House Bill 1774 Requires Urgent Action by Texas Policyholders to Preserve Coverage for Hurricane Harvey Flood ClaimsEven as Hurricane Harvey’s effects continue to unfold, Texas policyholders face another imminent threat. On September 1, 2017, a new Texas law becomes effective that dramatically limits insurance recoveries for Texan individuals and businesses. House Bill 1774 requires policyholders to provide more details when disputing insurance company coverage determinations and substantially reduces the penalties imposed on insurers who unfairly deny, slow pay, or underpay insurance claims filed after August 31, 2017. This anti-policyholder law also imposes additional (and potentially onerous) pre-suit notice and inspection requirements on policyholders; these requirements are all designed to minimize policyholder insurance recoveries. While policyholders may file claims after August 31, 2017, the penalty for insurers who fail to fully honor their obligations will be reduced. This law applies to homeowners and commercial policyholders on all commercial insurance programs (only government insurance programs fall outside the scope of this onerous law).

In light of this upcoming restriction on insurance recoveries, Texas policyholders should immediately ask their brokers or insurance agents to submit their insurance claims on all potentially responsive insurance policies no later than Thursday, August 31, 2017. If your broker or agent’s office is closed due to Hurricane Harvey, ask any affiliated office to immediately submit your claim. If your broker or agent does not have another office or you do not have a broker or agent, immediately submit your claim directly to your insurance company. Use any means available to document your notice submission in writing – whether by email, text, or letter – but undertake all efforts to comply with your policies’ notice requirements as your insurers may use any purported failure to follow the requirements against you.

Submitting notice of a claim will help you preserve your rights in the event of a covered claim.  It is better to risk a denial of a potentially uncovered claim than it is to lose coverage rights for an otherwise covered claim, so err on the side of notifying your insurers now.

Once you have dealt with the immediate notice issues created by the impending change of Texas law, you should take these additional steps to obtain any available insurance coverage for the damage caused by Hurricane Harvey:

  1. Gather all potentially applicable insurance policies.

Without copies of your insurance policies, it is very difficult to identify potentially responsive coverage. If you do not have copies of your insurance policies available, or your copies have been destroyed, obtain a copy from your broker or your insurance companies. Coverage may be available under a number of different policies and coverages, including property, named windstorm, flood, business interruption, contingent business interruption, loss of utilities, civil authority, automobile (commercial and personal lines), and homeowners’ policies.

  1. Identify potential coverage triggers.

Once you have obtained the potentially applicable policies, determine whether coverage is potentially triggered for the losses sustained as a result of the storm. Potential coverage triggers include:

  • Property damage or loss (to real or personal property) caused by:
    • Flood, if your policy includes flood coverage
    • Wind
    • Burst pipes
    • Sewer backup
  • Extra expenses for mitigation of damages
  • Business interruption due to shutdown of your facilities
  • Contingent business interruption due to shutdown of your supplier or customer facilities
  • Damage or theft by looters
  • Loss of power
  • Restricted access due to government shutdowns and restrictions
  • Damage to automobiles or other equipment

The particular losses incurred may trigger coverage under different policies depending on the structure of your insurance portfolio.

  1. Provide notice of claims if you have not already done so.

Once you have identified potentially responsive polices, provide notice of your claims if you have not already done so. Certain policies have strict notice requirements that require the policyholder to provide “prompt” notice as a condition precedent to coverage. Texas requires insurers show prejudice to deny coverage for late notice under a property policy and has historically allowed significant leniency for policyholders providing late notice under property policies. Last year, however, a federal appeals court upheld an insurer’s late notice defense under a property policy where the insured’s failure to provide notice until 19 months after incurring damage caused by a hail storm caused prejudice because the insurer was prevented from investigating the loss. Coupled with similar cases holding that delays of six weeks, three months, and six months are unreasonable as a matter of law, policyholders should be wary of delaying notice of loss, notwithstanding Texas’s historically favorable notice-prejudice case law.

  1. Document and mitigate losses.

Depending on the type of coverage, you may be required to provide proof of loss to demonstrate the extent of the insurance recovery. This process can be demanding, so you should be aware of necessary proof of loss documentation when you begin the mitigation and recovery process.

