Superstorm Sandy crippled communities, caused billions of dollars in property damage and resulted in hardship for thousands of people. Insurance claims have been pouring in. But how can insurance professionals make informed decisions regarding investigating flood claims? Which of the thousands of flood claims should be investigated for subrogation?
There are several approaches, from investigating all flood claims to investigating none, or only investigating those with obvious potential such as dam breaks, pipe breaks or collapses. The best solution is somewhere in the middle—a disciplined, incremental approach.
Carriers can pursue flood subrogation litigation and win, but informed investigation decisions must be made early on. From a liability perspective, floods are typically considered Acts of God. The Act of God defense requires that the flood be solely caused by unpredictable, uncontrollable natural events without any human intervention. However, most floods are a combination of naturally occurring events and human intervention; for example, a large rainstorm combined with the property owner’s failure to maintain a bridge, culvert or waterway. If we can demonstrate human intervention caused or contributed to a loss, settlement discussions—oftentimes ignored by liability insurers because of the Act of God defense—can occur.
The extremes are simple: Very small flood claims are rarely reviewed because of scarce investigation funds and because large floods are easier to justify. However, the majority of cases are in between, ranging from $150,000 to $500,000. An incremental investigation approach strategically allocates resources as the case unfolds and the prospect for recovery rises.
First, use “free” resources. Subrogation counsel, paid on a contingent fee, should be fully utilized before hiring costly engineers. Subrogation counsel handling substantial flood cases understand flood science. Counsel can gather preliminary details regarding the storm and flood—how much rain fell where and when, how deep the floodwater was or if the area was flood-prone.
If counsel’s initial evaluation indicates that the flood might have human causes, then an engineer can be retained for the limited purpose of surveying background information, the history of the community and source of the flooding. The goal is to determine if the flood was caused by too much rain falling too quickly, suggesting an Act of God rather than a viable subrogation case. Most of this information can be gathered online from websites tracking rainfall data, stream gage data (USGS has deployed a nationwide system of rain and stream gages) and FEMA flood-insurance studies. FEMA prepares flood studies and flood-insurance rate maps for thousands of communities including the smallest waterways. Engineering analysis of this data is more costly, and setting a “not-to-exceed” budget is recommended. Typically, this stage can require less than $5,000—a modest investment for a substantial flood case.
Now you can make an informed decision regarding a site inspection. The engineer will go to the site and photograph and measure all relevant areas and objects, including water marks on buildings, bridges and fences. Water marks can establish water-surface elevations at various points on either side (upstream and downstream) of the loss location, which can tell us what caused the flood. You can then determine if a professional site survey is necessary. A survey will help the expert understand the water-surface elevation as well as landmarks so that accurate measurements and comparisons can be made and data points identified. This analysis allows the expert to determine where the floodwaters came from and what factors contributed to the flooding.
The last and most expensive step is to instruct the engineer to complete a waterway profile. This involves taking actual field measurements of the waterway and adjacent areas and is done in conjunction with the survey. This will enable the expert to prepare a mathematical model (known as a HEC-RAS model) of the waterway. The engineer can calculate and evaluate if changes in dimensions of the waterway (width, depth, roughness of the channel) will impact water-surface elevations at the loss site. This is the essence of a flood recovery case and allows the expert to understand if waterway conditions such as lack of waterway maintenance or obstructions caused or contributed to the flood. We have had cases in which the engineer proves that a small change in the waterway causes the water elevation at the insured property to change.
A viable flood claim does not necessarily have to attribute all of the flooding to the defendant’s actions. Sometimes we can recover by proving that the defendant’s negligence caused an increase in water levels at the loss location. In the case of a hospital, data center or financial institution, three additional inches of water in the wrong place can mean the difference between valuable equipment being damaged or not—the difference between a small claim and a multimillion-dollar claim. Increasing information also increases the insurance professional’s ability to make a reasoned decision regarding flood subrogation. An incremental approach to these investigations is the best way to maximize the investment and the decision-making process.