Inc., 605 N.W.2d 685 (Mich. App. 1999). (Indeed, other than following the terms of the appraisal clause, the insured is free to select someone who otherwise competent in the matter to serve as the party-appointed appraiser, even a lawyer. Glen Falls Ins. Co. v. Garner, 155 So. 533 (Ala. 1934).) The Florida Court found that Pellet had prior experience and expertise, and that “competence is not synonymous with neutrality or independence.”
Note that one difference between the Florida and North Carolina cases decided one day apart is that in Florida it was the appraiser who said that he would never negotiate with the insurer and instead would automatically seek appointment of an umpire, whereas in the North Carolina case it was the policyholder who sought to initiate appraisal without negotiating preliminarily with the carrier (even though the carrier had issued a blanket denial for at least part of the claim). Notwithstanding that neither law nor equity requires the insured perform idle acts, Cal. Civ. Code § 3532, prudence might dictate that the policyholder go a bit through the motions to satisfy the court that it has given the insurer a last clear chance to make good on its obligations to pay before the policyholder seeks appointment of appraisers.
* * * *
See generally Jonathan Wilkofsky, The Law and Procedure of Insurance Appraisal (Ditmas Park Legal Pub. 2003); Janet Brown and Michael Scroder, Appraisal, Federal of Defense & Corporate Counsel Q.303 (2003).
Posted by Marc Mayerson at 11:51 PM | Comments (7) | TrackBack
February 19, 2006
The Risks of the Seas and of Federal Courts Seizing -- or Being Seised of -- Jurisdiction
Insurance contracts typically are creatures of state law. As a result, unlike other kinds of complex litigation, insurance-coverage disputes often are litigated in state, not federal, court. There are exceptions to this where there is diversity jurisdiction, though in complex, multiparty coverage cases it is often unusual for there to be complete diversity between and among all the parties.
Insurance disputes can end up in federal court under admiralty jurisdiction, which provides a jurisdictional hook to get into federal court where the insurance is maritime in character – or what is sometimes referred to as “salty.” There are traditional forms of maritime insurance that are subject to federal jurisdiction, such as hull, protection and indemnity, and cargo. Other forms of coverage may have a relationship to maritime risks, and parties may fight over getting into federal court and having federal admiralty law apply.
Where policies are not expressly maritime – or are combination policies with some maritime and traditional non-maritime coverage parts – there is a fair amount of uncertainty as to whether a case should be in federal court. The Second Circuit confronted these issues in Folksamerica Reinsurance Co. v. Clean Water of New York Inc. (2d Cir. June 30, 2005), a case that may well have impact on whether disputes associated with hurricane Katrina will be subject to federal-court jurisdiction, even though the particular facts concerned a bodily injury claim brought by a worker cleaning a vessel.
Clean Water was one of several entities covered under the policy at issue, which contained both a “Shiprepairers Legal Liability” section and a Comprehensive General Liability section. This package policy had combined limits for both sections, and a single premium for the policy as a whole. It was the insurer that argued for admiralty jurisdiction, arguing that it had a stronger basis for a misrepresentation defense under the standards of federal admiralty law.
The Second Circuit’s opinion is a lengthy tour of the issues concerning the standards for divining which types of contracts are sufficiently salty as to qualify for admiralty jurisdiction. The court characterized the question before it as a seemingly “simple inquiry: Is the Policy a maritime contract giving rise to admiralty jurisdiction?” Slip op. at 5. The federal courts possess a unique lawmaking authority under Article III for admiralty matters, with the essential idea being that it is important to have a uniform law for maritime matters even in the absence of Congressional action. This power stems from the need to “protect maritime commerce,” (p. 6). In the case before it, the dispute concerned “an insurance claim based on a ship-maintenance-related injury sustained by a ship oil-tank cleaner aboard an ocean-going vessel in navigable waters.” (p. 8)
Nevertheless, the coverage had little to do with maritime issues: the question concerned ordinary CGL coverage. While a portion of the package policy unquestionably was maritime in character, the coverage under which the dispute arose was the general-liability section, and on this basis the district court found the policy to be divisible and that the nonmaritime aspects predominated (and thus there was no jurisdiction).
