Insurance Coverage for Losses Due to Hurricanes Katrina and Rita: Practical
Advice for Policyholders
View or download the PDF version
of this Alert.
Taken together, Hurricanes Katrina and Rita are by far the most costly
natural catastrophe in U.S. history, with estimates of insured losses now
exceeding $60 billion. The previous record for insured losses is held by
Hurricane Andrew, for which insured losses totaled $21 billion (in inflation
|“These disasters will have enormous
impacts on insurers, who face far greater exposure from these losses
than they have from any other natural disaster in history.”
This disaster will have an enormous impact on insurers, who face far
greater exposure from this loss than they have from any other natural disaster
in history. Unlike Hurricane Andrew and the series of hurricanes that hit
the Florida Panhandle in 2004, which primarily affected residential property,
Hurricanes Katrina and Rita have caused an unprecedented amount of damage
to industrial (largely oil and chemical-related) and commercial property.
That means impacted businesses will face longer and therefore more costly
business interruption losses, complex contingent liability losses, and untold
amounts of extra expenses incurred in an attempt to restore business operations.
Insurers may also be further exposed due to the absence of state reinsurance
programs, such as Florida’s program that reportedly paid insurers $3 billion
following last year’s hurricane losses.
What this adds up to is heavy losses for insurers, and in such circumstances
it can be expected that the insurers will seek every available avenue to
limit their losses, including denial of potentially covered claims.
1. Coverage Issues Arising from Katrina and Rita
Damage caused by Hurricanes Katrina and Rita raise a number of critical
insurance coverage issues that should be addressed and evaluated for each
claim. These include:
- Flood Damage vs. Wind Damage – Most “all risk” business insurance
policies cover damage caused by wind and wind driven rain. Those same
policies typically exclude damage caused by flood. Insurers may argue
that properties damaged by wind, but later flooded, are not covered or
are only partially covered.
- Number of Occurrences – One issue certain to be litigated in
the wake of Katrina and Rita is the number of occurrences. Depending how
the courts or the legislature resolve this issue, many policyholders could
potentially be entitled to double, triple or even quadruple limits.
- Flood Insurance – Many victims of Katrina and Rita purchased
mandatory NFIP flood coverage, but these policies have maximum limits
of $250,000 in many cases. To the extent an insured purchased additional
flood insurance, coverage still may depend on whether the property is
in the 100-year flood plain.
- Business Interruption Losses – Coverage for lost income resulting
from Hurricanes Katrina and Rita will be afforded under most property
policies. But, business income losses, perhaps more than any other type
of insured loss, take time to mature and require extensive documentation,
leading inevitably to insurer delay and “negotiation.”
- Overlapping Coverage Grants – Business property policies contain
numerous overlapping coverage grants often containing separate sublimits.
The lines of coverage may include business interruption, contingent business
interruption, extended business income, extra expense, civil authority,
utility services, debris removal, expediting expense, and preservation
of property. Understanding these different coverages is essential. For
example, contingent business interruption coverage pays for losses resulting
from property loss at the location of a key vendor or supplier even in
the absence of physical damage at the policyholder’s premises. In the
past, some insurers have categorized losses in a manner to minimize such
coverage. In addition, some of these additional coverage grants are additional
amounts of insurance that will not erode the policy’s primary limits.
- Mold – Because the insured has a general duty to mitigate losses,
mold abatement will likely be necessary. Unless mold coverage has been
specifically added, most policies contain some form of mold exclusion
that acts either as an absolute bar to coverage or grants mold coverage
but carries such an unreasonably low sublimit that coverage mold is effectively
excluded. Many policies contain what is commonly referred to as an “absolute”
mold exclusion, which attempts to bar coverage for mold occurring in any
way, shape or form, even if it results from a covered cause of loss. The
Louisiana Department of Insurance has held that these absolute mold exclusions
are against public policy and may not be used to deny coverage for mold
resulting from a covered cause of loss.
- Civil Authority – Most policies cover losses resulting from
an evacuation order. Some of these policies provide set time limitations
on how long such coverage is afforded. Insurers will likely argue that
once a civil authority time limit is met covered damages cease, despite
the fact that other overlapping coverage grants continue to provide coverage.
