English: A diagram of the location of tornado alley and the related weather systems (public domain, NOAA). (Photo credit: Wikipedia)

Tornado season is right around the corner here in the United States.  May and June are typically the most active months of the year for tornado genesis across the Great Plains.  Tornado Alley, as the nickname goes, sees a very large number of super cell thunderstorms which are perfect producers of violent EF2 or greater tornadoes.  The boundaries of Tornado Alley reach from south/central Texas up to northern Iowa and east/west from Missouri to Colorado.  Other areas prone to tornadoes in the U.S. include Florida and the Gulf Coast which is named the Dixie Alley and has a relatively high number of tornadoes occurring in the late fall, October through December.  As many as 1,200 tornadoes hit the U.S. every year and recent years have shown that as our planet’s climate continues to fluctuate we are seeing even stronger storms and resulting tornadoes.  But tornadoes are not limited to just the United States.  In fact, tornadoes occur in many parts of the world, including Europe, Africa, Asia, South America and even Australia.  These regions are more likely to experience increased tornado potential in parallel to the time of year in which increased solar energy and strong frontal storm systems are the norm for that area.  Thus, tornadoes can occur (and do so) pretty much year round on planet earth.  

A Doppler on Wheels (DOW) unit observing a tornado near Attica, Kansas. (Photo credit: Wikipedia)

Tornado Damage/Coverage:

Over the past decade, insured losses from tornadoes have ranked second behind losses from hurricanes and tropical storms.  Tornadoes can cause extensive damage to your property due to the extremely high wind speeds they generate.  Depending on where the tornado ranks on the F-Scale (from 0-5), damage can be anything from a few broken windows and exterior issues or damaged roof, to completely losing your commercial building, business or home.  Insurers have been examining the underwriting of reoccurring natural disasters such as tornadoes in the past few years due to a noticeable increase in severity and size of these events.  U.S. insurers lost nearly $26 billion on tornadoes and related storms in 2011 which was more than the previous record for tornado related losses.  Perhaps the most tragic tornado related event occurred in Joplin, MO in May of 2011 when a very powerful EF-5 tornado took at least 161 lives and injured many more.  The tornado caused total destruction of much of the cities’ infrastructure, homes and businesses.  And as we’ve seen since the disaster, now almost 2 full years since it occurred, many claims have still not been settled with insurers.  Joplin’s total losses from the EF-5 tornado were eventually tallied at upwards of $2 billion dollars.

Property managers and owners should review their coverage accordingly to be sure that the coverage in place is adequate in light of the risks they are exposed to.  Full replacement cost coverage is of course ideal, but one should also be informed of the policy’s limits and exclusions, and for business owners, proper business interruption coverage should be in place as well.  In Texas (as well as some other states) additional coverage for windstorm or hail damage is available via a special insurance pool called the Texas Windstorm Insurance Association which requires an inspection and certain building standards to qualify.  In many cases concerning tornado damage, homes and commercial properties are not insured for their full value, which can leave property owners stuck with the difference of what they are insured for and what their damaged property is actually worth.   Insurers in many tornado prone areas do not include windstorm coverage in their common policies due to higher risk of such an event occurring.  It is imperative for you as a commercial property manager or homeowner to review your policies’ coverage limits and if needed, purchase additional windstorm coverage for the proper value of your home or property.

Related articles

• 4 Things You Need to Know About Tornado Season (livescience.com)
• Deadly Tornadoes Remembered Two Years Later (witn.com)
• Could global warming change tornado season, too? (rdmag.com)
• Weather official: Expect active tornado season ahead (kansas.com)
• Global warming to change tornado season? (wcpo.com)

“Headed North?  What you need to know, regulations wise: Florida vs New Jersey & New York”

Regulations can be completely  different from state to state.  Many public adjusters from Florida are taking their expertise to other states when catastrophic losses like Tropical Storm Sandy affect policyholders nationally.  It is imperative that a public adjuster understand the difference in regulations from state to state.  This course will concentrate on the differences in regulations between Florida, New Jersey and New York.  

 Find more info regarding the FAPIA Spring Forward Seminar here.

Authors: William A. Schreiner, Jr., Heidi H. Raschke, William R. Lewis,

Craig A. Jacobson, Christina M. Phillips, James P. Bobotek,

Jay M. Levin, Lisa A. Szymanski, Anthony B. Crawford,

and Christine T. Phan 

–William A. Schreiner, Jr. is counsel in the Washington, D.C., office of Zuckerman

Spaeder LLP. Heidi H. Raschke is of counsel and William R. Lewis is a partner in the

Tampa office of Butler Pappas. Craig A. Jacobson is a partner in the Chicago office of Gordon

Rees LLP. Christina M. Phillips is an associate in the Chicago office of Childress

Duffy. James P. Bobotek is counsel in the Washington, D.C., office of Pillsbury Winthrop

Shaw Pittman LLP. Jay M. Levin is counsel and Lisa A. Szymanski and Anthony B.

Crawford are associates of Reed Smith LLP, resident in the firm’s Philadelphia office.

All are members of the firm’s Insurance Recovery Group. Christine T. Phan was an associate

in the Boston office of Zelle Hoffman Voelbel & Mason LLP at the time of this writing

and is currently assistant litigation counsel at Jenzabar, Inc. Mesdames Raschke and

Phillips are vice chairs of TIPS Property Insurance Law Committee. The authors wish to

thank Lisa Gehlbach of Zuckerman Spaeder LLP for her valuable assistance in preparing

the final document. 

Recent Developments in Property Insurance Coverage Litigation:

I. Introduction

II. Business Interruption/Civil Authority

III. Collapse

IV. Covered Property

V. Exclusions

A. Earth Movement

B. Dishonest Acts

C. Faulty Workmanship

D. Mold and Water Damage

1. No Direct Physical Loss

2. Anti-Concurrent Causation

E. Ensuing Loss

VI. Damages

A. Hold Back

B. Other Insurance

VII. Obligations and Rights of the Parties

A. Representations and the Application for Insurance

B. Examinations Under Oath

C. Proof of Loss

VIII. Appraisal

A. Scope of Appraisal

B. Timeliness of Demand or Refusal to Appraise

C. Enforcing and Modifying Appraisal Awards

D. Miscellaneous Appraisal Issues

IX. Miscellaneous Issues

A. Who Can Sue on the Policy and Collect Proceeds?

B. Suit Limitations

C. Bad Faith

I.       Introduction 

For the first time in several years, this year’s survey of developments in

property insurance law is not dominated by cases arising out of any one

particular substantive area. We discuss notable cases in many areas, but

there is no discernible overall trend or dominance by any singular substantive

event, like Hurricane Katrina or Chinese-manufactured drywall,

giving rise to one large set of claims. For example, we discuss the Seventh

Circuit’s rather unique application of a continuous trigger theory, more

often applied to a liability policy, to a property policy. We also look at

interesting cases involving the insurers’ reliance on, and some policyholders’

reluctance to participate in, examinations under oath.

II.      Business Interruption / Civil Authority

 The recent decision of Millennium Inorganic Chemicals Ltd. v. National

Union Fire Insurance Co. of Pittsburgh, PA1 adds to the relatively small

number of cases that have interpreted contingent business interruption

(CBI) coverage. In Millennium, the insured, a global producer of titanium

dioxide, claimed for business interruption losses it sustained due to the

loss of the natural gas supply at its plant in Western Australia. At issue

was whether the natural gas production facility was a “direct contributing

property” under the insured’s contingent business interruption coverage

even though the insured purchased the gas from an intermediary, which in

turn bought the gas from natural gas producers for resale.  Millennium’s

policies provided coverage for loss resulting from the interruption of business

caused by damage to or destruction of any of the real or personal property

described below and referred to as CONTRIBUTING PROPERTY(IES)

and which is not operated by the Insured, by the peril(s) insured against during

the term of this Policy, which wholly or partially prevents delivery of

materials to the Insured or to others for the account of the Insured and results

directly in a necessary interruption of the Insured’s business.2 

The policies did not identify specific contributing property or define

“direct supplier” and “contributing property.”  Neither the insurer nor

the insured argued that the language was ambiguous, but each offered

a contrary application of the CBI coverage. The court noted that the gas

company was a “supplier” of gas to Millennium, notwithstanding the

intermediary from which Millennium contracted to receive the gas. It held

that although the parties intended for CBI coverage to apply only to direct

contributing properties, there was no extrinsic evidence reflecting the

specific meaning of “direct” or how the coverage would apply in the context

of the insured’s natural gas supply.  Therefore, the court relied on contra

proferentem and resolved any ambiguity in favor of the insured. The court

concluded that the “natural gas production facility was a ‘direct contributing

property’ to Millennium’s [o]perations, so as to come within the CBI coverage”

of the policies, because the gas facility physically provided a direct supply of

natural gas to Millennium’s premises despite the fact that the gas facility and

Millennium did not have a direct contractual relationship.3

III. Collapse 

The question of whether coverage for “collapse” requires a building to

actually collapse or merely be structurally damaged and in danger of collapse,

albeit standing, continues to generate interesting case law. In Kappa

Ethanol, LLC v. Affiliated FM Insurance Co.,4 the Eighth Circuit affirmed a

trial court’s ruling that a property policy covered a collapse of ethanol

tanks where the tanks had shifted but remained standing, although it remanded

the case for a new trial on the issue of how imminent the collapse

of the tanks needed to be to trigger coverage.

The ethanol tanks in Kappa Ethanol were stainless steel tanks that began

to shift off of their concrete foundation rings soon after construction. The

ethanol plant owner reset the tanks on their foundations and replaced

the fill underlying them, but its property insurer declined to cover its

claim, citing the policy’s exclusions for faulty workmanship and settling.

The policy provided coverage for a collapse, but only as an exception

to the exclusion for loss caused by settling. In the ensuing coverage

case, the insurer did not object to a jury instruction that allowed the jury

to find a “collapse” without finding that the tanks were “in imminent danger

of falling down.”5 The jury found that $4 million of Kappa’s damages

were caused by a collapse.6

On appeal, the Eighth Circuit held that the insurer had waived its

argument that the loss was caused by a collapse because it had not objected

to the jury instruction.7 It held, however, that Nebraska law may

require the collapse to be “imminent,” and it remanded the case for a

jury finding on whether the collapse of the tanks was imminent.8

The Florida District Court of Appeal also confronted this issue in

Kings Ridge Community Ass’n, Inc. v. Sagamore Insurance Co.,9 where the

roof trusses of the insured’s clubhouse “deflected twelve inches” downward

and a drop ceiling similarly lurched downward. The policy defined

“collapse” as “an abrupt falling down or caving in of a building or part of a

building”; it also provided that a building “in danger of falling down or

caving in” or that is “standing . . . even if it shows evidence of cracking,

bulging [or] bending, leaning . . .” would not be considered to have collapsed.

