Insurance Law Hawaii

Insurance Fallout from Hurricane Irene

  As noted in today's Christian Science Monitor [here], the insurance implications for losses caused by Hurricane Irene will be tempered by at least two factors.  First, much of the damage was caused by flood, a peril not covered under a home owner's or commercial property policy.  Only if the insured has additional flood coverage will flood loss be covered.  Second, many policies have high wind deductibles, effectively moving portions of the risk back to the insured.

    Thanks to my blogging colleague Mark Murakami (www.hawaiioceanlaw.com) for sending the Christian Science Monitor article my way.

Court Decides Which Documents Insurer Can Withhold From Discovery

   The insurers' resistance to discovery requests was before the court in Cummins, Inc. v. Ace Am. Ins. Co., et al., 2011 U.S.Dist. LEXIS 46984 (D. Ind. May 2, 2011).

   The factual background involved coverage Cummins sought for severe flood damage at its main corporate campus. The insurers had paid over $91 million on Cummins' claims. Discovery was pursued as the parties argued over additional coverage. The insurers withheld documents from production based on attorney-client privilege and work product. Other documents were withheld on relevancy grounds.

   The magistrate judge made a meticulous review of each of the grounds relied upon by the insurers to withhold documents. The insurers resisted producing documents generated by the outside counsel who were hired to provide counsel and advice, and who never provided an claims adjustment services. The court held that the insurers' privilege objections were well-founded as to many of the documents that were withheld. The privilege did not exist for other documents which the court ruled should be produced.

   Turning to documents withheld on work product grounds, the court noted that applying the work product doctrine in first-party insurance coverage disputes was challenging because it was difficult to separate documents that were prepared in the normal course of business from those prepared for purposes of litigation with its insured. The court adopted presumptions to determine the purposes of preparing particular documents. A document prepared before an insurer made a final decision on a claim and was part of the factual inquiry or evaluation of the claim was not work product because anticipation of litigation was presumed unreasonable before a final decision was reached on a claim. A document prepared after a claim was denied, however, was presumed to be work product. Under this test, the documents withheld by the insurer were not protected by work product and were ordered to be produced.

   Finally documents relating to the adjustment and payment of Cummins' claim were withheld on relevancy grounds. The insurers offered no arguments in support of their relevance theory. Therefore, the insurers were ordered to produce these documents, as well.

Agent's Alleged Negligence In Discouraging Need For Flood Insurance Presents Factual Issue

   When the insureds purchased their home along the Mississippi Gulf coast, they discussed obtaining property insurance with Richard Schmidt, a Nationwide insurance salesman employed by Felsher Insurance Agency.  See Mladineo v. Schmidt, 2010 Miss. LEXIS 569 (Miss. Oct. 28, 2010).  The insureds' complaint alleged they told Schmidt they desired a policy with full protection from all weather conditions.  Schmidt allegedly informed them they needed a hurricane policy, but would not need a separate flood policy in order to be covered for all wind and water damage.  Schmidt further informed the insureds their property was not located in a flood zone.

   The insured's agreed to purchase a "hurricane policy," which became effective the day the insureds closed on the purchase of their new home.  The policy, however, was not received by the insureds for another six weeks.  Upon receipt, the insureds filed the policy without ever reading it.  The policy provided that hurricane coverage did not include loss caused by flooding.  Further, loss resulting from water was not covered even if other perils contributed directly or indirectly to cause the loss.

   Hurricane Katrina caused extensive damage to the insureds' home on August 29, 2005.  Nationwide denied coverage for damage to the home caused by water.  The insureds alleged that in subsequent conversations, Schmidt admitted he never indicated that an exclusion existed in the policy for water damage.  Moreover, the insureds subsequently learned that a portion of their property was in a flood zone.  The insureds sued Nationwide, Felsher and Schmidt on a variety of claims for negligence, negligent misrepresentation and tortious breach of contract.  The trial court granted defendants' motion for summary judgment on all claims.  The insureds' reliance on Schmidt's representations that contradicted the policy was per se unreasonable.

   The Mississippi Supreme Court affirmed in part and reversed in part.  Having possession of the policy for four months before Katrina hit was enough time to have read the policy.  Therefore, the insureds were imputed with knowledge of the policy's contents.  Nonetheless, if an insurance agent offered advice, he had a duty to exercise reasonable care.  Accordingly, there was a question of fact whether Schmidt breached his duty of care by allegedly stating the property was not in a flood zone and counseling against flood insurance.  Further, there was a question of fact whether any such breach proximately caused any damages such as uninsured claims resulting from a lack of flood coverage.  Consequently, summary judgment was improperly granted to defendants on the negligence issue.

