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FEMA’s (Under)Adjustment Of Flood Insurance Claims: Lessons Learned From Sandy

On By coveragelawIn Biggert-Waters Flood Insurance Reform Act, FEMA, Flood Insurance, Homeowner Policy, Hurricane Harvey, Hurricane Irma, Hurricane Katrina, Insurance Coverage, Insurance policies, Maximizing Insurance Recoveries, National Flood Insurance Program, UncategorizedLeave a comment

Blogger:  Lee M. Epstein

Many business owners and most homeowners purchase flood insurance  through the National Flood Insurance Program (“NFIP”). Unfortunately, most homeowners affected by Hurricane’s Harvey and Irma and the associated flooding won’t have insurance. For example, only 17% of those suffering flood damage from Harvey were insured. The numbers in Florida are better but nevertheless well-under 50% of those suffering a flood loss will be insured.

Even those with flood insurance may still be up the proverbial creek without a paddle. The Federal Emergency Management Agency (“FEMA”), the agency that manages the NFIP, publishes statistics that reveal systematic underpayments of flood insurance claims.

According to FEMA, in the aftermath of Superstorm Sandy, nearly 144,000 policyholders filed flood insurance claims. When numerous problems, including fraud, were uncovered in connection with the adjustment of those claims, FEMA offered those policyholders an opportunity to have their claims re-reviewed. Over 19,000 Sandy claimants took advantage of that opportunity. To date, FEMA has closed 16,744 of those claims. Approximately 83.7% of those closed claims have resulted in additional payments totaling $227,060,819, or approximately $14,000 for each underpaid Sandy claimant. Thus, FEMA openly acknowledges that it vastly underpaid policyholders. Based on that large sample, if every one of the 144,000 Sandy claimants had sought a re-review, the underpayments would have exceeded $2,000,000,000. That is extraordinary.

But there is more. If a Sandy claimant was not satisfied with the FEMA re-review, they were entitled to a Third-Party Neutral Review by, for example, a retired judge. Approximately 2,277 Sandy claimants have requested a Third-Party Neutral Review. To date, 1,087 Third-Party Neutral Reviews have been completed. Total additional payments of $19,668,316 have been made based on those Third-Party Neutral Reviews or approximately $18,000 per claim. Thus, those Sandy claimants who pursued both a re-review and a Third-Party Neutral Review of their claim received, on average, an additional $32,000 over the amount FEMA originally offered to pay on their claim.

And there is still more. Sandy claimants that pursued Third-Party Neutral Reviews with the assistance of competent legal counsel and other professionals fared even better.

Those currently suffering flood losses throughout the country can learn several valuable lessons from the experience after Sandy.

First, flood insurance policyholders should anticipate and be prepared for FEMA to initially undervalue their claim.

Second, flood insurance policyholders should not hesitate in asking FEMA to reevaluate its initial of adjustment of flood insurance claims.

Third, in order to enhance the recovery on any flood insurance claim, policyholders should seek the advice and counsel of competent professionals.

Fourth and, perhaps, most importantly, don’t give up and don’t give in.

For more information, please contact Lee Epstein, Chair of the Insurance Counseling and Recovery Department at Flaster Greenberg PC. 

PROPERTY LOSS AND BUSINESS INTERRUPTION CHECKLIST FOR COMMERCIAL INSUREDS

On By coveragelawIn Biggert-Waters Flood Insurance Reform Act, Business Interruption, Checklist, FEMA, Flood Insurance, Forensic Accountants, Homeowner Flood Insurance Affordability Act, Homeowner Policy, Hurricane Harvey, Hurricane Katrina, Insurance Coverage, Insurance policies, Maximizing Insurance Recoveries, National Flood Insurance Program, UncategorizedLeave a comment

Blogger:  Lee M. Epstein

Beyond the personal toll extracted by Hurricanes Harvey and Irma, the property and business losses are projected to be among the greatest caused by a natural disaster. As the recovery efforts continue in earnest, the following Checklist is offered to assist those who have suffered a loss and are planning to submit an insurance claim for any property loss and business interruption suffered.