The Second Circuit reviewed recent Supreme Court jurisprudence that it believed undermined aspects the prior Second Circuit precedent. In general, “admiralty jurisdiction will exist over an insurance contract where the primary or principal objective of the contract is the establishment of ‘policies of marine insurance,’” (p. 12) but positing the issue this way obviously is circular.
Courts typically have looked at whether the maritime aspects predominate or whether they are incidental. The Second Circuit here found there was “nothing intrinsically ‘shore side’ about a CGL policy.” (p. 15). Instead, the keys are the terms of the insurance and the nature of the business insured, with the label or form of the policy not being determinative. (p. 16-17)
In the case at hand, the policy excluded typical or traditional maritime risks, though the court found ultimately an overlap in the coverage provided for premises/operations, products, completed-operations, pollution, and incidental-contract coverage. While concluding that the contracts coverage was not maritime, the Second Circuit found that the other portions were in the circumstances maritime in nature.
In Clean Water, the insured’s repair and maintenance operations on seagoing vessels implicated marine issues, and the insured’s replacement of parts on the ship in its maintenance activities similarly were maritime. As the court stated, “[t]he risk of injuries from, and damage to, a ship after defective or faulty repair or maintenance is a ‘maritime risk’ that includes the risk of ‘the loss of the ship or goods.’” (p. 22) While this coverage overlapped with P&I coverage, that confirmed rather than confuted admiralty jurisdiction.
In finding that disputes under the policy to be subject to admiralty jurisdiction, the court summarized:
In the circumstances of this case – a contract with two sections, one of which provides fully marine insurance [the shiprepairers legal liability], and the other specifically modified to cover maritime risks – we conclude that the Policy is marine in nature . . . [and that] the primary objective of the policy is to establish marine insurance. (p. 29)
The Second Circuit conceded that part of the policy unquestionably was nonmarine and that the policy did not fall within the traditional categories of marine insurance, yet it found there was a sufficient nexus to the risks of the sea as to merit the exercise of admiralty jurisdiction. The court’s lengthy opinion is not altogether satisfactory in guiding litigants on the question of how much of the policy needs to be maritime in nature and the required nexus between the dispute at issue and the maritime portions of the coverage for federal-court lawmaking to govern and for the federal court to be seised of jurisdiction under 28 USC § 1333(1).
Posted by Marc Mayerson at 3:34 PM | Comments (0) | TrackBack
November 17, 2005
Stranded without Recourse: FEMA Halts Payment of Flood-Insurance Claims
The insurance industry long has inculcated the belief that, in the policyholder’s time of need, the insurer will be a steadfast source of protection, compensation, and prompt relief. Over the past couple of months, close to a quarter million policyholders have turned to their (federally backed) flood insurers and filed claims under flood-insurance policies for losses from Katrina, Rita and Wilma. There are nearly 100 insurance companies whose write-your-own (WYO) flood-insurance policies are backed by FEMA, and FEMA – amazingly, alarmingly – has told those insurers to stop paying claims.
The way the WYO (or “Part B”) program is meant to work is that the insurance companies that participate collect premiums and hold that money for the purpose of paying claims. FEMA in turn provides letters of credit on behalf of the private insurers to pay claims in excess of the premiums collected and also provides reinsurance. But FEMA’s coffers now are bare.
Typically, an insurance company that has contractual privity with the policyholder cannot refuse to pay simply because its reinsurer is insolvent. It is the insurance company that typically assumes the risk of the reinsurer’s insolvency, not the policyholder. Yet, according to press accounts, private insurers may not pay flood-policy claims precisely to avoid being put in the position of stepping in when the federal government fails to perform.
