PERSPECTIVES: Nor'easter Athena plus Superstorm Sandy equal major coverage disputesReprints
A Nor'easter that combined with damage from Superstorm Sandy dealt a huge blow to the businesses along the Eastern Seaboard, causing business interruptions and property damage — and coverage disputes. Stacy M. Andreas, a partner at Lathrop & Gage L.L.P., discusses these problems.
A new storm — and a new insurance coverage battle — has hit the beleaguered East Coast.
The new storm, named Athena, struck already hard-hit businesses along the Eastern Seaboard, causing lengthened business interruptions and more property damage.
In addition, this new storm, named after the Greek goddess of war, could mean that businesses may be asked to pay yet another “per occurrence” deductible for additional or exacerbated property damage and business interruption.
Because businesses often manage their insurance costs with high per-occurrence deductibles, two separate storm deductibles — one for Sandy and another for Athena — pose a serious hit on the bottom line of businesses. The two storm deductibles may be added on top of additional specific risk deductibles. In fact, because winter storms are now named, another percentage deductible may apply if the policy contains a named storm deductible provision. In the end, the policyholder may be left with huge losses but no real coverage at all in terms of dollars as a result of the application of all of the deductibles.
Two storms, whether named or not, can trigger multiple policy coverage limits as well as multiple deductibles. That may be a welcome development for businesses that find themselves underinsured for Sandy. If the per-occurrence damage limit was insufficient to cover all the damage caused by Sandy, an additional limit for Athena — even if it means an additional deductible — may prove to be critical to business recovery.
Often, the business policies define what “occurrence” or “event” means for determining deductibles and limits, but there is little uniformity. In fact, there may be no uniformity even within a high-limit tower.
For example, a policy may define occurrence as damage or loss from a discrete event. Other policies may define occurrence as resulting from one cause or a series of related causes. For certain types of coverage and perils, insurance policies may add a time element component to calculating number of occurrences. For example, a policy may provide that any loss or damage during a 72-hour or one-week period caused by flood shall be considered a single occurrence. A different standard, however, may apply for other types of perils, leading to different numbers of occurrences for different perils.
The coverage disputes over number of occurrences for deductible and limits purposes are nothing new in New York, one of the storms' hardest-hit areas. The issue surrounding the number of occurrences was squarely at issue in the World Trade Center Sept. 1, 2001, coverage disputes — for example, World Trade Center Properties L.L.C. v. Hartford Fire Ins. Co.. The infamous “WilProp” form contained a fairly broad definition of occurrence, which stated, “Occurrence' shall mean all losses or damages that are attributable directly or indirectly to one cause or to one series of similar causes. All such losses will be added together and the total amount of such losses will be treated as one occurrence irrespective of the period of time or area over which such losses occur.”
Such a broad definition of occurrence seemingly would limit the chance for multiple occurrences and increase the chance for a successful argument that only one deductible would apply. However, the 2nd U.S. Circuit Court of Appeals found that there were two occurrences, and two limits, with respect to the WilProp form. Some of the other forms at issue, such as a Travelers form, either failed to define the term “occurrence” at all or defined it a different way, leading to a finding of ambiguity and the use of extrinsic evidence to determine intent.
With ambiguity and uncertainty comes litigation. Certainly, few businesses hit by Sandy and Athena can afford to mount the kind of litigation battle bankrolled by Silverstein Properties Inc.
The World Trade Center disputes illustrate that courts will endeavor to reach the right result in favor of coverage when dealing with complex issues such as the number of occurrences. Although Silverstein wanted a broad definition of occurrence to avoid multiple deductibles, the 2nd Circuit found a way to make a coverage-promoting ruling that did not run afoul of basic insurance principles, such as the reasonable expectations doctrine.
In the case of businesses affected by Superstorm Sandy and Nor'easter Athena, insurance companies likely will be looking for ways to argue that the occurrence of two storms means at least two per-occurrence deductibles in order to reduce or eliminate their payments to business policyholders. Business policyholders should be prepared for a difficult and protracted fight. For example, policyholders may be able to argue that Athena would not have caused covered damage but for the damage already caused by Sandy. In addition, Athena was another storm event in a chain of losses starting with Sandy, and thus could be considered the storm version of an earthquake aftershock. Therefore, because Athena's damage could be argued to be causally connected to damage from Sandy, policyholders may be able to contend that there is only one occurrence, particularly with respect to losses resulting from power outages and flooding.
This causation argument will be particularly important if the policy does not contain a definition of occurrence, or if the occurrence definition is unclear. Most jurisdictions considering this issue determine the number of deductibles by the number of causes of the loss. On the other hand, policyholders with low deductibles but insufficient per-occurrence limits may want to argue for two occurrences in order to maximize limits. This argument should be an easier one to make, particularly in light of the World Trade Center decision that two different airplanes caused two different occurrences.
Of course, as a first step, businesses would be well-advised to read and understand their property policies, and particularly the business interruption coverage, now in order to make arguments that maximize rather than reduce the dollar amount of available coverage and how to best position the number-of-occurrence argument. With business interruption coverage, just because the interruption has continued through Sandy and Athena does not mean that the interruption will be treated as the same event for coverage purposes. However, it may be impossible to separate business interruption caused exclusively by Athena as opposed to partially or totally by Sandy.
If the insurer takes an adverse position, the policyholder will want to be prepared to make counterarguments. First, it is important to seek information on whether the insurance company's position is consistent with that being taken with other policyholders. A broker or an insurance coverage lawyer can help obtain this information. Second, the policyholder will want to be able to argue that the relevant policy language is ambiguous in the context of Sandy and Athena. In the event of ambiguity, the policyholder can argue that the policy should be construed in favor of coverage.
Businesses subject to multiple storms also should consider whether it makes sense to try to revise future policies to resolve the multiple occurrence problem. For example, policyholders should consider looking for placements open to different treatment of occurrences for deductible and limits purposes. A policyholder with a high deductible would benefit from an endorsement limiting the total number of deductibles that can be applied in any policy term. In the alternative, policyholders may advocate an endorsement that prohibits the insurer from charging multiple deductibles during a specific period of time (such as a month) for damage suffered at the same location, or for any subsequent damage prior to reconstruction.
Stacy M. Andreas is a partner at Lathrop & Gage L.L.P. in Kansas City, Mo. She can be reached at 816-460-5531 or firstname.lastname@example.org.