6xpphu committee news eookgg pg:6 - merlin …...uniting plaintiff, defense, insurance, and...
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Uniting Plaintiff, Defense, Insurance, and Corporate Counsel to Advance the Civil Justice System
COMMITTEE NEWS
Fall 2017
Property Insurance Law
COMMITEE NEWS “Customer quotes,
called “pull quotes,” are
an excellent way to
demonstrate your suc-
cess and put emphasis
on your values. They
also add visual interest
to your newsletter...”
- Carlos Vivanco
In This Issue • Advantages of a
Newsletter
• Add Value to Your Newsletter
• Second Story
• Another Story
• Back Page Story
Uniting Plaintiff, Defense, Insurance, and Corporate Counsel to Advance the Civil Justice System
Corporate Counsel Committee The purpose of a newsletter is to provide specialized information to a tar-geted audience. Newsletters can be a great way to market your product or service, and also create credibility and build awareness for you and the services you provide. Use positive customer pull-quotes as eye-catching but subtle marketing.
Tips for Producing a Newsletter Every time you produce your newsletter, ask yourself:
Q: Who are our readers? A: Existing customers and potential customers,
Q: What will our readers want to know about our business? A: Timely, helpful, problem solving information.
Add Value to Your Newsletter Keep your content as current as possible. If you publish a monthly letter, ensure you include content from only the last month. Also, use photo-graphs and other visuals to add interest and enable the reader to scan quickly for information.
Summer 2017
William “Chip” Merlin, Jr. & Rene M. SigmanMerlin Law Group
William “Chip” Merlin, Jr., founder of the Merlin Law Group, dedicates his practice to the representation of policyholders in first party property insurance disputes and bad faith litigation.
Rene Sigman is a Regional Litigation Manager at the Merlin Law Group who heads the firm’s Texas practice. She also focuses on handling first party property disputes.
Read more on page 11
Navigating Hurricane Harvey Lawsuits: A New Age Following Unique Texas Legislation
Texas House Bill 1774, better known as “The Hail Bill” or “The Blue Tarp Bill,” went
into effect on September 1, 2017. It is unique legislation that will impact all Hurricane
Harvey insurance litigation except for lawsuits involving claims made under the
National Flood Insurance Program which is governed under federal law. The
primary impact of this legislation is that it requires policyholders or their attorneys to
take specific actions prior to filing a lawsuit. If these steps are not complied with, the
policyholder is prevented from filing a lawsuit.
Notice Letter
Under the new statute, 60 days prior to filing any lawsuit concerning a “force of nature”
or “weather-related” event,1 a policyholder or the policyholder’s representative must
send a notice letter detailing the cost to repair the property and attorney’s fees to
In This Issue• Navigating Hurricane
Harvey Lawsuits: A New Age Following Unique Texas Legislation 1
• The Missing Link In Business Interruption Coverage Claims 5
• If Flood Is Not Covered, Then What Is? 6
• Harvey Claims and Understanding the “Surface Water” Exclusion 7
• NFIP Extended Until December 8, 2017 8
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Chair Message
Dear PILC Members,
I became the PILC Chair at the ABA Annual Conference in August this year. I am taking over a well-organized committee, expertly chaired by Christina Phillips. Many thanks to her for all her hard work this past year (and continued work for the committee now).
It has been twelve years since the US experienced almost back to back catastrophic storms like Hurricanes Harvey and Irma. On August 25, 2005, Hurricane Katrina struck states on the Gulf Coast. Its storm surge waters swept away coastal homes, its winds knocked down power lines and damaged businesses, and it left immense damage in its wake. Shortly after Hurricane Katrina, Hurricane Rita struck the Louisiana and Texas coast. At that time, Rita was the fourth-most intense tropical cyclone ever observed in the Gulf of Mexico. A few short weeks later, Hurricane Wilma struck and damaged Florida.
Since 2005, there have been some strong hurricanes and tropical storms – for example, Superstorm Sandy – but until August 25, 2017, when Hurricane Harvey hit, none were as intense or costly as the 2005 Hurricane season. In the last few weeks, Hurricanes Harvey and Irma devastated regions in Texas, Florida, and beyond. Their destruction affected people we know and work with. And will likely affect the work we will be doing in the future.
The Property Insurance Law Committee is positioned to provide advice and support concerning the insurance legal issues that accompany catastrophic storms. This is a special edition newsletter that will provide advice on some of the issues that are raised by catastrophic hurricane storms. But more than legal articles, we want to provide practical advice to members of the ABA, TIPS, and the community at large. I am therefore calling on the members to volunteer and be creative.
Please reach out to me if you would like to be involved in planning a webinar to address common questions raised by catastrophes. This newsletter is also a great forum to submit articles, case notes, and even letters to the editor regarding issues that are raised by catastrophic claims.
We are also adding a panel to the 2018 PILC Spring CLE Meeting concerning these hurricanes. Our program, which will take place on March 2-3, 2018 in Nashville, is called “What Keeps You Up At Night?”, and will address those issues in our industry that cause serious concern for our clients, colleagues, and ourselves. Catastrophes and our industry’s response, are a perfect topic.
If you have any questions about the Committee, would like to become more involved, want to submit an article, or come to our Spring Meeting, please contact me directly. I look forward to working with all of you this year.
Best regards,
Shannon O’Malley, Chair
Shannon O’Malley Zelle LLP [email protected]
©2017 American Bar Association, Tort Trial & Insurance Practice Section, 321 North Clark Street, Chicago, Illinois 60654; (312) 988-5607. All rights reserved.