□    Restore service to any property protection systems that have been damaged, such as
     sprinklers and alarms

       □    If property protection cannot be restored, post a watch

□    Notify all insurance companies whose policies may be implicated

       □   Consider whether notice should be given to excess insurance companies or to
           insurance companies whose policies have expired

□    Prepare a preliminary report describing:

      □    The type of loss

      □    The date and time of the loss

      □    The location of the loss

      □    A contact person at the company

      □    The property involved, including: buildings, equipment and stock

□    Determine if:

      □    The property is protected from further damage

      □    Any buildings require temporary enclosures

      □    Any utility lines have been damaged and require repairs

□    Identify and separate damaged and undamaged property

□    Commence salvage operations

□    Determine whether:

      □    Production can be restored at the damaged facilities

      □    Damaged equipment can be repaired

      □    Substitute facilities and equipment are available and necessary

      □    Lost production can be made up through inventory, overtime, or other
           suppliers

□    Formulate a plan with the insurance company’s input for making repairs, 
     securing substitute facilities and equipment and undertaking other loss
     mitigation efforts

□    Set up accounting procedures to track:

      □    Property Damage

            □    Create separate accounts for all loss-related expenses

            □    Implement procedures for collecting and maintaining all loss-related
                 documentation  in accordance with insurance policy terms, including
                 invoices, contracts and manpower hours

            □    Inventory damaged and undamaged goods

      □    Business Interruption

            □    Determine the “period of interruption”

            □    Determine the quantity of lost production as reflected in inventory 
                 records, production records and sales records. Compute what the business
                 would have normally produced, had there been no loss, then see how many                    
                 units were actually produced.  The difference is the gross lost production.
                
            □    Deduct any sales or production that can be continued or made up through
                 the use of existing inventory, the utilization of other plants, the utilization
                 of overtime hours or other loss mitigation efforts.  The difference is the
                 net lost production.

            □    Multiply the net lost production by the marginal value of a single
                 production unit.

            □    Add back the extra costs associated with replenishing inventory and loss
                 mitigation efforts.

□    Prepare and submit claim

      □    Summarize

            □    Date, location and type of loss

            □    Amount claimed

      □    Break down the amount claimed

            □    Property damage

                  □    Real property

                  □    Equipment

                  □    Stock and supplies

                  □    Demolition and debris removal

      □    Business Interruption

            □    Interruption Period

            □    Sales value of lost production

            □    Expenses incurred to reduce the loss

□    Attach supporting documentation for each element of the property damage and
     business interruption

□    Press for written extensions of time to submit claim and to file suit if necessary

□    Seek prompt payment of claim by insurance company

□    If a dispute over a claim arises, determine

      □    Whether appraisal is appropriate or beneficial

      □    Whether litigation will expedite payment of claim

For more information, please contact Lee Epstein, Chair of the Insurance Counseling and Recovery Department at Flaster Greenberg PC. 

START SPREADIN’ THE NEWS…NEW YORK’S HIGHEST COURT SAYS PRO RATA ALLOCATION IS LEAVING TODAY

On By coveragelawIn Allocation, Guest Blog Posts, Guest Bloggers, Insurance Coverage, Insurance policies, Insurers, Maximizing Insurance Recoveries, New York High Court, policyholders, UncategorizedLeave a comment

new_york_1

Guest Blogger: John G. Koch, Shareholder, Flaster Greenberg PC

In a much anticipated decision, New York’s highest court handed policyholders a significant victory in In re Viking Pump, Inc. & Warren Pumps, LLC, Insurance Appeals, No. 59 (N.Y. May 3, 2016).  In the context of long-tail bodily injuries or property damage spanning multiple policy periods, the Court declared that policy language is the King of New York and trumps all else when determining whether the “all sums” or “pro rata” allocation approach applies to a liability insurer’s indemnity obligation.  Specifically, the Court held that the “all sums” approach applies to an insurer’s indemnity obligation where the policy contains language inconsistent with a pro rata approach. In this case, the Court reasoned that a “non-cumulation” or “anti-stacking” clause is inconsistent with allocating an insurer’s liability on a pro rata basis.  Although Viking Pump dealt only with the duty to indemnify, its ruling applies to the broader duty to defend and bolsters existing case law recognizing that the duty to defend language in most general liability policies cannot be reconciled with a pro rata allocation approach.

To put the Viking Pump decision in context, insurers usually prefer a pro rata approach, meaning they can only be liable for their share of a loss based on the time period their policies were in force compared to the overall period that the long term injury or property damage occurred.  This rests on the legal fiction that a single indivisible loss taking place over many years can be treated as one occurrence in each successive policy period, which is an expedient method for dividing the indivisible loss among multiple successive policies based upon each policy’s time on the risk, as opposed to the extent of actual injury or damage that took place during any specific period.  Id.  As the Court stated, the foundation of this approach is that no insurer will have to pay for any injury or damage that occurs outside of its policy period.  Viking Pump, slip op. at 11-12.