   The trial court properly granted summary judgment on the negligent misrepresentation claim, however.  The insureds could not have reasonably relied on the alleged assurances of coverage by Schmidt that directly contradicted the plain language of the policy they had in their possession.

Is Damage Caused by Water Escaping from Drainage System Excluded as "Surface Water" or Flood?

  Whether damage caused by rainwater escaping from a drainage system was excluded as "surface water" or flood was the issue before the court in M  and M Corp v. Auto-Owners Ins. Co., 2010 S.C. LEXIS 326 (S.C. Oct. 11, 2010).

   The insured owned a hotel located along a street that was being improved by the installation of a new underground storm water drainage system.  Heavy rains hit before construction was completed, causing significant water damage to the insured's hotel due to the rainwater exiting the drainage system.  As water left the drainage system, it pooled in the hotel parking lot, reaching sufficient depth to enter the hotel and cause damage.

   The insurer denied coverage based on surface water and flood exclusions.  Consequently, the insured filed suit in federal court.  The district court certified the following questions to the South Carolina Supreme Court:

   1.  Under an all-risk policy, does "surface water" encompass rainwater collected and channeled in a storm water collection system?

   2.  If the answer to Question 1 is no, can such non-surface water reacquire its classification as surface water upon exit from the storm water collection system and, if so, under what circumstances?

   3.  Under an all-risk policy, does "flood water" encompass water discharged from a storm water collection system in concentrated form, pooled, and that thereafter enters a building?

    The South Carolina Supreme Court answered all certified questions in the negative.  Addressing whether the collected water was "surface water," the court noted that while the water was surface water before it was collected in the storm water system, it then was concentrated and cast onto the insured's property.  Once surface water was deliberately contained, concentrated, and cast onto an adjoining landowner's property, it was no longer naturally flowing, diffuse water.

   Second, the water did not become surface water again under the policy once it was discharged from the pipe. 

   Finally, the water was not "flood water."  Flood water meant the waters had to breach their containment, either as a result of a natural phenomenon or a failure in a man-made system such as a levee or a dam.  The water here did not breach containment, but instead was deliberately channeled and cast upon the insured's land. 

  

Fifth Circuit Grants Rehearing on Case Involving Measurement of Loss

   A prior post [here]  discussed the Fifth Circuit's grappling with the proper measurement for covering loss of a home due to Hurricane Katrina.  On rehearing, the Fifth Circuit altered its prior determination that the policy's loss provision was ambiguous.  See Bradley v. Allstate Ins. Co., 2010 U.S. App. LEXIS 19476 (5th Cir. Sept. 20, 2010).

   Hurricane Katrina totally destroyed the insureds' home, leaving only a slab.  Allstate determined the dwelling was unlivable.  Payments for structural damage under the insureds' flood policy were $63,800 and from their homeowners' policy $41,339.06, for a total of $105,139.06.  Allstate later performed a retroactive analysis that appraised the pre-storm market value of the home at $85,000.  The insureds indicated at a deposition they intended to rebuild their home.

   Section 5 (a) of the Allstate policy promised to pay actual cash value if the insured did not repair or replace the damaged property.  If the insured repaired the home within 180 days of the actual cash value payment, additional payments would be made to reimburse for the costs of repair.  Section 5(e) stated that in the event of the total loss of the dwelling, the insured would pay the policy limits of $105,600.  Elsewhere, however, the policy excluded coverage for loss to property caused by flood.  Moreover, if there were two causes of loss and the predominant cause was excluded by the policy, there was no coverage.  

   The insureds sued Allstate, claiming they were entitled to policy limits of $105,600. The district court determined that, despite the total loss provision in the homeowners policy, the insureds were only entitled to the actual cash value of their home, which, prior to Katrina, was less than the total amount they received under their homeowners and flood policies.  Accordingly, any further recovery would amount to a double recovery.