The opinions herein are the authors’ and do not necessarily represent the views or policies of the ABA, TIPS or the Property Insurance Law Committee. Articles should not be reproduced without written permission from the Copyrights & Contracts office [email protected].
Editorial Policy: This Newsletter publishes information of interest to members of the Property Insurance Law Committee of the Tort Trial & Insurance Practice Section of the American Bar Association — including reports, personal opinions, practice news, developing law and practice tips by the membership, as well as contributions of interest by nonmembers. Neither the ABA, the Section, the Committee, nor the Editors endorse the content or accuracy of any specific legal, personal, or other opinion, proposal or authority.
Copies may be requested by contacting the ABA at the address and telephone number listed above.
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ChairShannon O’MalleyZelle LLP901 Main St, Ste 4000Dallas, TX 75202-3975(214) 742-3000Fax: (214) [email protected]
Chair-ElectStephen ClancyRobinson & Cole LLP280 Trumbull St, Fl 28Hartford, CT 06103(860) 275-8367Fax: (860) [email protected]
Council RepresentativeJoan SchaffnerGeorge Washington University Law School2000 H St NWWashington, DC 20052-0026(202) 494-0354Fax: (202) [email protected]
Diversity Vice-ChairSopi MitilPO Box 782003Orlando, FL 32878-2003(305) [email protected]
Immediate Past ChairChristina PhillipsThe Merlin Law Group181 W Madison St, Ste 3475Chicago, IL 60602(312) 260-0806Fax: (312) [email protected]
Membership Vice-ChairKyle SturmForeman Sturm & Thede LLPPO Box 13098Portland, OR 97213-0098(503) [email protected]
Scope LiaisonJames MyrickWomble Carlyle5 Exchange StCharleston, SC 29401-2530(843) 722-3400Fax: (843) [email protected]
Technology Vice-ChairJonathan MacBrideZELLE LLP401 Plymouth Road, Suite 120Plymouth Meeting, PA 19462(215) 266-9069Fax: (215) [email protected]
Vice-ChairsDaniel BentsonBullivant Houser Bailey PC1700 Seventh Ave, Ste 1810Seattle, WA 98101(206) 292-8930 Ext [email protected]
Adina BergstromSauro & Bergstrom PLLC992 Inwood Ave NorthOakdale, MN 55128(651) 389-9917Fax: (651) [email protected]
Eugene ChoiZurich North America1299 Zurich WaySchaumburg, IL [email protected]
Melissa D’AlelioRobins Kaplan LLP800 Boylston St, Ste 2500Boston, MA 02199-8032(617) 859-2742Fax: (617) [email protected]
Brian DevillingForan Glennon1400 16th St 16 Market Square, Ste 400Denver, CO 80202(720) [email protected]
Matthew FortinForan Glennon Palandech Ponzi & Rudloff222 N La Salle St, Ste 1400Chicago, IL 60601-1059(312) [email protected]
John GaraffaButler Weihmuller Katz Craig LLP400 N Ashley Dr, Ste 2300Tampa, FL 33602-4327(813) 453-9825Fax: (813) [email protected]
Jennifer GibbsZELLE LLP901 Main Street, Ste 4000Dallas, TX 75202(214) [email protected]
Erin GuytonCarroll Warren & ParkerPO Box 1005Jackson, MS 39215-1005(601) [email protected]
Rabih HamawiLaw Office of Rabih Hamawi2000 Town Ctr, Ste 1900Southfield, MI 48075-1152(313) 995-8728Fax: (248) [email protected]
Celeste HillClausen Miller PC10 S La Salle StChicago, IL 60603-1098(312) 606-7690Fax: (312) [email protected]
Kesha HodgeMerlin Law Group2999 N 44th St, Ste 520Phoenix, AZ 85018(480) [email protected]
Victor JacobellisMound Cotton Wollan & Greengrass2200 Powell Street, Ste 1125Emeryville, CA 94608(510) [email protected]
Emilie KaplanThompson Brody & Kaplan LLP161 N Clark St, Ste 3575Chicago, IL 60601-3214(312) 782-9320Fax: (312) [email protected]
Lisa KirkCarlson Calladine & Peterson LLP353 Sacramento St, 16th Fl San Francisco, CA 94111(415) [email protected]
Viktoriya Kruglyak926 Rxr PlazaUniondale, NY 11556(516) 357-3235 [email protected]
Johnathan LernerLerner Arnold & Winston LLP475 Park Ave S, Fl 28New York, NY 10016-6901(212) [email protected]
Sean McAloonRivkin Radler LLP926 Rxr Plaza, 10th FlUniondale, NY 11556(516) 357-3102Fax: (516) [email protected]
Joel MorganFreeborn & Peters, LLP411 E Franklin St, Ste 200Richmond, VA 23219(804) 644-1300 EXT [email protected]
Jonathan MutchRobins Kaplan LLP800 Boylston St, Ste 2500Boston, MA 02199-8032(617) [email protected]
Heidi RaschkeCarlton Fields4221 W Boy Scout Blvd, Ste 1000Tampa, FL 33607-5780(813) 223-7000Fax: (813) [email protected]
Member Roster
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Thomas H. Cook Jr.Zelle LLP
Published in Texas Law360
Thomas Cook is a partner in Zelle LLP’s Dallas office. He practices in the areas of insurance coverage, coverage litigation and related matters, with particular emphasis on representing carriers in complex property damage and business interruption claims.