Insurers issuing WYO flood policies are treated as fiscal agents of the United States, 42 U.S.C. 4071(a)(1), and the policies they issue are treated more as conduits for obtaining and disbursing federal funds than as ordinary private contracts. See generally Federal Crop Ins. Corp. v. Merrill, 332 US. 380, 385-86 (1947). As a consequence, most courts hold that claims against the “private” insurance companies writing the federally backed flood policies effectively are clothed in the sovereign immunity of the United States and that federal law governs all issues relating to the administration of these policies (and preempts state law). The federalization of this insurance program has a number of profound implications on the rights of policyholders under federally backed flood policies.
First, and perhaps most pertinent given this latest move by FEMA to authorize not paying valid claims until Congress appropriates more funding, policyholders are not able to recover interest on the amounts due but delayed. In Studio Frames Ltd. v. Standard Fire Ins. Co., 2005 WL 2977803 (M.D. N.C. Oct. 26, 2005), the court held that interest on delayed payments under flood policies was barred under the “traditional” no-interest rule, which requires that the United States separately waive its sovereign immunity for interest claims. While waiver can be express or (to some degree) implied, the court found Congress has not consented to paying interest for the FEMA backed policies; the court also refused to find an implicit waiver from the government’s entry into the flood-insurance business. And the no-interest rule applied whether one considered the claim to be against FEMA itself or against the Write-Your-Own carrier.
Second, the insurance companies handling these claims are immune from first-party bad-faith suits. In Wright v. Allstate Ins. Co. (5th Cir. June 28, 2005), the Fifth Circuit joined other circuits in holding that bad-faith and unfair-practices claims were preempted by federal law and that there was no independent federal bad-faith claim. Moreover, to the extent that state-law provides that the insurance company must pay the prevailing policyholder’s attorneys’ fees if the policyholder is compelled to file suit to collect, those claims too are preempted. Accordingly, while under other insurance policies insureds are able to get interest, attorneys’ fees, and bad-faith damages if their insurer refuses to pay because a reinsurer is out of money, flood-insurance-program policyholders have no such remedies.
What about suing FEMA directly for, e.g., misrepresentation of the promise that insurance benefits would be promptly and fully paid or for tortious interference with the policyholder’s contract with the WYO insurance companies? It would appear that that avenue, too, is closed off under the Federal Tort Claims Act, 28 U.S.C. §§ 1346(b), 2671-2680. See generally Muiz-Rivera v. United States (1st Cir. 2003) The FTCA effects a waiver of sovereign immunity to bring suit against the United States and its agencies, but there is an exception to the waiver (i.e., suit is barred) for "[a]ny claim arising out of . . . misrepresentation, deceit, or interference with contract rights." 28 U.S.C. § 2680(h).
Accordingly, there does not appear to be any judicially enforced (i) incentive on FEMA to pay claims promptly when due, (ii) directive to ensure that the private insurance companies perform promptly, or (iii) sanction to prevent the private insurers from engaging in bad faith. The check on FEMA’s power or abuses – or those of its partners in the WYO program – is political. That check, however, is not the same as one that says “pay to the order of,” which is what the residents of the Gulf States with valid claims are looking for.
Posted by Marc Mayerson at 3:21 PM | Comments (4) | TrackBack
November 10, 2005
Blowin’ in the Wind: Insurance Coverage for Wind, Rain, and Wind-Driven Rain
Seemingly in anticipation of the expected deluge of coverage disputes arising from Katrina, Rita, and Wilma, the Second Circuit released a careful opinion in a case where rain damage resulted from wind-caused openings in a building. The precise issue concerned application of a “wind deductible,” but the decision sweeps more broadly in addressing the methodology for interpreting policies in determining covered causes of loss and the relevance of insurance-industry practice. Turner Constr. Co. v. ACE Prop. & Cas. Ins. Co. (2d Cir. Oct. 28, 2005).
ACE Property & Casualty issued to Turner Construction a policy covering a Texas construction project. Turner had purchased a builder’s risk policy for the project, and the project was later damaged when rain entered openings that were caused by high winds. The policy included a large deductible for wind losses, which if applicable would wipe out coverage for the loss.
