Ask Tim

Flood Insurance Surprise

Photo by U.S. Geological Survey. Used under a Creative Commons Attribution 2.0 license.

I got a call yesterday from a member insurance agent located on Long Island. One of her clients had the foresight to buy flood insurance (good for him!) through a Write Your Own company. He suffered extensive flood damage during Superstorm Sandy. The insurance company investigated his claim and, to make a long story short, found out that the information on which it had based the premium calculation was incorrect. The homeowner's actual vulnerability to a flood loss was much greater than the company had been led to believe.

The company said it would honor the claim. However, it would also retroactively re-calculate the flood policy premium to what it should have been from the beginning. The homeowner's flood insurance premium effectively tripled for both the policy under which he made the claim and the renewal. The client's reaction (and the agent's) were what any ordinary person's reaction would be (after ingesting medication to reduce blood pressure to non-life threatening levels): "Can they do that?"

Yep. They sure can.

The answer is in Section VII. GENERAL CONDITIONS in the National Flood Insurance Program's Dwelling Form. Condition G., Reduction and Reformation of Coverage, states:

1. If the premium we received from you was not enough to buy the kind and amount of coverage you requested, we will provide only the amount of coverage that can be purchased for the premium payment we received.

2. The policy can be reformed to increase the amount of coverage resulting from the reduction described in G.1. above to the amount you requested as follows: ...

b. Discovery of insufficient premium or incomplete rating information after a loss.

(1) If we discover after you have a flood loss that your premium payment was not enough to buy the requested amount of coverage, we will send you and any mortgagee or trustee known to us a bill for the required additional premium for the current and the prior policy terms. If you or the mortgagee or trustee pay the additional premium within 30 days from the date of our bill, we will reform the policy to increase the amount of coverage to the originally requested amount effective to the beginning of the prior policy term.

In short, the policy language gives the insurance company the right to retractively bill for the correct premium. Obviously, this was an unwelcome surprise for the homeowner, but the good news is that he had the coverage. Too many others affected by Sandy didn't.

The NFIP's Dwelling Form is available for download from the program's Web site.

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Was the Boston Marathon Bombing an 'Act of Terrorism'?

Question from an IIABNY member: Can you address if the Boston incident would be considered terrorism and only covered if a commercial client elected the coverage?

Answer: For purposes of the federal Terrorism Risk Insurance Program, an “act of terrorism” is one that causes more than $5 million in property and casualty insurance losses; is not an act that occurred in a declared war; and is certified by the U.S. Treasury Department as:

• An act of terrorism
• A violent act or an act dangerous to human life, property or infrastructure
• An act that caused damage within the U.S. or outside the U.S. (in the case of air carriers, vessels, embassies and other U.S. property), and
• An act committed by one or more individuals “as part of an effort to coerce the civilian population of the United States or to influence the policy or affect the conduct of the United States Government by coercion.”

I haven’t seen any estimates yet on the dollar amount of P&C-insured losses. Certainly the property damage was extensive, and damaged businesses may be shut down for some time. However, some of the properties might have been franchises of national chains that self-insure (one of the bombs exploded in front of a Starbucks.) Therefore, I don’t think anyone knows yet whether the P&C losses will exceed $5,000,000. Virtually all of the injured were not working at their jobs at the time, so I’m guessing Workers’ Compensation losses will be relatively small.

We know this much: 

• The bombings did not occur in the course of a war declared by Congress
• The act was dangerous to human life, property and infrastructure
• It caused damage within the U.S.

What we don’t know right now is the alleged bombers’ motivation. One of the suspects is dead, and the other was communicating only in writing (he has since invoked his right to remain silent.) Therefore, not all of the elements that would enable the Treasury Department to certify this as a terrorist act are in place. In addition, if the total P&C insurance losses are $5 million or less, the department cannot certify it as a terrorist act (again, for purposes of TRIP).

If the department does certify this as a terrorist act, here are the coverage implications for Commercial Property insurance:

• If an insured’s policy includes ISO endorsement IL 09 53 01 08, Exclusion of Certified Acts of Terrorism, then the insurance will not cover the losses. This endorsement will be on the policy if the insured rejected the carrier’s offer of terrorism coverage.
• If an insured’s policy includes ISO endorsement IL 09 52 01 08, Cap on Losses from Certified Acts of Terrorism, the insurance will cover the losses. This will be on the policy only if the insured elected to buy the coverage. The carrier’s liability for terrorism losses in any one year is limited should they exceed $100 billion (for all insurers in the aggregate), but no one has yet suggested that the Boston events will approach that level. Hopefully, this is the last incident of this sort that we will see this year, so the cap should not be a concern.
• If an insured’s policy includes ISO endorsement IL 09 87 01 08, Limitation of Coverage for Certified Acts of Terrorism (Sub-Limit on Annual Aggregate Basis), then the insurance will cover the losses. The maximum the carrier will pay is the sub-limit shown on the endorsement.

