Top 10 Lessons From Harvey and Irma
What insurers should consider before the next big storm
After Hurricanes Harvey and Irma, insurers have stepped up to help their customers resolve claims as quickly as possible. Claims professionals work around the clock to help customers rebuild and get back to business. After reviewing claims from these two recent storms, lessons have emerged. Here are the top 10 lessons for claims professionals to consider before the next catastrophic storm.
1: FEMA Claims Process
In some instances, the Federal Emergency Management Agency (FEMA) steps in to help provide temporary economic relief to businesses affected by a major natural disaster. FEMA funds may decrease the total loss from an insurer’s perspective, but policyholders may argue that FEMA payments reduce a self-insured retention. When an insurer cannot settle a claim as soon as it would like because of an extended FEMA claim, the best practice is to arm itself with the most reliable and up-to-date information possible related to the insured’s request for FEMA funds. Information critical to the proper adjustment of a claim and information that an insured must provide to FEMA includes the nature of the loss, the expense for which FEMA funds are requested, and the actual amount paid by FEMA. A Freedom of Information Act request may help obtain such information when the insured does not provide it.
2: Civil Authority Coverage
Civil authority provisions cover business income losses sustained during the period of time when access to property is impaired by order or action of civil or military authority issued in connection with or following a peril insured against. Most policies contain three requirements: The order must (1) prohibit access to the insured premises; (2) address physical damage to property, other than insured property; and (3) pertain to damage caused by a peril covered under the policy. Some courts enforce such requirements strictly. For example, in South Texas Medical Clinics v. CNA Financial Corp., a federal court in Texas did not permit recovery under the “civil authority” clause for losses caused by a mandatory evacuation order that was issued as Hurricane Rita approached Texas because “the official who issued the evacuation order did so because Rita was threatening the Texas coast, not because Rita had already caused property damage in Florida.”
3: Off-Premises Power Coverage
Power outages are common after hurricanes, but most commercial property insurance policies do not cover business interruption losses caused by off-site damage unless off-site power outage coverage is purchased by endorsement. Endorsements vary widely with regard to the scope of coverage (only “off-premises power” or also “off-premises utilities”) and exclusions. For example, finding no coverage for a Hurricane Ike claim in Houstoun, Woodard, Eason, Gentle, Tomforde & Anderson Inc. v. Escalante’s Comida Fina Inc., an intermediate court in Texas set aside a jury verdict that did not enforce an exclusion for loss caused by off-premises damage to overhead power lines.
4: Independence of Consultants
In the aftermath of Hurricane Katrina and Superstorm Sandy, some insurers faced allegations of bad-faith control of consultants and/or manipulation of their reports. Insurers are advised to hire engineers, independent adjusters, and other consultants with peer-review credentials and the ability to handle the large volume of claims. Other protocols that have proven effective include requiring the lead engineer advising on each claim to visit the site of the loss, documenting the professional’s independent judgment in reports, and preventing engineers and other consultants from subcontracting their responsibilities to others.
5: Wind, Rain, or Named Storm?
The wind-or-rain issue remains an issue for insurers to determine, according to the policy language applicable to each loss. Policies often provide different limits, sub-limits, and scope of coverage for a “named storm” (e.g., coverage for storm surge could vary depending on whether it is deemed to be caused by a named storm or a general flood). Sometimes the loss is caused by both, which means jurisdictions will vary as to how they handle mixed causation. Policyholders generally have the advantage in Florida, but Texas courts are more likely to enforce exclusions that unambiguously apply to a loss. Compare Sebo v. Am. Home Assurance Co. Inc., which said that “it seems logical and reasonable to find the loss covered by an all-risk policy even if one of the causes is excluded from coverage,” to JAW The Pointe LLC. v. Lexington Ins. Co., which said there is no coverage where “‘excluded and covered events combine to cause’ a loss and ‘the two causes cannot be separated.’”