Insurers usually prefer the pro rata approach because their risk is typically reduced and the risk of lost policies, insurer insolvencies or other gaps in coverage may fall upon the policyholder.  In contrast, under the “all sums” approach, each successive insurance policy triggered by a long term injury or damage is, essentially, jointly and severally liable for the entire loss up until the policy’s limits are exhausted.  Under this approach, the insured may target one or many insurers for the entire loss, leaving it to the insurers to seek contribution from one another.

Prior to Viking Pump, insurers often brandished Consolidated Edison Co. of New York v. Allstate Insurance Co., 98 N.Y.2d 208 (2002), to assert that New York is a “pro rata” state.  But in Viking Pump, the Court of Appeals distinguished and limited the reach of Consolidated Edison by pointing out that it never formed a blanket rule for pro rata allocation and that the policies in Consolidated Edison did not contain non-cumulation or similar clauses.  Viking Pump, slip op. at 11-12.

The Viking Pump Court held that non-cumulation clauses are antithetical to the concept of a pro rata allocation.  Non-cumulation clauses essentially provide that where a single loss triggers successive policies, any amount paid by a prior policy will reduce the limits of the policy containing the non-cumulation clause.  The original purpose of the clause was to prevent policyholders from double dipping when the industry made the switch from accident based policies to occurrence based policies.  Non-cumulation clauses are inconsistent with a pro rata allocation because they “plainly contemplate that multiple successive insurance policies can indemnify the insured for the same loss or occurrence,” whereas the entire premise underlying pro rata allocation is that an insurer cannot be liable for the same loss to the extent the loss occurs in another insurer’s policy period – hence the legal fiction that a separate occurrence takes place in each successive policy period.  Id. at 18 (emphasis added).  The two provisions are logically inconsistent.  Thus, adopting the pro rata approach would render the non-cumulation clause superfluous in violation of New York’s principles of policy interpretation. For this reason, the Court determined that the “all sums” approach applies to policies containing a non-cumulation clause.

In addition to the pro rata versus all sums allocation issue, the Court determined that the proper method for allocating between primary and excess layers of insurance under the “all sums” method is vertical exhaustion – meaning that a single primary policy may be required to respond to the long term loss up to its policy limits, at which time the excess coverage above that policy is pierced on an all sums basis.  The Court rejected the argument that horizontal exhaustion should apply, where all primary coverage would have to be exhausted before any excess coverage must respond to a loss, noting that the excess coverage was tied to the exhaustion of only the underlying policy, not prior or subsequent policies.  Thus, the Court ruled that vertical exhaustion is the appropriate method.

Although Viking Pump specifically addressed the effect of non-cumulation clauses, it undoubtedly stands for the propositions that: (1) no blanket rule controls how an  insurer’s indemnity obligation must be allocated, and (2), where language or a clause in an insurance policy is inconsistent with the pro rata approach, pro rata allocation does not apply.

The latter point is especially important when considering the issue of whether the duty to defend is subject to pro rata allocation.  Most general liability policies provide that the insurer has a duty to defend “any suit” in which at least one potentially covered claim is alleged.  New York courts have interpreted this language as requiring the defense of the entire lawsuit so long as at least one claim is at least in part potentially covered.  A pro rata allocation is inconsistent with the language obligating insurers to “defend” “any suit” if at least one potentially covered claim is alleged.  Thus, the reasoning in Viking Pump suggests that the “all sums” approach is the appropriate method respecting the duty to defend and is consistent with the duty to defend language found in most liability policies.

To learn more, contact John. 

 

Every Dawg Has Its Day – A Report From Philly I-Day 2016

On By coveragelawIn Cybersecurity, Guest Bloggers, Insurance Brokers, IT, policyholder commuinications, UncategorizedLeave a comment

cyber securityGuest Blogger: Emily Breslin Markos, Weisbrod Matteis & Copley PLLC

On Thursday, April 28th, I had the pleasure of attending Philly I-Day, an annual event where insurance professionals gather to network, share ideas and get informed about industry trends.  The attendees had the opportunity to hear from Tom Finan, who previously served as the Senior Cybersecurity Strategist and Counsel with the Department of Homeland Security.  While in this role, he established and led the agency’s Cyber Incident Data and Analysis Working Group (CIDAWG), which I previously blogged about.  I appreciated hearing him speak about the important work that the CIDAWG has done to secure businesses against cyber-attacks.  Mr. Finan shared that the National Protection and Programs Directorate (NPPD) recently held a workshop to focus on the execution of the repository for reporting cyber incidents, as described in my previous blog post.

