Bullivant Houser Bailey PC on Rising Catastrophic Flood Losses and Insurer Response
In this commentary, Bullivant Houser Bailey’s J. Douglas Durham and Erin Nelson discuss the coverage and adjustment issues presented by flood claims and provide practice insights for attorneys in dealing with them.
Floods cause significant and largely unpredictable property and business interruption losses each year. From 1972 to 2006, flood catastrophes have caused national losses of $94 billion, an average of over $176 million per flood. 2008 has been no exception. These losses trigger insurance claims under policies that provide various types of insurance coverage. As they respond to these claims, insurers are working to minimize claims expenses and evaluating or implementing various risk-limiting strategies. By rapidly fielding personnel who not only help process claims, but also assist policyholders taking steps to limit their losses, insurers can help limit the extent of individual insured losses while providing assistance when it is most needed. In addition, the commentary notes, “Given this year’s extensive flooding along the Mississippi River and major tributaries, some insurers may elect to limit their risks by reducing or eliminating their underwriting in such areas, just as they have in coastal areas prone to hurricane-related flooding, by reducing available coverage limits, by increasing premiums, or some combination of these approaches.”
The commentary discusses some of the leading Hurricane Katrina insurance coverage litigation cases. It finds a general trend in the court decisions “that rejects application of the efficient proximate cause doctrine when evaluating coverage for claims arising out of damage caused by Hurricane Katrina …. The efficient proximate cause doctrine does not apply where separate causes, some covered and some not covered, cause divisible or different property damage.”
The authors recommend that practitioners focus on the cause of each divisible item of coverage. The commentary examines a number of insurance coverage court decisions involving floods where losses resulting from covered perils could not be distinguished from those resulting from covered perils.
Aside from property damage issues, the commentary also explores business interruption loss issues triggered by floods. It discusses several issues arising from business interruption coverage provisions concerning the ”period of restoration.” It also examines issues arising from “net profit” and “net income” provisions. Loss of market exclusions are also discussed. The authors recommend that the “formula a particular policy uses to determine the extent of business interruption coverage should be reviewed to determine what sort of information the insured must present to establish a valid claim …. [B]ecause the disaster may introduce extraordinary problems in obtaining information required to process a claim, early identification of those problems can permit the insured and insurer to agree on how to address them, as well as whether an interim arrangement is required, thereby minimizing dispute and delay.” Lastly, contingent business interruption coverage and extra expense coverage issues are described. Attorneys representing policyholders are urged to carefully assess possibilities for coverage under these provisions.