10 The insured sued after the insurer denied the claim, and the

trial court granted the insurer’s motion for summary judgment, holding

that the clubhouse was not in a state of collapse that would trigger

coverage.11

The appellate court disagreed. It held that the downward movement of

the roof trusses and the drop ceiling constituted a “falling down” of those

elements of the building sufficient to trigger coverage; moreover, those

parts were not “standing” when a dictionary definition of that word,

meaning “upright on the feet or base,” was applied to the policy.12

IV.      Covered Property

In Tracy v. USAA Casualty Insurance Co.,13 the District of Hawaii had to

decide whether plaintiff could bring a breach of contract claim against

her insurer for failing to pay a claim for stolen property under her homeowners

policy. Her policy provided “coverage for loss to trees, shrubs, and

other plants.”14 She filed a claim for the theft of twelve marijuana plants

that she “lawfully possessed, grew, nurtured and cultivated . . . consistent

with the laws of the State of Hawaii,” which allows individuals “to possess

and grow marijuana for medical purposes.”15 USAA agreed to pay the

claim and issued a check, but when the insured complained that it was

not enough, USAA refused to make any further payments because it believed

plaintiff did not have an insurable interest in the plants.16 Relying

on the Hawaii Legislature’s intent that users of medical marijuana not

face criminal penalties,17 the court predicted “the Hawai’i Supreme

Court would hold that a qualifying patient who is in strict compliance

with the Hawai’i medical marijuana laws has a lawful interest [and thus

insurable interest] in her marijuana supply.”18 Despite this prediction,

the court granted the insurer’s motion for summary judgment, holding

that “[p]laintiff ’s possession and cultivation of marijuana, even for State authorized

medical use, clearly violates federal law. To require the insurer

to pay insurance proceeds for the replacement of medical marijuana plants

would be contrary to federal law and public policy.”19

In Gilbert v. Allstate Insurance Co.,20 plaintiff owned a building as a tenant

in common that he insured solely in his name.21 After a fire destroyed

the building, plaintiff filed a claim and defendant paid him for one-half of

the value of the property.22 The court held that “[w]hen two co-tenants

own real property which is damaged by a fire and insurance is procured

in the name of only one co-tenant, recovery under the policy is limited

to the insured co-tenant’s one-half interest in the real property.”23

V.     Exclusions

 A.  Earth Movement

The Supreme Court of New Hampshire held that an earth movement

exclusion did not bar coverage for damage caused when a cellar chamber

holding the insured’s septic pump gave way under the pressure of heavy

groundwater, allowing water to ruin the pump. In Barking Dog, Ltd. v.

Citizens Insurance Co. of America,24 the insured’s septic system failed during

a period of heavy rain and melting snow. Although its expert opined that

the underground septic box failed due to water pressure and the pressure

of water-swollen earth, the insurer declined coverage based on the earth

movement exclusion.25 In its declaratory judgment action, the insured argued

the earth movement exclusion gave way to the “Broad Form Water

Damage” endorsement it had purchased, which covered damage caused

by “water under the ground surface pressing on . . . foundations, wall,

floors [or] basements.”26 After the trial court held that the endorsement

trumped the earth movement exclusion, the insurer appealed. The New

Hampshire Supreme Court, affirming, rejected the insurer’s argument

that a subterranean septic chamber did not have a “wall,” “ceiling,” or

“floor” as those terms are commonly used.27 It also held that to the extent

the two conflicting provisions of the policy, the earth movement exclusion

and the water damage endorsement, were in conflict, the resulting ambiguity

was to be read in favor of coverage: “a reasonable layperson would

not understand that the additional coverage he paid for does not provide

such coverage.”28

Also during the survey period, a Massachusetts appellate court affirmed

a trial court’s holding that the earth movement exclusion barred coverage

for damage to a condominium unit where the insured’s expert opined that

the damage resulted from “hydro-compaction related to a leak in a water

pipe.”29 The insured in Audubon Hill South Condominium Association v.

Community Association Underwriters of America, Inc.30 argued that another

portion of the expert’s opinion, i.e., that the damage to the unit occurred

suddenly, made the loss a covered collapse despite the earth movement

exclusion, but the court held that anti-concurrent causation language in

the earth movement exclusion barred coverage.31

B.  Dishonest Acts

In 2315 St. Paul Street v. Hartford Fire Insurance Co.,32 an insured sought

coverage under a builder’s risk policy for a demolition contractor’s theft

of fixtures, construction equipment, and other items. The demolition

contractor was given unsupervised access to the property and had removed

the items without the owner’s permission while the property’s

supervisor was away on vacation.33 Upon learning of the items’ removal,

the property supervisor contacted the demolition contractor and entered

into a second contract under which the demolition contractor agreed to

“fulfill the terms of his original contract” and “correct and repair any damage

and replace any stolen or destroyed items at his expense.”34 When the

demolition contractor failed to honor the second contact, the insured contacted

law enforcement and filed an insurance claim for the theft.35 The

insurer denied the claim, contending the policy’s entrustment exclusion

precluded coverage because “the loss in question was caused exclusively

by dishonest and criminal acts of a contractor to whom you entrust[ed]

the property.”36 The trial court granted the insurer’s motion for summary

judgment, finding that the demolition contractor was responsible for the

theft and that the entrustment exclusion applied because the insured had

entrusted the property to the demolition contractor by providing the contractor

with “unfettered access to the property . . . and with the confidence

that he would complete the demolition work and secure the building.”37

C.  Faulty Workmanship

In 1765 First Associates, LLC v. Continental Casualty Co.,38 a tower crane

collapsed on a construction site. The insurer agreed to pay for certain

costs arising from damage to and cleanup of the construction site and

building stemming from the crane collapse.39 Relying on the faulty workmanship

exclusion in the builder’s risk policy, the insurer refused to reimburse

the insured for costs associated with construction delays resulting

from the collapse.40 In entering declaratory judgment for the insured,

the court held that

the Faulty Workmanship Exclusion, as it is most naturally read, does not

apply to losses related to accidents or equipment malfunctions during con-struction. . . .

[T]he Faulty Workmanship Exclusion applies only to losses attributable to the quality

of the constructed property and arising from defects in the materials or process used

by the insured or its agents to construct the property, that provision does not exclude

losses incurred during construction associated with the crane collapse.41

 D.  Mold and Water Damage

1. No Direct Physical Loss

In Miller v. Safeco Insurance Co. of America,42 the Seventh Circuit affirmed

the somewhat unique application of a continuous trigger to a first-party

insurance loss. The case presented the question of whether the insureds

experienced an “accidental direct physical loss to property” during the

policy period.43 After purchasing a home, the insureds discovered extensive

water and mold damage. Their insurer denied the claim on the basis that

the claimed damage did not occur during the policy period.44 With respect

to the question of when the loss occurred, the court observed thatWisconsin

law applies the “continuous trigger theory to determine the date of

injury in cases where the exact date of harm is uncertain and potentially occurring

over several policy periods.”45 The court was not persuaded that

this trigger theory is only applicable to liability insurance cases but also

found that the loss manifested during the policy period.46 Safeco argued

that “because the district court found that the property was a total loss

when the [insureds] discovered the problem, the water leakage and mold

growth [could not] have caused any direct physical loss to the property during

the policy period.”47 The court disagreed, stating, “That the degree of

damage put the home beyond repair doesn’t mean water leakage wasn’t still

causing further direct physical loss to the property during the policy

period.”48 The court also held that Safeco could not rely on any policy exclusions

because the insureds did not receive the policy until after they discovered

the loss. “Wisconsin law provides that an insurer cannot rely on a

policy’s exclusions when it fails to inform the insured of those terms.”49

In Universal Image Productions, Inc. v. Federal Insurance Co.,50 the court

affirmed summary judgment in favor of the insurer after finding that mold and

bacteria contamination did not constitute “direct physical loss or damage.”51

The insured was a tenant in a building where a “significant microbial

contamination” was identified in the heating, ventilation, and air conditioning

system, which required the system to be shut down (during 100 degree heat)

and the insured to relocate from the first floor to the third floor during remediation.52

The insured made a claim for lost leasehold improvements, cleaning and

moving expenses, and lost business income.53 The insurer denied the claim, arguing

that the insured had not suffered a “direct physical loss.”54 The policy did not

define “direct physical loss or damage,” but the insurer argued that mold and bacterial

contamination did not qualify because no property of the insured was

“structurally damaged.”55

The court held that although the insured had suffered an inconvenience,

it had not demonstrated that it had experienced any “tangible

damage” to its property.56 The court held the claimed cleaning and moving

expenses were economic, not tangible, losses.57

2. Anti-Concurrent Causation

During the survey period, three cases dealt with the application of anticoncurrent

causation issues in water damage claims. This issue often

comes up when determining whether wind, which is often covered, or

water, which is frequently excluded or limited, caused the loss in question.

In Robichaux v. Nationwide Mutual Fire Insurance Co.,58 the insurer denied

coverage for an insured’s claim for property damage following Hurricane

Katrina. The trial court granted summary judgment for Nationwide, finding

that the insureds failed to create an issue of fact as to whether their

home was damaged by wind or destroyed by flood.59 Although the fact

that the home was ultimately destroyed by flood was not disputed, the

Supreme Court of Mississippi held that it was error for the trial court

to have concluded that there was no issue of fact as to whether the

home was damaged by wind prior to the storm surge.60 Not all the damage,

the court found, was caused by a simultaneous convergence of wind

and water. Therefore, the anti-concurrent causation clause would not

apply to damage caused by wind prior to the storm surge.

