The Next Hurricane- Wind Versus Flood Losses. WILLIAM T. SALZER GEORGE CARR Swartz Campbell, LLC

Transcription

1 The Next Hurricane- Wind Versus Flood Losses WILLIAM T. SALZER GEORGE CARR Swartz Campbell, LLC

2 Katrina and Rita NFIP Losses Total Number of Losses Paid: 165,112 Affected States: Alabama, Florida, Mississippi, Louisiana Total Amount of Losses Paid: $15,760,144,120 Hurricanes Katrina, Rita, Wilma and Dennis in 2005 generated $57 Billion in insured losses and 3.3 Million Claims Insurance Institute reports that insurer claims payments amounted to 11% of state income in Louisiana and 10% in Mississippi FEMA Statistics Reported as of 7/31/2007

3 Hurricane Frequency Increased 2010 Atlantic hurricane season included 19 named storms, 12 hurricanes and five classified as major Category 3 storms with wind speeds of 111 mph or greater With exception of Tropical Storm Hermine, U.S. mainland spared significant property damage in 2010 despite greater storm activity Source: Insurance Information Institute

4 Climate Change Creates Uncertainty Regarding Severity and Frequency of Extreme Weather Events Some predictive modeling studies suggest increase in hurricane wind speeds of two to five percent over the next 20 years generating a percent increase in property damage Insured losses rising because of continued development in coastal areas

5 The Coverage Grant HO-3 We insure against risk of direct loss to property described in Coverage A and B only if that loss is a physical loss to property. We insure for direct physical loss to the property described in Coverage C caused by a peril listed below unless the loss is excluded in SECTION I EXCLUSIONS. 2. Windstorm or hail. This peril does not include loss to the property contained in a building caused by rain, snow, sleet, sand or dust unless the direct force of wind or hail damages the building causing an opening in a roof or wall and the rain, snow, sleet, sand or dust enters through this opening.

6 The Typical Water Damage Exclusion We do not cover loss to the property consisting of or caused by: 1. 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 2. Water or any other substance on the surface of the ground regardless of its source

7 Water Damage Definition c. Water Damage, meaning: (1) Flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind; (2) Water which backs up through sewers or drains or which overflows from a sump; or (3) Water below the surface of the ground, including water which exerts pressure on or seeps or leaks through a building, sidewalk, driveway, foundation, swimming pool or other structure.

8 Water Damage Exclusion Damage caused by flood waters encompassed by WDE even if flooding is influenced by human actions In Re Katrina Canal Breaches Litig., 495 F. 3d 191 (5 th Cir. 2007) Water damage exclusions include storm surge Tuepker v. State Farm, 507 F. 3d 346 (5 th Cir. 2007)

9 The Anti-Concurrent Causation Clause (ACC) We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.

10 The Leonard Decision-Fifth Circuit Lead Case Insured home battered by rain and wind followed by storm or tidal surge that flooded ground floor of two story home Insured claims wind damage due to compromised walls and windows Court holds that ACC clause is unambiguous and removes coverage for damage due to combined effect of storm surge/tidal wave irrespective of sequence of damage due to wind and water surge Leonard v. Nationwide Mut. Ins. Co., 499 F. 3d 419 (5 th Cir. 2007)

11 Leonard Decision-Analysis of ACC Court recognizes three discrete causes of damage: (1) Damage caused exclusively by wind; (2) Damage caused exclusively by water; (3) Damage caused by wind concurrently or in any sequence with water. Court concludes that storm surge flooding on heels of hurricane is a concurrent wind-water peril within scope of ACC; Only damage caused exclusively by wind is covered.

12 ACC Unambiguous Per Leonard The plain language of the policy leaves the district court no interpretive leeway to conclude that recovery can be obtained for wind damage that occurred concurrently or in sequence with the excluded water damage.

13 But Leonard recognizes PD for roof water intrusion If roof blown off by hurricane results in water intrusion, damage covered unless storm surge flooding inundates the same part of the building; if so, then ACC clause is triggered to remove coverage irrespective of sequence of events. Court rejects percentage allocation of wind caused damage if both wind and flooding caused loss.

