Insurers are starting to deploy adjusters to handle claims fromHurricane Sandy. An article in the Wall Street Journal reportsthat “Disaster-modeling firm AIR Worldwide estimates the industry'sshare of losses at $7 billion to $15 billion. At the high end ofthat range, Sandy would become the third-most-expensive storm forinsurers in U.S. history.” Yesterday, an article in the New York Times by Mary Williams Walshand an article in PropertyCasualty360 by Chad Hemenway reported thatcatastrophe-modeler Eqecat predicts total economic damages atbetween $30 billion and $50 billion, with insured losses between $5billion and $10 billion. The Times reports that the topthree homeowners' insurers in New York are State Farm, Allstate andTravelers.


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


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

  1. Some states have specific deadlines for certainclaim-related activities, which may or may not be extended forcatastrophes, and violation of these deadlines sometimes results inautomatic penalties. In the Hurricane Katrina classactions, insurers were able to successfully defeat classcertification in federal court in numerous cases, but there were afew class actions certified in state court that resulted in somelarge verdicts and settlements. Most significant was theLouisiana Supreme Court's decision in Oubre v. LouisianaCitizens Fair Plan, 79 So. 3d 987 (La. 2011), which awardedpenalties of $5,000 per claim for every adjustment that was notinitiated in compliance with the statute, without any showing ofbad faith (for more, see my blog post on Oubre). The verdict againstLouisiana Citizens Fair Plan was over $100 million withinterest. As I noted previously, I see some due processproblems with this type of penalty, although the U.S. Supreme Courtdenied certiorari in Oubre.
  2. Keep in mind that general contractor overhead andprofit has been a major hotbed of class actionlitigation in recent years. In the Katrina litigation, thefederal courts refused to certify classes on this issue, but onestate intermediate appellate court certified a class (that decisionwas later overturned by the state supreme court). For more onthis issue, see my article, “DefendingClass 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 tobecome a key battleground in litigation. The Katrinadecisions 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 SlopeRegional Corp. v. Affiliated FM Ins. Co., 564 F.3d 707 (5thCir. 2009). The new COASTAL Act could also come into play onthis, although as far as I can tell FEMA has not yet promulgatedregulations under that Act (if you know more about this please letme know so I can keep readers informed). For more on theCOASTAL Act, see this poston my firm's Property Insurance Coverage Insightsblog.
  4. Adjusting each claim on its individual merits helpsreduce class action exposure. Class action lawsuitsare easiest to defend when a company's adjusters make case-by-casedecisions based on the particular factual circumstances of eachloss. That also often makes business sense, althoughsometimes adjusters ask for “rules” to follow when they should beusing their discretion.
  5. Good customer service helps avoidlawsuits. Adjusters won't always be delivering goodnews to insureds following Sandy because many policies do not coverflood and a lot of the damage was caused by flood. How thatnews is delivered and how people are treated can make a differencein reducing the number of lawsuits your company receives andwhether your company is sued in class actions. Insureds whohave a more positive experience in their interactions with thecompany, even when bad news is being delivered, will be less likelyto respond to an advertisement from a plaintiffs' attorneysuggesting that they file a lawsuit. Especially when they are askedto file a putative class action lawsuit, where they would besubjected to extensive discovery and other burdens on theirtime. Even lawsuits that seem relatively frivolous cost moneyto defend, and meritless class action suits cost more. Andeven where a lawsuit is filed, it is always helpful in defendingthe case when the insured at her deposition and at the classcertification hearing or trial admits that Jane Smith the adjusterwas so nice and explained things to her so well.
  6. Start putting a plan together for coordinating thelitigation that inevitably will follow the storm. InLouisiana following Katrina, some plaintiffs' lawyers filed suitsin Baton Rouge, including class actions, before the New Orleanscourts were even open. I wrote an article with Louisianalawyer Seth Schmeeckle on “Handlingthe Flood of Coverage Litigation: Lessons Learned from HurricaneKatrina.” Seth and I spent several years coordinating theKatrina litigation. We talk about several important strategies thatcan be used, including: (1) establishing coordination among defenselawyers and using test cases for seeking court resolution ofcritical issues; (2) recognizing the unique issues of judicialethics that can occur when a widespread catastrophe affectseveryone living in the affected area; (3) moving to strike classallegations in putative class actions; (4) using methods toefficiently resolve large amounts of smaller suits, such asestablishing a protocol to administratively stay cases, conductwritten discovery, and then have settlement negotiations; and (5)taking measures to minimize possible class action tolling of suitlimitation provisions in insurance policies.

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