Take necessary, reasonable steps to protect property from further damage. Document the extent and nature of the damage suffered, making extensive use of photographs and video where appropriate. Make back-up copies of documents and photographs. Retain subject matter experts and forensic accountants when appropriate to calculate the cost of repairs and replacements, document extra expenses, and determine lost profits. Where possible, identify and preserve documentation supporting valuation of personal and real property, and avoid costly appraisal disputes with insurers.

Additionally, be aware of your insurer’s right to investigate your property to make its own determinations regarding coverage and the extent of the damage. Often insurers will have a right to physically inspect the property upon request “as often as reasonably required.” Insurers may also have limited rights to sample damaged and undamaged property and a general right to “cooperation” in the investigation and settlement of any claim. Your insurers may also have the right to take your testimony under oath; this process is known as an examination under oath or an EUO. While some amount of cooperation is required, your policy should not grant an insurer carte blanche to review records, interview your employees or experts, or enter your property.  Policyholders need to strike a balance between unfettered access and cooperation.

  1. Prepare for potential exclusions.

While many insurance policies could provide coverage for losses arising out of Hurricane Harvey, policyholders must be prepared for potential coverage disputes as insurers deny coverage based on restrictive policy language. For example, the special cause of loss form (sometimes called “all-risks insurance”) includes a broad form “water” exclusion that removes coverage for loss or damage “caused directly or indirectly by…flood, surface water, waves (including tidal waves and tsunami), tides, tidal water, overflow of any body of water, or spray from any of these, all whether or not drive by wind (including storm surge).”  See ISO Form CP 10 30 09 17. This exclusion applies regardless of “any other cause or event that contributes concurrently or in any sequence of the loss.”  Policyholders can mitigate the impact of similar exclusions by carefully documenting losses and limiting claims submissions to exclude losses potentially implicated by broad exclusionary language.

  1. Lobby your legislators.

Texas commercial and personal policyholders should urge their lawmakers to repeal this upcoming onerous law, which is particularly ill-timed in light of Hurricane Harvey. Texas law should protect Texans – not penalize them when faced with a disaster. In addition, insurers may argue that the new law’s pre-suit requirements apply even to claims submitted before the law’s effective date – thus further impairing policyholders’ rights.

Have Questions?

These are particularly difficult times for all of Texas, particularly Houstonians and other Texans impacted by Hurricane Harvey. Bradley’s experienced team of policyholder attorneys is available to answer your questions as you grapple with this historic weather event.

Keep Viking Pump in Your Long-Tail Claim Toolbox “Long-tail” claims involve personal injury or property damage from alleged exposure to injury-causing products, such as asbestos or PFCs, over a number of years and multiple policy periods. Courts in various jurisdictions use different methods to identify the insurance policies applicable to these long-tail claims. One of the most important coverage cases of 2016 demonstrates that policyholders engaged in allocation disputes with insurers may succeed in securing “all sums” allocation even in so-called pro rata states.

The “all sums” method of allocation permits recovery of up to the limits of liability under any policy in effect during the periods when personal injury or property damage occurred. (The all sums method derives its name from the standard insuring clause promising to pay all sums above the self-insured retention “the insured shall become legally obligated to pay …”)

The “pro rata” method of allocation, on the other hand, limits each insurer’s liability to its pro rata share of the total loss incurred. Jurisdictions differ as to allocation for years with missing policies or policies issued by insolvent insurers. Certain jurisdictions allocate these years to the policyholder; others do not.

In the Matter of Viking Pump, Inc., 52 N.E. 3d 1144 (N.Y. 2016), New York’s highest court held that the policy language rather than a blanket rule determines whether the all sums or pro rata method of allocation is appropriate. This ruling sent shockwaves through the insurance industry because in 2002 the court had applied (and appeared to have adopted) the pro rata method.

The court held that the all sums method applied to allocate the excess insurers’ liability for asbestos-related losses in Viking Pump because the “non-cumulation” clause and “continuing coverage” clause in the followed primary policy was inconsistent with the pro rata method.