14 Leonard: ACC Clause Trumps Efficient Causation Doctrine Common law efficient causation doctrine holds that the initial causative factor for loss- if covered- is determinative even if subsequent causal factors are excluded from coverage Leonard court holds that ACC clause trumps doctrine under Mississippi law Neither statutory law nor public policy is offended by application of ACC clause

15 Tupepker Decision: Lead-In Clause Same As ACC Policy does not cover any loss which would not have occurred in the absence of one or more of the following excluded events ; Court holds that lead-in clause is materially the same as ACC; Water damage exclusion in conjunction with lead-in clause removes coverage for all damage caused by flood or wind acting concurrently or sequentially with water; If roof first blown off, value of roof damage covered even if house subsequently destroyed by floodingdamage occurred in absence of excluded peril. Tuepker v. State Farm Fire & Casualty Co., 507 F.3d 346 (5 th Cir. 2007)

16 5 th Circuit Applies Leonard Under Texas, Louisiana and Florida law ARM Properties Management Group v. RSUI Indemnity, 2010 WL (5 th Cir. Nov. 5, 2010) (ACC and water damage exclusion remove coverage for wind/water combined loss; Arctic Slope Regional Corp. v. Affiliated FM, 564 F. 3d 707 (5 th Cir. 2009) (Louisiana law); Paulucci v. Liberty Mut. Fire Ins. Co., 190 F. Supp. 2d 1312 (M.D. Fla. 2002) (insurer may contract out efficient causation doctrine through ACC); Claunch v. Travelers Lloyds Ins. Co., 2008 U.S. Dist. LEXIS 1979 (N.D. Tex. 2008).

17 But Mississippi Supremes Reject Leonard Reading of ACC

18 Corban v. USAA, 20 S. 3d 601 (Miss. 2009) Loss vests at time of initial damage-if wind caused- sequential damage due to flooding and storm surge does not vitiate coverage for wind loss Court finds ACC reference to sequential loss ambiguous in context of whole policy While storm water surge related damage is excluded it does not override initial windstorm damage Carrier will have burden of proof on allocation

19 Corban States Loss Occurs Immediately Upon Physical Damage Court notes that loss is undefined and occurs upon injury due to covered peril and is unaffected by subsequent events. Loss to property may consist of many elements and need not refer to the totality of the damage and should not when different forces have caused different damages. Court reads concurrent as simultaneously as part of indivisible force. Court reads sequentially out of policy based on finding that policy rights vest upon initial damage event

20 Ramifications of Corban Allocation between wind and flood caused damage becomes battle of experts Meteorological evidence will likely establish initial wind caused damage followed by flooding Neighbor testimony regarding sequence of events May presumptively yield covered PD to roof, upper floors of structure Prompt securing of physical evidence to evaluate differentiation between water and wind damage Where storm leaves slab, how will insurer meet BOP? Flood damaged property may not bar coverage for antecedent wind/rain caused damage-undermining value of the ACC

21 Claims Handling Consistency Under Corban analysis, sequence of physical events key; suggestive of individualized determinations Some structures may have greater wind load capacity Documenting physical evidence and conclusions on causation for claims handling consistency Admissibility of evidence of CAT claim handling of neighboring property claims

22 Post-Corban Proof Issues Can policyholder rely on proof of total loss of structure following combined wind/flood loss or must fact/expert testimony be proffered to establish existence of initial loss due to covered wind peril? Where slab remains and no immediate physical proof of antecedent wind damage, what is carrier s burden from claim handling perspective? If all risk policy, will burden fall on insurer to establish flood loss in slab case where no first hand evidence exists as to sequencing? If insured can establish existence of windstorm event prior to flood surge, how will PH meet burden of proving amount of covered loss: BOP will ultimately fall on insurer to prove excluded damage

23 Post-Corban Proof Issues Will PH or insurer bear burden of proof on segregating between covered and uncovered damages? Under all risk or open peril policy, will PH sustain BOP once proof of wind covered damage exists, placing BOP on insurer to segregate? Under specific peril (Personal Property) will PH have the burden of proving amount of damage due to covered peril?