   In its initial decision, the Fifth Circuit determined "total loss" was ambiguous because the provision was susceptible of two possible meanings. The ambiguity was construed in favor of the insureds, entitling them to a recovery of up to policy limits, or $105,600.  Bradley v. Allstate Ins. Co., 606 F.3d 215 (5th Cir. 2010).  The new decision abandoned the ambiguity determination, instead noting the relevant question was whether a non-covered peril (flood) was the predominant cause of the loss, an issue never decided by the district court.  Accordingly, the district court did not address the total loss provision under section 5 (e), instead grating summary judgment to Allstate based on the actual cash value under section 5 (b).  Consequently, the case was remanded so that the district court could evaluate the causation issues and ascertain the applicability of the section 5(e) total loss provision.

   The Fifth Circuit also altered its prior discussion on the potential double recovery by the insureds.  Previously, the court found an unresolved question on whether the appropriate measure of the insureds' actual loss was the cost to rebuild or actual cash value, believing the insureds had an option to rebuild.  The new decision held that the insureds had failed to repair, rebuild, or replace their home within the two year period allowed under the policy and state law.  Thus, the appropriate measure of loss was the actual cash value of the property, not the cost to rebuild or replace the property.

   Further, depending on the factual determinations to be made on remand regarding the predominant cause of the damage to the insureds' property, either: (1) the total loss provision in section 5 (e) would dictate that the insureds were entitled to recover the full policy limits for covered losses; or (2) the actual cash value provision in section 5 (b) would dictate that the insureds were entitled to recover the actual cash value of their home, replacement cost minus depreciation.  Under either section 5(e) or 5(b), the fact-finder would arrive at the proper figure for the actual cash value to establish the amount of actual loss.  As long as the insured's combined recovery under their homeowners and flood policies was less than their actual loss, then the double recover rule would not preclude the insureds from receiving additional compensation under their homeowners policy.

American Samoa Utility Company Seeks Coverage for Loss Caused by Earthquakes and Tsunamis

   The American Samoa Power Authority (ASPA) recently filed suit against Lloyd's and HCC International Insurance Company for failure to provide coverage for property loss caused by the earthquakes and tsunamis that struck the area in September 2009.  See Am. Samoa Power Authority v. Certain Underwriters at Lloyd's London, et al., Civil No. 10-00546 ACK-KSC (Complaint filed Sept. 24, 2010).  ASPA is a public utility that provides electricity, water, waste-water and solid waste services to the residents of American Samoa.   

    A series of earthquakes and accompanying tsunamis hit the South Pacific last year, killing 34 people in American Samoa, 183 in Samoa, and nine on Tonga.  The complaint alleges that ASPA suffered in excess of $50 million in property losses from this disaster.  Lloyd's policy stated no suit could be filed against it unless "legal action is started within twelve months after inception of the loss."  Although Lloyd's has paid $5 million, it has not explained whether further amounts would be forthcoming.  Consequently, ASPA filed suit so as not to waive its right to do so under the policy's terms.

    The policy's "Limits of Liability" stated that the "maximum limit of liability in a single occurrence regardless of the number of Locations or coverages involved will not exceed the Policy limit of liability of $20 million."  The section further stated, "Each loss by Earth Movement, volcanic action, storm tidal wave, or flood within any period of 72 consecutive hours commencing during the period of this insurance shall constitute a single loss hereunder." 

    The complaint's first count alleged that each loss by "Earth Movement" was to be considered separately from each loss by "Flood" and the 72 hour period merely specified the duration of each loss.  It further alleged that because the losses suffered by ASPA were caused by "flood" and "Earth Movement" separately, those losses implicated two separate $20 million limits, or $40 million at a minimum.  Therefore, the complaint seeks a declaration that the Policy has a $20 million limit for losses occasioned by Flood and a separate $20 million limit for losses occasioned by Earth Movement.

    This will be an interesting case as it evolves.  Thanks to Damon Key blogging colleague, Mark Murakami (hawaiioceanlaw.com), for forwarding notice of the case. 

Insured's State Law Claims Barred Against Flood Insurer

   After flood coverage was denied, the insured sued under state law theories.  See Worthen v. Galveston Ins. Associates, 2010 U.S. Dist. LEXIS 94925 (S.D. Tex. Sept. 13, 2010).  The district court dismissed the state law claims on preemption grounds.