The non-cumulation clause in the policy (also known as a “prior insurance” clause) was substantially identical to the clause that first appeared in the London Market in 1960 to prevent policyholders from recovering under both a then-standard “accident-based” liability policy, as well as a subsequent now-standard “occurrence-based” policy. (Ironically, according to law professor Christopher French in an article cited by the court, some insurers have over the years attempted to expand non-cumulation clauses to eliminate their liability for long-tail claims altogether.) The continuing coverage clause extends coverage for continuing injuries after the policy period ends.

The Viking Pump court observed that pro rata allocation is based on policy language limiting liability to only those losses occurring during a particular policy period. In other words, “no two insurance policies, unless containing overlapping or concurrent policy periods, would indemnify the same loss or occurrence.” The presence of the non-cumulation and continuing coverage provisions, the court said, does not square with that principle. Those provisions “plainly contemplate that multiple successive insurance policies can indemnify insureds for the same loss or occurrence by acknowledging that a covered loss or occurrence may also be covered in whole or in part under any other excess policy.”

The court also held that “vertical exhaustion” is appropriate when an all sums allocation is applicable. This permits the policyholder to exhaust the layers of coverage in a specific policy year. (“Horizontal exhaustion” requires all applicable primary and umbrella excess layers to be exhausted before triggering any additional excess insurance.)

This week in Olin Corporation v. OneBeacon American Insurance Co., the Second Circuit extended Viking Pump, holding that once a layer is exhausted, the presence of a prior insurance clause reduces the limits of any applicable prior policies, whether or not the same insurers issued the prior policies.

The likely influence of Viking Pump cannot be overstated. This seminal case will be considered by courts around the country when called upon to decide allocation issues and should be included in the policyholder’s long-tail claim toolbox.

More States Applying “No-Prejudice Rule” on Notice to Claims-Made PoliciesIn a majority of states, an insurer cannot deny coverage based on a policyholder’s late notice of a claim without showing that the delay prejudiced the insurer. This “notice-prejudice rule” is an advance over the traditional “no-prejudice” rule that allows insurers to deny claims based on late notice regardless of the circumstances leading to the delay. The Wyoming Supreme Court, the most recent court to adopt the notice-prejudice rule, described the rationale for the rule in Century Surety Company v. Jim Hipner, LLC: most policyholders lack the leverage to negotiate for better policy terms; forfeiture of coverage on a mere technicality gives an unwarranted windfall to the insurer; and states have an interest in ensuring that accident victims are compensated. The court also held that a policy provision attempting to “contract around” the notice-prejudice rule violated public policy.

Nevertheless, more states are limiting the notice-prejudice rule to occurrence policies and applying the no-prejudice rule to claims-made policies. The New Jersey Supreme Court  applied the no-prejudice rule to a claims-made policy that required written notice of a claim “as soon as practicable” in Templo Fuente De Vida Corp. v. National Union Fire Insurance Co.  The court agreed with National Union’s contention that the policyholder’s notice of a D&O claim more than six months after service of the lawsuit violated the notice provision. Despite longstanding precedent in New Jersey following the notice-prejudice rule, the New Jersey Supreme Court refused to apply the notice-prejudice rule to claims-made policies with clear and unambiguous terms. The court discounted the equitable concerns behind the notice-prejudice rule because purchasers of claims-made policies are “knowledgeable insureds, purchasing their insurance requirements through sophisticated brokers.”

Despite this court’s application of the no-prejudice rule to a claims-made policy, policyholders should not presume this is a blanket rule, even in New Jersey. In Templo Fuente, the policyholder gave no reason for its delay in providing notice. An explanation could have dissuaded the court from denying coverage. In addition, not all purchasers of claims-made policies are “sophisticated.” Finally, the goal of avoiding an unwarranted windfall to the insurer appears to equally apply to a claims-made policy. Unlike an occurrence policy, which can be triggered years after the policy period expires, coverage under a claims-made policy is limited. In order for coverage to apply, the policyholder must give notice of the claim within the policy period or any applicable extended period, as did the policyholder in Templo Fuente.

To avoid a forfeiture of coverage, policyholders should establish a protocol for giving notice of claims and potential claims under all potentially applicable insurance policies, including umbrella and excess policies. In Century Surety, the policyholder had notified the primary insurer but not the umbrella insurer, perhaps believing that the claim would not exceed the primary policy’s limits. The policyholder’s failure to notify the umbrella insurer did not forfeit coverage in that case, but would have under the no-prejudice rule.