Hurricane Sandy will require insurers, insureds, counsel, and the courts to revisit many of the familiar coverage issues that arose out of the numerous past hurricanes in places like the Gulf states. 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.
Coverage and Exclusions
Most homeowners’ 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 also utilize this named-peril approach to the dwelling structure coverage.
A typical homeowners’ 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 it is 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 (for instance, levee issues).
The standard ISO commercial property policy issued to businesses is 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.
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 resulting from Hurricane Katrina and other 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 also 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 that the policy covers 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 of how the loss occurred. The efficient proximate cause does not have to be the cause that sets all of the other causes in motion, though. If the main reason the home was destroyed or damaged was because of 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.
In ruling on claims arising out of hurricanes, courts in the Gulf states 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 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 a claim under a property policy, the insured generally needs only to 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. For 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 winds 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’s premises. Thus, if a transformer and power lines are located on the insured’s premises and high winds damage these utilities, resulting in a house fire, 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 famous Seaside Heights boardwalk in New Jersey. 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 similar 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 it was a “post-tropical storm” rather than a hurricane.
Possibly because of this description by the National Weather Service, the governors of New York, New Jersey, and Connecticut issued press releases stating that hurricane deductibles would not apply to losses arising from this storm. The governor of Pennsylvania announced that homeowners in that state would 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.
Coastal Act Formula
In an attempt to solve the wind-versus-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-upon 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, similar storms. Whether the Coastal Act formula will be available to be implemented to resolve the issues in litigation arising out of Hurricane Sandy remains to be seen.
Aerial Imaging Shines
As the effects of Sandy unfolded across the Northeast, several major insurance carriers and independent adjusting firms turned to aerial image-based technology to help assess the storm’s widespread impact and analyze its effects on the individual properties of their policyholders.
Key forensic information, such as determining if damage was caused by the storm’s surge waters or its winds, needed to be analyzed and documented on a large scale. The importance of acquiring this information quickly was intensified by the incoming nor’easter bound for many of the same areas just a few days later.
For insurance professionals planning and executing response operations in the wake of Sandy, policies in force could be overlaid on imagery, located, viewed, and inspected. The immediacy of the imagery allowed adjusters to view the condition of properties not long after the storm had left the area and make informed decisions on managing the claim based on a solid understanding of the current state. In the weeks following the storm, this aerial imagery was employed to:
Identify the inland edge of the storm surge, helping draw distinction between wind and water claims. This could be done by simply viewing the surge debris lines in comparison to the insured property;
Immediately gain access to even the most heavily damaged areas for initial assessments without the need to have an adjuster physically go on-site;
Extract a date- and time-stamped pictorial documentation of property condition;
Confirm loss reserve estimates by visualizing the extent of the storm’s impact; and
View comparisons of the actual surge against existing surge models for future policy underwriting consideration.