Two Massachusetts cases addressed anti-concurrent causation clauses

in the context of surface water exclusions. In Boazova v. Safety Insurance

Co.,61 the insured brought a claim for water damage to her home,

which was built against the side of a hill with a full basement and garage

below the house. A concrete patio was added at the rear of the house at a

grade higher than the foundation. There was no waterproofing barrier or

membrane between the patio and the rear wall of the house to prevent

water from entering the home’s wooden frame. Extensive interior wall

damage was found during kitchen renovations.62 The insured informed

the insurer that ground water, surface water, or both entered the home

through the sill and rear wall where the patio was added.63 The insurance

company denied the insured’s claim because the damage was “caused by a

combination of surface water, deterioration, settling, and improper construction

of the concrete patio. . . .”64 The court agreed with the insurer,

unconvinced by the insured’s argument in favor of coverage built on a distinction

between “hidden seepage” and “surface water.”65 Because the

surface water exclusion included anti-concurrent causation language,

the court held that it barred coverage where the loss was caused by a combination

of covered and excluded perils.66

The same court reached the same conclusion in Surabian Realty Co. v.

NGM Insurance Co.67 The insured made a claim for damage caused when a

parking lot drain, which backed up during a heavy rainstorm, caused

flooding in the building. The insured argued that the loss was covered

as a result of “water that backs up or overflows from a sewer, drain or

sump.”68 The court found that although the loss did result in part due

to a backup, it was also caused by the accumulation of surface water.69

As a result, the policy’s anti-concurrent causation provision excluded coverage

for damage caused by surface water “regardless of any other cause or

event that contributes concurrently or in any sequence to the loss.”70

E.  Ensuing Loss

In Vision One, LLC v. Philadelphia Indemnity Insurance Co.,71 the insured

was developing a condominium project.72 Temporary shoring, which was installed

during construction to support the pouring of a concrete slab, failed; as a result,

the framing, rebar, and newly poured concrete crashed onto a lower level.73

The carrier denied coverage, contending that the builder’s risk policy excluded

faulty workmanship and defective design.74 The insured contended that the

resulting loss due to the faulty workmanship was the collapse of the concrete

and thus coverage should be extended.75 The court found that ensuing loss

clauses limit the scope of what is otherwise excluded under the policy because

they ensure that any ensuing loss that is otherwise covered remains covered

even if the original event is never covered.76 Applying this reasoning, the court

held that the collapse resulting from the faulty workmanship was covered due to

the ensuing loss clause.77

In Sprague v. Safeco Insurance Co.,78 the insured discovered that the supports

of a deck were improperly constructed and made a claim to its

insurer.79 The insurer denied coverage based on the defective construction

exclusion.80 The insured contended that the deck was in a state of

imminent collapse due to the rot and resulting damage from the defective

construction.81 The court found that the damage to the deck was excluded

by the policy because the rot and imminent collapse was only to the deck

itself.82 There was no damage to any other property that would have triggered

coverage under the ensuing loss provision.83

In Friedberg v. Chubb & Son, Inc.,84 the insureds discovered extensive

water damage to their home and requested coverage from their insurer.85

After an investigation, the insurer denied coverage, contending that the

water damage was a loss caused by faulty construction and therefore

was excluded from the policy.86 The insureds argued that the water damage

was an ensuing loss and thus an exception to the exclusion.87 Examining

Minnesota law, the court determined that an ensuing loss provision

applies only to “distinct, separable, ensuing losses.”88 The damage due to

faulty construction and resulting water intrusion were not “separable and

distinct perils.”89 The interpretation advocated by the insureds, it held,

would “nearly destroy the exclusion.”90 In the court’s view, “[t]o define

a loss that is contributed to, made worse by, or in any way results from

faulty construction as only the cost of remedying the construction defect

itself would be an unnatural reading of the language.”91

VI.    Damages 

 A.  Hold Back

In Florida Insurance Guaranty Association v. Somerset Homeowners Association,

Inc.,92 the Florida District Court of Appeal reversed a trial court ruling

and held that plaintiff properly withheld depreciation.93 After suffering

hurricane damage to its condominiums, defendant filed claims with its

insurer; when a dispute arose about the amount of loss, it was submitted

to appraisal.94 The umpire issued an award for both the replacement cost

value (RCV) and the actual cost value (ACV) of the loss.95 The insurer

neither timely paid the award nor contested it, and the insured obtained

a final judgment of $6,262,339 from the trial court as the ACV.96 The

insurer appealed on the grounds that the appraisal award included

$951,262 attributed to depreciation.97 The policyholder countered that

it should receive “the depreciation under the doctrine of prevention of

performance because [the insurer] failed to timely pay the appraisal

award.”98 Under the language of the policy, “an insured must actually

repair or replace the damage as a condition precedent to payment of

replacement costs.”99 The court found this policy language to be unambiguous

and remanded the case to the trial court to deduct the

depreciation.100

B.  Other Insurance

In Tyler v. Pacific Indemnity Co.,101 two parties entered into a land contract

for the purchase and sale of real property. Although the seller had existing

property insurance on the property, the land contract required the purchaser

to obtain property insurance on the property.102 Thus, two property

insurance policies were in effect at the same time on the property.103

After a fire occurred, the purchaser made a claim under his property policy.

The insurer denied the claim and, as a result, the purchaser filed suit

against the insurer.104 One issue on summary judgment was the insurer’s

reliance on the policy’s “other insurance” clause, which required a pro

rata allocation in the event that other property insurance applied to a covered

loss. The Eastern District of Michigan, applying Michigan law in

connection with “other insurance” clauses, held that those clauses “only

apply [when] the applicable insurance policies cover the same interests

in the same property.”105 In entering summary judgment in favor of the

purchaser, the court stated that “the policies were on the same property

and against the same risks[,] but on different interests and payable to different

parties. . . . As such, the other insurance clause does not apply.”106

VII.     Obligations and Rights of the Parties

A.  Representations and the Application for Insurance

In Sexton-Walker v. Allstate Insurance Co.,107 the insurer, investigating a

claim for water damage, learned the insured had made several misrepresentations

on her insurance application. The insured answered “yes” in

the application when asked whether “the dwelling . . . [was] on a solid

and continuous foundation,” but the insurer discovered “the property

was a mobile home and therefore not on a solid and continuous foundation.”

108 The insured also stated in the application that the property was

regularly occupied in the days and evenings, but she conceded in her

examination under oath that she “mostly live[d] in [another state].”109

Finally, the insured had made nine property claims in the last five

years, despite answering “none” when asked to describe her five-year

loss history at the residence.110 On appeal, the Fifth Circuit affirmed

the district court’s grant of summary judgment, finding the misrepresentations

were material and that there were no genuine issues of fact for

trial.111

In Landmark American Insurance Co. v. Moulton Properties, Inc.,112 the

insured made a claim for damage related to Hurricane Dennis. During

the claim adjustment, the insurers discovered that the “damage at issue

was not from Hurricane Dennis, but instead was unrepaired or partially

repaired damage from Hurricane Ivan.”113 The insured’s insurance broker

had previously submitted a property summary to the insurers during

the policy application process representing that the repairs of prior storm

damage from Hurricane Ivan were complete.114 The insurers rescinded

coverage and filed suit for declaratory judgment based upon the misrepresentations

made by the broker about the status of repairs for damage

related to Ivan.115 The district court rejected all of the insurers’ arguments

for rescission, and the insurers appealed.116 On appeal, the Eleventh

Circuit considered whether the insurance broker was acting as an

agent of the insured when it submitted the alleged misrepresentations

regarding the status of repairs.117 The court found that the broker was

in fact the agent of the insured and held that, based on Florida law and

the language of the brokerage contracts, all representations made by the

broker were attributable to the insured.118 The case was remanded to the

district court for a finding of whether the representations were material.119

In Landmark American Insurance Co. v. Moulton Properties, Inc.,112 the

insured made a claim for damage related to Hurricane Dennis. During

the claim adjustment, the insurers discovered that the “damage at issue

was not from Hurricane Dennis, but instead was unrepaired or partially

repaired damage from Hurricane Ivan.”113 The insured’s insurance broker

had previously submitted a property summary to the insurers during

the policy application process representing that the repairs of prior storm

damage from Hurricane Ivan were complete.114 The insurers rescinded

coverage and filed suit for declaratory judgment based upon the misrepresentations

made by the broker about the status of repairs for damage

related to Ivan.115 The district court rejected all of the insurers’ arguments

for rescission, and the insurers appealed.116 On appeal, the Eleventh

Circuit considered whether the insurance broker was acting as an

agent of the insured when it submitted the alleged misrepresentations

regarding the status of repairs.117 The court found that the broker was

in fact the agent of the insured and held that, based on Florida law and

the language of the brokerage contracts, all representations made by the

broker were attributable to the insured.118 The case was remanded to the

district court for a finding of whether the representations were material.119

B.  Examinations Under Oath

An increasing number of cases are holding that policyholders must submit

to an examination under oath (EUO) and answer questions as a condition

precedent to coverage; failure to comply can bar recovery under the insurance

policy. Occasionally, these cases have held that an insurer has the

right to examine an insured that no longer has an interest in the property.

For example, in Citizens Property Insurance Corp. v. Ifergane,120 the insureds

submitted a claim under a wind-only dwelling policy for damage from

Hurricane Wilma. The insurer made an initial payment and then requested

the EUOs of both insureds when it became concerned the property

had suffered damage not covered under the policy.121 The insureds

filed for divorce shortly after the claim was submitted, and as part of the

divorce Alexandra Ifergane “executed a quit claim deed to Haim Ifergane

granting him ‘all right, title, interest, claim and demand’ in the subject property.”122

