Consumer activist J. Robert Hunter has called on insurance commissioners to repeal the clause that permits carriers to deny claims for covered losses if uncovered events cause damage at the same time.

The anti-concurrent causation clause is used to override coverage for a claim from a covered cause such as wind, when at about the same time an uncovered event--such as flood--damages a property.

"Consumers cannot be expected to understand how this clause works, and will always be shocked to learn that their coverage has been trumped by the occurrence of some other type of claim," wrote Mr. Hunter, insurance director of the Consumer Federation of America.

During Hurricane Katrina, some insurers used the clause to refuse to pay for wind losses on homes that also had experienced flood damage. "This was even if the flood occurred hours after the hurricane hit the home," Mr. Hunter wrote.

Insurers that use ACC clauses, he added, "are creating a trap door through which apparent coverage can disappear at great risk to the consumers buying their policies."

He concluded his letter by stating that "insurance is supposed to remove risk, not create risk. Insurance is supposed to bring certainty, not financial peril to the buyer."

He said "it is time for [regulators] to act to remove the egregious ACC clause from the insurance policies of your state. Please let me know if I can help in this endeavor."

In response, industry officials defended the ACC clause's validity and necessity.

Robert Detlefsen, vice president for public policy at the National Association of Mutual Insurance Companies, said the ACC clause was added to make clear that if any portion of a loss is caused by a noncovered peril, the loss would not be covered.

"Stripping anti-concurrent causation clauses from insurance contracts would prevent insurers from managing their exposures, forcing them to either raise rates or exit markets in jurisdictions where the ACC is disallowed," Mr. Detlefsen said.

Richard Koon, director of product review for the Florida Office of Insurance Regulation, said the Florida Legislature has made it clear that insurers are allowed to use the ACC clause. "So instead of 'Dear Commissioner,' Mr. Hunter's letter should have been addressed 'Dear Legislator,'" he said.

Since insurers pay wind claims all the time when there is some flooding damage involved, it would appear the ACC clause is not as all-encompassing as it may sound, he said. "It is the human element at play, and not the wording," according to Mr. Koon, adding it is up to adjusters to figure out the exact proportion of damage from covered and uncovered perils.

"If flood initially caused it, you could argue that there is no coverage. But where there are wind-water claims, they are paying where they are determining that part of the claim is because of wind," he said.

In addition, the fact that the standard forms created by the Insurance Services Office allow for the ACC clause would indicate that it is a generally acceptable industry practice. "Those are national forms that even independent carriers use, so I would be surprised if it is not countrywide," he said. "I've got my hands full in Florida, so I don't really know."

However, according to Mr. Hunter, "the problem is that the ACC clause is inherently ambiguous, no matter how clear the words are. No policyholder would believe that a trustworthy insurance company would construct a policy that was so deceptive and such a bad deal."

Robert P. Hartwig, president of the Insurance Information Institute, said insurers priced their policies in the expectation that they would not be paying for damage in combination with flooding.

Without the provision, he added, "if a home is destroyed by an excluded peril like flood, but the damage occurred in connection with another peril like wind, you'd effectively be saying that, in effect, flood coverage is provided."

However, Mr. Hunter wrote that "surely it is terrible public policy to allow this sort of policy provision to exist, ticking like a time bomb, waiting to go off in the face of unsuspecting customers. Insurance policies should either fully cover a peril or not cover it at all. No surprises should be built in."

He went on to suggest that "if losses occur for both a covered and noncovered peril at about the same time, insurers should do what they have done for many centuries--pay for the covered damage and not for losses that are not covered. To the extent there is some uncertainty about the cause of damage, insurers--as the risk takers--should pay for it."

The ACC clause is at the heart of the flood of litigation filed in the aftermath of the record storm losses of 2004-2005.

While insurers have won several cases, there has been enough ambiguity, along with bad public relations, to spur lawmakers and regulators to look for a solution for uninsured disaster victims, who often end up getting relief from the government.

In the fall of 2005, Florida Insurance Commissioner Kevin McCarty led a group of regulators urging the National Association of Insurance Commissioners and lawmakers to adopt an all-perils policy to ameliorate the problem of policyholders left bare when they did not purchase federally backed flood insurance.

That proved to be a nonstarter with the insurance industry but has not stopped efforts to respond in Congress, in ways that go beyond the immediate problem.

For example, much of the current impetus behind the effort to repeal the McCarran Ferguson Act has been seen as stemming from the public relations hit the industry has taken because of homeowners denied coverage under the ACC clause.

Last month, Mississippi Insurance Commissioner George Dale announced a settlement in which Nationwide agreed to pay $25 million to Mississippi homeowners involving wind-water disputes. The announcement followed a civil racketeering suit against State Farm, claiming in part that the insurer used contrived inspection reports in similar disputes.

Special Reports /

Hunter Asks Regulators

Related Stories

Recommended For You