AMTRAK, PSE&G AND NJ TRANSIT HAVE SUED THEIR INSURERS ALLEGING SANDY DAMAGES NOT SUBJECT TO THE FLOOD SUBLIMITS. THE TOTAL DAMAGE COSTS CONTINUE TO BE REVISED UPWARDS.
As has been expected, litigation will be centered on a few types of disputes, from gale-force wind or wind-versus-flood determinations, flood versus wind-driven rain determinations, to business interruption claims to alleged negligence by insurance brokers to failure to protect one’s property despite the storm warnings.
Flood insurance covers direct physical losses by flood and losses resulting from flood-related erosion caused by heavy or prolonged rain, coastal storm surge, snow melt, blocked storm drainage systems, levee dam failure or other similar causes. To be considered a flood, waters must cover at least two acres or affect two properties. Homes are covered for up to $250,000 on a replacement cost basis and the contents for up to $100,000 on an actual cash value basis. Replacement cost coverage pays to rebuild the structure as it was before the damage. Actual cash value is replacement cost minus the depreciation in value that occurs over time. (Excess flood insurance is available in all risk zones from some private insurers for NFIP policyholders who want additional coverage or where the homeowner’s community does not participate in the NFIP.) Coverage for the contents of basements is limited. Coverage limits for commercial property are $500,000 for the structure and another $500,000 for its contents.
Homeowner, renter and business owner insurance policies DO NOT cover flooding. Generally, policies will cover wind, rain, hail, wind-driven rain, and lightning damage. A separate flood insurance policy is needed to protect homes, businesses and personal property against flood damage. If a home, business or other residence is in a FEMA-identified high risk flood zone, a separate flood insurance policy should have been required on a mortgage transaction.
Rain or wind-driven rain, and hail damage are not in the same damage category as floods. Wind-driven rain damage, regardless of the cause, is a covered peril like wind or lightning which may have caused an opening in which rain has entered and caused water damage to the home or personal property.
If people affected by Hurricanes Sandy have suffered both flood and wind-driven rain damage, it should be reported to the flood insurance carrier as well as to the homeowner, tenant, or business owner insurance carrier. It is likely that a separate adjuster would have been assigned for each claim. Adjusters should have communicated with each other to coordinate information prior to final settlement.
The burden of proof required under a flood policy versus a wind policy will be equally important. A wind policy is often written as an "all risk" insurance policy, and a flood policy is written as a named peril policy.
As long as the insured presents evidence making a prima facie showing that wind caused substantial damage to their home, the insured will not be required to present further evidence negating the possibility that the damage was caused by water and the burden will instead shift to the insurer to prove the extent of damage caused by water. This, in turn, will make it easier for the insureds to recover under their homeowner’s policies, and more difficult for the insurers to avoid coverage under their policy exclusions.
Hurricane (or Storm or Superstorm) Sandy
In late October 2012, Hurricane Sandy caused widespread damage to buildings across the entire affected area, as well as widespread power outages and interruptions in utility service. Hurricane Sandy brought large-scale flooding to coastal and riverine residential and urban areas, particularly concentrated along the New Jersey and New York coastlines. Although the effects of Sandy were felt along much of the northeast coast, New Jersey and New York sustained the worst impacts from the storm. New Jersey was expected to sustain such severe damages due to the almost reckless defiance of common sense in allowing the building of numerous and expensive dwellings in the floodplains along the coast line. New Jersey has been aggressively pursuing for many years federal dollars to haul sand to the beach (the so-called “sand dollars”) to “nourish the beaches. Basically they brought sand to the beach, pilled it up over the years and built their homes, most of them not meeting modern floodplain design standards.
Most of the damage observed was caused by flooding (hydrostatic, hydrodynamic, buoyancy, and wave loads). These flooding forces caused inundation of the structures, erosion and scour, and wave action. Although inundation alone was a significant source of damage, some of the more dramatic structural failures observed were a result of the added force of wave action. Many buildings, both residential and non-residential, were inundated at the basement and first floor levels, which disrupted operations and damaged utilities, causing significant repair costs and extensive loss of income.
Observations of damage caused by wind were rare, and wind damage was much less significant than the flooding damage. This does not include the consequential effects of wind damage, such as tree fall, which in turn caused extensive power outages and damages to the electrical distribution grid. In our community, for example, the two electric substations were destroyed due to the tree strikes knocking down the power lines and transformers.
