The nor’easter that was expected to hit the storm-ravaged East Coast Wednesday night could further complicate the existing minefield of insurance coverage issues created in the wake of Hurricane Sandy.
And as with many areas of the law, the devil is in the details when it comes to coverage disputes, making the likelihood of litigation in Sandy’s wake quite high. That is only compounded by the fact that the storm hit one of the most populated regions of the country, increasing those with claims to make.
William Krekstein of insurance boutique Nelson Levine de Luca & Hamilton said the region and the insurance industry could be dealing with two storms hitting the same area—areas in which people might not have had access to since Sandy struck. The second storm might create different damage, complicating the causation issue, he said.
“It’s really going to compound the difficulty that both insurance companies and insureds have,” Krekstein said.
Cozen O’Connor’s Richard Mackowsky, a member of the firm’s global insurance group, said new damage from a second storm could result in a separate occurrence, potentially requiring a separate set of deductibles.
If there is damage caused by a second storm but related to the first storm, issues arise as to whether there were one or two occurrences. A second storm could impact causation as to what is really driving the loss. If the only reason the second storm caused damage was because of damage from Sandy, the question then becomes whether that is a covered cause of loss, Mackowsky said. A second storm could trigger a separate limit of liability if it’s a big enough situation, he said.
But even one storm can create causation questions. Was the damage from wind or flooding? Not a simple question to answer, litigation stemming from previous storms has shown.
“There’s definitely going to be a big wind-versus-flood issue, which was a big issue coming out of Hurricane Irene and Tropical Storm Lee last year,” Krekstein said.
On top of that, the same type of litigation seen after Hurricane Katrina could also present itself in Sandy’s wake, he said. Business interruption coverage and civil authority coverage issues could come into play.
When home and business owners are forced to evacuate a certain area, business operations are affected. Some policies provide coverage for business operation losses, but often that coverage has to result from a direct physical loss. That could present problems for businesses that evacuated but didn’t suffer physical damage, Krekstein and Mackowsky noted.
Business owners would most likely have to have more than just traditional business interruption coverage, but the broader contingent business interruption coverage, they said. That type of coverage might cover a business that suffered losses because a supplier couldn’t deliver goods or customers couldn’t get to the store.
“On the business interruption side, it more becomes a battle over the relationship between the business interruption and the property damage,” Krekstein said.
Mackowsky said civil authority coverage is standard in some policies and an option in others. He said it requires a strict order that prohibits access to an area. That coverage may not kick in for a few days after the area is evacuated and could be cut off by around 30 days, Mackowsky said.
Flood, surge, does it matter?
While many policies exclude coverage for flooding, Mackowsky noted one of the big issues on the Jersey Shore and in parts of New York was water damage from storm surge. He said storm surge is driven by hurricane-associated winds.
Insureds argued in Katrina, and could do so after Sandy, that storm surge losses weren’t losses due to flooding, but were part and parcel of the wind storm, Mackowsky said. In Katrina, the flooding was associated by the insureds with the failure of levees, which they argued was a man-created problem.
“That argument, we learned in Katrina, hasn’t worked,” Mackowsky said. “Courts have rejected such arguments.”
He noted, however, that it wouldn’t prevent someone from raising the argument again.
“Having said this, I think for the most part it’s fair to say, where the cause of damage is inundation with water in places where it doesn’t ordinarily exist, it will be considered flood damage,” Mackowsky said.
Homes or businesses that suffered water damage could also have suffered wind damage, he noted. And water that entered the home due to an opening in the property created by wind, such as a broken window, would not be considered flooding, Mackowsky said. He said figuring out what caused what damage will be an issue for adjusters and potentially the courts.
In Pennsylvania, inland New Jersey and parts of Manhattan that weren’t flooded, loss of electric power was the big issue. Mackowsky said that, generally, the mere loss of power to a home or a business won’t trigger property insurance coverage and won’t give rise to covered business interruption insurance.
But if loss of power results in loss of a restaurant’s frozen goods, for example, that may trigger the coverage. Some policies have utility service interruption coverage. But the bulk of policies will require some sort of property damage for the business interruption coverage to kick in. And in that case, it often has to be damage to the utility that would be covered by a business’s individual policy. So, for example, if electrical equipment gets flooded and causes a power outage and a business didn’t have flood insurance, the business is out of luck, Mackowsky said.
Governors from a number of states affected by Sandy have said insurance companies are not permitted to apply what is known as “hurricane deductibles” because Sandy was not actually a hurricane by the time it hit their states. Such deductibles apply when hurricanes cause damages, allowing insurers to require a percentage of the property value as a deductible rather than the typical set payment of around $500 or $1,000.
Mackowsky noted that most homeowner policies have hurricane deductible language that is dictated by the state insurance commissioners and will most likely not create any problems or litigation post-Sandy.
But commercial policyholders often have varying language in their hurricane deductible provisions that might specifically note the word “hurricane” or might mention instead the phrase “windstorm.” That means the applicability of the provision under the mandates from these governors would vary from policy to policy and may be open to interpretation, Mackowsky noted.
K&L Gates attorneys David F. McGonigle, John M. Sylvester and Paul C. Fuener authored an insurance coverage alert for clients Oct. 30 as Sandy was still making its way across Pennsylvania. In it the lawyers identify a number of common insurer responses to claims and ways in which insurers might look to restrict coverage.
The alert emphasizes that many of these claims will come down to the specific policy language in each individual policy. Beyond that, there could be some debate over what constitutes a policy’s use of the term “business interruption” and whether the interruption was “necessary,” the alert noted.
“Insurers may argue that at least some part of the interruption or reduction in a policyholder’s business was the result of a normal business decision by the policyholder or the consequence of an economic downturn, and was not made ‘necessary’ solely because of damage to insured property,” K&L Gates noted in the alert.
The firm also noted that the validity of defenses or limitations to coverage may vary depending on whether the policy is governed by laws of the United States, the United Kingdom, Bermuda or another jurisdiction.
Krekstein said insurance companies were sending out robocalls to policyholders in advance of the storm in an effort to urge policyholders to be proactive and, in the event there is damage, encourage claims to be filed as soon as possible so as to mitigate further losses.
No matter the preparation, Sandy’s reach and an impending second storm make the related insurance issues “complicated” and “unique,” the attorneys said.
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I think for the most part it’s fair to say, where the cause of damage is inundation with water in places where it doesn’t ordinarily exist, it will be considered flood damage.
of Cozen O’Connor’s global insurance group