The Missing Link In Business Interruption Coverage Claims
Suppose you are counsel for a policyholder impacted by a damaging storm,
hurricane or other catastrophic event. Your client reports that it sustained
property damage and a significant business interruption loss. You are asked
to assist in preparing and submitting the claim to the carrier. The accountant
confirms that the policyholder’s net profit is down substantially as compared to
the two prior years. You dutifully prepare the claim, submitting to the carrier 100
percent of the measured loss in net earnings plus fixed expense. Is that all there
is to it?
Or, suppose you are counsel for the carrier receiving the claim. Has the insured
satisfied its burden simply by submitting this total measure of its “business
interruption” loss?
The simple answer to both questions is “no.” Whether you represent the carrier or
the policyholder, a critical step in the process is to evaluate whether the claimed
business interruption loss is causally connected to insured physical damage. This
step is often the “missing link” in business interruption claim submissions.
First-party property policies typically contain language that requires business
interruption loss to be a “direct result” of insured physical loss or damage,
typically damage to insured property. This causal link reflects the fundamental
nature of property insurance policies — they insure physical loss or damage to
insured property. To the extent business interruption coverage is available, it also
must be caused by the insured physical loss or damage.
This may seem a fairly self-evident proposition, but it is often “overlooked” in
claim submissions to carriers. And even if the policyholder recognizes this policy
requirement, significant disputes can arise as to whether the requirement has been
met and which party has the burden of proof on the issue. Fortunately, courts
around the country have provided helpful guidance.
In one of the leading cases, United Airlines incurred a significant loss of income
due to the Federal Aviation Administration’s ground stop order following the events
of 9/11.1 United owned a ticket office at the World Trade Center, which was
destroyed when the twin towers collapsed. United’s gates at the Ronald Reagan
Washington National Airport were also purportedly “impacted” by the attack at the
Pentagon when ashes and debris settled near it. United submitted a time element
claim to its insurer for the income United lost during the period of time the FAA
grounded flights.Read more on page 15
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Bob Rutter & Justin RudinRutter & Russin, LLC
Bob Rutter and Justin Rudin are lawyers at Rutter & Russin, LLC in Cleveland, Ohio. They represent policyholders in a wide variety of insurance coverage disputes.
If Flood Is Not Covered, Then What Is?
Hurricane Harvey dropped record amounts of rain on Texas, and the photographs of
the devastation are horrific. Texas Governor Greg Abbott has predicted that Harvey
damages will cost $150 to $180 billion, exceeding damages from Katrina, which
devasted the greater New Orleans area in 2005, and Sandy, which destroyed areas
of the Northeast in 2012.
But where will the money come from to repair the damage?
Most people instinctively think that insurance will respond and assist homeowners to
rebuild their homes and companies to reopen their businesses. Insurance companies
are probably working overtime preparing denial letters that will undoubtedly be going
out to policyholders in the coming weeks. Why? Because the typical homeowner
insurance policy (HO) excludes damage caused by flood, surface water, waves,
tidal water or overflow of a body of water. This is the way it has been since the
1960s. Flood insurance is provided by the federal government through the National
Flood Insurance Program (NFIP), and comes with its own unique set of rules and
restrictions that makes it the poster child for the oft-repeated quote from Ronald
Reagan: “If more government is the answer, then it was a really stupid question.”
Regardless of the deficiencies of the policies offered by the NFIP, they are certainly
better than nothing. But only about 15% of the homes in the Houston area have
policies from the NFIP.
Numerous charitable funds are in full swing, and although laudable, the combination
of NFIP coverage, government assistance, and private charity will probably fall far
short of making the disaffected whole.
So, where will homeowners turn?
For some, the answer is back full circle to their own insurance company. True,
property damage caused by flood or surface water is excluded under a broadly
worded water damage exclusion contained in typical HO policies. But policyholders
have certain coverage arguments that can be used to support their position under
first party property policies.
Damage caused exclusively by wind or wind-driven rain.
Much of the property damage inflicted by hurricanes is caused by wind and wind-
driven rain, flood or surface water, or a combination of both. Damage caused by
windstorm is covered by the standard HO policy, as is damage caused by wind-
Read more on page 18
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Victoria L. VishZelle LLP
Victoria L. Vish is an attorney in Zelle LLP’s Dallas Office, where she represents clients in insurance coverage and commercial litigation matters.
