Written by Bart Higgins, Principal/Attorney at Shields Legal Group
Category 4 Hurricanes cause billions of dollars in damages to real and personal property. Hurricane Michael is just the latest in a string of intensive storms.
If you are an owner of commercial property or you live in a coastal area that could be impacted by a devastating hurricane, it’s time to look at your insurance coverage. What will the insurance company cover in your business? What types of damages will they reimburse?
The first step in the insurance dance is understanding the coverages you purchased, not the coverages you assumed would be included. The time to argue about your coverage is before a catastrophe strikes, not after.
There is a second step in any dance with your property insurer. If they deny your claim based on a clause that you didn’t fully appreciate when you bought the policy, how do you respond? For example, if you purchased an all-risk policy for your business, and the insurance company denies or reduces your claim because of the anti-concurrent causation clause, what do you do?
Fortunately, an informed and knowledgeable business owner can use technology to document claims as they occur. Videos, construction bids, and timely notices to the insurance company are some of the ways to defeat the hidden clauses in your “all-risk” policy.
Proactive Knowledge is Power
Let me share a story with you that will bring all of these elements together. The scenario I am about to describe is hypothetical, but unfortunately may be the reality for thousands of people and businesses in the Pensacola, Florida area after Hurricane Michael.
The Smiths own a marina located on a dam controlled lake, several miles inland from the Texas coast. Heavy rains for over a week caused wide-spread flooding and damaged several of the marina’s buildings and HVAC equipment. As the flood waters began to recede, Hurricane Nancy made herself known. Her path veered, and she made landfall at the exact part of the coastline that connects the marina to the Gulf.
Right before the hurricane made landfall, winds of 155-miles per hour rip off the roofs of all the marina’s buildings. The walls of the buildings quickly lift from their foundation, leaving no structure standing. A storm surge created from tidal waves and wind rushes up the inland channel. When it reaches the marina, the surge destroys all of the docks, boats and anything else that is still standing.
As you might guess from this description, the destruction of the marina is total. Nothing remains of the physical structures. It is a complete and total loss.
The Smiths don’t panic, because they believe that all of these damages will be paid for by their insurance company. They had purchased a more expensive “all-risk” policy, and their insurance agent assured them that the marina would be protected from any damage.
Warning flags go up when the insurance company profusely apologizes but denies the Smith’s claim. They rely on the anti-current causation clause in the policy that clearly and explicitly excludes coverage for damages caused by concurrent wind, flood and storm surge events. The insurer, “Earth, Wind and Fire Insurance Company,” even references a video from the local television station, that recorded Hurricane Nancy’s destructive winds, floods and storm surge abolishing everything in its path.
The Smiths pull out their insurance policy from the file cabinet and start reading it for the first time. They thought they had purchased an “all-risk” policy that would cover any damage to the marina. But their lay understanding of “all-risk” is not what their policy provided.
An “all-risks” policy generally means that it covers any “physical loss or damage to Covered Property at the premises,” no matter what causes that loss or damage, unless the policy specifically excludes or limits coverage for losses resulting from a specific cause. See, e.g.,SMI Realty Mgmt. Corp. v. Underwriters at Lloyd’s, London,179 S.W.3d 619, 627 n.3 (Tex.App.–Houston [1st Dist.] 2005, pet. denied) (“As a general rule, an all-risks policy creates a special type of coverage in which the insurer undertakes the risk for all losses of a fortuitous nature that, in the absence of the insured’s fraud or other intentional misconduct, is not expressly excluded in the agreement.”).
Mr. Smith identified the two separate endorsements that clearly stated the marina was covered for flood and wind. He was puzzled, however, because he couldn’t find anything that used the phrase “anti-concurrent causation.”
Mrs. Smith (the smarter half of the Smiths), points to The Building and Personal Property Coverage Form’s section that addresses “Exclusions” which also refers to the “applicable Causes of Loss Form as shown in the Declarations.” Section B of the Causes of Loss—Special Form, lists the policy’s exclusions:
1. We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.
a. Ordinance or Law
The enforcement of any ordinance or law:
1) Regulating the construction, use or repair of any property; or
2) Requiring the tearing down of any property, including the cost of removing its debris.
* * *
1) Flood, surface waters, waves, tides, tidal waves, overflow of any body of water or their spray, all whether driven by wind or not.