   The insured purchased a flood policy on August 10, 2007 for his home located on the Texas Gulf coast.  The policy was placed by Galveston Insurance Associates and issued by Fidelity National Property and Casualty Insurance Company pursuant to the National Flood Insurance program.  Fidelity sent a renewal notice to the insured in June 2008, which the insured admitted he received.  Galveston Insurance thereafter contacted the insured about paying the premium in order to renew the policy.  On August 22, Galveston Insurance forwarded an expiration letter to the insured reminding him that his policy had expired on August 10, 2008. 

   The insured finally made payment for a new policy on September 9, 2008.  On September 11, Fidelity issued the flood policy, but not effective until October 9, 2008.  Hurricane Ike struck on September 13, causing flood damage to the insured's home.  When the insured submitted his claim, Fidelity denied coverage.

   The insured sued under a variety of theories, including extra-contractual claims for unfair insurance policies, deceptive trade practices, promissory estoppel, negligent misrepresentation, negligence, knowledge and attorney fees.  Fidelity move to dismiss.  The insured conceded his extra-contractual and tort claims were preempted and barred by federal law.  But he argued his "procurement-based claims", as opposed to "claims handing disputes" against the insurer, were valid.

   The court disagreed.  Insurers offering flood insurance could not alter the terms offered by the National Flood Insurance Program.  Further, the insured was charged by statute with constructive knowledge of the content of the program.  Under the National Flood Insurance Program, when the premium payment was received within 30 days of the policy expiration, the same policy would issue.  Therefore, on September 9, the insured was covered by his expired policy and qualified for a reissued policy under the same terms.  Hence, the insured had no procurement claims since he had coverage under the Program.  Paying the premium on the 30th day after expiration was timely.  Nevertheless, the fact that Fidelity issued a policy effective October 10, 2008 did not alter the result.  Accordingly, Fidelity's motion to dismiss the extra-contractual claims was granted.

Burden of Proving Damage Caused by Both Covered and Non-Covered Risks Addressed

   When both a covered risk and a non-covered risk cause some of the property damage, which party bears the burden of identifying the discrete items of property that were damaged and proving what portion of the damage was caused by a non-covered or excluded risk?  See Bayle v. Allstate Ins. Co., 2010 U.S. App. LEXIS 16635 (5th Cir. Aug. 11, 2010).

  The insureds' home was damaged by Hurricane Katrina.  After the insureds evacuated, eight to ten feet of water (mixed with escaped oil from a nearby storage tank) flooded their one-story house.  Little of the damage appeared to have been caused by wind.  An adjuster observed severe damage to the interior and contents of the house, all of which were attributed to flood.  Further, few window panes were broken.   Policy limits of $105,000 were paid under the flood policy.  But only $17,560.73 was paid for wind damage under the homeowners policy.

   The insureds sued and Allstate moved for summary judgment.  The district court granted Allstate's motion because the insureds failed to point to any wind damaged items for which Allstate had not already compensated them.

   On appeal, the Fifth Circuit noted that Allstate did not contest that a covered peril (wind) caused some damage to some of the insureds' property.  The question was which particular items of property were damaged by wind.  The insureds never identified which particular damaged items had gone uncompensated or under-compensated under their policy's coverage for structural damage.  They simply presented the court with a line-item cost estimate to repair all the damage to their property, without attempting to explain which portion of those costs were attributable to wind-caused damage. 

   When Allstate presented evidence sufficient to establish a prima facie case that flood, not wind, caused any uncompensated or under-compensated damage complained of by the insureds, the burden of production shifted to the insureds to offer rebuttal evidence sufficient to create a genuine issue of material fact as to which, if any, uncompensated items of damage were caused by wind.  Summary judgment was proper because the insureds failed to bear their burden of production after Allstate produced evidence identifying those items of damage that were excluded from wind coverage because they were caused by flood.

Anti-Concurrent Causation Clause Does Not Bar Excess Coverage

   The Fifth Circuit considered whether the district court properly determined that an excess policy covered flood, but that coverage was limited under the policy's anti-concurrent causation clause (post on district court's prior decision here).  The appellate court reversed in part and remanded.  Stewart Enter., Inc. v. RSUI Indem. Co., Inc., 2010 U.S. App. LEXIS 16555(5th Cir. Aug. 4, 2010).