Harvey Claims and Understanding the “Surface Water” Exclusion
Many homeowner policies exclude coverage for damage caused by flood or “surface
water.” The term “surface water” typically is not defined in the policy itself, but the
term has been defined by Texas courts as “water or natural precipitation diffused
over the surface of the ground until it either evaporates, is absorbed by the land, or
reaches channels where water naturally flows.”1
Recent Texas precedent lends further guidance on the subject. In Safeco Ins. Co. of Indiana v. Moss, the appellee homeowner contended the water that damaged his
home was not “surface water” (and therefore not excluded) because it entered his
home by flowing through the electrical conduit.2 The court analyzed and compared
several cases in which Texas courts found the surface water had lost its status as
surface water by the time it damaged property.3
In State Farm Lloyds v Marchetti, excessive rainfall had caused non-flood water and
sewage to discharge or overflow within the plumbing system in the policyholder’s
home.4 The court held that the damage was caused by water after it lost its status as
surface water by flowing into underground sewage lines.5 Likewise, in Transamerica Ins. Co. v. Raffkind, the Court of Appeals of Amarillo held the water had seeped into
underground ducts, which discharged as vapor into the home, and thereby had lost
its status as surface water before causing damage.6
Ultimately holding the damage was excluded from coverage, the court in Moss
makes two important findings. First, surface water only loses its status as surface
water and presents questions of coverage if the water “co-mingles” with non-surface
water or changes in form before causing damage.7 Surface water does not change
status by the mere fact that precipitation collects, or flows in, man-made structures.8
Moreover, unlike the policies involved in Marchetti and Raffkind, the policy at issue
in Moss contained an anti-concurrent causation clause stating that damage from
surface water is excluded if the loss was “caused directly or indirectly” (emphasis
added) by surface water.9 As such, under this clause, damage to the home is
excluded from coverage even if the surface water indirectly caused damage by
forcing other non-surface water into the home.10
There are two key takeaways from Moss for policyholders and insurers: (1) surface
water must comingle with non-surface water to lose status as surface water; and (2)
policy language is imperative and could exclude coverage, regardless of whether or
not surface water changes status.
Endnotes 1 See, e.g., State Farm Lloyds v. Marchetti, 926 S.W.2d 58, 61 (Tex. App.—Houston [1st Dist.] 1997, pet. denied (citing Transamerica Ins. Co. v. Raffkind, 521 S.W.2d 935 (Tex. Civ. App.—Amarillo 1975, no writ)).
2 No. 03-16-00879-CV, 2017 WL 2856750, at *3 (Tex. App.—Austin, June 29, 2017).
3 Id.
4 See id. (citing Marchetti, 926 S.W.2d at 61).
5 See Moss, 2017 WL 2856750, at *4 (citing Marchetti, 926 S.W.2d at 61).
6 See Moss, 2017 WL 2856750, at *4 (citing Raffkind, 521 S.W.2d 935).
7 See Moss, 2017 WL 2856750, at *4.
8 Id.
9 Id.
10 Id.
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NFIP Extended Until December 8, 2017
When Hurricane Harvey made landfall near Rockport, Texas on August 25, 2017 as
a Category 4 storm, it was the wettest tropical hurricane on record in the contiguous
United States. Harvey dropped 52 inches of rain in southeast Texas and southwest
Louisiana, causing extensive inland flooding. Harvey also trigged flash flooding in
Arkansas, Kentucky, and Tennessee. Less than two weeks later, Hurricane Irma,
initially a Category 5 system, battered the U.S. Virgin Islands on September 6, 2017
with winds of 185 miles per hour accompanied by more than 15 inches of rain and
storm surges exceeding 8 feet. Irma continued its devastating path north and, on
September 10, 2017, touched down in the Florida Keys, with equally impressive
storm surges of up to five feet in some areas. The low pressure near the storm’s
eye remarkably pulled massive volumes of seawater from the ocean, temporarily
and visibly erasing the shorelines. While the extent of the damage is still being
assessed, it is expected, as with prior systems of similar strength, that a substantial
portion of the devastation recently caused by both Harvey and Irma was and will be
directly attributable to the massive flooding, brought on by the strong winds, rain,
and storm surges.
The overwhelming majority of flood insurance policies are issued in the U.S. as
a part of the National Flood Insurance Program (“NFIP”) which allows for the
issuance of standard flood insurance policies (“SFIP”). The NFIP is administered
by the Federal Emergency Management Agency (“FEMA”). The purpose of
NFIP is to provide flood insurance, over a period of time, on a nationwide basis
through the cooperative efforts of the Federal Government and the private
insurance industry.
Residents and business owners in over 22,000 participating communities across the
United States and its territories are able to buy NFIP flood insurance policies through
insurance agents and companies that participate as third-party administrators in the
‘‘Write Your Own’’ (“WYO”) program. Under the WYO program, private insurance
companies are authorized to write their own SFIP policies. Ninety-five percent of all
SFIP policies are issued pursuant to the WYO program.
The flooding caused by Harvey and Irma were not the only concern for flood
insurance policyholders. Many were aware that the NFIP was set to expire on
September 30, 2017 and questioned whether their claims had to be submitted
before the end of September, even if the full extent of the sustained damaged was
unknown. Thankfully, on September 8, 2017, just before the NFIP’s scheduled
expiration, President Donald Trump signed H.R. 601, the “Continuing Appropriations
Act, 2018 and Supplemental Appropriations for Disaster Relief Requirements Act,
Kesha A. HodgeMerlin Law Group
Kesha A. Hodge is an attorney with the Merlin Law Group in its Phoenix office who focuses her practice on the representation of policyholders in first-party insurance claims stemming from varying causes of loss, including hail, wind, rain and fire events.
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2017”, which extended the NFIP for three months (until December 8, 2017) and
provided additional funding for hurricane relief.
The NFIP remains the subject of legislative concern. As of September 11, 2017,
there were more than two dozen proposed bills introduced or pending in the 115th
Congress that sought to either reauthorize, amend or revise the NFIP. Of the
proposed bills, less than half made it out of committee. Some notable bills and their
changes include:
H.R. 1422 • Extends the private flood insurance options.
H.R. 1588
• Requires certain communities that participate in the NFIP to implement community-wide plans for
flood mitigation.
• Allows certain NFIP policyholders to pay their annual premiums in monthly installments.