Haim Ifergane submitted a proof of loss and sat twice for his EUO.123

However, Alexandra refused to appear, “asserting that she was not

obligated to do so because she had assigned [to her ex-husband] all of her

rights and interest in the property.”124 The insurer filed suit, seeking a

declaratory judgment that, among other things, the “assignment did not

relieve [Alexandra] of her obligations under the policy.”125

The trial court found that Haim was entitled to coverage as a resident

spouse co-insured who complied with the policy’s post-loss requirements,

and that Alexandra’s “alleged failure to comply could not be imputed to

him as an innocent co-insured.”126 It also granted Alexandra’s motion

to dismiss based on the fact she transferred her rights and never made a

claim for the insurance proceeds.127 The appellate court reversed, finding

that the insurer was entitled to an EUO from Alexandra as a named

insured and resident spouse with potentially material information, regardless

of the assignment.128 The appellate court further held that Alexandra’s

refusal to submit to an EUO precluded any recovery under the policy,

even for her ex-husband, because submitting to an EUO was a condition

precedent to coverage.129

In Portside Investors, LP v. Northern Insurance Co. of New York,130 the

owner of a pier on the Delaware River filed an insurance claim after the

pier collapsed. Shortly thereafter, the insured’s principal was indicted for

“involuntary manslaughter and other offenses related to ignoring warnings

by engineers and others that the pier was unsafe and in danger of imminent

collapse.”131 The insurer requested the EUO of the indicted principal to

investigate his knowledge of the pier’s decay before its collapse and refused

to further adjust the claim without his EUO.132 On appeal, the insured

claimed this position was a “bad faith delay tactic, as there was no reason

to believe [the principal] could do anything at that point except exercise

his Fifth Amendment rights throughout the course of his criminal

case.”133 The appellate court affirmed the trial court’s denial of the insured’s

statutory bad faith claim related to the EUO request, noting that,

under the insurance policy, “coverage was unavailable for the . . . loss

caused by ‘decay’ unless the decay was ‘hidden decay,’ ” and that the “indictment

gave reason to believe [the pier’s] collapse resulted from something

other than hidden decay.”134 Thus, the EUO request sought information

material to the coverage analysis and was a reasonable part of the

investigation into whether the pier decay was actually hidden decay

unknown to the insured before the collapse.135

C.  Proof of Loss

In Telerico v. Nationwide Mutual Fire Insurance Co.,136 the insureds submitted

a notice of claim after their home was damaged when its roof sagged

and leaked. The insurer began an investigation of the loss but closed its file

after the insured failed to submit a completed proof of loss as requested.137

The insureds filed suit several years later, and the insurer moved for summary

judgment claiming the insureds could not recover under the policy

for six reasons, including their failure to timely return their proof of loss

as required under the terms of the policy.138 The policy stated that the

insured was required to submit a sworn proof of loss within sixty days

after requested by the insurer.139 In their depositions, the insureds both testified

that they had “no memory” of sending the proof of loss to the

insurer.140 However, one of the insureds submitted an affidavit after his

deposition asserting that he had properly mailed the requested information

to the insurer.141 The district court granted summary judgment to the

insurer because the insured had not established that the proof of loss was

properly mailed and timely received, which was a condition precedent to

recovery under the policy.142 Regarding the affidavit, the court followed

the Sixth Circuit’s instruction that a factual issue is not created when a

party files an affidavit that contradicts his earlier deposition testimony

after a motion for summary judgment has been made.143

VIII.     Appraisal 

 A.  Scope of Appraisal

In Auto-Owners Insurance Co. v. Second Chance Investments, LLC,144 the

issue was whether the district court erred by denying the insurer’s motion

to compel appraisal to determine whether the fire resulted in a total loss

to the insured’s property. In this case, the property caught fire and certain

areas of the residence were charred and burned, while other areas were

completely destroyed.145 The insured filed a proof of loss with the insurer

claiming that it was a “total loss” and asserted it was entitled to payment

of the policy limits.146 The insurer demanded appraisal to resolve both

the scope of the damage and the amount of the loss.147 The insured,

which contended an appraisal was inappropriate, insisted that it would

proceed only if the appraisal panel’s determination would be binding as

to whether a total loss occurred.148 The insurer then filed suit, seeking

a declaration that all issues be submitted to appraisal, including the determination

as to whether the property suffered a total loss.149 The district

court denied the motion, holding that there were genuine issues of material

fact and ordering that the issue of whether the property suffered a

total loss be submitted to a jury.150

The appellate court affirmed, holding that the determination as to

whether fire damage caused a total loss is beyond the scope of an appraisal

panel’s authority.151 Noting that questions of law are outside the scope of

an appraiser’s powers, the court held that appraisers do not have the

authority to determine liability under an insurance policy.152 Therefore,

the district court did not err in concluding that a jury must make the

determination.

In Quade v. Secura Insurance,153 the insured submitted a claim for storm

damage to several buildings. The insurer paid for some of the damages

but determined that the roofs of the buildings were not covered and

informed the insured that it should initiate an appraisal if it disagreed.154

Instead, the insured filed suit, arguing that the appraisal clause did not

apply to its claim for damage to the roofs because the policy covered roof

damage.155

The district court concluded that determining the amount of loss

under the appraisal clause included a causation element and ordered the

parties to appraisal.156 The appellate court reversed the decision, conclud-

ing that resolution of the claim required determination of legal questions.

157 It held that appraisers have the authority to decide the “amount

of loss” but may not construe the policy or decide whether the insurer

should pay.158 Thus, the appraisers must necessarily determine the cause

of the loss as well as the amount necessary to repair the loss, but cannot

go beyond that scope and interpret policy exclusions.159

B.  Timeliness of Demand or Refusal to Appraise

In Amerex Group, Inc. v. Lexington Insurance Co.,160 the Second Circuit

held that an insurer’s appraisal demand made six years after the loss was

still timely in a case where the insured contributed to the delay. In Amerex,

a 2001 flooding loss resulted from an equipment collapse that set off sprinklers.

Two years later, the insured submitted its proof of loss to its primary

and excess property carriers. The primary insurer paid its policy limits, and

the insured sought to collect the remaining $6.3 million from its excess insurers.

Those insurers ultimately denied the claim in 2006 based on the

insured’s failure to document the claimed loss of its business income.

The parties then proceeded to mediation, in which the insurers made a settlement

offer.161 The insured rejected the offer and filed suit in 2007.162

In response, the excess insurers moved to compel appraisal.163 The

insured objected, arguing the demand was untimely and was made only

to preclude the insured from prosecuting its claims and obtaining discovery.

164 The district court granted the excess insurers’ motion.165 On appeal,

the insured claimed that the excess insurers’ appraisal rights were waived

because they had failed to invoke them within a reasonable time.166

The Second Circuit affirmed the appraisal demand. The court found

that the insurers did not waive their appraisal rights by asserting them

after the insured initiated litigation because much of the delay was due

to the insured’s inaction, i.e., specifically, its failure to promptly produce

necessary documents.167 Furthermore, the parties engaged in good faith

negotiations prior to the appraisal demand.168

C.  Enforcing and Modifying Appraisal Awards

In First Protective Insurance Co. v. Hess,169 First Protective challenged an

appraisal award because the trial court affirmed the award without reducing

it based on certain limits in the insured homeowner’s policy. The policy

contained a $1,000 deductible for all perils except for those caused by

hurricanes.170 Furthermore, the policy also provided “Special Limits of

Liability” for certain items of personal property like money, gold, and

jewelry.171 The insured made a claim for losses after her home was burglarized.

The appraisal panel issued an award to the insured for $130,011.172

The appraisal award was not itemized.

First Protective issued a check for $28,994 based on its own calculation

of the applicable deductibles and limits.173 The insured sued, seeking confirmation

of the original appraisal award amount. The trial court affirmed

the original award, finding that it could not make the insurer’s adjustments

to the award because, in order to do so, it would need to take testimony

from the appraisal panel, which was neither contemplated by the

policy nor permitted by Florida law.174 The Florida District Court of

Appeal affirmed.175

D.  Miscellaneous Appraisal Issues

To encourage insurers and insureds to resolve disputes without resort to

litigation or appraisal, Florida Statutes § 627.7015 requires insurers to

notify insureds of their right to participate in mediation when a firstparty

claim is made. If the insurer fails to do so, the insured is not required

to submit to appraisal as a precondition for a suit for breach of

contract for the insurer’s failure to pay the claim. In Gassman v. State

Farm Florida Insurance Co.,176 the Florida District Court of Appeal enforced

the statute in favor of the insured, finding that Gassman was not

required to submit to appraisal because of the insurer’s failure to comply

with the statute.

However, the insured unsuccessfully attempted to invoke the statute in

another Florida case.177 In American Integrity Insurance Co. of Florida. v.

Gainey, the insured claimed damage, which the insurer paid in part, to

her home from a water leak.178 The insured responded that the payment

was “significantly inadequate” to cover the losses and subsequently filed a

breach of contract suit against the insurer.179 The parties engaged in

mediation at the insured’s request, but once mediation proved unsuccessful,

the insurer requested appraisal.180 The insured moved to enjoin

appraisal, arguing that the insurer had waived its right by failing to provide

notice of mediation pursuant to the statute.181 On appeal, the

court noted the statute was meant to encourage insurers and insureds to

“use the mediation process to encourage an inexpensive and speedy resolution

of insurance claims prior to commencing the appraisal process,

or commencing litigation.”182 The court found that the insured could

not rely on the statute because she had rendered it inapplicable by filing

suit.183

IX.    Miscellaneous Issues

A. Who Can Sue on the Policy and Collect Proceeds?

In Stone Flood & Fire Restoration, Inc. v. Safeco Insurance Co. of America,184

the Supreme Court of Utah held that simply by signing a nonwaiver

agreement as the “named insured” and the “spouse,” the shareholders

of a closely held corporation did not gain standing to sue for breach of

a property insurance policy issued to the corporation.185 In rejecting

the shareholders’ argument that identifying themselves as “named insured”

and “spouse” on the nonwaiver converted them into “de facto insureds,”

the court reasoned that “[a] contrary conclusion would lead to

the absurd result that Safeco insured the Stones’ personal property when

they paid no premiums to gain that coverage.”186 The court also held

that the shareholders lacked standing to pursue their claim for intentional

infliction of emotional distress against the insurance company on the

grounds that their alleged injuries were derivative of injuries to the insured

corporation.187

In Peters v. Lexington Insurance Co.,188 the Hawaii District Court held

that condominium owners did not have standing to sue under a property

insurance policy issued to the condominium’s homeowners association.189  \

The court also rejected the owners’ assertion that a state statute requiring

insurance policies covering buildings with attached units to cover individual

units and common spaces conferred on unit owners standing to sue

under such policies.190 Interestingly, the court noted that although the

owners did not have standing to sue under the association policy, they

nonetheless had the legal remedy of suing their own association for failing

to vigorously seek coverage from its insurer.191

B.  Suit Limitations

Two cases decided under Georgia law during the survey period grappled

with the consequences of a state statute that required contractual limitations

periods in all multiline property policies to be as favorable as the two-year

limitations period in the state’s standard fire policy. In White v. State Farm

Fire & Casualty Co.,192 the Supreme Court of Georgia answered a question

certified to it by the Eleventh Circuit, asking whether the Georgia Commissioner

of Insurance acted within its legal authority in enacting the statute.