Note that all three of these endorsements are approved in Massachusetts, but IL 09 87 01 08 is not approved in New York. Carriers may not write terrorism coverage with a sub-limit in New York.

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Business Income Coverage and the Boston Marathon Bombings

 

Photo by Rebecca Hildreth. Used under a Creative Commons Attribution 2.0 license.

I write this on a Tuesday with the fervent hope that this week will be far less nerve-wracking than was last week. As the whole world knows by now, two bombs exploded within a few seconds of each other near the finish line of the Boston Marathon on Monday, April 15. Four days later, we all held our breath as the authorities killed one of the suspected bombers in a gunfight and spent most of the next 24 hours searching for the other suspect. He was apprehended late Friday evening. 

(Full disclosure: My oldest son is a law student at Boston University. He was a couple of blocks away from the explosions when they occurred, and he spent a good part of Friday waiting outside a closed bus terminal, hoping to catch a bus back to New York for the weekend. I'm happy to say that he made it home safely, but he got to watch his city become a war zone. Still, we're the lucky ones.)

During a conversation over the weekend, he and I got to discussing the insurance coverage considerations for Boston area businesses (insurance geekiness spreads to the next generation!) I explained how business income coverage applied to the businesses whose property was damaged by the explosions. Then he threw a curveball at me, an activity normally restricted to IIABNY members.

During the manhunt on Friday, the city government told people to stay in their homes and told businesses not to open. A full day's unscheduled closing in a large market like Boston adds up to some serious money. Would business income coverage apply to the income lost that day? The answer is no.

The ISO Business Income (and Extra Expense) Coverage Form states in part:

We will pay for the actual loss of Business Income you sustain due to the necessary "suspension" of your "operations" during the "period of restoration". The "suspension" must be caused by direct physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss. [Emphasis added]

In the case of the businesses that were closed on Friday, most of them had not suffered physical damage. They were closed because there was an individual on the loose presumed to be armed and dangerous, and no one knew precisely where he was. I don't think anyone will dismiss the financial hardship this caused to area businesses, but without damage to their premises, there is no business income coverage.

It is true that the form provides an additional coverage titled Civil Authority. Under this, the insurance company pays for loss of business income when a covered cause of loss damages property other than the insured's and the civil authorities prohibit access to the insured's premises because of it. However, coverage applies only if both of the following are true:

Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage, and the described premises are within that area but are not more than one mile from the damaged property; and

The action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property.

Again, the absence of physical damage to a nearby property means that coverage does not apply.

Lastly, even if coverage did apply, coverage begins 72 hours after the suspension of operations begins. Happily, most of Boston was back in business on Saturday, a bit more than 24 hours after the manhunt began. Those who weren't were at Fenway Park singing along with Neil Diamond. All of the closures would have been for less than the 72-hour deductible.

The bombers killed innocent adults and a child, wrecked too many other lives to count, caused millions in property damage, cost honest business owners in Boston a day's earnings, and terrified an entire major metropolitan area. Unfortunately, only some of these losses can be insured, and the forced closure last Friday is not among them.

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Are Reciprocals Covered By the Guaranty Fund?

Question from an IIABNY member: We are thinking of doing business with a property carrier which is a reciprocal. I just want to make sure they are covered under the New York State guaranty fund and there is no other issue with a reciprocal. I was told their policy is not assessable and they have A rated reinsurers.

Answer: The guaranty fund (the New York State Property/Casualty Insurance Security Fund) does cover most policies issued by reciprocals. Article 76 of the New York Insurance Law applies to the PCISF. Section 7602(c) states:

" Insurer " means any insurer (other than an insolvent insurer, or a municipal reciprocal insurer which issues policies not covered by the property/casualty insurance security fund, or a risk retention group …, or a provider of service contracts …) authorized to transact the (following) kinds of (insurance: Fire; miscellaneous property; water damage; burglary and theft; glass; boiler and machinery; elevator; animal; collision; personal injury liability; property damage liability; fidelity and surety; credit; motor vehicle and aircraft physical damage; marine and inland marine; and marine protection and indemnity.)

