November 6, 2012
A threshold issue in many Hurricane Sandy-related property damage claims will be whether the loss resulted from flooding, an excluded peril under most standard property insurance policies. Courts have developed rules for determining whether Hurricane-related damage resulted from an excluded peril—flooding—or a covered peril—wind or defective construction—and insurers have added Anti-concurrent Cause Clauses (ACCC) to their policies in an attempt to contract out of those rules. We will discuss causation principles and ACCC language in upcoming blogs.
Before attempting to apply these principles, practitioners should ask whether the insured’s loss resulted from multiple causes.
1. Did wind and water cause divisible or different damage? Suppose Hurricane storm surge inundates the basement of an insured’s home, leaving a clearly visible water mark five feet up the walls in the basement. The first floor of the property is elevated and survives the hurricane unscathed, but there is significant damage to the roof and a second-floor deck. Under these facts, flood and wind caused divisible damage and coverage can be determined without resort to multiple causation principles. The insurer must pay for the damage to the roof and the deck but not for damage to the basement.
2. Did wind—a covered peril—completely destroy the property before flooding—an excluded peril fully capable of destroying the property had wind not already done so—intruded? If so, wind is the sole cause of the loss because nothing was left for the flood to damage. The flood should be irrelevant to the coverage analysis. Whether the wind did the job before the flood arrived is, of course, a factual question, which typically turns on expert testimony about the effect of Hurricane strength winds, the extent of damage farther inland where flooding did not occur, and the eye-witness testimony of people who rode out the storm. Wind is much more likely to cause catastrophic damage in a Category 3 or higher hurricane than in a Category 1 hurricane, such asSandy, but the pre-flooding effect of wind should still be part of the coverage analysis.
3. Did defectively designed or negligently constructed levees or other barriers allow water to enter the insured’s property? Following past hurricanes, policyholders have distinguished “naturally caused” floods from “artificial” or “man-made” floods, and argued that the flood exclusion applies only to naturally caused floods. This argument has met with mixed success, but it is one policyholders are likely to make. Compare Judge Duval’s decision adopting the distinction with the Fifth Circuit’s and the Louisiana Supreme Court’s decisions rejecting it. In re Katrina Canal Breaches Litigation, aff’d in part, vacated in part; Sher v. Lafayette Ins. Co. See also John K. DiMugno and Dennis J. Wall, et al, “CATClaims: Insurance Coverage for Natural and Man-Made Disasters” (West, 2012 Supplements).
Tomorrow we will discuss whether storm surge qualifies as a “flood” within the meaning of the flood or water exclusion.