The court held that the commissioner had authority only to require that

the two-year limitations period be incorporated into the fire coverage portion

of a multiple-lines policy.193 As such, the court held that a policyholder’s

claim for personal property loss resulting from a burglary was subject to

the one-year limitations clause in his multiline policy.194

In Jenkins v. Allstate Property & Casualty Insurance Co.,195 the Eleventh

Circuit rejected the policyholder’s argument that because the one-year

limitations period in her property insurance policy did not conform to

the two-year limitations period in the standard fire policy, Georgia’s

six-year statute of limitations for contract causes of action should apply

to her suit against the carrier.196 Instead, the court applied the two-year

limitations period prescribed in the standard fire policy on the grounds

that the “at least as favorable” language in the policy’s conformity provision

made it clear that “the parties intended . . . to substitute the closest

limitations period permitted by the relevant state law.”197

Other cases have addressed waiver of a policy’s suit limitations clause.

For instance, in Jackson v. State Farm Fire & Casualty Co.,198 the Sixth Circuit

held that the insurance company did not waive its right to enforce a

policy’s one-year limitations period where the policyholder presented no

evidence that:

(1) the carrier indicated that it was liable under the policy,

or

(2) that the carrier’s actions caused the policyholder to delay filing

suit.199

Conversely, in Portside Investors, L.P. v. Northern Insurance Co. of

New York,200 Pennsylvania’s Superior Court held that the insurance company

was estopped from enforcing the two-year limitations period in its

policy where the insurer indicated it would defer the issue of appraisal

until after one of the policyholders, who was then a criminal defendant

in a case relating to the collapse of the insured property, could be examined

under oath.201 In reaching its holding, the court reasoned that the

insurance company’s “statement is reasonably read as a willingness to

resume action of the claim after [the policyholder]’s criminal trial, regardless

of the policy time-bar.”202

C.  Bad Faith

Several cases during the survey period examined the general principle that

coverage must exist before an insured can bring a bad faith action against

an insurer. In Trafalgar at Greenacres, Ltd. v. Zurich American Insurance

Co.,203 the Florida District Court of Appeal held that an appraisal

award constituted a “favorable resolution” of coverage necessary to sustain

the policyholder’s bad faith claim.204 Citing the Florida requirement

that coverage be resolved favorably for the policyholder before a bad faith

claim can accrue, the trial court dismissed the policyholder’s bad faith

claim on the grounds that its breach of contract claim had been dismissed

on summary judgment.205 On appeal, the court noted that the contract

claim was dismissed only because the carrier had invoked the appraisal

provision in its policy, which had resulted in a multimillion dollar

award for the policyholder.206 Noting that “[a] judgment on a breach of

contract action is not the only way of obtaining a favorable resolution,”

the court ruled that the appraisal award satisfied the bad faith prerequisite.

207 In Miller v. Safeco Insurance Co. of America,208 the Seventh Circuit

rejected the homeowner insurer’s contention that the district court erred

in granting summary judgment to the policyholder on its bad faith claim

because coverage was excluded under the policy.209 In reaching its deci-

sion, the court noted that although the policy form excluded coverage,

the insurer’s failure to timely provide the policy to the homeowners rendered

the exclusions ineffective.210 Specifically, the court reasoned that

the insurer “cannot now avoid a bad faith finding based on exclusions

that were not part of the policy when the [homeowners] discovered the

damage.”211

1. 2012 WL 4480708 (D. Md. Sept. 28, 2012).

2. Id. at *3.

3. Id. at *19.

4. 660 F.3d 299 (8th Cir. 2011).

5. Id. at 303.

6. Id.

7. Id. at 304.

8. Id. at 306.

9. 98 So. 3d 74 (Fla. Dist. Ct. App. 2012).

10. Id. at 75–76.

11. Id. at 75.

12. Id. at 78 (quoting MERRIAM-WEBSTER’S COLLEGIATE DICTIONARY 1216 (11th ed.

2008)).

13. 2012 WL 928186 (D. Haw. Mar. 6, 2012).

14. Id. at *1 (internal quotation marks omitted).

15. Id.

16. Id. USAA made the argument that “in order to have an insurable interest, the insured’s

interest in the property must be ‘lawful’ property.” Id. at *2 (citing HAW. REV. STAT.

§ 431:10E-101).

17. See 2000 Haw. Sess. Laws Act 228, § 1, at 595–96 (“Therefore, the purpose of this Act

is to ensure that seriously ill people are not penalized by the State for the use of marijuana for

strictly medical purposes when the patient’s treating physician provides a professional opinion

that the benefits of medical use of marijuana would likely outweigh the health risks for

the qualifying patient.”).

18. Tracy, 2012 WL 928186, at *10.

19. Id. at *13.

20. 95 A.D.3d 1072 (N.Y. App. Div. 2012).

21. Id. at 1073.

22. Id.

23. Id. (citations omitted).

24. 53 A.3d 554 (N.H. 2012).

25. Id. at 557.

26. Id.

27. Id. at 558.

28. Id. at 559.

29. Audubon Hill S. Condo. Ass’n v. Cmty. Ass’n Underwriters of Am., Inc., 975 N.E.2d

458, 462 (Mass. App. Ct. 2012).

30. Id.

31. Id. at 469.

32. 2012 WL 2450167 (D. Md. June 25, 2012).

33. Id. at *1–2.

34. Id. at *2.

35. Id. at *5–6.

36. Id.

37. Id. at *6–8.

38. 817 F. Supp. 2d 374 (S.D.N.Y. 2011).

39. Id. at 375.

40. Id.

41. Id. at 376 (internal citations omitted).

42. 683 F.3d 805 (7th Cir. 2012).

43. Id. at 809.

44. Id.

45. Id. at 810 (citing Soc’y Ins. v. Town of Franklin, 607 N.W.2d 342, 346 (Wis. Ct. App.

2000)).

46. Id. at 810–11.

47. Id. at 811.

48. Id.

49. Id. (citing Kozlik v. Gulf Ins. Co., 673 N.W.2d 343, 348 (Wis. Ct. App. 2003)).

50. 475 F. App’x 569 (6th Cir. 2012).

51. Id. at 569–70.

52. Id. at 570.

53. Id. at 571.

54. Id. at 572–73.

55. Id.

56. Id. at 575.

57. Id.

58. 81 So. 3d 1030 (Miss. 2011).

59. Id. at 1037.

60. Id.

61. 968 N.E.2d 385 (Mass. 2012).

62. Id. at 388.

63. Id. at 388–89.

64. Id.

65. Id. at 393.

66. Id. at 394.

67. 971 N.E.2d 268 (Mass. 2012).

68. Id. at 273.

69. Id. at 274.

70. Id. at 271.

71. 276 P.3d 300 (Wash. 2012).

72. Id. at 302.

73. Id. at 303.

74. Id. at 303–04.

75. Id. at 304.

76. Id. at 307.

77. Id. at 310.

78. 276 P.3d 1270 (Wash. 2012).

79. Id. at 1271.

80. Id.

81. Id.

82. Id. at 1272.

83. Id.

84. 691 F.3d 948 (8th Cir. 2012).

85. Id. at 950.

86. Id.

87. Id.

88. Id. at 953.

89. Id.

90. Id. at 954.

91. Id.

92. 83 So. 3d 850 (Fla. Dist. Ct. App. 2011).

93. Id. at 853.

94. Id. at 851.

95. Id.

96. Id.

97. Id.

98. Id.

99. Id. at 852.

100. Id. at 853.

101. 2012 WL 300883 (E.D. Mich. Feb. 1, 2012).

102. Id.

103. Id. at *1–2.

104. Id. at *2.

105. Id. at *4 (citing Lubetsky v. Standard Fire Ins. Co., 187 N.W. 260, 260 (Mich. 1922)).

106. Id. at *5.

107. 2012 WL 3139567 (5th Cir. Aug. 2, 2012).

108. Id. at *2.

109. Id. at *5.

110. Id.

111. Id.

112. 440 F. App’x 788 (11th Cir. 2011).

113. Id. at 791.

114. Id.

115. Id.

116. Id.

117. Id. at 792–93.

118. Id.

119. Id. at 795.

120. 2012 WL 4010964 (Fla. Dist. Ct. App. Sept. 12, 2012).

121. Id.

122. Id.

123. Id.

124. Id.

125. Id. at *2.

126. Id.

127. Id.

128. Id. at *5.

129. Id. at *17.

130. 41 A.3d 1 (Pa. Super. Ct. 2011).

131. Id. at 5.

132. Id. at 7.

133. Id.

134. Id. at 8.

135. Id. at 14.

136. No. 11-10702, 2012 WL 3609882 (E.D. Mich. Aug. 22, 2012).

137. Id. at *4.

138. Id. at *6.

139. Id. at *1.

140. Id. at *9.

141. Id.

142. Id.

143. Id. at *10.

144. 812 N.W.2d 194 (Minn. Ct. App. 2012).

145. Id. at 196.

146. Id.

147. Id.

148. Id.

149. Id.

150. Id.

151. Id. at 201.

152. Id. at 199.

153. 814 N.W.2d 703 (Minn. 2012).

154. Id.

155. Id. at 705.

156. Id.

157. Id.

158. Id.

159. Id. at 708.

160. 678 F. 3d 193 (2d Cir. 2012).

161. Id. at 198.

162. Id.

163. Id.

164. Id.

165. Id.

166. Id. at 199.

167. Id.

168. Id.

169. 81 So. 3d 482 (Fla. Dist. Ct. App. 2011).

170. Id. at 483.

171. Id.

172. Id.

173. Id. at 484.

174. Id. at 485–86.

175. Id. at 485.

176. 77 So. 3d 210 (Fla. Dist. Ct. App. 2011).

177. Am. Integrity Ins. Co. of Fla. v. Gainey, 100 So. 3d 720 (Fla. Dist. Ct. App. 2012).

178. Id. at 721.

179. Id.

180. Id.

181. Id.

182. Id. at 722 (citation emphasis and internal quotation marks omitted).

183. Id.

184. 268 P. 3d 170 (Utah 2011).

185. Id. at 177.

186. Id.

187. Id. at 179.

188. 836 F. Supp. 2d 1117 (D. Haw. 2011).

189. Id. at 1123.

190. Id. at 1124–26.

191. Id. at 1126.

192. 728 S.E.2d 685 (Ga. 2012).

193. Id. at 687.

194. Id. at 688.

195. 448 F. App’x 977 (11th Cir. 2011).

196. Id. at 979.

197. Id.

198. 461 F. App’x 422 (6th Cir. 2012).

199. Id. at 426.

200. 41 A.3d 1, 14 (Pa. Super. Ct. 2011).

