By Mark M. Bell
The past decade has seen tremendous domestic catastrophic storm including Hurricane Katrina, Hurricane Wilma, Hurricane Sandy, and various other serious storm events. It is unclear whether these events have been the cause or have simply provided an opportunity to view a different phenomenon on a larger scale: insurers increasingly pushing back on claims by interpreting their policies narrowly. In 2010, Joseph J. Plumeri, Chairman and CEO of Willis Group Holdings P.L.C said that 50 percent of nonstatutory claims his company sees bring push-back from the carrier. For larger claims, the percentage could climb as high as 90 percent. Push back, indeed, is on the rise.
This statistic does not insinuate a sustained collusive effort by the insurance industry. Rather, insurers seem to independently push back on claims by strictly applying the sophisticated provisions contained in their form insurance contracts. One of the most common areas where insurers have pushed back on claims is when multi perils combine to cause a loss. The multi-peril phenomena are often referred to as "concurrent" causes.
While this article will focus on insurer pushback on property-insurance losses, similar trends can be seen in commercial general liability insurance, directors and officers insurance, errors and omissions insurance, and other industry-specific lines.
Property insurance policies provide the clearest lens through which to view this phenomenon because of the various forms of insurance, property insurance generally sees the broadest similarity among market carriers; thereby enabling similarly situated parties to view how their policy may be interpreted. Property insurance is most commonly written on an Insurance Services Office form and insurance carriers typically present the policies to the majority of property owners on a take-it-or-leave it adhesion basis. While property insurance does see the greatest commonality among the product lines, this does not mean that all property insurance policies are created equal or that all policies protect against the same losses.
The area of greatest inconsistency among various property insurance policies is often found in the exclusions to the policies, particularly as the exclusions relate to the perils of water, earthquake and collapse. The policies also may differ on their use of the "anti-concurrent causation exclusion" as it relates to these and other perils.
Property owners are often surprised to learn how little their "all risk" property insurance policy covers, and all too often, cannot learn about the deficiencies in their policies until after a loss occurs, and the policyholder learns the loss is not covered. Adequately procuring property insurance on the front end can alleviate the risk of learning that coverage does not exist on the back end.
The term "all-risk" in the policies leads policyholders to believe that their policy covers every possible risk of loss except perhaps a few limited exclusions. Policyholders are often familiar with the types of exclusions set out above and assume that so long as their damages were not directly caused by an earthquake, a flood or a collapse, their policy should cover them. The term "all-risk" itself presumably lulls them into this false sense of security.
This area is ripe for pushback by insurers because of the nature of all-risk policies. All-risk policies generally describe individual perils that are excluded. Under the policies, if a loss is caused by an excluded peril, there is no coverage, but if the loss is caused by anything that is not excluded, there is coverage. The problem arises when excluded and covered perils operate in conjunction to cause a loss. When covered and non-covered perils are connected to a loss, it may be unclear from the policy whether the entire loss should be covered, whether the entire loss should be excluded, or whether the loss and resultant damages should be bifurcated to indemnify the insured for losses caused by covered perils while denying indemnity for losses caused by excluded perils. Policyholders are often similarly confused wondering whether their policies cover all of the loss, none of the loss, or a portion of the loss.
The policyholders are understandably confused on this point because the answer often depends on the exact wording of the policy, the policy's endorsements and the particular state where the policyholder lives. Thus, there is not a one-size-fits-all approach to addressing concurrent causation issues. Rather, prudent policyholders should take the opportunity presented by the year end to reassess their policies by taking into account the state where they are located.
Many policyholders may be surprised to learn that their policies may bar coverage even if 99 percent of their loss was caused by a covered cause of loss and 1 percent of their loss is caused by an excluded loss. While this may be surprising, many courts authorize this exact approach.
A Utah case demonstrates how these types of exclusions operate in practice. In the case, the policyholder's loss was caused when a pipe ruptured due to unusually low temperatures. Water escaped from the broken pipe causing extensive flooding and soil erosion, which ultimately damaged the policyholder's property. In that case, the insurer denied the claim because the homeowner's damages were caused by "earth movement," which was excluded by the policy. The Utah court agreed with the insurer and ruled against the policyholder. Providing an exhaustive list of the various jurisdictions and how they treat concurrent causation exclusions is beyond the scope of this article.
Another area of concern for policyholders relates to the policyholder's duty to promptly notify an insurer in the event of a loss. Most policies require the policyholder to notify the insurer within a limited timeframe and insurers often deny claims for untimely notice. Notice issues have caused otherwise-covered losses to be denied and excluded.
A recent Florida case (Slominski v. Citizens Property Insurance Corp.) arising out of Hurricane Wilma demonstrates how these issues arise. In the case, the policyholders suffered what they believed to be minor damages after Hurricane Wilma that they believed were less than their policy deductible. The policyholders elected not to report the claim, and to handle the repairs themselves. Unfortunately for the policyholders, they learned that the damages were much greater than initially expected. They then filed a claim with their insurer and the insurer denied the claim.
The Florida Court of Appeals in that case found for the insurer. Florida courts presume that prejudice exists in late-notice cases, and the court found that the burden is "on the insured to show lack of prejudice where the insurer has been deprived of the opportunity to investigate the facts," according to court documents. The court held that the insured could not demonstrate that the insurer was not prejudiced and affirmed the dismissal of the policyholder's complaint.
In summary, given the increased pushback from property insurers, it is important for an organization to ensure that the perils expected to be covered are and will be covered by the policy. It is also important to ensure that organizations have the appropriate policies in place to timely and adequately notify the insurer in the event of a loss to ensure maximum recovery.
Mark Bell is an attorney with Waller in
Nashville, Tenn. He has published a number of insurance articles in various trade and law review publications throughout the United States.
November 28, 2012
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