Forensic observations of the damage and review of the meteorological records indicated that the wind speed of Hurricane Sandy was below a design wind event. However, the flooding caused by Hurricane Sandy was in excess of the 1-percent-annual-chance flood event across much of the area impacted by the storm. The 1-percent-annual chance flood event is used as the minimum NFIP design requirement by those communities that have adopted the NFIP. The storm caused significant flooding and erosion in most of the areas the forensic investigators visited. Flooding caused widespread damage to structures, critical facilities, and infrastructure. Most damage to low-rise buildings resulted from inundation, and oceanfront low-rise buildings were damaged by wave action, erosion, and scour. Many low-rise one- and two-family dwellings in coastal areas were of older construction that pre-dates community adoption of floodplain regulations. Very few of these homes were elevated to the appropriate base flood elevation (BFE). Most damage to mid- and high-rise buildings resulted from the inundation of mechanical, electrical, plumbing, and other critical systems. Many of these systems were not elevated to or above the BFE. In addition to building damage, utility outages were widespread.
The NJ Transit Suit
On October 1, 2014, NJ Transit filed a suit in Newark, New Jersey against its insurers (Lloyd’s of London, et al[1]) for up to $300 million in additional coverage it says it is owed for damages incurred during Hurricane Sandy, after the insurance companies insisted on capping coverage at the flood sublimit of $100 million.
In addition to Lloyds, the suit names U.S. insurers Hudson Specialty Insurance Company, Maiden Specialty Insurance Company, RSUI Indemnity Company, Torus Specialty Insurance Company, and Westport Insurance Corporation.
Many of NJ Transit's trains, buses, tracks, stations and other assets were damaged by the salt-water storm surge that overwhelmed the region in October 2012. The agency estimates total damage from Sandy at $625 million, with the agency anticipating $342 million in federal relief funds. Flooding of the agency's Hoboken and Kearny rail yards alone caused $120 million in damage to NJ Transit trains.
The suit insists that the agency's policies explicitly covered any "Named Windstorm" for up to $400 million in damage, and challenged insurers' contention that coverage was subject to a "Flood Sublimit" of $100 million.
The policies sold by defendants to NJ Transit have been component of a $ 400 million complete insurance system, the lawsuit says. The policies supply coverage in 4 layers above a per-occurrence deductible of $ 500,000.
The 1st layer of coverage is $ 50 million, the second layer of coverage is also $ 50 million, the third layer is $ 175 million, and the 4th layer is $ 125 million. With the exception of the initial layer presented by AIG’s Lexington Insurance coverage Co., which is not a defendant in this lawsuit, numerous insurers including defendants are accountable for the coverage accessible in every single layer, with each and every organization assuming a particular percentage of every layers’ coverage limit.
In wake of Sandy, NJ Transit immediately notified its broker Marsh and all of its carriers, like defendants, of the harm it sustained. And above the following many months, inspections, valuations, and required repairs proceeded, with NJ Transit keeping all of the carriers informed as total harm estimates produced, the lawsuit says.
In April 2013, NJ Transit obtained a letter from defendants that stated the insurers believed all Sandy-associated water injury fell with their policies’ definition of flood and that they would spend no more than the flood sublimit of $ 25 million, or $ 50 million in excess of the initial-layer coverage offered by Lexington Insurance coverage Co., in accordance to the complaint.
In December 2013, excess insurers agreed to spend the $ 50 million in mixed policy limits of the 2nd-layer policies, which, when mixed with the $ 50 million that NJ Transit’s major insurer had previously paid, brought NJ Transit’s total insurance recovery to $ 100 million — the flood sublimit.
The lawsuit says NJ Transit has not received any more payment of the remaining $ 300 million in coverage from defendants or any other insurer since then. NJ Transit argues in the lawsuit that it is entitled to a declaration that the flood sublimit in the policies does not apply to the losses triggered by Sandy and its ensuing storm surge. NJ Transit says defendants should shell out for the total amount of NJ Transit’s losses from Sandy, up to the policies’ general restrict.
The PSEG Damages
In late October 2012, Superstorm Sandy caused severe damage to PSE&G's T&D (transmission and distribution) system throughout its service territory as well as to some of Power's generation infrastructure in the northern part of New Jersey. Strong winds and the resulting storm surge caused damage to switching stations, substations and generating infrastructure. The damage appeared to be caused by a combination of wind damage and flood damage.
The Power division of PSEG had incurred $79 million and $85 million of storm-related expense in 2013 and 2012, respectively, primarily for repairs at certain generating stations in Power's fossil fleet. These costs were recognized in O&M Expense, offset by $25 million and $19 million of insurance recoveries in 2013 and 2012, respectively.
