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Flood losses trigger insurance changes

Flood losses trigger insurance changes

Liability and insurance disputes from Hurricane Katrina, mostly resolved a decade after the storm, were far more numerous and involved different coverage issues than suits that followed Superstorm Sandy, legal experts say.

Katrina, which ravaged the U.S. Gulf Coast in 2005, triggered several hundred thousand legal claims against defendants ranging from insurers and local governmental entities to the U.S. Army Corps of Engineers.

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Coverage cases often focused on flood and other policy exclusions, lawyers said.

By contrast, Sandy, which hit the East Coast in 2012, has produced fewer court cases, many of which focused on the scope of flood coverage and the application of flood and named windstorm deduc-tibles, experts say.

“There are not the same big coverage issues (in part) because the events were somewhat different,” said Wystan M. Ackerman, a partner at law firm Robinson & Cole L.L.P. in Hartford, Connecticut.

However, disputes from Katrina — which produced $41.1 billion in insured losses, the largest insured loss in history, according to the New York-based Insurance Information Institute Inc. — are not entirely in the rear-view mirror.

As recently as July, the 5th U.S. Circuit Court of Appeals ruled that St. Paul Surplus Lines Insurance Co. must pay $22.6 million in Katrina-related pollution cleanup damages and interest to a Louisiana oil and gas company.

In addition, the state of Mississippi sued in April, accusing State Farm Fire & Casualty Co. of avoiding Katrina windstorm claims, and passing them on to a state assistance program by mischaracterizing them as flood losses. State Farm, which has denied the allegations, succeeded in May in having the suit moved to federal court in Jackson, Mississippi, where it is pending.

The majority of Katrina liability and coverage disputes, though, are history. Federal courts in 2013 dismissed a series of massive class actions seeking billions of dollars of damages from the Corps of Engineers for faulty construction of New Orleans' levee system and for improper maintenance of the Mississippi River-Gulf Outlet Canal, which funneled Katrina's storm surge into the city. The courts ruled that the Corps is immune from liability under federal law.

Coverage litigation often involved whether damage was caused by wind or by flooding, and in what sequence, said Jeffrey S. Weinstein, a partner at Mound Cotton Wollan & Greengrass L.L.P. in New York. Determinations often were made more difficult since there was little left of some buildings above their foundation slabs, he said.

Many policyholders had flood exclusions in their property policies and did not have separate flood coverage, leaving them uninsured, said Finley T. Harckham, a shareholder at Anderson Kill P.C. in New York.

Other disputes focused on anti-concurrent causation clauses, which generally provide that if a loss is caused by both a covered peril and an excluded one, none of the loss will be covered.

For policyholders with flood exclusions, the anti-concurrent causation clauses resulted in even those portions of a loss attributed to covered windstorm damage typically were ruled unrecoverable, lawyers say.

Liability and coverage disputes over Sandy generally have taken a different path, lawyers said.

For example, while more than 800 Sandy damage suits have been consolidated in New York federal court and more are pending in New Jersey, relatively few involve anti-concurrent causation clauses.

Because of Katrina, more policies now include anti-concurrent causation language, but few buyers have wanted to relitigate issues settled in Katrina cases, lawyers say.

“There's really much less fighting about anti-concurrent causation language,” said Jay Levin, counsel at Reed Smith L.L.P. in Philadelphia.

Since Katrina, more policyholders have bought separate flood coverage, and Sandy disputes have often centered on application of flood sublimits and the higher deductibles attached to named windstorm coverage, experts say.

A New Jersey state court, for example, rejected the argument of Wakefern Food Corp., a Keasbey, New Jersey, supermarket buying cooperative, that Sandy had been downgraded to a “post-tropical cyclone” when it hit New Jersey and that its named storm deductible should not apply. The court ruled instead last year that Sandy was still a hurricane when some losses occurred and this created a “substantial nexus” with Wakefern's total losses, according to a blog post by Charles R. Mathis IV, a lawyer at Merlin Law Group P.A. in Red Bank, New Jersey.

And in July, the National Railroad Passenger Corp., better known as Amtrak, settled litigation with several primary property insurers after a federal judge ruled that the $125 million flood sublimit of its $675 million property program applied to storm surge losses. Amtrak had argued that seawater damage from the surge caused by Sandy was separate from flood losses.

Insurers treat storm surge coverage differently, with some including it in windstorm policies and others in flood policies, said Duncan Ellis, national property practice leader at Marsh L.L.C. in New York.

Policyholders also need to be aware of how percentage deductibles in named-storm coverage operate — whether, for instance, they represent the percentage of total insured value at the time of loss or of the value of property damaged, he said.

Litigation on these issues is “very fact-specific and very concentrated on the wording and structure of the policy,” Mr. Weinstein said.

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