The builder’s risk policy provided first-party property coverage for covered causes of loss. In Turner, one question was what were the covered causes of loss. The policy covered risks of direct physical loss except those causes of loss listed in the exclusions. Wind is a covered cause of loss; certain risks were identified by name in the exclusions section. Here’s where things start to get tricky. One exclusion takes the form of “A, unless B.” Let’s call the subset of all circumstances where “A” is involved and where B also occurs “A!”. Formally, then, if (i) all risks are covered except those excluded and (ii) A is excluded except where B occurs, then “A!” is a covered cause of loss. The particular exclusion reads:
Rain . . . whether driven by wind or not, to Covered Property, unless located within a fully enclosed structure and then only for such loss that is caused by or results from rain . . . entering through an opening caused by a Covered Cause of Loss.
In this instance, the opening was caused by wind, a covered cause. Accordingly, while Rain in general was not a covered cause (“A”), rain-caused damage that results from an opening caused by wind (“A!”) would be a covered loss.
The issue in Turner is the application of the “wind deductible.” For the loss in question, “[t]he damage in this case . . . was directly caused by rain, and only indirectly caused by wind.” Slip op. at 5. The insurer urged that because wind was the covered cause of loss that created the opening, the wind deductible necessarily applies, even if the damage was from the entering rain.
The Second Circuit majority reasoned, however, that the wind deductible applied only where wind was the covered cause of the loss; given how the rain exclusion was structured and how formally that defined rain from a wind-caused opening as a covered peril (A!), the wind deductible did not apply. After citing a treatise on modern symbolic logic, the court elaborated:
The policy language says, in effect, “Rain is not a covered cause of loss, unless it enters a building as the result of a different covered cause of loss.” This is logically equivalent to saying, “if rain enters a building as the result of a different covered cause of loss, rain is a covered cause of loss.”Slip op. at 7. Because the application of a deductible is a limitation of coverage, the insurer could not show that the “wind” deductible plainly and unambiguously applied to the rain-as-a-result-of-wind-caused-opening peril.
The dissent took a different tack. Judge Straub first contextualized the dispute against the backdrop of “windstorm” insurance policies, commonly understood as a thing in itself in the “Texas insurance industry.” Consequently, while implicitly acknowledging that the majority’s formal construction was linguistically permissible, the dissent believed that that construction was not a reasonable one (and therefore the policy was not ambiguous).
Relying on the maxim that exclusions do not create coverage, the dissent reasoned that the exception to the rain exclusion served only to
limit[] the force of the rain exclusion. That is, the clause gives the insured protection from a covered event (in this case, wind) and all the damages flowing from it, despite the fact that some of the damage has also been caused by an excluded event (rain). . . . In sum, my wholly logical reading is that rain is never a Covered Cause of Loss as defined under the policy, and even where rain in fact causes damage, that damage is attributed to the Covered Cause of Loss that caused the opening and allowed in the rain.Slip op. at 11.
Responding to the majority’s rejoinder that this construction means that rain-caused damage can be subject to differing deductibles depending on the circumstances that let in the rain (wind, earthquake, or fire), the dissent conceded the point but was untroubled by it since the dissent assumed the conclusion that rain was never a separate cause of loss; consequently, applying different deductibles results from how the antecedent peril is covered (wind, earthquake, fire). In other words, whatever covered loss is caused by, e.g., earthquake is subject to a particular deductible, regardless whether the earthquake also let in rain.
The dissent’s rationale in part is revealed in a footnote where it embraces the remote cause of loss as being determinative (the wind that caused the opening) rather than the nearer cause of loss, the water. Slip op. at 12 n.1. More typically, courts apply the immediate cause at least where it will result in coverage (the policy generally being silent on the point of remote or immediate causes). E.g., Maples v. Aetna Cas. & Surety Co., 83 Cal.App.3d 641, 647-48 (1978) (“the term ‘accident’ unambiguously refers to the event causing damage, not the earlier event creating the potential for future injury”) (citing cases).