Power incurred an additional $10 million and $19 million for the three months and six months ended June 30, 2014, primarily for repairs at certain generating stations in Power's fossil fleet.
PSEG maintains insurance coverage against loss or damage to plants and certain properties, subject to certain exceptions and limitations, to the extent such property is usually insured and insurance is available at a reasonable cost.
The PSEG Suit
After failing to settle with its insurers, on June 18, 2013, Public Service Enterprise Group, a publicly traded diversified energy company and its subsidiaries, sued 11 primary and excess insurers in a New Jersey court in Essex County, seeking a declaration that the insurance policies cover their losses resulting from damage caused by Superstorm Sandy's storm surge and that their losses incurred as a result of Superstorm Sandy were caused by a "Named Windstorm" (i.e., Superstorm Sandy) and are not subject to the flood sublimits contained in the policies issued by 10 of the 11 insurers. The case is Public Service Enterprise Group, et al. v. ACE American Ins. Co., et al., No. ESX-L4951-13, N.J. Super., Law Div., Essex Co.
PSEG contends that 11 insurers — whose policies together provide $1 billion in coverage — have suggested they are only liable for $50 million of its Sandy losses. The insurers are relying on flood sublimits that not only cap such coverage at $250 million per occurrence but further restrict payouts to $50 million for losses in particular flood zones.
PSEG claims that apart from an excess policy that National Union Fire Insurance Co. of Pittsburgh, Pa., issued, their coverage for a "named windstorm" includes "ensuing storm surge" and doesn't define "flood" to include a storm surge. This will be very critical for PSEG to prevail in this suit.
According to PSEG, had the defendants other than National Union intended to subject losses caused by a named windstorm's ensuing storm surge to the flood sublimits of their policies, they could have adopted language similar to that adopted by National Union, whose policy clearly states with respect to named windstorms that “ensuing flood and wind driven water damage ... shall be subject to the flood annual aggregate”. According to the suit, there is no such language in the other policies.
Hurricane Sandy damaged huge portions of the traditional power grid, but it also wreaked havoc on some of the installations of New Jersey’s largest solar developer. In a filing with the New Jersey Board of Public Utilities, Public Service Electric & Gas said its solar installations suffered more than $3 million worth of damage, primarily from storm surges that flooded ground-mounted solar systems, as well as wind and lightning taking their toll on rooftop arrays.
In April 2014, Following the Answer to the Complaint, PSEG revised upwards the Damages
In that lawsuit, PSEG stated that its estimate of the total costs related to damaged facilities was approximately $426 million. Of these costs, $364 million and $62 million related to Power and PSE&G, respectively. In August 2013, the insurance carriers filed an answer in which they denied most of the allegations made in the Complaint. Discovery is ongoing. In April 2014, PSEG notified the insurance carriers of a revised estimate of $579 million for total costs related to damaged facilities, of which $484 million and $95 million related to Power and PSE&G, respectively.
Amtrak Wants $500M from Insurers for Sandy Coverage
On September 17, 2014, Amtrak filed suit against a number of insurers in New York federal court to recoup the total $504 million in losses the rail giant claims to have suffered from Superstorm Sandy, telling the court it has only received $30 million in compensation from the insurers thus far. The case is National Railroad Passenger Corporation v. Ace Bermuda Insurance, Ltd. et al, 1:2014cv07510, U.S. District Court for the Southern District of New York, Sept. 17, 2014.
The National Railroad Passenger Corp. told the court in its complaint that the railroad operator, known as Amtrak, informed its more than one dozen insurers in December that it suffered an estimated $504 million in losses from Sandy and submitted more than $270 million in claims. But the insurers have only paid a token portion of that amount and have maintained that Amtrak isn’t entitled to more than $125 million under their plans, the suit says. “Amtrak seeks a declaration as to the meaning of certain policy provisions that are actively in dispute. Amtrak also seeks a judicial determination that defendants have breached their contractual obligations in connection with Amtrak's outstanding claim for losses following Superstorm Sandy,” the complaint said. The insurers say most of the damages sustained had been induced by a flood while Amtrak says damages were brought on by the storm surge and that losses were induced by a number of occasions.