H.R. 2246
• Eliminates the requirement for commercial properties in flood zones to have flood insurance if the
properties are financed by a federally regulated lending institution, or a federal lender.
• Provides for greater transfer of risk under the NFIP to private capital and reinsurance markets.
H.R. 2565• Requires the use of replacement cost value in determining the premium rates for flood insurance
coverage under NFIP
H.R. 2868• Limits the chargeable risk premium of any single family residential property to $10,000 per year,
adjusted for inflation every five years.
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H.R. 2875 • Institutes administrative procedures within NFIP to increase fairness and accuracy and protect the
taxpayer from program fraud and abuse.
• Prohibits false or fraudulent statements connected to the preparation, production, or submission
of claims adjustment or engineering reports, and provide penalties for such violations, including
disbarment from participation in the NFIP.
• Codifies the due process protections for policyholders established after Superstorm Sandy by
FEMA for individuals wishing to appeal a full or partial denial of their NFIP claim by their insurance
company, and requires FEMA to provide policyholders with a written appeal decision that upholds
or overturns the decision of the insurer.
• Requires FEMA to make final determinations regarding the approval of a claim for payment or
disapproval of the claim within 90 days of the claim being made and allows for a 15-day extension
when extraordinary circumstances warrant more time.
• Provides FEMA with additional authority and responsibilities for overseeing litigation conducted by
WYO insurance companies acting on behalf of the NFIP and gives FEMA the authority to direct
litigation strategy as necessary.
• Improves disclosure requirement for standard flood insurance policies
As of the same date, none of the preceding bills had been voted on in either the
House or the Senate. Some commentators have speculated that the final action,
if any, will be an omnibus bill that combines aspects of the proposed bills. Will
Congress reauthorize, amend, or allow NFIP to expire . . . only time will tell.
To monitor these and other bills, visit https://www.govtrack.us/.
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date. The letter must specify the individuals and entities the policyholder intends
to file a lawsuit against, the specific amount of money being sought for the cost of
repair to the damage property, and attorney’s fees incurred to date. The statute also
requires the notice letter to include, at a minimum, the following:
1. A statement of the acts or omissions giving rise to the claim;
2. The specific amount alleged to be owed by the insurer on the claim for
damage to or loss of covered property; and
3. The amount of reasonable and necessary attorney’s fees incurred by the
claimant, calculated by multiplying the number of hours actually worked by
the claimant’s attorney, as of the date the notice is given and as reflected in
contemporaneously kept time records, by an hourly rate that is customary
for similar legal services. Tex. Ins. Code 542A.003(b)
If a policyholder fails to provide pre-suit notice, the lawsuit will be dismissed. There
are a few exceptions to this pre-suit notice listed in the statute, but they involve the
tolling of a statute of limitations, and eventually notice must be given even in those
exceptional cases.
Significantly, the new law also allows insurance companies to enter the notice letter
into evidence if the claim goes to trial. Therefore, it is crucial that the notice letter be
accurate as to the cost of repairs, estimates of covered expenses and anticipated
damages owed under the policy. It could later become the measurement of a jury
verdict. Likewise, recovery of attorney’s fees will also be directly impacted by the
pre-suit notice letter as detailed further below.
For attorneys representing policyholders, the notice letter poses numerous problems.
While the intent of the statute was to deal with the problems of increased lawsuits
following hail claims primarily to residential structures, the law applies to commercial
and residential policies. Vetting the proper amount to claim on a residential roof
claim worth less than one hundred thousand dollars may have some complications,
but determining multimillion dollar business income losses which are still accruing
is quite another matter. The law applies to all weather-related insurance claims. It
will require significant pre-litigation attorney involvement to properly vet and then
prepare these notices.
Attorney’s Fees
Under the new statute, at 542A.007(a), the amount of attorney’s fees that may be
awarded is the lesser of:
Navigating.... Continued from page 1
The primary impact of
this legislation is that it
requires policyholders
or their attorneys to
take specific actions
prior to filing a lawsuit.
If these steps are
not complied with,
the policyholder is
prevented from filing a
lawsuit.
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1. Amount of reasonable and necessary attorney’s fees incurred by claimant
in bringing the action and supported sufficient evidence;
2. Amount of attorney’s fees that may be awarded under other applicable law;
or
3. Amount calculated by: (A) dividing actual amount awarded in the judgment
for the claim by amount alleged to be owed on the claim in the notice letter;
and (B) multiplying the amount under (A) by the total amount of reasonable
and necessary attorney’s fees incurred by the claimant, as supported by
sufficient evidence and determined by a trier of fact.2
The statute also states: “[T]he court shall award the claimant the full amount of
reasonable and necessary attorney’s fees… if the amount [in (3)(a)] is greater than
or equal to 0.8; not limited by this section or another law; and otherwise recoverable
under law.” Also, pursuant to the following section, the court may not award attorney’s
fees if the amount determined by (3)(A) is less than 0.2.3
In other words, discrepancies between amount alleged in a pre-suit notice letter and
the amount awarded may jeopardize a policyholder’s ability to collect attorney’s fees
entirely. This is exactly why policyholder counsel must ensure their notice letters are
as thorough and accurate as possible. Likewise, if a policyholder does not send a
notice letter that complies with these new requirements and the insurer can prove
it was entitled to one, but did not receive one, a court may decide not to award
attorney’s fees at all.4 Policyholders and their counsel will find that they will often
have to pay for their own experts and arrive at damage opinions before filing the
notice letter and filing suit. It is an extra cost to the policyholder who previously
would not have to make this determination.