But the dissent mainly relied on what it characterized as Texas insurance industry practice (even though the policyholder is a New York company and the insurer is a Pennsylvania one). Judge Straub contended that “windstorm” coverage was a known quantity in Texas, and it would have covered this loss; reasoning back from the existence of this other coverage that had not been purchased, Judge Straub ruled that it was unreasonable to construe the builder’s risk policy to afford this separate coverage. (There was no evidence that Turner had been offered windstorm coverage separately and turned it down, though the salience of that is disputable anyway inasmuch as (i) the policyholder’s pure, undisclosed subjective intent is not relevant to limiting coverage and (ii) the policyholder could have turned down the offer of windstorm coverage thinking that the risk of that loss was covered at least in part by the builder’s risk policy.) The dissent noted that Texas windstorm coverage insured against loss from “wind-driven rain damage, regardless of whether an opening is made by the wind.” Slip op. at 14.
As the dissent concluded:
In light of this context, I would find that a reasonable observer knowledgeable of insurance practices in Texas would view damage caused by rain entering through a wind-blown opening as windstorm damage and would view a “wind deductible” as applying to the windstorm-protection aspects of the policy.
Slip op. at 14. Judge Straub does not analyze the choice-of-law question implicit in his analysis, though there certainly is a sound basis to conclude that Texas law would apply generally. But there is a separate question whether custom and practices of Texas are properly chargeable to a New York company and a Pennsylvania company that between them lawfully insure a project in Texas. Generally, custom and practice may be considered to give context to what the speaker or writer must have meant by his use of a particular term, see Frigaliment Importing Co. v. B.N.S. Int’l Sales Corp., 190 F. Supp. 116 (S.D.N.Y. 1960) (Friendly, J.); the dissent however is using custom not to interpret the meaning of wind as expressed in the contract but rather to presume that something that was unexpressed – windstorm – should limit the words that were expressed. This is not an appropriate basis to interpret an insurance policy to restrict coverage that otherwise may be found under a construction of the words used themselves. In other words, the dissent errs in relying on an implied, subjective-intent theory of contract, in derogation of the rule that establishes a contract “not on the parties’ having meant the same thing but on their having said the same thing.” Frigaliment, 190 F. Supp. at 117, citing Holmes, The Path of the Law at 178.
The Turner case will be relevant to the various losses associated with the 2005 hurricane season as policyholders and insurers seek to sort out which losses are covered or not. The majority’s rejection of the dissent’s approach – everybody knows that such and such is not covered – in favor of an approach based on construing the policy language where doing so will afford coverage is consistent with bedrock principles of insurance law (and contract law, too). It also makes it easier for insurers to administer the coverage and handle claims, for the claims handler can rely on the contract as written rather than on secret knowledge that lawyers debate that everyone knows. Turner also shows that policyholders need to closely read and analyze the policy language, for it is not obvious to most people that what is excepted from an exclusion is presupposed to be covered in the first instance by the insuring agreement.
Posted by Marc Mayerson at 4:19 PM | Comments (4) | TrackBack
September 30, 2005
Good Deeds, Smart Business, Corporate Waste, and Ex Gratia Payments
Americans in the Gulf States have endured Katrina and Rita in close succession, similar to how their Florida neighbors suffered through a series of hurricanes last year. Those who have been affected by these hurricanes naturally turn to their insurers for help. When losses stem from both of the recent hurricanes, however, insurers can compound their insureds' financial woes by requiring them to absorb separate deductibles for each storm.
Some insurers have responded by saying that only one deductible will be required in these circumstances. That decision, however, potentially exposes those insurers on the reinsurance and shareholder fronts.
Of course, responding by "waiving" the second deductible reflects the aspiration of insurers genuinely to help their assureds in their time of need. It also enhances goodwill and helps cement their relationship with their policyholders (the source of their premiums). I know from personal experience with my auto insurer that when our two cars kissed each other one day damaging both our insurance policy waives deductibles completely -- we didn't even pay one, let alone two (i.e., a deductible each for each damaged car). I can't quite say that because of that alone we're still premium-payers ten years later, but it certainly helps ensure the continuation of the income flow from my family to that insurance company.
One key difference between my experience and that of the Katrina/Rita policyholders is that my insurance policy had a provision on point saying that no deductibles are owed in the circumstances. Here, the insurers ostensibly are waiving deductibles at the point of claim or retroactively (whereas in my case the insurer waived what would otherwise be the right to two deductibles in advance, that is, in the policy).