The suit lists 17 insurers as defendants, including ACE Specialty Insurance Co., Federal Insurance Co., Lexington Insurance Co., Certain Underwriters at Lloyd's of London and more. Amtrak says the insurers have contractual obligations to cover the rail operator under more than 25 first-party all-risk property insurance policies they sold to Amtrak in 2011 for substantial premiums. After Sandy made landfall in October 2012, inflicting more than $72 billion in damages across the Eastern Seaboard, Amtrak reached out to its insurers. According to the complaint, Amtrak’s “critical physical assets” around New York City, including tunnels, bridges, track systems and power stations, had been substantially impacted by the storm. The affected properties are “essential” to Amtrak’s operation of trains along the Northeast Corridor, the business railroad in North America, and are also essential to other commuter rail services provided by the Long Island Railroad and New Jersey Transit, the complaint says. In addition to rail damage because of excessive flooding and gale force winds from the storm, Amtrak suffered losses from business interruption when it was forced to shut down its services for several days after the storm, the suit says. In total, it says it lost around $504 million from the storm. The rail operator says that while it informed the insurers of the damage in a timely fashion after the storm, the insurers engaged an adjuster of their own and have forced Amtrak to facilitate inspections at its facilities.
But despite Amtrak’s cooperation, it says it has been unable to recover more than “a token amount” of insurance proceeds. Most of the insurers claim Amtrak is not entitled to receive more than $125 million under the various policies, but the “plain language of those policies calls for defendants to pay Amtrak’s claim up to the limits of each policy,” with the pre-occurrence limit set at $675 million, the complaint says. Amtrak asked the court to declare that the insurers have breached their contracts and that the rail operator is entitled to full coverage up to the limits of each of the policies.
This Oct. 31, 2012, aerial photo shows damage from Superstorm Sandy in Mantoloking.
One Critical Issue to be decided by the Courts is whether Superstorm Sandy was a "Named Storm?"
Property insurance policies commonly contain a “Named Storm” deductible, which provides for a substantially higher deductible than other causes of loss. For example, the policy in AFP 104 Corp. v. Columbia Casualty Company1 contained a base deductible of $10,000 and a Named Storm deductible of $1 million per occurrence.
In AFP 104 Corp., the insured claimed damages in the amount of $774,562.32 for direct property damage and time element losses related to the interruption of electrical services following the storm. The carrier denied coverage for AFP’s claim on the grounds that the total loss did not exceed the applicable Named Storm deductible of $1 million per occurrence. AFP thereafter brought suit against Columbia and Columbia filed a motion to dismiss based on the Named Storm deductible.
The policy defined “Named Storm” as:
A storm that has been declared to be a named tropical storm or hurricane by the U.S. National Weather Service or other government authority including hurricane or tropical storm spawned tornado(s) or microburst(s). The named tropical storm or hurricane ends when the National Weather Service officially declares the named tropical storm or hurricane permanently downgraded to a tropical depression.
AFP claimed that upon landfall in New Jersey, Sandy was characterized as a post-tropical storm, and thus it was not a “tropical storm or hurricane” as defined in the policy and the Named Storm deductible was never triggered.
Ultimately, the Court denied Columbia’s motion to dismiss, finding that AFP had sufficiently alleged a facially plausible claim that AFP was entitled to coverage under the policy.
While this opinion did not resolve the question of whether Superstorm Sandy was a Named Storm as defined by the policy, it did find that the insured could pursue its claim and offer evidence to show that the Named Storm deductible was wrongfully applied to its claim.
Whether a Named Storm deductible applies to a claim and how the courts decide this issue could mean the difference of thousands of dollars for insureds.
1 AFP 104 Corp. v. Columbia Casualty Co., No. 13-4077, 2014 WL 793780 (D. N.J. Feb. 26, 2014).
If the Claim Damage Estimates are Too Low for Hurricane Sandy Damages, the Insurer and the Inspector/Cost Estimator Could be Liable for Bad Faith Damages
One recent case in Louisiana sends a caution to the firms or individuals who provide flood or storm damage inspections and repair estimate about potentially significant liability for errors or omissions during the course of their investigation.
The case is SHELTER MUTUAL INSURANCE COMPANY v. RIMKUS CONSULTING GROUP, INC. OF LOUISIANA, ET AL. (Parish of Lafayette), 2013-CC-1977.
Shelter Mutual Property Insurance Company (Shelter) retained Rimkus Consulting Group, Inc. (Rimkus) and Craig Rogers of Rimkus to provide an engineering evaluation and expert witness services in connection with its defense of litigation resulting from a claim for hurricane damages brought by a corporation (Patriot Corporation) insured by Shelter. Rimkus sent Shelter a letter confirming the engagement and indicating Rimkus’ services were subject to its “Terms and Conditions” attached to the letter. The “Terms and Conditions” included a forum selection clause which required venue for any suits arising out of the contract to be in Harris County, Texas. When a dispute arose, Shelter filed suit against Rimkus in the 15th Judicial District Court for the Parish of Lafayette. Shelter essentially asserted Rimkus issued an erroneous opinion relative to the cause of the property damage and failed to properly estimate the underlying repair costs, causing Shelter to incur liability for bad faith damages and additional costs relative to further litigation. Rogers has already conceded to Shelter, after reading a contractor’s cost estimate, that his (Rimkus/Rogers’) estimates were erroneous and that Shelter should have paid Patriot almost $554,000 instead of the original damage estimate of $143,000. Shelter paid Patriot a bad faith settlement amount of $797,000, in addition to the original cost of $143,000. Shelter now seeks these damages from Rimkus and Rogers.