201. Id.

202. Id.

203. 2012 WL 3822215 (Fla. Dist. Ct. App. Sept. 5, 2012).

204. Id. at *2–3.

205. Id. at *2.

206. Id.

207. Id. at *2–3.

208. 683 F.3d 805 (7th Cir. 2012).

209. Id. at 812.

210. Id.

211. Id.

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Environmental Risks

Advances in the horizontal drilling technique known as hydraulic fracturing over the past 10 years has greatly increased the use of the drilling technique by US energy companies in efforts to obtain large amounts of natural gas that was previously unattainable.  Horizontal fracking drills are capable of reaching miles below the surface where the natural gas resides in large deposits of porous shale rock.  These drills can turn sideways once they’ve reached this layer and bore horizontally into the shale layer.  Water, sand and various chemicals are pumped into the well at high pressures, breaking apart the layers of shale and releasing the natural gas back to the surface.  At face value this would seem to be a good thing for energy companies and their consumers alike.  Currently natural gas accounts for approximately a quarter of all energy used in the United States.  A more abundant natural gas supply could potentially offset the ever rising cost of oil and provide consumers with an alternative to it (oil) all together.  The harvesting of natural gas is expected to become even more common in coming years due to that reason alone. 

Natural gas production by countries (in cubic meters per year) (Photo credit: Wikipedia)

However, the environmental side effects of this procedure can hardly be classified as “tolerable” for residents who live nearby these drilling sites as well as for our planet.  The potential for contamination of surrounding ground water from the chemicals used in fracking is very high.  The fracking liquid along with the wastewater that is produced from this type of procedure is known to infiltrate nearby wells thus severely effecting local communities’ water supplies.  Wastewater from hydraulic fracture drill sites is commonly  stored in disposal wells which themselves have been blamed for causing “micro earthquakes” in areas such as Youngstown, Ohio which experienced a light, magnitude 4.0 quake in 2011 due to large volumes of wastewater in a nearby fracking disposal well.  Many residents close to fracking sites have filed suit over drinking water contamination and well damage (well explosions) caused by the methane gas that is one of the chemicals used in the fracking fluid.  The chemicals used in fracturing fluid have been known to spread into outlying areas and groundwater supplies further contaminating local water supplies.

Against fracking 01 (Photo credit: Bosc d'Anjou)

The sheer amount of water usage alone for this type of drilling has raised concerns over fracking as well.  A typical hydraulic fracturing drill requires 3 to 5 million US gallons of water over the course of its operational lifespan.  The transport and storage of such large amounts of fresh water raise concerns from many different angles.  Can the municipal systems support such a large use of local water?  In a world consistently headed toward natural resource decline, this would seem to be an irresponsible use of one of our planet’s most valuable resources.  Other concerns such as the dependability of well casing design, and transport of chemicals (possible chemical spills) seem relevant given the recent mishaps by large oil companies struggling to contain massive oil spills in the Gulf of Mexico.  The EPA is currently shaping its policy regarding fracking and is taking in stories/research from both sides of the spectrum concerning the process with many saying this scrutiny by the agency is long overdue.   Recently two environmental groups filed federal suit in Sanford, New York after the town banned discussion of hydraulic fracking at city board meetings.   The town’s attorney has stated that in the minds of the board members, residents had “monopolized discussion” during the public participation of meetings thus hindering the board from addressing other business.  Gov. Andrew Cuomo is expected to decide soon whether to lift a 4.5 year old moratorium on hydraulic fracking in the state.  There is intense support on both sides of the issue as energy company lobbyists go head to head with local residents over the controversial drilling technique.

Business Risks  

Energy company risks:

Insurance companies offer very little when it comes to coverage for hydraulic fracturing risks.  Many have issued statements expressing a lack of information and or claims experience regarding fracking and therefore do not and will not write coverage for this specific type of risk.  Many energy companies currently rely on limited pollution coverage under their policies due to the reluctance of insurers to write hydraulic fracturing risks into their policies.  Most environmental impairment liability policies that are written are for well owners and contractors with very large fracking operations.  Insurers are still very choosy as to what risks are written and rates generally depend at least partly on geographical locations and the size of the operation.  Many energy companies still avoid spending the money on this type of coverage and instead rely on their general liability policies for coverage.  Insurance underwriters are mainly concerned with well integrity, fracking processes, and the number of drills at each fracking site when evaluating and writing risks.  Pollution coverage can sometimes be covered in a general liability or commercial lines policy if the well blowout and resulting pollution were “sudden and accidental” and if the incident is reported to the underwriter within 90 days.  As with any type of coverage, policy wording is complex and different events will trigger different coverage.

From the property owner’s viewpoint:

Oil and gas company drill leases currently do not contain provisions for liability on the part of the drilling company.  Property owners should be sure they are named as additional insured on all energy company policies if drilling is to occur on their land.  That alone however is not enough.  When the insurance company is left to choose they will most likely use a very narrow additional insured provision in the hopes of limiting their exposure to risks.  It is best to set the terms of the additional insured provision with as much specification as possible as to the amount of coverage in the event of contamination by pollutants or damage to property buildings, homes, existing water wells etc… caused by the drilling.  Most commercial general liability policies include pollution exclusions that the insurance companies rely on to deny coverage for the contamination by pollutants due to drilling.  Energy companies can (and should) obtain specialty insurance for their specific (fracking) type of operation which does not include pollution exclusions or at least contains limited ones.   Property owners and municipalities should stress this type of coverage before signing leases with drilling companies in order to avoid coverage denial due to pollution exclusions.  The more involved property owners are in the writing and implementation of coverage the more prepared they will be if and when a loss occurs due to hydraulic fracturing.  The only way for property owners or municipalities to be sure the energy company’s insurance policies meet their coverage standards is to obtain and review copies of all policies in effect regarding the drilling that is to occur.  Another valid concern are the effects/damages that do not manifest during the duration of coverage but instead begin to show several years after drilling has occurred.   Liability for these long term effects will very likely be a grey area when it comes to coverage and therefore should be addressed when shaping your policies.

Hydraulic fracturing has potential to provide large amounts of usable energy that is literally right underneath us.  But it will not come about without environmental, societal and business risks.  Attentive risk evaluation and management can and will help reduce risks to all of the parties involved.  From property owners, municipalities and residents close to drill sites to energy companies and the insurers who are underwriting the risks, we are all involved in the proper assessment and implementation of risk management as well as environmental awareness when it comes to this type of procedure and the effects it has on us and our planet.

Related articles

• Pennsylvania Judge Orders Records Opened in Fracking Case – Bloomberg (bloomberg.com)
• Maryland Researchers Issue Fracking Recommendations (insurancejournal.com)
• Anti-fracking forces to rally at Illinois Statehouse (stltoday.com)
• Energy firms, environmentalists agree on ‘fracking’ standards (csmonitor.com)
• Fracking and California: A three-part editorial (utsandiego.com)
• Companies, environmentalists agree on new fracking rules (usatoday.com)

Sinkhole (Photo credit: Salim Virji)

Sinkholes are depressions or holes in the Earth’s surface caused by the dissolution of a layer or layers of soluble bedrock, usually carbonate rock such as limestone.  Subterranean drainage wears away at these layers, carrying away sediment and eventually causing the area above to collapse.  These sink holes can be very dramatic, as we’ve seen in Florida recently, they can occur in populated areas resulting in structure collapse and human casualties.  Sinkholes are common in the state of Florida due to the geographical makeup of the land.  They can occur gradually over time or very quickly causing damage from as little as cracks in the sidewalk to swallowing up portions of homes and cars.  Florida law requires insurers to cover “catastrophic ground cover collapse” but that does not necessarily mean damage caused by a sink hole will be covered by your policy.  Florida law defines catastrophic ground collapse differently from sinkholes.  As per usual the policy wording is complex with catastrophic ground cover collapse defined as “geological activity that results in all of the following:

1)      The abrupt collapse of the ground cover.

2)      A depression in the ground cover clearly visible to the naked eye. 

3)      Structural damage to the building including the foundation.  

4)      The insured structure being condemned and ordered to be vacated by the government agency authorized by law to issue such an order for that structure.”

Therefore if your home or commercial property sustains damage from a sinkhole but does not meet all four of the catastrophic ground cover collapse definitions (e.g. structural damage sustained but building is still livable/operable) your insurance may deny your claim if you do not have additional sinkhole coverage.  Florida (and Tennessee) insurers are required to offer additional sinkhole insurance as an addendum or rider to an existing policy and for an additional premium.  If you have additional sinkhole coverage and sustain damage from a sinkhole, your insurance company will likely order a geological report that will dictate the cause of damage.   By law you are entitled to an unbiased evaluation if you are in conflict with your insurer over whether or not damage was caused by a sinkhole.  Sinkhole insurance in Florida has been a difficult issue for policyholders and insurers alike.  Premiums for sinkhole coverage have increased significantly last year, with Citizens Property Insurance jumping their rates 50% in some sinkhole prone areas of Florida.  Private insurers have been reported hiking rates up to 200%.  The reason for rate hikes according to insurers is due to the sheer amount of sinkhole related claims received over the past 5 years.  Florida’s porous limestone underground contributes greatly to these types of natural disasters.  It is always a good idea to review your coverage and the risks associated with your building’s location (geographically speaking), with the hope of bettering your chances of compensation in the event of these types of disasters.

Related articles

• Sinkhole Insurance (wjhg.com)
• Homeowners concerned about sinkhole insurance (news4jax.com)
• Second sinkhole appears. Does your insurance cover sinkholes? (csmonitor.com)
• Florida is the sinkhole king, but Alabama is not far behind (al.com)
• Sinkholes: common, costly and sometimes deadly (cnn.com)

Presented as a speech at the Rutgers Fragmented Risk conference March 1, 2013

I.          Introduction

The insurance industry operated for centuries under certain fundamental principles. An insured, looking to minimize its own risk, looks to purchase an insurance policy.  The insurer issues the policy and remains profitable by spreading risks over as large a population as possible.  In the event of a loss, the insurer and insured give effect to the policy terms.

In recent years, however, insurers have employed a cornucopia of cost saving tactics that have turned this elementary understanding of the insurance process on its head.  Brokers work to benefit the insurance industry while insurers analyze risk only after issuing policies and shift that risk back onto the insureds.  The supposed camaraderie and commonality of interest touted by insurers gives way to an increasingly adversarial process that treats the insured as a foe.