I was surprised to learn that Mr. Finan invented the acronym CIDAWG for the working group, and intentionally made it, well, awesome.  He boasted that it is the best acronym in the federal government to date, and I tend to agree, at least until we all start calling the President “P-Dawg.”   To learn more about the CIDAWG’s continuing cyber-security efforts, please visit:  www.dhs.gov/cybersecurity-insurance.

While at the event, I also had the opportunity to attend a Presentation given by our own Lee Epstein, with Kevin M. McPoyle of KMRD Partners, on effective communications between brokers and policyholders.  In our work representing policyholders, we have seen our clients rely on brokers as an incredible source of expertise, guidance, and comfort when it comes to our client’s coverage needs.  Unfortunately, we have also had the firsthand experience of having communications between the policyholder and broker unearthed in coverage litigation, and sometimes used against the policyholder.

For example, when a broker gives the unequivocal opinion that a certain claim is not covered, that can come back to haunt the policyholder.  The insurer may rely on that statement as evidence of no coverage, and a court may find the broker’s statement compelling.  In light of that, Lee and Kevin discussed how can brokers strike a balance between providing helpful and definitive advice to their clients, while aware that their statements can carry a great deal of weight if the claim is ever litigated.

Two main themes emerged from the discussion.  First, the broker’s role is to offer business advice, not legal advice, and couching communications in business terms can avoid many problems if the claim ever goes to litigation.  Second, when there is a question as to the scope of coverage, setting forth advice in terms of what the insurer’s position may be provides sound advice to the policyholder, but also protects the policyholder in the event of litigation.  It was an eye-opening Presentation, and fodder for continuing discussion.

To learn more, contact Emily Breslin Markos

Caveat Emptor in the Brave New World of Cyber Insurance Coverage

On By coveragelawIn Caveat Emmptor, Cybersecurity, data breach, Guest Bloggers, Insurance Coverage, Insurance policies, Insurers, IT, Maximizing Insurance Recoveries, policyholders, UncategorizedLeave a comment

databreach

Guest Blogger:  Martin Bienstock, Weisbrod Matteis & Copley PLLC

There are two types of entities in the world, goes the adage: those who have learned that their data was breached; and those who just don’t know it yet.  The cost of these data breaches is no laughing matter, however; according to a recent study sponsored by IBM, the average data breach costs a company more than $200 for each record lost.[1]  (In the health-care sector, the cost are even greater, approaching $400 per-record lost record.[2])  The more records that are lost, the greater the per-record expense, so that a large data breach may give rise to exorbitant costs.[3]

Thoughtful executives can mitigate these costs through effective utilization of insurance coverage.  Insurance companies aggressively are marketing new cyber-insurance policies that provide first-party and third-party coverage in the event of a data breach.  Often, the new policies are accompanied by an exclusion in the entity’s Commercial General Liability Policy for losses arising from a data breach.

Entities entering the market for cyber coverage therefore must be vigilant to ensure that, at the end of the day, their efforts not yield less coverage than previously had been available.

Cyber Insurance Policies Are Often Conditioned Upon Maintaining a Particular Level of IT Security.

The new cyber policies typically require an applicant to complete a comprehensive assessment of its cyber security measures, affirming, for example, that it has in place “up-to-date, active firewall technology,” and “updated anti-virus software active on all computers and networks.”[4]   Coverage may be conditioned on the accuracy of these representations.[5]   In the event of a breach, if it turns out that the IT security information represented in the application form was inaccurate, coverage might not be available.

Thus, in one recent case,[6] an insurer sought to deny coverage because, among other things, the insured health-care provider had not maintained the level of IT security described in its application.  The insurer argued that the policy therefore was void.[7]  Under cyber-liability policies, then, an insured might be excluded from coverage in the event that it was negligent in implementing cyber-security measures – hardly the result that the insured had in mind when it purchased the policy.

Traditional CGL Policies Offer Some Protection for Data Breaches Even When the Insured Failed to Maintain Adequate IT Security.

When a data breach arises from an entity’s failure to maintain security, third-party coverage likely would be available under a standard Commercial General Liability Policy.  The standard CGL Policy provides coverage for “advertising injury.”  It defines such advertising injury to include injury caused by “oral or written publication, including publication by electronic means,” which “disclosed information about a person’s private life.”

This definition of “advertising injury” is ill-suited for costs arising from a data breach since it depends upon “publication.”  In the event of a data breach, many of the costs are unrelated to the actual publication of private data; the costs arise from the mere possibility of publication, not its actuality.  Conditioning data-breach coverage upon an irrelevant “publication” standard makes little sense.