- Valuation – Many policies value a property’s loss as the lesser
of the cost to repair, rebuild or replace damaged property. However, these
policies typically do not require that the insured repair property simply
because the repair cost will be cheapest; in these cases, the insured
may replace the property at the existing site or another site and use
insurance proceeds from the damaged property to fund the replacement building(s).
- Appraisal – Insurer delay is common with complex property loss
claims. Many policies have provisions that allow the policyholder to force
an appraisal to cut through disagreements on value related to both property
damage and business interruption. Enforcing such obligations, however,
may not be easy, given the overwhelming losses this catastrophe presents.
- Advances – There is no general right to an advance, and, in
most instances, the policy controls. However, many policies obligate the
insurer to provide an advance upon receipt of a partial proof of loss.
- Recovery of Attorneys’ Fees and Adjustment Costs – Some policies
cover legal and accounting fees associated with presenting a loss to the
insurance carrier, and even if such coverage is not afforded, many state
laws mandate that recalcitrant insurers pay for a policyholder’s legal
fees incurred to enforce coverage. Insurers often ignore such rights.
- Specific Legal Rights Under State Law - Louisiana, Mississippi
and Alabama all impose penalties upon insurance companies for unfair or
deceptive trade practices, triggered by an insurer's improper handling
of a claim. Claims handling requirements are a matter of state law. Louisiana,
for example, requires that all insurers must make a written offer to settle
a property damage claim within 30 days after receipt of a “satisfactory
proof of loss” for that claim. LA. REV. STAT. ANN. § 22:658 (West 2005).
The insurer’s failure to make the written offer to settle, if found to
be arbitrary, capricious or without probable cause, entitles the insured
to statutory penalties of up to twenty-five percent damages on the amount
due. Id. A “satisfactory proof of loss” has been defined under Louisiana
law as occurring when the insurer has adequate knowledge of the loss.
Matter of Hannover Corp. of America, 67 F.3d 70, 73 (5th Cir. 1995).
2. Potential Avenues for Obtaining Coverage for Losses Due to Katrina
|“Many losses relating to Hurricane
Katrina and Rita, by their nature, will raise complex issues involving
the inter-relationship of property policy coverages and “legal causation.”
Many losses relating to Hurricanes Katrina and Rita, by their nature,
will raise complex issues involving the inter-relationship of property policy
coverages and “legal causation.” Affected businesses are generally entitled
to coverage when part of the loss was caused by a covered peril (wind damage),
even if the loss was exacerbated by a non-covered peril (flooding). Hence,
a business may be fully covered for all of its business interruption losses,
despite widespread flooding. Also, additional coverages, such as contingent
business interruption, dependent property coverage, and utility services
coverage may broaden the scope of recovery for lost income if the loss of
income results even in part from a covered peril. For example, contingent
business interruption coverage pays for losses resulting from property loss
at the location of a key vendor or supplier even in the absence of physical
damage at the policyholder’s premises. Similarly, evacuation orders may
trigger civil authority coverage, but any time or money limitations on that
coverage should not interfere with coverage afforded under parallel lines
of coverage provided for in the policies.
3. The Proof of Loss – Only a First Step but it is a Critical One
Most property policies put the initial burden of characterizing a claim
on the policyholder. This is done through submission of a document known
as a proof of loss. In its most basic form, the document must outline total
damages that the policyholder believes are covered under the policy, and
must be signed under oath. Insurers typically also require the attachment
of relevant documentation evidencing the claim. Of course businesses cannot
quantify the totality of a loss within the short periods of time typically
required in the policy for submission (e.g., 30 days from loss). For this
reason, it is often necessary to submit a series of “preliminary” or “partial”
proofs of loss accumulating more damage information as the claim develops.
In the end, a proof of loss can and will be used against the policyholder,
so careful attention must be paid to every word prior to signing.
Property policies may require proofs of loss to be completed within a
specified time period after the insurer's request (usually 30 or 60 days).
Other policies simply require a proof of loss to be completed "as soon as
possible." In either case, failure to comply with these requirements could
impair an insured's ability to enforce its rights to coverage under the
policy. The Louisiana Department of Insurance recently issued an Emergency
Rule for the fourteen parishes most severely impacted by Katrina and Rita
suspending enforcement of these and other time-dependent provisions.