Following a loss, insurers lowball and coerce vulnerable insureds into signing releases and waivers.  Insurers cry wolf following a natural disaster and claim that bankruptcy is inevitable if they are compelled to pay claims on a large scale.

Highlighted by recent natural catastrophes such as Superstorm Sandy and the series of Christchurch, New Zealand earthquakes, the insurance industry is in desperate need of reform.  Governments across the world have attempted to step in and provide relief for the insureds, and individual states in the U.S. have promulgated statutes aimed at disincentivizing such insurer conduct.  These answers have been met with varying success.

II.       Disaster Background

Natural disasters are occurring with increased frequency.  900 natural catastrophes caused $160 billion in overall loss worldwide in 2012,[1] and 2011 saw 820 catastrophes cause $400 billion in overall loss.  Compared to the 30 year average, which included 650 events and $115 billion in overall loss, natural disasters have also become more destructive.[2]  Eight of the ten costliest natural catastrophes since 1950 occurred in 2004 or later and none occurred prior to 1992.[3]  Violent hurricanes continue to hit the United States, New Zealand has suffered a series of earthquakes, and Australia has experienced  bushfires spanning five states,[4] a “major flood crisis” in Queensland,[5] and a cyclone.[6]

And yet the insurance industry is thriving.  Insurance premiums represented 8.1% of the United States’ GDP in 2011.[7]  The first three quarters of 2012[8] saw U.S. property and casualty insurers enjoy a dramatic post tax net income increase, rising 221.7 percent to $27 billion.[9]  Over the same period insurers’ underwriting losses tumbled 81% to $6.7 billion, while premiums grew 4.2 percent.[10]  Australian insurers earned $21.21 billion and averaged a net loss ratio of 65.66% in the first three quarters of 2012.[11]  Between July 2011 and June 2012, Australian homeowner insurers received $66 million in premiums and paid only $29 million in claims.[12] New Zealand insurers had loss ratios of 55.65% and 62.30% for material damage and business interruption policies and domestic buildings and contents policies, respectively.[13]  The parent company of Vero Insurance, one of the biggest property insurers in Australia and New Zealand, saw its stock outperform the ASX 200[14] index “despite five years of disaster recoveries.”[15]

III.    Insurance Background

The concept of insurance is not new or novel.  In ancient times, farmers of China sent their crops to market on boats. Inevitably, on occasion a boat sank along the way. The farmers began spreading their crops among numerous boats, so that if one boat sank, any one family would only lose a small portion of their crops, thus avoiding financial devastation. The loss was spread among many families, and was therefore manageable for each one.[16]

Actual insurance contracts originated in the 13th century with ship owners who wanted to protect themselves against the possibility of catastrophic losses. As before, ships were inevitably lost at sea from time to time. The owners were aware of this, but they could not foresee which ships would be lost at what time. Wealthy individuals agreed to receive a certain amount of money from each ship owner in exchange for a promise to pay for the loss of a ship when it occurred. Insurance is, in actuality, a social vehicle for spreading the risk of financial loss among a large group of people, thus making a loss manageable for any one person of that group.[17]

The purpose of insurance is to restore the insured to their original financial position. Over the years, its basic premise remains unchanged: to spread risk, thus making loss, when it occurs, manageable.[18]  Moreover, the purpose of the Unfair Claims Settlement Practices Model Act (1972) is to set forth standards for the investigation and disposition of claims. This Act requires insurance companies to promptly investigate claims and settle claims in good faith by effectuating prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear.[19]

IV.    Tactics Employed by Insurers to Deny or Minimize Claims: Hidden Conflicts

A.       Broker Underwriting Interference

Insureds often have no contact with the entity actually providing insurance, but instead exclusively meet with insurance brokers or agents.  As such, the broker and not the insurer explains what the policy includes and excludes and deals with the insured in the event of a loss.  These brokers furthermore act under the guise of being a friend to the insured; the insured is lead to believe that the broker acts in the insured’s best interest, finds the best coverage, and stands up to the insurer.  Unbeknownst to the insured, however, the insurer spares no effort or expense in turning a broker into its own surrogate.[20]

Conflicts of interest manifest themselves in a variety of circumstances and at various times throughout the insurance process.  A common representation to an insured comes as the broker promises to scour the globe searching for the most comprehensive coverage at the most reasonable price.  What the insured does not know, however, is that insurers send more attractive brokers – those that minimize claims and costs – on lavish vacations in return for the broker’s client list and loyalty.[21]  Faced with such added perks, brokers often only refer the insured to one or two choice insurers.

Insurers also achieve broker loyalty by basing the broker’s compensation on the insurer’s loss ratio.  In essence, insurers base brokers’ compensation not only on the number of clients provided but also on the amount the insurer pays out in claims; the more the insurer pays the insured, the less the insurer pays the broker.  Such payment schemes naturally result in a strong incentive for brokers to act in their own self interest and keep claims and payments down and premiums up.

When a loss occurs, the brokers or agents are the first line of defense against claims.  Notice of a claim must be given to the broker.  The brokers will, at that point, give an opinion of coverage or worthiness of the claim.  Fear of increased premiums, cancellation or inability to find cover, is often suggested.  The value of loss is minimized prior to and without any investigation of the visible damage let alone evaluation of any hidden damage.  Policyholders are encouraged to walk away.

This is all the more true after a wide spread disaster.  Many disasters include some type of water damage.  Water damage is often a covered and uncovered peril depending on the source.  This creates uncertainty and doubt about coverage which is seized on to create doubt about whether to proceed with a claim at all.

B.       Post Loss Underwriting

In an ideal world, premiums and coverage are based on risk factors.  Before issuing an insurance policy, an underwriter or agent examines the property’s potential for loss and issues a policy with premiums based on the potential for loss.  However, through a process known as post-loss underwriting, insurers insure a building without first examining its risk factors.[22]  The insurer quietly collects premiums and permits the insured to operate under the assumption that the property is sufficiently insured.  In the insured’s mind, any property defect would have been raised by the insurer or broker and attended to in the policy.  However, in such a situation it is only after a loss occurs that the insurer finally gets around to analyzing the risk, at which point the insurer knows precisely what it has to exclude.  The insurer can point to a perceived construction defect as the sole cause of the damage and deny the insured’s claim, despite the defect having existed well before the insurer issued the policy.  The insured could have taken appropriate action had it known at the outset that its property suffered from a construction defect, yet post loss underwriting’s tendency to lull the insured into a false sense of confidence often prevents the insured from becoming so informed.[23]

C.       Claims Handling Practices: Shifting Risk Back onto the Insured

An insurer has but two basic obligations.  First, the insurer must provide services, the least of which encompasses conducting a reasonable investigation following a loss.  Second, the insurer must pay claims pursuant to the policy.  And yet, with increasing frequency insurers are conducting superficial investigations or forcing the insured to bear the cost of the investigation, whether directly (by demanding the insured pay the costs) or indirectly (through “broad information requests propounded upon the insured as part of a ‘claims’ investigation”[24]).

 1.          Running and Gunning

Following a publicized calamity such as a hurricane or earthquake, insurance companies are eager to acquire some positive media coverage.  After all, video of newly-homeless hurricane victims whose insurer refuses to pay a claim can hardly be good for business.  Insurers attempt to avoid this negative PR by engaging in a practice known as “running and gunning,” under which an unqualified adjuster slaps a Band-Aid on the damage and is never seen again.

Large scale natural disasters cause insurers to suffer somewhat understandable headaches.  Hundreds if not thousands of insureds become effectively homeless overnight and the insurer needs to send claims adjusters en masse to examine the affected properties.  The demand for qualified adjusters quickly eclipses the supply, and in their haste insurers send anyone into the field that can simultaneously walk and chew gum.  These individuals come from all walks of life and lack any formal training, yet are entrusted to assess intricate damage done to properties.  Furthermore, these adjusters’ salaries are commensurate with the number of properties examined and not the quality of work, making a methodical investigation all the less likely.

It is in this context that “adjusters” visit properties in the aftermath of a hurricane, conduct a quick and dirty investigation, and give a token check to the insured on the spot.  Video of an insured receiving a $5,000 check five days after a hurricane surely creates great publicity for the insurer, but the cameramen eventually leave and fail to record the adjuster never returning to the property.  Instead, the insurer’s claims department simply pays – or refuses to pay – the insured based on photos taken by the unqualified adjuster.

Such practices seem to fly in the face of various state Unfair Claims Practices Acts, which prohibit an insurance company from failing to adopt reasonable standards for the prompt investigation of claims and from refusing to pay a claim without first conducting a reasonable investigation.[25]  These Acts have regrettably produced little effect on running and gunning, which continues unabated after every natural disaster.

2.          Reinterpreting the terms after the fact

Most individuals purchasing property insurance are not experts and acquire insurance under the assumption that they will be covered if a flood or hurricane damages their property.  Insurers add to this belief by erecting barriers to the insured’s ability to examine the policy prior to issuance[26] and by including policy language subject to incredible interpretation.  As such, although an insured does not expect its insurer to contest a claim arising from water damage, the insurer can point to a provision distinguishing among various types of water damage, reinterpret the provision any way it so chooses, and deny the claim.

3.          Limiting risk through underpayment and releases

One of the most effective tactics employed by insurers is also among the simplest: underpay the insured.  Following a natural disaster the insured’s property is often severely damaged or destroyed.  As a result, the insured is vulnerable and desperate to receive some payment in order to afford temporary housing or prevent its business from going under.  The insurer, acutely aware of the insured’s precarious situation, quickly offers a meager payment that will only cover a fraction of the cost to repair or replace the property.  The insured, already exposed and facing a lengthy court battle, reluctantly accepts this lowball offer.

Many insurers are not content to stop after receiving such a bargain.  Instead, the insurer will often make this payment contingent on the insured signing a document that categorizes the payment as the full and final settlement and releases all future claims the insured might have under the policy.  The insurer accomplishes this feat without providing separate consideration for this gratuitous release and despite the fact that the policy does not require a release in exchange for a claim payment.  In essence, then, the insured releases its rights without receiving consideration in order to obtain performance to which it is already entitled.  The insured’s need for immediate funds to house his family or keep her business afloat thus results in the insured receiving pennies on the dollar and being unable to properly repair its property.