Insurer Inspection Following Pre-Suit Notice
Within thirty days of receiving the pre-suit notice letter, the insurance company
can make a written request to inspect the property. If reasonably possible, the
inspection must be completed no later than the sixtieth day after receipt of the pre-
suit notice.5 Insurers and their counsel will probably take advantage of this extra
opportunity to review their previous position in light of whatever issues are raised in
the policyholders notice letter. From an insurance defense perspective, there is little
except expenses to lose by doing so.
Payment, Appraisal or Litigation
Insurance carriers and their counsel will be faced with a decision following the
demand letter. They can pay the amount demanded along with attorney’s fees. They
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can keep their same position by denying the petition and go to court. They can also
demand appraisal if the policy affords that alternative dispute process. Each has its
advantages and disadvantages depending on what the notice letter demands and
how insurance counsel may view the strength of a case.
Suits Agents or Adjusters of the Insurance Company
As for agents or adjusters, insurers will have the opportunity to accept, via written
notice to the claimant, liability on behalf of its agents or adjusters for their acts or
omissions. If the insurance carrier makes this election, the agent or adjuster cannot
be a party to the lawsuit. Insurance carriers are anticipated to use this provision
to stay and remove lawsuits to federal court since most insurance carriers have
diversity of citizenship with Texas plaintiffs. If this occurs, most would expect a
significant rise in the number of insurance lawsuits filed in federal court since most
insurance defendants seem to favor this forum in Texas. How the federal courts
will deal with this influx of insurance lawsuits related to a large number of Hurricane
Harvey insurance claims remains to be seen.
Penalties and Interest
Previously, the Texas Insurance Code allowed for penalties of 18% to be added to a
finding of underpayment or delay of an insurance claim. Under the new law, the 18%
penalty provision was slashed to a standard interest rate under the finance code
plus 5%.6 Historically, the 18% penalty was a deterrent to carriers to ensure they
promptly paid valid claims.
Texas Windstorm Insurance Association
The National Flood Insurance Program provides the vast majority of all issued flood
insurance policies in Texas. Claims and lawsuits involving federally sponsored flood
policies are governed solely by federal law. The new Texas legislation will have no
impact on those claims procedures or lawsuits. Privately placed flood insurance is
relatively rare. But all such policies and all excess flood insurance policies, including
difference in condition policies common with commercial accounts, will be governed
under Texas Bill 1774.
The Texas Windstorm Insurance Association is exempt from the new Texas law.
However, lawsuits against the Texas Windstorm Association appear to be limited
to denials of coverage.7 Disputes regarding the amount owed under the policy are
determined through appraisal. Generally, policyholders have 60 days to file a dispute
with the amount paid by the Association in order to trigger the right to appraisal.
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To summarize, when faced with potential Hurricane Harvey litigation, keep in
mind that Texas law has changed significantly. The most important aspects of the
changes are:
• A claimant must provide pre-suit notice to his insurer—along with a laundry
list of details—including, most notably, the “reasonable and necessary”
amount of attorneys’ fees incurred thus far;
• Filing a lawsuit before complying with the notice requirements can result in
a dismissal without prejudice;
• A claimant must permit an inspection upon the insurer’s request after
receiving such notice, and even if there has been a previous denial of the
claim;
• A claimant’s lawsuit can be abated (and in some cases is automatically
abated) where a claimant fails to comply with either the inspection or notice
requirement;
• Insurers may elect to assume an agent’s or adjuster’s responsibility provided
they give their claimants notice, making a lawsuit against such an agent or
adjuster subject to dismissal with prejudice; and
• Limitations on the recovery of attorneys’ fees and interest will be based
upon the amount received at verdict.
Endnotes 1 Tex. Ins. Code 542.001(2)(C) (“arises from damage to or loss of covered property caused, wholly or partly, by forces of nature, including an earthquake or earth tremor, a wildfire, a flood, a tornado, lightning, a hurricane, hail, wind, a snowstorm, or a rainstorm.”).
2 Tex. Ins. Code 542A.007.
3 Tex. Ins. Code 542A.007(b) and (c).
4 Tex. Ins. Code 542A.007(d).
5 Tex. Ins. Code 542A.005.
6 Tex. Ins. Code 542.060(c).
7 Tex. Ins. Code 2210.574(b).
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Fall 2017Property Insurance Law
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The court rejected United’s claim as presented because United did not link its
lost earnings with insured property damage. The relevant policy language provided:
This policy insures against loss resulting directly from the necessary
interruption of business caused by damage to or destruction of the
insured locations resulting from terrorism ... This section is specifically
extended to cover a situation when access to the insured locations
is prohibited by order of civil authority as a direct result of damage to
adjacent premises…
The court determined that the language “resulting directly from” requires a link
between the lost income claimed and insured physical damage at the insured
location (or located adjacent to the insured location). The court noted that “United
cannot show that the airport was shut down ‘as a direct result of damage to’ the
Pentagon ... The evidence also indicates, not surprisingly, that the government’s
subsequent decision to halt operations at the airport indefinitely was based on
fears of future attacks.”2
The court ultimately concluded that United could recover the amount of losses
attributable to the destruction of its ticket office in the World Trade Center, but
“because the other loss of earnings was caused by the nationwide suspension
of air service rather than ‘damage to or destruction of [a United] location,’ United
could not recover under the policy for earnings lost as a result of the systemwide
disruption of air service.”3
These principles have been applied across a wide variety of factual circumstances.