In addition to fostering customer loyalty, waiving the second deductible reduces the transaction costs of adjusting the claim (since the adjuster need not unscramble the omelet to see which particular damage was caused by one hurricane or the other). This practical point then goes to the legal question of who bears the burden of proof against the unscrambling problem: if the insurance company bears the burden of differentiating the damage before the second deductible applies, in the absence of adequate evidence the insurer not only would lose that case but potentially risks bad faith (if it did not have a reasonable basis to believe that part of the particular loss was attributable to the second storm). Issues of causation arise, too, for if my roof would need to be replaced from the first storm, that it was further damaged from the second storm is irrelevant (other than that the policyholder cannot collect twice for the roof). Against the potential complexities of these legal questions of burden of proof and causation as well as the increased costs of ascertaining the information needed to refine the determination of what was caused by one storm or the other, those insurers that have "waived" the second deductible may be taking a practical problem and turning it into a PR victory (at no additional cost to them).
In life, it sometimes seems that no good deed goes unpunished, so here's the consequences to these "enlightened" insurance companies.
First, if the experience of the Florida hurricanes holds true, the reinsurers will not similarly allow the insurance companies to aggregate the two storm-related losses together. Last year, reinsurers said publicly that, while waiving the second (or third or fourth) deductible may be sound public relations, they would require in effect the insurers to offset their reinsurance claims by the amount of deductible that was not collected. The ground for this position is that the insurer's expenditure of money within the amount of the additional deductible is a gratuitous (ex gratia) payment, so the reinsurer does not have an obligation to reimburse. Whether this is a winning point for the reinsurers largely depends on the language of the reinsurance policy and on whether the reinsurance contact is governed by English or US law, for English law is much more rigid (and uncommercial) on the issue than is the law in US jurisdictions. When one considers the number of deductibles a major carrier like Fireman's Fund may be giving up, the amount of money at stake could be considerable.
The rejoinder to the ex gratia point is the same as indicated above regarding the legal and practical difficulties regarding the second deductible, which is not a "reinsurance" point as such but rather a question whether under the insurance policy that was issued would the insurer even have had the right to the second deductible. Even if the insurer might have been able to collect the second deductible, the reinsurance policy may contain various follow-the-settlements, follow-the-fortunes, and loss-adjustment clauses that may vest in the insurance company (cedant) the power to make this decision, so long as it does so in good faith and acts as if it is playing with its own money (i.e., as a prudent unreinsured).
Second, the same structure of argument, or criticism, might well be leveled by shareholders of the insurers who elect not to pursue the second deductible. The argument here is that by not pursuing the second deductible (especially without reinsurance recovery) the company has engaged in corporate waste. The burden of demonstrating waste is a high one. In Re Walt Disney Co. Derivative Litigation (Del. Ch. Aug. 9, 2005), slip op. at 111 ("[W]aste is a rare, 'unconscionable case() where directors irrationally squander or give away corporate assets.'") (citation omitted). One also wonders how Wall Street will react to insurers' election not to collect the second deductible and whether the trading value of those stocks actually will go up in recognition of the future return (in terms of customer loyalty -- and future premium streams) on the investment of not pursuing the second deductible. Depending on how Wall Street reacts, there may be no damages suffered by shareholders. (Insurers might consider adopting internal corporate resolutions, however, recognizing that there may be circumstances where the company will waive deductibles, which would help insulate the board from challenges by future shareholders re future disasters.)
At all events, "waiving" or not pressing the question of the second deductible is the right thing to do. There is a sound business and legal case for doing so, so one expects that corporate directors and officers (and their insurers) should be insulated from liability from making this business judgment. And one further hopes that the reinsurers likewise recognize that the legal case for contending that performance is owed without regard to the second deductible is substantial, so that the insurers obtain reinsurance recovery without need to resort to arbitration or litigation on the question.