Underpayment occurs with alarming frequency.  In 2007, the ten largest insurers in the United States paid out in benefits only about half the money they received in premiums.[27] Underpayments are also becoming more prevalent, as payouts from property and casualty insurers decreased from 67 cents for every premium dollar in 1987 to 53 cents per dollar in 2006.[28]

D.       Using the law and the system to the fullest extent possible and thereby punishing the claimholder

Many insurance companies came to view claims procedures from the 1970s and 80s as undisciplined and overly reliant on an individual adjuster’s discretion.  Believing that these practices resulted in consistent overpayment of claims, insurers renewed their focus on the bottom line, standardized practices and removed any semblance of discretion.  This had the immediate effect of creating a new breed of adjustors who deny claims as a matter of right and, despite lacking a law license, interpret policies to exclude coverage.

Adjusters were not the only professionals to experience the ramifications of this profit-driven strategy, as it eventually came to affect the insurer’s attorneys.  Although insurers tend to express no reservations with litigating claims into oblivion, pursuant to this redeveloped strategy insurers now examine their attorneys’ billable hours with increased scrutiny.  The attorneys in turn are forced to find new ways to create revenue, and often end up taking unprincipled stands in court in order to prevent an early disposition of the case.  Every motion is contested, requests for production go unheeded, and interrogatories are met with objections or left unanswered.  As a result, settlements today are few and far between and previously routine coverage disputes now wind up in protracted litigation.

This increasingly adversarial process is further aggravated by an unexpected culprit: tort reform.  The reduction of available damages in tort in the 1980s caused an exodus of litigators away from the tort world and into to the contract world.  Little cordiality ever existed in tort litigation, so when these attorneys began litigating contract claims what little congeniality was left disappeared.

As a result, what used to be a levelheaded process has deteriorated to the point where insurers view their insureds with the utmost contempt.  Insureds can no longer expect a straightforward or fair clams adjusting process and instead must prepare to meet heavy resistance at every step.

Uniformly, adjusters and experts for insurance companies limit their investigations to visible damage.  This leads the insured to believe there is no further damage.  The results of hidden damage often manifest long after the claim is closed and the policyholder has no further remedy.  The fact is most policyholders never know the true value of their losses or what they are really owed.

E.       Schemes of Arrangement

Perhaps the most facially persuasive argument insurers make in the wake of a catastrophe is that they simply cannot afford to pay all the claims.  The insurers point to the swath of devastation incurred, shrug their shoulders, and claim that paying every claim would render them bankrupt and subsequently cause thousands of insureds to lose coverage.  Insurers made these claims after Hurricane Katrina and the New Zealand earthquakes, and likely will make these claims following Superstorm Sandy.  Insurers have found general success in this regard, as governments effectively bail out insurers and reduce consumer protections[29] while insureds accept reduced payments.  Similarly, insurers use these catastrophes as grounds for raising premiums, which increased an average of 30% in New Zealand following the series of earthquakes.[30]

If these claims were accurate, they would indeed be compelling.  However, in reality insurers are “paying out lower claims, charging consumers higher premiums, reaping greater profits, and are more financially solid than at any other time in history.”[31] The stability of property and casualty insurers following a catastrophe is perhaps best demonstrated by U.S. insurers’ financial conditions post Hurricane Katrina.  A straightforward indicator of how much an insurer pays in claims is the pure loss ratio, which compares total losses incurred in claims plus adjustment expenses with total premiums earned.  If an insurance company pays $75 in claims for every $100 collected in premiums, for example, the loss ratio is 75%.  Accordingly, lower loss ratios represent higher earnings for insurers.  The following chart represents U.S. property and casualty insurers’ pure loss ratios from 2000 to 2006:

The pre-Katrina ratio average is 67%, yet the years including and following Katrina see the ratio dwindle to 61.5% and 53.3%.  Similarly, 2006 was the property and casualty insurance industry’s best year since 1988.[33]  Property and casualty insurers had a $600 billion surplus in 2006-07, while Hurricane Katrina resulted in $28.6 billion in damages after taxes.[34]  The net premiums written to surplus ratio provides further insight.  The insurance industry over time has varied in expressing what it considers a prudent ratio, with most experts comfortable with ratios under 1.5 to 1 (1.5) or 3 to 1 (3). Property and casualty insurers’ ratio was 0.8 in 2005 and 0.7 in 2006.[35]  Simply stated, the insurance industry became more profitable following Katrina, and reports of financial calamity are grossly misleading.

A more contemporary example can be found in insurer Ansvar’s conduct following the series of earthquakes that hit Chirstchurch, New Zealand in 2010 and 2011.  Ansvar, which subsequently changed its name to ACS (NZ) Ltd, insured churches and historic buildings throughout Christchurch.[36]  Following the earthquakes, Ansvar pursued a unique strategy of officially claiming solvency yet planted seeds of doubt by withdrawing from New Zealand,[37] cancelling all insurance policies, threatening higher premiums[38] and asking insureds to agree to a contingency plan in the event of insolvency [39] (in turn causing the New Zealand Reserve Bank to voice concerns over the fairness to insureds who take longer to settle claims[40]).  Ansvar’s CEO even went so far as to suggest that those who settle their claims early – before Ansvar becomes insolvent – would receive a larger settlement.[41]  Feeling this pressure exerted by Ansvar,  many insureds scrambled to settle and opted to receive a discounted claim rather than “risk” getting nothing at all.[42]  Ansvar, perhaps unsurprisingly, remains solvent to this day.

V.       Solutions

A.       Government Answers

1.          New Zealand: Earthquake Commission

Well before the Canterbury earthquakes of 2010 and 2011, New Zealand enacted the Earthquake Commission Act 1993.[43]  Following a natural disaster, the Act provides monetary relief for damage to residential buildings and personal property for individuals who already have insurance.[44]  Although the Act has eased tension on some New Zealand insureds, others are left exasperated with the process[45] and the cost weighs heavily on the state.  The Earthquake Commission paid over $4.1 billion as of January 2013,[46] the state’s reinsurance premiums more than tripled in the earthquake’s aftermath, and the EQC has suggested that private insurers have attempted to shift costs onto the state.[47]  Furthermore, the EQC’s efforts have not ameliorated the ills inherent in the property insurance industry, as fewer than 300 houses were estimated to have been replaced in 2012, insurance payouts moved at a “sluggish” pace,[48] and a 2012 survey reported that 80% of respondents experienced delay in rebuilding and many worried about “the death of elderly property owners exhausted by perceived dishonesty, dubious tactics and double-dealing on the part of both EQC and insurers.”[49]

2.          Australia: Financial Ombudsman Service

The Financial Ombudsman Service was established in 2008 in order to resolve disputes between consumers and financial service providers such as insurers.  If an insured believes its insurer underpaid or wrongfully denied its claim, the insured can lodge a dispute with the FOS.  If the insurer and insured are unable to resolve the dispute directly, the FOS resolves the dispute through negotiation and conciliation;[50] if the parties still have not reached an agreement, FOS will issue a determination that reads like an informal court opinion.[51]

Home building and contents insurance disputes constituted slightly over 10% of all disputes in 2011-12. [52] A majority of the disputes in this arena arose from insurers denying claims, making lowball offers or delaying the handling of claims.[53]  However, the FOS has received an influx of natural disaster related claims since 2010, which has in turn delayed the processing of non disaster related claims.[54]  FOS resolved approximately 70% of the 1,772 accepted natural disaster disputes over an 18 month period from 2011 to 2012.[55]

B.       Washington Insurance Fair Conduct Act: Five Years Later

Perhaps recognizing the difficulties insureds face in dealing with property insurers, state legislatures have promulgated statutes aimed at punishing and preventing improper insurer conduct.  In 2007 Washington passed perhaps the most comprehensive of these statutes,[56] despite the insurance industry spending millions of dollars to force a referendum.[57]  The statute forbids insurers from engaging in “unfair methods of competition” or “unfair or deceptive acts,” and prohibits an insurer from “unreasonably deny[ing] a claim for coverage or payment of benefits to any first party claimant.”[58]  An insurer that unreasonably denies a claim is liable for actual damages and attorneys’ fees and litigation costs, and may be further liable for treble damages.[59]  This approach has been generally received as a more effective method to deter insurer misconduct.[60]

Has this been effective to balance the playing field?  Time will tell.

VI.    Conclusion

Property insurers continue to exceed profit expectations despite natural disasters increasing in both number and destruction.  Although common sense dictates that property insurers should struggle in a disaster’s wake, insurers have avoided paying claims through developing techniques that are sometimes subtle, sometimes obvious, and always novel.  Having lived through a hurricane or earthquake, insureds are often ill-equipped to properly handle these

Related articles

• Michael Childress to speak at Rutgers Fragmented Risk Conference (childresslawyers.com)

Managing these types of risk has become an increasingly important topic for businesses to address and there is much discussion and assessment of these risks as of late due to its relevance in the modern markets.  The integration of risk management can seem costly for companies.  Many had initially switched to global supply chains in an effort to reduce costs for their business and/or to offset capital levels in response to the troubled world markets and thus may perceive risk management as a deterrent to their business models.  However, it is proving to be more and more crucial for companies to assess these risks and take measures to avoid vulnerability in supply chains.  When a company operates over such a large geographical area, it exposes itself to the risk of business interruption due to unforeseen events such as natural disasters.  Many risk specialists encourage the use of advanced supply chain modeling tools that can help surmise the financial impact of supply strength on product and service demand, and can measure the impact that new product manufacturing (or entering a new market) can have on a companies’ financial position.  These risks are even further exacerbated by the possibilities of natural disasters disrupting supply chains and causing business interruption.

We all know now that climate change is increasing the frequency and intensity of natural disasters, and have seen these disasters occurring all over the globe.  The link between a company’s product and its consumer market can easily be disrupted in various ways due to these unforeseeable, natural events.  Risk assessment, modeling, and preparedness will prove to be vital for companies as they manage their global supply chains.  Many insurers provide corporate business supply chain coverage or “all risks” policies intended to protect businesses from some of these risks.  Many companies suffering business delays resulting from damage to a third party facility do not realize that they may be protected by their insurance policy.  Corporate business interruption and extra expense insurance policies can be incredibly complex in their wording once again highlighting the importance of policy interpretation and comprehension when leveraging a claim with your insurer.   Risk management again takes center stage as we continue to observe the mix of turbulent weather patterns and global business networking.  How will your company respond in the case of a natural disaster?  We, of course, feel that a well thought out, actively integrated risk management plan is essential for business survival in this new era of uncertain, and devastating natural events.

Related articles

• Supply Chain Disruption a Major Threat to Business (forbes.com)
• More natural disasters as insurance premiums rise (abc.net.au)