Two recent cases highlight the limitation of relying on the “publication” standard to provide protection against data-breach claims.  In one case, electronic data concerning 50,000 employees fell out of a transport van and never was recovered.  The Connecticut Supreme Court held that the data had not been “published,” since there no factual support for the conclusion that the data, which was not in a readily usable format, ever was accessed by anyone.[8]  In contrast, in another recent case, the Fourth Circuit Court of Appeals affirmed a district court decision that damages resulting from a data-breach did constitute “advertising injury” because the information had been made available on the internet, and therefore was “published.”[9]

Cyber-data and Cyber-security policies can be better designed than the CGL “advertising injury” coverage, so that coverage is not dependent on publication.  But as some insureds have learned to their dismay, cyber-liability policies may be drafted to shift the costs of negligence back to the insured, and to make coverage unavailable for the very data breaches for which the insured purchased the insurance in the first place.

Caveat Emptor

Cyber-risk insurance therefore may serve a useful purpose by providing coverage that is targeted specifically towards data breaches, and that covers damages that go beyond the scope of the traditional CGL Policy. Buyers must beware however that the extra financial and administrative burden they assume in buying such policies not leave them worse-off than before.

For more information, please contact Marty at mbienstock@wmclaw.com or 202.751.2002.

 

[1] IBM 2015 Cost of Data Breach Study United States, conducted by Ponemon Institute LLC (May 2015) at 1.

[2] Id. at 7.

[3] Id. at 7.

[4] A sample cyber-risk policy issued by Travelers Group and containing these representations (last accessed on the date of publication) is available here .

[5] Id., Cyber-Risk Policy at III.M. (p. 22).

[6] Columbia Cas. Co. v. Cottage Health Sys., 15-cv-3432 (2015 C.D. Cal.).

[7] Id., Dkt No. 22.

[8] Recall Total Info. Mgmt., Inc. v. Fed. Ins., 317 Conn. 46, 115 A.3d 458 (2015).  The Connecticut Supreme Court adopted the reasoning of the appellate court in Recall Total Information Management, Inc. v. Federal Ins. Co., 147 Conn.App. 450, 465, 83 A.3d 664 (2014).

[9] Travelers Indem. Co. of Am. v. Portal Healthcare Sols., L.L.C No. 14-1944, 2016 WL 1399517, at *2 (4th Cir. Apr. 11, 2016).

Declaration of Independence: Court Declares That Insureds Are Entitled To Independent Counsel When A Conflict Of Interest Develops

On By coveragelawIn UncategorizedLeave a comment

This past week, the Nevada Supreme Court adopted the so-called “Cumis” Rule. See State Farm Mutl. Ins. Co. v. Hansen, No. 64484 (Nev., Sept. 24, 2015). That Rule derives from a California appellate court case decided over thirty years ago. San Diego Fed. Credit Union v. Cumis Ins. Society, Inc., 208 Cal. Rptr. 494, 506 (Cal. Ct. App. 1984). The Cumis Rule provides that when a conflict of interest develops between an insurer that is defending its insured against a third-party claim, the insurer must satisfy its contractual duty to defend by paying for independent defense counsel chosen by the insured.

Courts throughout the country are split on whether and when the Cumis Rule or some variant of that Rule applies. Thus, the right to independent counsel varies from state to state and policyholders must be proactive in understanding and securing their right to independent defense counsel.

Those courts that have refused to allow insureds to select independent counsel hold generally that no conflict arises because defense counsel represent and owe a duty of loyalty to to the insured only and not to the insurer. Conversely, those courts allowing insureds to select independent counsel hold that defense counsel engage in a dual representation by representing the interests of both insurers and insureds. When a conflict of interest develops in a case involving a dual representation, independent counsel selected by the insured and paid by the insurer is required.

Courts are likewise split on when an actual conflict of interest arises. Some courts hold that whenever an insurer reserves its right to deny coverage an actual conflict arises. Other courts have decided that an insurer’s reservation of the right to deny coverage does not create a per se conflict of interest. An actual conflict of interest requiring the retention of independent counsel arises in those jurisdictions only when the outcome of the coverage determination can be controlled by defense counsel. The Hansen Court opted for the latter approach, holding that “there is no conflict of interest if the reservation of rights is based on coverage issues that are only extrinsic or ancillary to the issues actually litigated in the underlying action.”

The Hansen decision underscores the reality that insurance coverage law and rights are ever developing state by state. Knowing which states acknowledge dual representation and when an actual conflict arises will make all the difference in securing independent defense counsel at the insurer’s expense.

Questions? Let me know.