Posted by Marc Mayerson at 10:04 AM | Comments (0)
September 21, 2005
Katrina -- Submit Your Proofs of Loss or Forfeit Insurance Coverage -- Updated!
The federal government provides flood insurance protection principally through private insurance companies. These flood policies require that the insured file a sworn proof of loss within 60 days from the date of the damage. In the circumstances of Katrina, there has been a great desire to assist policyholders in obtaining their coverage benefits. FEMA apparently has responded by relaxing the period within which to file a claim and, if necessary, to bring suit.
In the past, court have strictly enforced the 60-day deadline within which to file a proof of loss -- i.e., a failure to comply has resulted in a total forfeiture of coverage. Flood victims always are sympathetic plaintiffs, but the courts have not always been responsive. For example, the Eleventh Circuit, in a decision issued three months before Katrina, held that a policyholder forfeited coverage by not submitting the proof of loss within 60 days, even though the insurance adjuster first came to the policyholder's property 90 days after the loss. Lucien v. US Security Ins. Co. (11th Cir. June 8, 2005).
On September 21, 2005, FEMA promulgated guidelines for the adjustment of Katrina-related losses. Moroever, FEMA has authorized payment of claims based on an adjuster's report alone, rather than requiring a separate proof-of-loss submission. If the policyholder does not agree with the adjuster's analysis of the covered loss, the policyholder then must file a proof of loss and that proof of loss must be submitted within twelve months of the date of loss. (Note that the twelve-month period is from the loss date not the date of the adjuster's report.) If the insurer then denies the policyholder's claim based on the proof of loss, the policyholder is required to file its lawsuit within twelve months of the date of claim denial.
This revised process applies to all flood-events between August 23, 2005 and December 31, 2005.
Individuals and businesses that suffered loss from Katrina should not wait until the adjuster comes knocking to put a marker down, that is, even if one is not be in a position to submit the full proof of loss, it is still advisable to submit a partial proof of loss, noting that the entire amount of the loss is not yet determined. Personally, I would not be comfortable in allowing the 60-day period to elapse if I knew I had flood coverage and the adjuster had not yet arrived (as the Lucien case shows). FEMA has a guide to submitting claims, and the insurers have set up a website that seeks to provide comprehensive contact information for flood insurers.
One must be careful that in submitting a claim for flood that one is not undermining a claim under a property or homeowners policy. Accordingly, it is advisable in submitting the proof of loss to the flood program to temporize by stating that "[Policyholder] submits this proof of loss to comply with the requirements of its flood-insurance policy, although it is uncertain at this time the extent to which the items claimed were caused by flood or caused by another hazard covered by other insurance policies."
For the moment, protective claims should be submitted to any possibly available insurance, flood, property, or homeowners.
Posted by Marc Mayerson at 10:20 AM | Comments (11) | TrackBack
September 16, 2005
Tragedy and Failure
Insurers dealing with Katrina losses are caught between a rock and a hard place -- more accurately, between flood and wind-driven rain. Generally, under typical homeowners policies, flood-caused loss is excluded but wind-driven rain and other windstorm-caused loss is covered. The Mississippi attorney general, under pressure from leading members of the plaintiffs' mass-tort bar, has brought suit seeking to force insurers to pay claims, notwithstanding the terms of the insurance policies.
There is historical precedent for insurers' paying claims following mass disaster in derogation of policy terms. The story is told famously of Cuthbert Heath, an underwriter at Lloyd's of London, who following the San Francisco earthquake cabled his US attorneys saying: "Pay all our policyholders in full irrespective of ther terms of their policies." And there seems to be little doubt that this decision of C.E. Heath helped establish the positive reputation (deserved or not) Lloyd's enjoyed in the US for many, many years.
But there is a key difference between Heath's cable and the complaint filed by the State of Mississippi: Heath's commitment of capital was voluntary. The Mississippi action seeks to void insurers' policy defenses and extract the insurers' money involuntarily.