The Supreme Court ruling only pertained to the forum selection clause, resolving a split in the circuit courts of appeal regarding whether forum selection clauses are per se violative of public policy in Louisiana. The Court answered that question in the negative and reversed the rulings of the lower courts.
Not too long ago, there was a congressional inquiry into the changing of the results section of a flood damage report also prepared by Rimkus. The issue appeared to be similar to the ones that have been raised by Plaintiff’s lawyers, as was detailed here: https://sites.google.com/site/metropolitanforensics/fraudulent-superstorm-sandy-flood-expert-reports
In addition to these erroneous damage estimates, many victims of Superstorm Sandy have found that the settlement offered by their insurance company falls short of the actual costs associated with rebuilding and restoring the damages incurred. There are several reasons for this disparity.
Most insurance carriers employ outside claims adjusters to conduct site inspections of the damaged homes, condominiums and businesses. These outside claims adjusters are typically overwhelmed with insurance claims, so this work load may result in errors in the scope and pricing of repairs. Another reason the settlement offered maybe short is that the software used by the insurance company to calculate the claims does not adequately reflect the reality of the actual field conditions caused by the storm.
In the past decade, there have been computer software programs used by insurers to estimate construction costs. These programs calculate structural damage, repair and rebuilding expenses. Unfortunately the models are based on tract housing and do not take into consideration such things as historic, custom or expensive dwellings. Furthermore, Super Storm Sandy ravaged areas and communities comprised of high valued real estate. As a result, the estimates produced by these software programs will most likely be insufficient to reimburse the claimant for the actual cost of rebuilding or replacing his damaged property.
Builders and contractors retained by property owners (not by insurers) do not use this type of software program to produce their estimates. They base their cost estimates on sub-contractor bids and their general knowledge about the costs and time involved in a potential job as well as the current cost of materials found locally.
Another factor that these software programs do not take into consideration is the principal of supply and demand. The amount of damage produced by Super Storm Sandy was cataclysmic. As a result, contractors are inundated with requests for bids and estimates. The demand for skilled labor far exceeds the supply, so contractors and builders are not able to compete for work. Therefore those left to rebuild have little room to negotiate pricing, often creating a gap between the claim settlement offered by the insurance company and the actual cost of restoring and repairing their homes.
Finally, there are always the allegations of the conflicts of interest for cases where the WYO (Write Your Own) policy insurer determines the damages to itself (due to wind, wind-driven rain or other isnured peril) and the NFIP. Key concerns raised from the Superstorm Sandy event include whether or not some property-casualty insurance claims for wind-related damages were improperly shifted to NFIP at the expense of taxpayers. For properties subjected to both high winds and flooding, determinations must be made to assess the damages caused by wind, which may be covered through a property-casualty homeowners policy, and the damages caused by flooding, which may be covered by NFIP. The property-casualty insurer, NFIP, and the poliholder all have a financial stake in the outcome of these determinations. Under NFIP, most flood damage claims are adjusted by private property-casualty insurers, known as the write-your-own (WYO) insurers, which sell and service flood insurance policies on the program's behalf. Concerns over the processing of these flood claims are heightened when the same insurance company serves as both NFIP's WYO insurer and the property-casualty (wind) insurer for a given property. In such cases, the same company is responsible for determining damages and losses to itself and to NFIP, creating a potential conflict of interest. Based on an audit done by FEMA personnel of the Superstorm Sandy and other storm property assessments regarding the proper allocation of wind versus flood damages, there is no evidence that such situation exists.
Metropolitan Engineering, Consulting & Forensics (MECF)
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[1]New Jersey Transit Corporation v. Certain Underwriters at Lloyd’s Hudson Specialty Insurance Co. Ironshore Specialty Insurance coverage Co. Maiden Specialty Insurance coverage Co. RSUI Indemnity Co. Torus Specialty Insurance coverage Co. and Westport Insurance Corp. Superior Court of New Jersey Law Division, Essex County, Oct. 1, 2014.
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