6: Claims Triage
Many storm claims can be resolved within 60 days. The most important step in closing these claims is to confirm the insured’s agreement to a fair payment, preferably in a sworn proof of loss. However, some claims take longer, so an effective practice to resolve such losses is for claims professionals to constantly identify areas of agreement and narrow the areas of disagreement. Delayed resolution—taking more than six months to resolve a loss—presents the greatest risk. If a claim is not resolved within a few months, or if there appears to be undue involvement from attorneys or public adjusters, then insurers are advised to invest their best resources, in the form of senior claims professionals, proven consultants, and extensive documentation, to identify, document, and address the disagreements.
7: Texas’ New Notice Requirement
On Sept. 1, 2017, HB 1774 went into effect in Texas, potentially reducing the damages that insurers will face for violating the Texas Insurance Code. Prior to the new law, if an insurer was found to have violated the Texas Insurance Code in the handling of a claim, then the insurer would be required to pay 18 percent interest on the claim as damages. The new law changes the interest rate to five percent plus the interest rate determined under Section 304.003. Therefore, pursuant to these statutes, the current interest rate that insurers would have to pay as damages is 10 percent of the amount of the claim. Further, Texas law requires a person seeking damages to provide at least 60 days written notice prior to filing suit. Notably, the new statute is not retroactive and will only apply to Notices of Action sent after the new law went into effect on Sept. 1, 2017.
8: Florida’s Civil Remedy Notice
Florida’s bad-faith statute (Fla. Stat. § 624.155) outlines certain actions by an insurer that permit a person to bring a civil action against it when the person is damaged by any of the specified acts. One such act is when an insurer does not attempt to settle claims in good faith when, under all of the circumstances, it could and should have done so had it acted fairly and honestly toward its insured and with due regard for the insured’s interests. However, before a suit can be filed, the insurer must be given 60 days’ written notice of the alleged violation. Upon receipt of such a civil remedy notice, an insurer has 60 days to pay the damages incurred by the individual bringing the claim or to correct the alleged violation. A Florida district court recently held in Landers v. State Farm Florida Ins. Co. that the law neither specifies a time limit for filing a civil remedy notice, nor requires that a final determination of coverage and damages be made prior to the filing.
9: Georgia’s Diminished Value
Georgia’s bad-faith statute (O.C.G.A. §33-4-6) is simpler than the framework of Texas or Florida. The statute imposes a 50 percent penalty on top of covered damages when an insurer fails to pay a claim within 60 days of a pre-suit demand without a good reason. The most significant issue in Georgia is that policyholders can recover post-repair “diminution in value” of real property, even under standard commercial property policies that give the insurer the right to pay the lower of repair costs or lost market value. Notably, in 2016, a federal court certified a class action brought by policyholders with unpaid “diminution in value” water damage claims. Insurers are advised to ensure claims settlements address not only the agreed scope of repair, but also any related questions of value.
If a dispute arises over the value of a claim, then most policies call for an appraisal. Appraisal is a dispute resolution mechanism in which the determination of the amount of a loss is submitted to a three-person appraisal panel. Advantages of this process are that it is inexpensive, faster than litigation, and more likely to result in fairness and finality. Further, the process allows the disputed cost of repairs to be determined by repair professionals rather than judges and lawyers. A limitation is that appraisals usually cannot address coverage issues, which typically are questions of law for a court to decide. Most importantly, parties can use appraisal to get the right number while minimizing the risk and time lost litigating extraneous claims, such as fraud against policyholders or bad faith against insurers.
The post-hurricane period is difficult for insurers and policyholders alike. Paying attention to the 10 issues discussed should help insurers settle claims quickly and fairly.
For more recommendations about claim triage, the authors recommend Superstorm Sandy: Minimizing Extra-Contractual Risk in Late-Filed Claims, written by J. Randolph Evans, J. Stephen Berry, Alan Kaufman, and Michelle Swiren Zaltsberg, ABA Insurance Section (May 21, 2013).
For more recommendations about using appraisal to minimize litigation risks, see Appraisal in Property Damage Insurance Disputes, written by J. Randolph Evans, J. Stephen Berry, and Robin A. Besaw (CLM, 2013).