For example, when the U.S. Food and Drug Administration issued an advisory to
customers regarding potential E. coli contamination in spinach, a provider of fresh
spinach experienced a reduction in earnings for which it submitted a business
interruption claim. A California court rejected the spinach provider’s claim because
there was no causal link or nexus between its business loss and an event covered
by the policy.4
Also in California, following the Rodney King trial, the city of Los Angeles
imposed dusk-to-dawn curfews on businesses in certain areas due to rioting
and looting. The owner of several movie theaters submitted a claim for business
interruption loss, which their carrier denied. The court upheld the denial because
the loss was not a direct result of damage to or destruction of property and,
therefore, was missing the requisite causal link.5
Another example arose in a case out of Hurricane Andrew, where an insured
hotel owner made a claim for loss of income where it sustained damages to air
Missing Link... continued from page 5
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conditioning units, a pool pump and the telephone system. The insured claimed
that the hotel lost profits as a result of damaged rooms not being available for rent.
The factual evidence, however, indicated that the insured never turned away a
single customer due to physical damage from the hurricane and there were at all
times vacant rooms available to rent. Focusing on the lack of evidence connecting
the damage to the hotel to the claimed loss of revenue, the court concluded that
the insured had failed to demonstrate the required “causal nexus” between the
two and sustained the coverage denial.6 Many more examples can be found in
courts across the country.
Moreover, because this causal requirement is a condition of coverage, not
an exclusion, the insured bears the burden to establish the necessary link. In
Compagnie Des Bauxites de Guinee, for example, the insured’s business was
interrupted when two trains collided, thereby halting rail traffic and preventing the
insured from transporting ore from its mine to the coast to be shipped.7
The policy’s time element coverage insured against “loss resulting directly from
necessary interruption of business caused by damage to or destruction of real or
personal property …”8 The insured claimed over $2.6 million in lost business
income. The insurer argued that the claim was overstated as much of the alleged
lost income was attributable to other causes of loss, including the unavailability
of qualified locomotive engineers.
The trial court charged the jury to find a causal connection between the lost
income and the insured property damage. The insured argued on appeal that the
trial court “erred in instructing that the business interruption must have resulted
directly from damage or destruction of real or personal property, that the court
erred in placing the burden of proof on the policyholder, and that the court erred in
charging that [the insured] cannot recover for business interruption losses caused
by a lack of locomotive operators.”9
The appellate court affirmed the judgment. The court noted that the company
agreed to pay loss sustained “resulting directly from such interruption of business,”
not loss sustained from other causes. Such interruption is interruption caused by
“damage to or destruction of real and personal property,” not interruption caused
by the unavailability of locomotive engineers. And since the policy required that
the insured submit a proof of loss, and CBG was the plaintiff in a contract action,
placing on it the burden of establishing its loss was not error.10
Whether policyholder or carrier, it is critical to understand these fundamental
principles and policy requirements. Businesses sustain economic losses for any
Fall 2017Property Insurance Law
americanbar.org/tips 17
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number of reasons, including competition, unavailability of labor, reduced demand
for services or products, geographic undesirability, or a whole host of other
causes. This is particularly true in claims arising out of catastrophic losses with
significant and sometimes long-lasting areawide impacts.
But if an insured is seeking business interruption coverage, it has the burden to
establish a causal link between insured physical loss or damage and the
claimed business interruption loss. Failure to supply this missing link can prove fatal
to a claim.
Endnotes 1 United Airlines, Inc. v. Ins. Co. of PA., 439 F.3d 128 (2d Cir. 2006).
2 Id. at 134.
3 Id. at 130.
4 Fresh Express Inc. v. Beazley Syndicate 2623/623 at Lloyd’s, 131 Cal. Rptr. 3d 129 (Cal. Ct. App. 2011).
5 Syufy Enterprises v. Home Insurance Co. of Indiana, No. 94-0756, 1995 WL 129229, *2 (N.D. Cal. March 21, 1995).
6 Southern Hotels Ltd. P’ship v. Lloyd’s Underwriters at London, Civ. A. No. 95-2739, Civ. A. No. 95-2739, 1996 WL 592732 (E.D. La. Oct. 11, 1996).
7 Compagnie Des Bauxites de Guinee v. Ins. Co. of N. Am., 721 F.2d 109 (3rd Cir. 1983).
8 Id. at 111.
9 Id. at 113 (emphasis in original).
10 Id. at 113-114 (emphasis in original); see also Minkler v. Safeco Ins. Co. of Am., 232 P.3d 612, 616 (Cal. 2010) (holding that: “The insured has the burden of establishing that a claim, unless specifically excluded, is within basic coverage, while the insurer has the burden of establishing that a specific exclusion applies”); Leprino Foods Co. v. Factory Mut. Ins. Co., 453 F.3d 1281, 1287 (10th Cir. 2006) (holding that “under an all-risk policy, once the insured demonstrates a loss to the property covered by the policy, the insurance carrier has the burden of proving that the proximate cause of the loss was excluded by the policy language”) (emphasis added).
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Fall 2017Property Insurance Law
americanbar.org/tips 18
driven rain that permeates a home’s shell and damages windows, insulation, drywall,
and the electrical system.