No one explained the impact of this clause to the Smiths when they purchased the policy. Unfortunately, they became intimately familiar with the phrase “anti-concurrent causation” through the denial letter received from the Insurance Company’s lawyer.
The attorney, Chris Jerkthem, pointed out in the denial letter that Earth, Wind & Fire’s position was consistent with the case law developed by the Supreme Court of Texas and the Fifth Circuit Court of Appeals. When there is a combination of wind and water damage, the anti-concurrent causation clause can be relied upon by the carrier. The attorney quoted from one of the opinions that supported their position. “[t]he only species covered under [a policy with an anti-concurrent causation clause] is damage caused exclusively by wind. But [when] wind and water synergistically cause the same damage, such damage is excluded.” JAW The Points, L.L.C. v. Lexington Insurance Company, 460 S.W. 3d 597607-608 (Tex.2015) citing ARM Props. Mgt. Group, RSUI Indem. Co., 400 Fed. 938, 941 (5th Cir. 2010) and Leonard v. Nationwide Mut. Ins. Co.,499 F. 3d 419, 429-31 (5thCir. 2007(interpreting Mississippi law).
The denial letter concluded by stating that the anti-causation clause and the exclusion for losses caused by flood, “read together in the marina’s policy, exclude from coverage any damage caused by a combination of wind and water.” Mr. Jerkthem then stated that “Earth Wind & Fire would not pay any damages caused by Hurricane Nancy.”
This news devasted the Smiths. They thought they had lost their family business and livelihood. Fortunately, Ms. Smith called her daughter, Clarese Darrow Smith for advice. Clarese passed on the family business and went to law school instead. She was working in a big downtown law firm and agreed to help out her parents.
Clarese reviewed the policy, the denial and the case authority cited by Mr. Jerkthem. She created a strategy to demonstrate to the Insurance Company that they had made an incorrect decision.
Clarese sent a package of information to Earth, Wind & Fire’s attorney explaining why the marina had filed two separate claims. The reason was simple: because there were two separate events.
The marina filed a previous claim for water damage caused one week before Hurricane Nancy. She included detailed photos and videos of the damage caused by the flooding. A written report by the marina’s electrician stated that the HVAC and electrical systems were a total loss. A report from a local construction company that inspected the marina after the flooding, (but before Hurricane Nancy was designated as a hurricane) described the extent of the physical property damage. These losses totaled more than $700,000. The insurance company was invited to inspect the damage from the flooding but refused to do so. Weather reports for each day of the flooding showed there were no strong winds reported.
The wind claim was for any property damage that occurred when the 155 MPH winds from Hurricane Nancy tore through the marina. It did not include any damage from the storm surge. Clarese contacted local news stations and obtained a copy of drone video taken of the area surrounding the marina. The video captured the roofs of the building being peeled back and the walls collapsing, all before the storm surge arrived.
A separate report from a contractor and structural engineer stated that the wind destroyed the buildings before the surge water hit the marina. The engineer estimated that 95% of the property damage was wind-related and that it would cost a total of $14,000,000 to repair. According to these experts, wind and water only caused 5% of the damage.
The conclusion was logical and clear. There were clearly two separate incidents, under different parts of the policy, rendering the anti-concurrent clause ineffective. Because the endorsements for wind and water provides specific coverage, it trumps an exclusion contained within the policy’s primary form. Clarese cited an old Texas case that was still good law. See Drane v. Jefferson Standard Life Ins. Co.,139 Tex. 101, 161 S.W.2d 1057, 1062 (1942)(“If there be a conflict between the policy and the rider, the latter controls, especially since its provisions are the more specific.”).
Earth, Wind & Fire reluctantly recognized that they owed the claim. The Smiths rebuilt the marina, and they were so proud of their daughter.
The best defense against any insurance company is knowledge, documentation, and timeliness. The combination of all three makes it difficult for the insurance company to deny the claim.
Had the Smiths understood the coverage they were buying, they could have been more decisive about the specific policy. Knowledge is power, and it very potent when used at the front end of a buying decision.
If you find yourself in a similar situation, documentation is the key to dealing with the insurance company. Photographs, videos, and estimates from contractors make it hard for the insurance company to dispute the claim. Investigating the sequence of events and making separate claims is another way to force the insurance company into a corner.