Filed Under:Markets, Litigation

Sandy Claims: How Insurers Can Reduce Class Action, Bad Faith Exposure

Insurers are starting to deploy adjusters to handle claims from Hurricane Sandy. An article in the Wall Street Journal reports that “Disaster-modeling firm AIR Worldwide estimates the industry's share of losses at $7 billion to $15 billion. At the high end of that range, Sandy would become the third-most-expensive storm for insurers in U.S. history.” Yesterday, an article in the New York Times by Mary Williams Walsh and an article in PropertyCasualty360 by Chad Hemenway reported that catastrophe-modeler Eqecat predicts total economic damages at between $30 billion and $50 billion, with insured losses between $5 billion and $10 billion. The Times reports that the top three homeowners’ insurers in New York are State Farm, Allstate and Travelers.

The reason for the large gap predicted between economic losses and insured losses is that a substantial portion of the damage is caused by flood and is either uninsured or underinsured. Flood insurance is available for homeowners from the National Flood Insurance Program, but many people buy only the amount necessary to cover their mortgage (not insuring their equity) or buy the maximum of $250,000 on a property that has a higher replacement cost (excess insurance above that amount is often available in the private market but is expensive). Insurance is often available in the private market for commercial properties, and relatively small commercial properties can be insured through the National Flood Insurance Program.

Insurers will be denying claims where flood is not covered by their policies and segregating damage between wind and flood, similar to the adjustment of claims following Hurricane Katrina. Given that I spent most of my time for several years defending insurance companies in lawsuits from Hurricane Katrina, including numerous putative class actions, I thought I would offer here some thoughts on what claim executives and their counsel can be doing now to try to reduce potential class action and bad-faith exposure:

  1. Some states have specific deadlines for certain claim-related activities, which may or may not be extended for catastrophes, and violation of these deadlines sometimes results in automatic penalties. In the Hurricane Katrina class actions, insurers were able to successfully defeat class certification in federal court in numerous cases, but there were a few class actions certified in state court that resulted in some large verdicts and settlements. Most significant was the Louisiana Supreme Court’s decision in Oubre v. Louisiana Citizens Fair Plan, 79 So. 3d 987 (La. 2011), which awarded penalties of $5,000 per claim for every adjustment that was not initiated in compliance with the statute, without any showing of bad faith (for more, see my blog post on Oubre).  The verdict against Louisiana Citizens Fair Plan was over $100 million with interest.  As I noted previously, I see some due process problems with this type of penalty, although the U.S. Supreme Court denied certiorari in Oubre.
  2. Keep in mind that general contractor overhead and profit has been a major hotbed of class action litigation in recent years. In the Katrina litigation, the federal courts refused to certify classes on this issue, but one state intermediate appellate court certified a class (that decision was later overturned by the state supreme court).  For more on this issue, see  my article, "Defending Class Actions on Coverage Issues," and my post on the Alabama Supreme Court’s decision in National Security Fire & Casualty Company v. DeWitt. 
  3. Segregation of wind and flood damage is likely to become a key battleground in litigation. The Katrina decisions on this include Leonard v. Nationwide Mutual Ins. Co., 499 F.3d 419 (5th Cir. 2007), Corban v. USAA, 20 So. 3d 601 (Miss. 2009), and Arctic Slope Regional Corp. v. Affiliated FM Ins. Co., 564 F.3d 707 (5th Cir. 2009).  The new COASTAL Act could also come into play on this, although as far as I can tell FEMA has not yet promulgated regulations under that Act (if you know more about this please let me know so I can keep readers informed).  For more on the COASTAL Act, see this post on my firm’s Property Insurance Coverage Insights blog
  4. Adjusting each claim on its individual merits helps reduce class action exposure.  Class action lawsuits are easiest to defend when a company’s adjusters make case-by-case decisions based on the particular factual circumstances of each loss.  That also often makes business sense, although sometimes adjusters ask for “rules” to follow when they should be using their discretion.
  5. Good customer service helps avoid lawsuits.  Adjusters won’t always be delivering good news to insureds following Sandy because many policies do not cover flood and a lot of the damage was caused by flood. How that news is delivered and how people are treated can make a difference in reducing the number of lawsuits your company receives and whether your company is sued in class actions.  Insureds who have a more positive experience in their interactions with the company, even when bad news is being delivered, will be less likely to respond to an advertisement from a plaintiffs’ attorney suggesting that they file a lawsuit. Especially when they are asked to file a putative class action lawsuit, where they would be subjected to extensive discovery and other burdens on their time. Even lawsuits that seem relatively frivolous cost money to defend, and meritless class action suits cost more. And even where a lawsuit is filed, it is always helpful in defending the case when the insured at her deposition and at the class certification hearing or trial admits that Jane Smith the adjuster was so nice and explained things to her so well.
  6. Start putting a plan together for coordinating the litigation that inevitably will follow the storm. In Louisiana following Katrina, some plaintiffs’ lawyers filed suits in Baton Rouge, including class actions, before the New Orleans courts were even open. I wrote an article with Louisiana lawyer Seth Schmeeckle on “Handling the Flood of Coverage Litigation: Lessons Learned from Hurricane Katrina.” Seth and I spent several years coordinating the Katrina litigation. We talk about several important strategies that can be used, including: (1) establishing coordination among defense lawyers and using test cases for seeking court resolution of critical issues; (2) recognizing the unique issues of judicial ethics that can occur when a widespread catastrophe affects everyone living in the affected area; (3) moving to strike class allegations in putative class actions; (4) using methods to efficiently resolve large amounts of smaller suits, such as establishing a protocol to administratively stay cases, conduct written discovery, and then have settlement negotiations; and (5) taking measures to minimize possible class action tolling of suit limitation provisions in insurance policies. 

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