However, Texas and other jurisdictions have expressly recognized that when the
anti-concurrent causation clause (ACC) found in most HO policies is read together
with the exclusion for flood and surface water, damage caused by a combination of
wind/wind-driven rain and water is excluded. JAW The Pointe, LLC v. Lexington Ins. Co., 460 S.W.3d 597 (Tex. 2015). In Texas and other jurisdictions that have upheld
the applicability of ACC clauses, an insured should attempt to obtain evidence on
the extent of damage due to wind or wind-driven rain before the flood or surface
water arrived. The fact that flood waters later damage the same components does
not negate coverage for the damage caused by the covered peril. Corban v. United States Automobile Assn., 20 So.3d 601 (Miss. 2009). Missing siding or shingles go
a long way in making this coverage argument work. Eyewitness testimony as to the
effects of wind to nearby residences and expert testimony that rain or wind caused
irretrievable damage before any flooding can provide critical evidence needed to
establish the claim. See Arcement v. GeoVera Specialty Ins. Servs., Inc., 2015 WL
151325 (E.D. La.) (upholding judgment for wind and rain-related property damage
based on expert testimony that rain and wind damaged the rendered numerous
areas of home and contents unsalvageable prior to flooding); see also, Grilleta v. Lexington Ins. Co., 558 F.3d 359 (5th Cir. 2009) (upholding judgment awarding
policy limit to insured based on expert testimony that house was destroyed by wind
before flood arrived).
Storm surge.
In May 2011, the Insurance Services Office (ISO) issued a new standard HO3 policy
form. The HO3 is the most commonly used residential policy form in the United
States. This edition of the HO3 expanded the water damage exclusion by explicitly
exempting coverage for “storm surge.” Prior editions of the HO3, many of which
are probably still in use, did not specifically exclude storm surge. Even so, insurers
argued, and many courts agreed, that the exclusion for flood encompassed storm
surge. Policyholders now have a better chance of successfully arguing that storm
surge is not excluded under the older HO3 policies. If the prior HO3 form already
clearly excluded storm surge, then why did ISO amend the form to list it separately?
This may be enough to convince a court that since the old version of the HO3
form does not specifically exclude storm surge, it must not be excluded. Not being
excluded equals being covered under “all-risk” property insurance policies.
Storm surge is not just a giant wave. Rather, it is a rise in the sea level along the
coastline caused by a combination of a hurricane’s surface winds and the physical
If Flood... continued from page 6
Fall 2017Property Insurance Law
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geography of the coastline. This argument will be best utilized by homeowners close
to the coast, but storm surge can carry far inland, as witnessed by the storm surge
damage done in New York City by Sandy.
Sewer backup on the premises.
Most HO policies provide at least some coverage for damage caused by water that
backs up from a sewer or drain on the insured premises. Often, this is the first
source of water into a house as water enters through a basement floor drain or a
toilet that backs up and overflows. Only later, after the house has been damaged
by several inches of sewer backup water, does outside flood or surface water enter.
Policyholders can argue that their homes were damaged by covered sewer backup
water before the non-covered outside flood water or surface water entered.
However, sewer backup endorsements are usually subject to their own policy limit,
and this limit is often quite low, maybe $5,000 to $15,000. But this is not always the
case. Some HO policies have sewer backup endorsements with policy limits that
match regular dwelling limits.
Storm drain or sewer overflow off the premises.
Some policies, including the 2011 HO3 policy form, contain an exception that
specifically allows coverage for damage caused by surface water. The coverage
can apply when storm drains or sewer lines located off the insured premises are
overwhelmed by heavy rain and accidentally discharge or overflow and cause all
or part of a building on the insured premises to collapse. One of the keys for this
coverage to apply is establishing that the water occupied the drain or sewer system
before it caused the collapse. The coverage does not apply to water accumulating
on the ground that never entered the system. See, Surabian Realty Co., Inc. v. NGM Ins. Co., 971 N.E.2d 268, 272 (Mass. 2012). In contrast to coverage for on premises
sewer backup, this coverage is not typically tied to a lower policy limit.
Collapse.
Water that accumulates on flat roofs can become sufficiently heavy that the roof
collapses. Collapse is included as an Additional Coverage under the standard HO3
policy and applies when “[w]eight of rain which collects on a roof” is the cause of the
collapse. Other HO policies deal with the collapse peril separately, so a policyholder
should carefully examine the policy to see how this peril may apply. This coverage
may also be available for business owners who have flat roofs, and may be combined
with the drain backup coverage when a roof drain becomes clogged or overtaxed.
Fall 2017Property Insurance Law
americanbar.org/tips 20
All policies are not created equal.
The best lesson for a policyholder with a water damage claim is to remember that
not all policies cover this peril in the same way. Fire is a peril uniformly covered under
all HO policies, but coverage for loss caused by water damage is much “trickier.”
The exclusions are not uniform, the endorsements modifying the policies are not
uniform, and the exceptions to the exclusions are not uniform. In some cases, the
analysis of coverage for a water loss can be mind-numbingly complex. Each policy
must be examined carefully; there is no “one-size-fits-all” in this arena.
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Justin RudinRutter & Russin, LLC4700 Rockside Rd, Ste 650One Summit Office ParkCleveland, OH 44131(216) [email protected]
Stacey StracenerCarroll Warren & Parker188 E Capitol St, Ste 1200Jackson, MS 39201-2131(601) 592-1010Fax: (601) [email protected]
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