Note that Workers’ Compensation is not on that list. This is because there is a separate guaranty fund for Workers’ Comp, known as the Workers’ Compensation Security Fund. New York Workers’ Compensation Law Sections 106 and 107 clearly state that policies issued by reciprocal insurers are covered by this fund. Section 107 states:

The purpose of the fund is to assure to persons and funds entitled thereto the compensation and benefits provided by this chapter for employments insured in insolvent carriers, including the return of unearned premiums. Such fund shall be applicable to the payment of awards for compensation or death benefits and to the payment of benefits into the special funds … and remaining unpaid, in whole or in part, by reason of the default … of an insolvent carrier including the return of unearned premiums, but such fund shall not be applicable to the payment of any amounts due under any policy of reinsurance issued to an insurance carrier. The fund shall also be applicable to the payment of liability claims against an employer under the employer's liability insurance portion of the standard New York workers' compensation and employer's liability insurance policy, but no payment from the fund for such liability claim shall exceed the lesser of the policy limit or one million dollars on any one claim…

Section 106 defines the terms:

" Mutual carrier " means any mutual corporation or reciprocal insurer, other than an insolvent carrier, authorized to transact the business of workmen's compensation insurance in this state. …

" Reciprocal insurer " means any reciprocal insurer authorized to transact the business of workmen's compensation insurance in this state and such reciprocal insurer shall be deemed to be a mutual carrier within the intent of the several provisions of this article.

" Carrier " means a stock or mutual corporation or a reciprocal insurer or a nonprofit property/casualty insurance company, if such corporation or insurer is authorized to transact the business of workers' compensation insurance in this state, including but not limited to the issuance of an assumption of workers' compensation liability insurance policy, but not including any such corporation or insurer which is insolvent.

" Insolvent carrier " means a carrier as to which an order of rehabilitation or of liquidation, or, if such carrier be a foreign insurer, as to which an order for conservation of its assets within the state, shall have been made after the effective date of this article pursuant to article seventy-four of the insurance law, or a foreign carrier which withdraws from or discontinues operation in this state and fails to meet payments due on awards made, but not including a carrier, whether a domestic or foreign insurer, which shall have become rehabilitated and allowed to resume business after any such rehabilitation or conservation of assets and meets its obligations as they mature.

Therefore, most P&C policies issued by reciprocals are covered by the guaranty funds. 

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It's Not a Vehicle Loss if the Vehicle Doesn't Hit the Building

Photo by Massachusetts Department of Environmental Protection. Used under a Creative Commons Attribution 2.0 license.

Question from an IIABNY member: Under a standard ISO commercial property policy, specified causes of loss include vehicles and aircraft, but the policy does not define the action with these. In other words, a vehicle causes a fire to a building or collides with a building, is what I always thought. Do you have an elaboration on this? 

If a vehicle overturns on the land and a pollution event takes place without colliding with building, and the Department of Environmental Conservation comes after the insured, I think this is a pollution event not related to a covered cause of loss. Therefore, no property coverage, right?

Answer: I agree. It’s worth noting that, although the Causes of Loss – Special Form does not define the aircraft or vehicles peril, the ISO Basic and Broad Causes of Loss forms do:

6. Aircraft or Vehicles, meaning only physical contact of an aircraft, a spacecraft, a self-propelled missile, a vehicle or an object thrown up by a vehicle with the described property or with the building or structure containing the described property. This cause of loss includes loss or damage by objects falling from aircraft.

We will not pay for loss or damage caused by or resulting from vehicles you own or which are operated in the course of your business.

I don’t know that an insurer could argue this definition in court when it’s not in the insured’s policy, but there are other arguments it could make. The International Risk Management Institute cited a 1959 federal court decision in which a worker operating a bulldozer pushed dirt against a wall. The wall eventually collapsed, but the court ruled that this loss did not fall within the vehicle peril because the vehicle never actually touched the building.

I didn’t find a New York court case that cited this decision, but it appears that physical contact between the vehicle and the building or structure is required before coverage is triggered. What seals the deal, in my opinion, is the Insuring Agreement and the Covered Property sections of the ISO Business and Personal Property Coverage Form:

A. Coverage

We will pay for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.