   The insured's properties suffered heavy damage from wind and flood created by Hurricane Katrina.  The insured had three layers of insurance.  Lexington issued the primary lawyer, providing all risk coverage for up to $10 million, including $10 million in flood coverage.  Lloyd's had the first excess layer, $15 million of all risk coverage,  including $15 million in flood coverage, excess to the first $10 million provided by Lexington.  Finally, RSUI issued the second excess layer, providing a coverage limit of $225 million, excess to the $25 million provided by the first two layers.  Both Lloyd's and RSUI's policies were  "following form," adopting the terms and conditions of the Lexington primary policy.

   After Katrina, both Lexington and Lloyd's paid the full amounts of their policies.  RSUI resisted, however. RSUI contended it was not obligated to cover flood damage.  Even if flood damage was covered, it was limited by the anti-concurrent causation clause to damage caused exclusively by flood and not in conjunction with wind.  The insured argued the RSUI policy adopted the limits set forth in the Lexington and Lloyd's policies, and covered any of the $25 million in flood coverage unpaid by these policies.  Further, the anti-concurrent causation clause only operated above that $25 million limit.

   The district court found that the RSUI policy covered up to $25 million in flood damage, but that the anti-concurrent causation clause barred any recovery for damage jointly caused by wind and flood.  Damage caused by wind or flood exclusively, however, would be covered.

   Devoting extensive effort to untangle various provisions in the three policies, the Fifth Circuit first determined that RSUI's following form policy provided flood coverage.  The court then turned to whether the anti-concurrent causation clause under Lexington's policy barred recovery for damage caused concurrently by wind and flood within the $25 million limit.

   The relevant provision in Lexington's policy read:

This policy does not insure against loss or damage caused directly or indirectly by any of the following excluded perils.  Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss:  

. . .

P. loss or damage cause by or resulting from:

. . .

(2) Flood, unless specified in Section 3, Sublimits of Liability, Paragraph J., and then only for such specified amount

(3) any and all loss from any other cause when occurring concurrently or sequentially with . . . Flood . . . .

Section 3, Paragraph J set forth a $10,000,000 sublimit of liability to cover Flood.  Therefore, the Lexington policy excluded flood, but in the same sentence created an exception to the exclusion by providing flood coverage up to $10,000,000.

   The Fifth Circuit found there was coverage for damage caused by wind and flood regardless of the two anti-concurrent causation clauses.  RSUI's interpretation would force the insured to demonstrate that damage was caused exclusively by one of two included perils.  This reading could only assume a full exclusion of flood damage, ignoring that the Lexington policy, which the RSUI policy followed, did cover flood.  Accordingly, the anti-concurrent causation clause applied only to damage in excess of the $25 million aggregate limit.

   Thanks to new Damon Key colleague, Rebecca Copeland, for flagging this case.

Fifth Circuit Certifies Question to Louisiana Supreme Court on Assignment of Policies

   The Fifth Circuit asked the Louisiana Supreme Court whether a policy's anti-assignment clause prohibited post-loss assignments of policy rights.  See In Re: Katrina Canal Breaches Litigation, 2010 U.S. App. LEXIS 15603 (5th Cir. July 28, 2010).

   After Hurricanes Katrina and Rita, Louisiana distributed federal funds to homeowners under its "Road Home" program for repair of uninsured or under-insured property damage.  In return for such funds, recipients executed an assignment to the State all claims and future rights to reimbursement from any casualty, property or flood policy on their residence.  The program was popular and eventually created a one billion dollar shortfall.  To remedy the problem, the State sued various insurers, relying on the assignments to argue for recovery of funds expended under the Road Home program. 

   The district court denied the insurers' motion to dismiss, holding that the anti-assignment provisions did not bar post-loss assignments under Louisiana law.   The Fifth Circuit noted there were conflicting decisions from Louisiana courts.  An old case from 1936 invalidated an anti-assignment clause as applied to the post-loss assignment of rights to life insurance proceeds.  On the other hand, a Katrina case enforced an anti-assignment clause to invalidate a post-loss assignment of all claims arising out of the ownership of the insured property.  The Fifth Circuit noted that this more recent case was consistent with cases from several other jurisdiction and specifically cited the Hawaii Supreme Court's decision in Del Monte Fresh Produce (Haw.) Inc. v. Fireman's Fund Ins. Co., 183 P.3d 734, 747 (Haw. 2007).

   Given this inconsistency, the Fifth Circuit asked the Louisiana Supreme Court whether an anti-assignment clause barred an insured's post-loss assignment of claims under the policy when the assignment transferred contractual obligations, not just the right to money due?