The property claims arising from Hurricanes Katrina and Rita will present
a minefield of insurance coverage issues. To minimize disputes with insurers
and to maximize coverage, policyholders should consider the following steps:
||Preserve evidence of the damage immediately. Take
videotapes (with sound), as well as photographs, of all property damage
– ideally while damage is occurring, but certainly during initial
cleanup efforts. Assign an internal account number to the loss and
require use of that number so that all costs can be captured.
||Review all insurance policies for potential coverage
with counsel before submitting any claim. The obvious coverages are
property damage and business interruption, but scouring flood, automobile,
comprehensive general liability, and other policies may turn up some
potentially overlooked coverages.
||Notify the insurer and the broker of any property
damage and business interruption immediately. (Often times the call
can be to the broker, who will involve the insurer. Make sure that
the broker does this immediately and obtain proof of such notice.)
Schedule an initial conference with the insurer, ideally including
the key members of the recovery team (risk manager, facility manager,
financial officer, on-site response manager, counsel, accountants
and other outside consultants).
||Demand written extension for any deadlines that might
be missed. Policies may require that proofs of loss be submitted within
30 days of the start of damage, and that lawsuits must be filed within
one year. Extensions are readily granted, especially for major losses.
However, failure to comply with such deadlines, or to secure adequate
extensions, can be fatal.
||Negotiate a funding arrangement with insurers to
advance cash for business interruption losses or other partial payment
of losses. Policies vary on this obligation, but insurers will generally
agree to such an arrangement if reasonable under the circumstances.
Do not negotiate any final settlement of claims before the loss is
fully developed, however.
||Retain an accounting firm to work with your counsel
and recovery team if the claim will be large or complex. Depending
on the terms of the insurance policy, these costs may be recoverable.
Consider all costs and benefits before retaining a public adjuster
for large, complex claims. In Louisiana, be careful not to enter into
outlawed fee arrangements with public adjusters, such as contingency
||Thoroughly evaluate the insurance policy and potential
coverage issues, including applicable deductibles and sublimits, early
in the process, as an insurance company’s categorization and payment
of certain types of expenses could compromise coverage. Again, retention
of counsel possessing an intimate knowledge of how property policies
work and a law governing the key issues is vital to protecting a policyholder’s
||Gather all documentation in support of the business
interruption claim and present that information in as coherent a fashion
as possible to ease the burden on the insurer. Allocate costs to appropriate
coverages, mindful of deductibles and sublimits. A well-presented
claim, with complete backup documentation, will be paid faster than
a disorganized or piecemeal claim.
||Identify the extra expenses that also may be recoverable.
These could include the costs of continuing production at the current
site, moving to a temporary location, using other company facilities,
contracting out work, and paying overtime and bonuses. Understand
the extra expense sublimit to establish a budget for recovery efforts.
Finally, here are a few practice suggestions:
- Obtain approval from insurers before replacing damaged property. Insurance
carriers may also have a right to physically take and sell damaged property.
It is not uncommon for an insurance carrier to deny payment on otherwise
useless property that was subsequently destroyed or discarded, if such
action was taken without their knowledge or consent.
- In securing interim funding for business interruption losses,
present to the insurer as much documentation as possible demonstrating
what must be done to get back into business, either at the current location
or at a temporary location. Also, determine what products are most important
to get back into production.
- Communicate with the insurer as much as possible, but keep
a log to document those communications. Continue to provide all necessary
and relevant documentation to the insurer. Keep written documentation
of when the claim was submitted, when adjusters viewed the damaged property,
what they saw, what they asked for, and what was provided. It is common
practice for insurance carriers to repeatedly ask for information that
has already been provided, especially if there is no written evidence
that there has been compliance with information requests.
This Alert was written by
Peter M. Gillon,
Mark E. Miller,
Andrew J. Enschedé,
Rita M. Alliss Powers and
Brian G. Friel, members
of the Insurance Recovery and Advisory Practice Group. Please contact Mr.
Gillon, Mr. Miller, Mr. Eisenberg and Mr. Friel at 202.331.3100 or Mr. Enschedé
and Ms. Powers at 312.456.8400 or your Greenberg Traurig liaison, if you
have any questions regarding the subject matter of this Alert.
© 2005 Greenberg Traurig
For more information, please review our Insurance Recovery and Advisory
Practice description, or feel free to contact one of our attorneys.
This GT ALERT is issued for informational purposes only and is not intended
to be construed or used as general legal advice. Greenberg Traurig attorneys provide
practical, result-oriented strategies and solutions tailored to meet our clients’
individual legal needs.