1. Covered Property

Covered Property, as used in this Coverage Part, means the type of property described in this section, A.1., and limited in A.2., Property Not Covered, if a Limit of Insurance is shown in the Declarations for that type of property….

2. Property Not Covered

Covered Property does not include:…

h. Land (including land on which the property is located), water, growing crops or lawns;

So, even if the aircraft or vehicles peril is broader in the Special form than it is in the Basic and Broad forms, in your example, the Property policy would not apply because land is not covered property. Also, the Special form states that the insurer will not pay for loss or damage caused by or resulting from release of pollutants unless the release was caused by one of the specified causes of loss (including aircraft or vehicles). The combination of the Property Not Covered provisions and the court decision cited above tells me that the policy would not cover this incident.

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Superstorm Sandy: No Power and No Coverage

Photo by André-Pierre du Plessis. Used under a Creative Commons Attribution 2.0 license.

Question from an IIABNY member: We are having issues with the carriers denying all claims for power outage from Superstorm Sandy, saying it was due to flooding. The insureds for the most part were in Manhattan; some power outages were due to wind or the utility turning off the power prior to flooding. Is there a way to determine which happened first in order to get some of these insureds' claims paid? Since the flood was not at the insured’s premises and was at the utility's stations, how can the insured not have coverage?  

Answer: A couple of things: If the policy carries the Causes of Loss – Special Form, the carrier has the burden of proof to show that a loss is not covered. If the carrier is going to deny a claim on the grounds that flooding caused the power outage, it must provide evidence supporting that conclusion. The insurer (or a public adjuster, if the insured hires one) should be contacting the utility to determine what exactly happened. 

However, if flood was the proximate cause of loss at the power station, then there is no coverage. The ISO Spoilage Coverage Endorsement, CP 04 40, can cover losses caused by power outage, “meaning change in temperature or humidity resulting from complete or partial interruption of electrical power, either on or off the described premises, due to conditions beyond (the named insured’s) control.” However, the endorsement specifically excludes coverage for power outages caused by water.

Similarly, the Utility Services – Direct Damage Endorsement, CP 04 17, may cover loss caused by an interruption in power supply services, meaning utility generating plants, switching stations, substations, etc., that supply electricity. However, “The interruption in utility service must result from direct physical loss or damage by a Covered Cause of Loss … to the property (providing the power supply services)...” Since water is not a covered cause of loss, there would be no coverage under this endorsement for loss caused by flooding. 

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Two Minutes With Tim: Coverage For Building's New Owner?

Tim looks at a situation where a mortgages holder foreclosed on a property and a third party has bought it without obtaining insurance.

Download Two Minutes With Tim- Coverage For Building's New Owner?

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You Ain't Seen Nothing Yet

Claire Wilkinson starts August out by sounding an ominous note:

A Weather Channel report reminds us that some 93 percent of major hurricanes (Category 3 or higher on the Saffir-Simpson hurricane wind scale) – those causing the most damage — occur during the peak months from August through October.

Another reason for residents of hurricane-prone areas not to let their guard down.

Insurers know this only too well. In a ranking of the top ten most costly hurricanes in the United States posted at III.org, all 10 hurricanes on the list occurred from August through October.

This year marks the 20^th anniversary of Hurricane Andrew, the category 5 hurricane that devastated South Florida on August 24, 1992. It’s important to note that Andrew was the first storm in a late-starting season that produced only six named storms.

via www.iii.org

To this I would add the following: It has been an unusually hot summer here in the mid-Atlantic states. The waters of the North Atlantic likely are not as cold as they might normally be in August. Warmer water = more fuel for storms. A Long Island agent voiced these concerns to me just a few weeks ago. All things being equal (and I'm not factoring in the effects of El Nino,) the hotter summer would appear to increase the odds that a major storm will hit the New York City metro area and New England.

No one in New York is anxious to see the cousins of Tropical Storms Irene and Lee pay us a visit, but we shouldn't be terribly surprised if they do.

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Ask Tim, Episode #31 -- Conditional Renewal Notices

In today's episode of the Ask Tim podcast, I take a look at the requirements in New York Insurance Law Section 3426 regarding when insurance carriers have to send conditional renewal notices on commercial lines policies. Also, a generous IIABNY colleague buys me lunch. Here are the highlights:

Carriers must send conditional renewal notices on some commercial lines policies to the first-named insured, at the address shown on the policy, and to the insured's authorized agent or broker. They must send a notice if they are conditioning renewal upon:

• Change of limits
• Change in type of coverage
• Reduction of coverage
• Increased deductible
• Addition of exclusion
• Some premium increases in excess of 10 percent

Future episodes will explore Section 3426 in more detail. 