The state will argue that its action is not a taking of the insurers' capital because the policy terms are void ab initio. But what the state's argument highlights is the failure of its insurance-regulatory scheme. Mississippi should not have permitted insurance policies to be issued in the state with flood exclusions if such exclusions are so violative of public policy. Besides arguing on the merits that the exclusions are proper, insurers will argue that voiding them constitutes a taking of property (meaning that the taxpayers will then fund the losses).
If for some reason the insurers are compelled to make these payments, the insurers may well be stuck with the costs and unable to pass the costs onto their reinsurers. So the comment by a plaintiffs' bar attorney, Mr. Richard Scruggs, is misplaced: "The Philadelphia lawyers wrote these things to protect the insurance companies and most of the risk have been spun off in worldwide reinsurance markets. What I want is for some Swiss gentlemen to be very nervous about rebuilding the Gulf Coast." (Regulators of Katrina-Torn States Grapple With Wind vs. Flood Assessments, BestWire (Sept. 12, 2005)).
The European reinsurers probably have little to fear -- other than the threatened insolvency of their customers (i.e., the insurers). This is because if the insurers follow the precedent of C.E. Heath the reinsurers will deny reinsurance recovery on the ground that the payments were voluntary or ex gratia -- that is, were made to enhance goodwill and the like but were not compelled by the terms of the ceded coverage. (The directors and officers of the insurers that make such voluntary payments no doubt will be sued by their shareholders for mismanagement and corporate waste.) Alternatively, the reinsurers will argue that the expropriation of capital by Mississippi and perhaps others is not reinsured, notwithstanding "follow the fortunes" clauses. See Commercial Union Assur. Co. v. NRG Victory Reinsurance Ltd., 1996 Folio No. 1350 (English App. March 16, 1998).
At all events, the Mississippi lawsuit is an extreme example of regulation by litigation and only underscores a massive failure of the Mississippi insurance regulators and the Mississippi state legislature to ensure that their citizens are protected financially through insurance mechanisms, were that their intent. (Of course, not all Mississippi citizens purchase homeowners, renters or other first-party property insurance -- it is not a mandatory coverage like auto often is.) No doubt the Katrina losses substanially will be socialized in some manner: whether it be done through the tax system and thus publicly or the insurance system and thus privately. But changing the rules on an after-the-fact basis and attempting to paint the insurers as the bad guys simply is not fair.
To be sure, the losses suffered by the citizens of the affected communities are mindboggling. And while tapping -- or taking -- insurers' capital may be expedient, that doesn't make it right. Although responding to Katrina poses a challenge to America, one hopes that Americans' values were not blown or washed away at the same time.
Posted by Marc Mayerson at 9:42 AM | Comments (8) | TrackBack
September 6, 2005
Businesses Far from Katrina May Have Insurance Claims
Businesses lucky enough to be located outside of Katrina's wrath still are exposed to losses from the hurricane: while they may not have suffered physical losses to their assets, their suppliers or customers, or both, may have been damaged. As a result, these "unaffected" businesses may have coverage for their own economic losses stemming from Katrina.
An increasingly common add-on to coverage in recent years has been "contingent" business-interruption coverage (or contingent business-income coverage). These policies are limited in what types of event triggers their coverage: typically, only those hazards that are insured against with respect to the insured's own assets qualify as covered events when they befall the insured's supplier or the insured's customer.
In general, there are certain steps that companies should now be taking:
1. Check to see if your property policies include coverage for contingent business-interruption losses (or trade-disruption losses).
2. Give notice NOW to your insurance company of the possibility of a covered loss.
3. Carefully and contemporaneously document the lost sales or increased costs that may be attributable to Katrina. The more contemporaneous documentation, including memorializing memoranda to file, the better in the event of a coverage dispute.
4. Consider engaging counsel, forensic accountants, or a public adjuster to assist you in gathering the financial material needed to prove your claim.
5. Beware that many policies include a time period within which a suit for coverage must be brought or within which notice or proof of loss must be provided. If there is any possibility that the time period is about to expire, ask the insurer for an extension of the period and obtain the insurer's written agreement. It is vastly easier to obtain an extension than to litigate questions of the tolling of the period.
Posted by Marc Mayerson at 3:51 PM | Comments (3)