For non-Japanese policyholders with substantial presence in Japan or with commercial relationships with Japanese firms, much has already been written about the nature of their potential commercial property insurance claims and the scale of covered losses coming out of the Tohoku Earthquake. Little attention has been paid to what such policyholders can actually expect if they pursue their claims for insurance coverage. Yet what can a policyholder expect from its insurance company over the next three to 10 years when it actually files such a claim?
Answers to this question can be divined from the collective experience of U.S. policyholders that made claims for losses from the terrorist attacks of September 11, 2001, and Hurricane Katrina of Aug. 2005.
In terms of commercial insurance claims, these three catastrophes are very similar. Sept. 11 and Katrina spawned insurance claims that were individually large but collectively massive, putting a strain on the insurance industry as a whole and on its individual players. Given press reports noting expectations of claims in the tens of billions of dollars, the same will be true for the Tohoku Earthquake.
Additionally, the types of claims and ensuing disputes stemming from Sept. 11 and Katrina were often very similar: for example, the scope of civil authority coverage from police action in lower Manhattan, or wind-versus-flood claims after Katrina. The same will be true for claims from the Tohoku Earthquake: e.g., many U.S. policyholders with Japanese customers or suppliers are contemplating making contingent business income insurance claims.
Further, the appetite of the insurance industry for litigating commercial property insurance claims seems to have increased from Sept. 11 through Katrina. Before September 11, 2001, there were about 300 cases, decided over the course of a century, addressing business income and related coverages in the United States. Nearly 600 such cases have been decided in the 10 years since then, with more than 40 involving Sept. 11 claims and more than 60 involving Katrina claims.
While the pace of litigation in commercial property claims has increased dramatically since Sept. 11, nonetheless, commercial property case law is still quite thin. For the primary-type claim that U.S. policyholders are likely to pursue--contingent business income--there are perhaps a score of decisions to guide courts.
What does this mean for policyholders making claims for loss from the Tohoku Earthquake?
First, because of collective scale and similarity of claims, carriers will be very reluctant to take positions on coverage in one claim that may limit their room for maneuver on a host of other, similar claims. Alternatively stated, policyholders can expect insurance companies initially to take a very hard line on coverage and maintain that line for years until courts clarify common issues or the bulk of similar claims are resolved.
Second, despite the fact that business income coverage is generally marketed as something that will do for the policyholder what its operations would have done but for the catastrophe, carriers are generally reluctant to make payments as income would have been earned. Why? This can be construed as a concession of liability. Instead, carriers either make no advances at all, or small advances, and pay a bulk sum years later at the time of settlement.
Third, because of the relative paucity of case law to constrain them, property insurers can be expected to become quite creative in justifying their refusals to pay. The creativity of these positions will only increase if the cases are litigated.
Fourth, prior to litigation, insurance company claims adjusters will seek to exploit the disparity in their experience, developed over a career of adjusting claims, and that of their policyholders, each of whom should count itself as unfortunate if it has more than one major property claim a decade. Many of the insurers' coverage-minimizing positions will seem reasonable even to experienced business persons. For instance, after the Sept. 11 attacks, many New York policyholders were told that their business income recoveries had to be slashed because of depressed consumer demand immediately after the attacks. While this seems reasonable, it was a complete about-face from the position carriers had historically taken: Business income recovery must be metered by expectations as of the moment before the catastrophe.
Fifth, policyholders with significant claims should anticipate that they may have to file suit and litigate for a substantial period--perhaps even to judgment--to secure coverage.
Lastly, for all of these reasons, it will take a long time for most of these claims to get resolved, by litigation or otherwise. Litigation itself takes a long time. There were a couple of Sept. 11-related coverage decisions issued last year and Katrina coverage litigation is in full swing. Many policyholders can expect to wait up to five years to settle and as many as 10 years for judgment if they are forced to litigate.
DOUGLAS CAMERON is a partner and practice group leader of the firmwide Insurance Recovery Group at Reed Smith.
April 18, 2011
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