Download Episode 31 of Ask Tim

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Coordinating Flood Insurance Deductibles

Last winter, I got a call from an IIABNY member who had a commercial client with flood damage from Tropical Storm Irene. This client, despite not being in a flood zone, had purchased both private flood insurance (an endorsement to a Package policy) and coverage from the National Flood Insurance Program. This turned out to be a very good decision. However, the Package carrier was claiming that the client should pay "stacked" deductibles; that is, the private insurance deductible should be added to the NFIP deductible. Since both of these deductibles were quite large, the member wanted to know if this was true. The following is the text of my email back to him.

Answer: Following up on our phone conversation yesterday, I disagree with the Package carrier’s contention that two deductibles should apply to your client’s flood loss.

The NFIP General Property Form states:

C. Other Insurance 

1. If a loss covered by this policy is also covered by other insurance that includes flood coverage not issued under the Act, we will not pay more than the amount of insurance that you are entitled to for lost, damaged, or destroyed property insured under this policy subject to the following: 

a. We will pay only the proportion of the loss that the amount of insurance that applies under this policy bears to the total amount of insurance covering the loss, unless C.1.b. or c. immediately below applies. 

b. If the other policy has a provision stating that it is excess insurance, this policy will be primary. 

c. This policy will be primary (but subject to its own deductible) up to the deductible in the other flood policy (except another policy as described in C.1.b. above). When the other deductible amount is reached, this policy will participate in the same proportion that the amount of insurance under this policy bears to the total amount of both policies, for the remainder of the loss. 

The ISO Commercial Property Conditions endorsement (CP 00 90 07 88) states:

G. OTHER INSURANCE

1. You may have other insurance subject to the same plan, terms, conditions and provisions as the insurance under this Coverage Part. If you do, we will pay our share of the covered loss or damage. Our share is the proportion that the applicable Limit of Insurance under this Coverage Part bears to the Limits of Insurance of all insurance covering on the same basis.

2. If there is other insurance covering the same loss or damage, other than that described in 1. above, we will pay only for the amount of covered loss or damage in excess of the amount due from that other insurance, whether you can collect on it or not. But we will not pay more than the applicable Limit of Insurance.

The Deductible provision in the ISO Building and Personal Property Coverage Form (CP 00 10 06 07) states:

D. Deductible

In any one occurrence of loss or damage (hereinafter referred to as loss), we will first reduce the amount of loss if required by the Coinsurance Condition or the Agreed Value Optional Coverage. If the adjusted amount of loss is less than or equal to the Deductible, we will not pay for that loss. If the adjusted amount of loss exceeds the Deductible, we will then subtract the Deductible from the adjusted amount of loss, and will pay the resulting amount or the Limit of Insurance, whichever is less.

The NFIP’s coverage is directly dependent on the private flood coverage. If the Package policy says that its flood coverage is excess, then NFIP is primary, but only up to the amount of the Package policy’s deductible. Once it meets that deductible, coverage switches to pro-rata. To illustrate, assume an NFIP policy with a $100,000 limit and a $10,000 deductible, and a commercial package policy that covers flood with a $500,000 limit and a $25,000 deductible. The insured suffers a loss valued at $250,000. Based on the terms in the NFIP policy, here’s how the two carriers should share the loss: The insured pays the first $10,000 (the NFIP deductible) and NFIP pays the next $25,000 (the Package policy deductible). The remaining amount of the loss is $215,000 ($250,000 minus $35,000.) The combined flood limit equals $600,000 ($100,000 NFIP, $500,000 Package), so NFIP pays 1/6 of the balance and the Package pays 5/6. Using this formula, the final loss sharing looks like this:

Insured’s deductible	$10,000
NFIP	$60,833 ($25,000 plus [$215,000 multiplied by 1/6])
Package	$179,167 ($215,000 multiplied by 5/6)
TOTAL	$250,000

In this example, the Package carrier pays only $179,167, whereas it would have paid $225,000 if there was no NFIP policy. I forget the dollar amounts of your claim situation, but the math is the same. In any case, I believe that only one deductible applies – the NFIP policy deductible. As an aside, it seems to me that the neatest solution to this is to make the Package deductible equal to the NFIP limit, assuming that the Package carrier will offer that.

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