By Bill Wein, President, IMS ExpertServices™
BullsEye Newsletter: March 2009
The 2008 hurricane season was the sixth most active tropical
storm season recorded since data collection began in 1851. Six storms
made U.S. landfall in 2008. They were hurricanes Dolly, Gustav and
Ike and tropical storms Edouard, Fay and Hanna. Ike, which made landfall
at Galveston, and Gustav, which made landfall in Louisiana, caused
the greatest destruction.
Current estimates project that Ike will be the fourth costliest Atlantic storm
to make U.S. landfall, behind Katrina, Andrew and Wilma, while Gustav is projected
to come in anywhere from number 12 to 20.
A number of key coverage issues emerged
in the aftermath of 2005’s Katrina
and the subsequent insurance claims litigation. Many of these issues are still
ongoing. They include the question of flood exclusions from homeowners’ policies;
issues of wind
damage versus water damage; and the question of potential agent
liability in situations where property owners felt their coverage wasn’t
adequate.
Some of these issues will continue to come into play in insurance cases
arising from Ike, Gustav, and the other storms of the 2008 season, while others
are not likely to be as significant. I spoke to some of IMS’s insurance
litigation clients to learn more about how insurance claims from the 2008 season
are likely to play out.
One difference we can anticipate with the 2008 season
fallout is that we won’t
see the same frontal challenges to flood exclusions that occurred after Katrina,
when plaintiffs argued that storm surge wasn’t flood. In light of these
challenges, some carriers changed the language of their flood exclusions, specifically
listing storm surge as a water exclusion. However, this change is not likely
to have much impact, because for the most part, the courts have already determined
that storm surge does equal flood. In the words of one AmLaw 100 litigator, “The
argument that storm surge doesn’t constitute flood is dead.”
The question
of wind damage versus water damage, however, is still very much in play. For
one thing, after Katrina some insurers refined the anti-concurrent clause conditions
in their policies, defining exclusions with even more precision. Anti-concurrent
clauses state, “We can exclude the following perils, alone
or in sequence.” They’ve been the basis of the rejection of wind-damage
claims in the Katrina aftermath. The anti-concurrent clauses at issue specify
that if a property is damaged by an excluded event, such as flood or earthquake,
then it doesn’t matter that the property was also damaged by a covered
issue, such as wind. In such cases, insurers argue, there is no coverage at all.
State
Farm and Nationwide have argued in the Fifth Circuit Court that if storm surge
destroyed the house, then wind damage didn’t matter. The court’s
response has been mixed. In some cases it found that when there was damage caused
by wind, then even if storm surge later swept the house away, the insurer still
owed something. In other instances, anti-concurrent clause conditions have been
upheld by the Fifth Circuit Court. It will be interesting to see how the Texas
courts handle the anti-concurrent causation provisions in the aftermath of Ike.
Another aspect of the wind versus water issue is the burden of proof. In situations
where the courts are allowing coverage for wind damage, how does one determine
which damage was caused by what? “During Katrina, people fled for their
lives. When they returned, sometimes there was nothing but a slab,” a hurricane
litigator recalls. “This became the plaintiff’s argument: the house
was knocked down by the wind.”
The difficulties of proof are substantial
in this situation, raising the question: where does the burden of proof lie?
Plaintiffs argue: my house is gone. That’s
the proof. But some carriers have pushed back, arguing that once they’ve
proved conditions were right for flooding to occur, then the burden of proof
shifts back to the plaintiff. Cases in Louisiana have gone both ways on this
issue. In Mississippi, the Supreme Court has agreed to address the wind versus
water issue in Corban v. USAA, which is still pending.
Because the wind versus water issue is still so unsettled, there’s a lot
of potential development on the question of damage causation. Teams of causation
experts will continue to be needed. These teams traditionally consist of meteorological
experts who perform forensic meteorology and weather reconstruction to opine
on storm conditions at a precise location and moment in time, and structural
engineers, who determine the effects of those conditions on existing structures.
Finally,
even when the damage is entirely caused by water, disputes will arise over the
cost of repairs. This is normal in the insurance industry, of course, and not
unique to hurricane claims. What is particular to hurricane insurance litigation
is the question of when the loss is valued. Since traditionally prices spike
in affected areas during the aftermath of a hurricane, the timing of the valuation
has a big impact. This question will only be exacerbated by the current state
of the economy.
“There are many more contractors willing to work for lower fees than there
were a year ago,” our AmLaw 100 client acknowledges. “However, in
insurance valuation, you value for what the cost will be for the next few months.
You would never say, it’s down now, but it’s going back up, so that’s
how we’ll value it.”
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