24 Will Corban Become Lead Case? Louisiana federal court holds that ACC applies where included peril occurs concurrently with excluded peril. Stewart Enterprises v. RSUI Indem. 614 F. 3d 117 (10 th Cir. 2010). ACC clause of excess policy did not bar coverage for combined wind/flood loss where flood exclusion was subject to sublimit in primary policy.

25 ACC Generally Trumps Efficient Causation Doctrine In Most Jurisdictions Majority of jurisdictions allow for ACC to override efficient causation principles Exceptions include California, West Virginia and Washington Insurers still bear burden of proving that excluded event contributed to cause of loss and that damage is result of combined or synergistic effect of covered and uncovered loss

26 Other Jurisdictions Adhering to ACC Application Builders Mutual v. Glascar Properties, 688 S.E. 2d 508 (NC App. 2010) Court holds ACC in builder s risk policy bars coverage for mold damage even though initial cause of loss is water related Vandals broke in, left water running, causing PD and subsequent mold PH advances Corban for notion that vandalism, covered peril, caused initial water damage and triggered policy irrespective of ACC Court holds that vandalism was an indirect cause of the mold and holds that ACC applies to mold remediation costs-does not address initial water damage

27 Other Jurisdictions Adhering to ACC Application White v. West American Ins. Co., 2008 WL (MD Pa.) Extensive rainfall led to opening of dam causing flood of trailer Court holds once water accumulated on ground, becomes surface water within scope of WDE Court applies ACC to find that flood damage stemming from initial rainfall due to opening of flood gate triggers WDE

28 Interplay of Flood Coverage and Total Loss Insured had homeowners and flood policies Property sustained catastrophic wind and flood damage; HO policy excluded for flood only if predominant cause Flood policy paid limits for building and contents HO carrier bears burden of proving how much of loss attributed to flood damage; Total loss provision allows for full recovery of ACV of property as long as combined recovery under both policies less than actual loss Bradley v. Allstate Ins. Co., 620 F. 3d 509 (5 th Cir. 2010)

29 Generally No Double Recovery Under Flood and HO Policies Espinosa v. Nationwide, 2008 WL (SD Miss.) (Senter, J.) Plaintiff s acceptance of flood benefits constituted admission of amount of flood damage and estopped PH from denying amount) Waters v. Nationwide, 2008 WL (S.D. Miss.) Applying offset of benefits collected under one policy; if total loss, recovery limited to either pre-storm value of property or limits of applicable coverage, whichever is lower NO DOUBLE RECOVERY FOR SAME PD

30 Valued Policy Law Considerations Florida VPL obligates insurers to pay limits if property is total loss BUT FLA VPL does not obligate insurer to pay total loss where a covered peril causes only part of a covered loss Florida Farm Bureau Cas. Ins. Co. v. Cox, 2007 WL (Fla. 2007) Chauvins v. State Farm, 450 F. Supp. 2d 660 (E.D. La. 2006) (applying same precept under La. law)

31 Louisiana VPL Does Not Bar Policy Loss Computation Clause VPL simply deems total loss at face value but does not trump clearly drafted loss calculation provision Addresses value of insured property but not causation requirements Express policy language regarding payment of covered losses not overridden by VPL

32 Legislative Developments COASTAL ACT S NFIP 5 year extension Senate proposed bill would allow for allocation between wind and flood damage under NFIP policies and private market based on NOAA data and poststorm formula on an individualized property basis

33 Claims Administration under NFIP Completed Proofs of Loss within 60 days of DOL No Waiver; No Estoppel; Strict Deadline One year SOL to commence suit No bad faith exposure Attorney fees discretionary Treasury Funds

34 QUESTIONS? William T. Salzer Swartz Campbell, LLC (215) George Carr Swartz Campbell, LLC (407)