As natural disasters go, the tornado season of 2011 was one of the worst on the books. The National Weather Service reported that a record number of tornadoes touched down during the April-May 2011 tornado season, with the state of Alabama having more tornadoes reach the ground than in any other state.
NOAA ranks the 24 hours between 8:00 a.m. on April 27, 2011 and 8:00 a.m. on April 28, 2011 as the fifth-deadliest period of tornadic activity in U.S. history.
The Alabama Department of Insurance (ADOI) estimates that the outbreak led to insured property losses that even exceeded the $2 billion in claims from Hurricane Ivan in 2004.
The ADOI estimated some 90,000 insurance claims would be filed as a result of the April 2011 storms and, indeed, on April 28, State Farm, the largest home and automobile insurance company in Alabama by market share, reported receiving more than 6,000 claims.
By the end of June 2011, the ADOI said it received nearly 500 calls from policyholders disputing the amount of money their insurers owed them pursuant to their policies. At the time, the Resolution of 98 percent of those 90,000 claims would still leave room for almost 2,000 coverage disputes.
Obviously, claims brought under both commercial property and homeowners’ policies seek coverage for property damage and lost contents as a result of the storms. In addition to claims for property damage related directly to a tornado or associated wind events, carriers likely have dealt with a number of other policy provisions triggered by claims arising from the storms. Here is what we can learn from them.
Business Interruption Claims
Following the various tornado outbreaks, newspapers, web sites, and network news displayed photographs and video footage of business districts that were completely destroyed by the storms. Debris littered the streets of towns and cities in the direct path of the storm.
The damages, however, extended beyond those areas that suffered the majority of the devastation. According to reports in both The Huntsville Times and The Birmingham News, one of the more unique loss situations occurred in an area relatively undamaged from the tornado outbreak.
Madison County, Ala., located in the northern part of the state and home to the state’s fourth-largest city, Huntsville, experienced a massive power outage that lasted for days. The power outage occurred when tornadoes in the vicinity severely damaged service lines and power plants outside the city and county limits. Even though the city of Huntsville itself sustained little property damage, businesses and interests nevertheless sustained economic losses due to the power outage and subsequent curfew that was implemented until power was restored.
These businesses likely sustained covered losses as a result of this interruption. Many courts have interpreted business interruption clauses within an insurance contract to require the complete suspension of business operations that is related to some sort of property damage in order for coverage to apply. See, e.g., H&H Hospitality L.L.C. v. Discover Specialty Ins. Co., 2011 WL 6372825 (S.D. Tex. Dec. 20, 2011).
However, some clauses contain language that allows coverage for a partial cessation of business. See, e.g., Am. Med. Imaging Corp. v. St. Paul Fire and Marine Ins. Co., 949 F.2d 690 (3d Cir. 1991); Studley Box & Lumber Co. v. Nat’l Fire Ins. Co., 154 A. 337 (N.H. 1931). In addition, businesses whose products or services became adversely affected by actions of civil authorities in preventing access to damaged areas or as a result of their suppliers being forced to shut down due to damage or other covered reasons may have claims under contingent business interruption coverage. See South Texas Medical Clinics, P.A. v. CAN Financial Corp., 2008 WL 450012 (S.D. Tex. Feb. 15, 2008).
The measure of the loss for these types of coverages generally is the difference between the expected profits during the recovery period after a disaster or loss and the actual profits incurred during that period.
Homeowners’ Loss of Use
Following the disaster, homeowners and their families found themselves in dire need of temporary living quarters. The standard homeowner’s insurance policy provides for additional living expenses (ALE). The purpose of ALE is to enable insureds to maintain, insofar as possible, their pre-loss standard of living during the repair and replacement period following a total or significant loss. See Thompson v. Shelter Mut. Ins., 875 F.2d 1460 (10th Cir. 1989).
What constitutes a “reasonable” amount of ALE is specific to each insured and depends on the insured’s standard of living prior to the loss. What constitutes a reasonable repair and replacement period depends not only on the claimant’s individual circumstances, but also the extent of repairs necessary, any updates to building codes that must be followed in a rebuild, and, in the case of a natural disaster like the 2011 tornadoes, the availability of inspectors, field adjusters, and building contractors.
One of the top consumer complaints regarding property insurance companies’ responses to claims is for delay and/or denial of additional living expenses. Claims filed in the aftermath of the Alabama tornadoes were no exception. By June 21, 2011, at least 475 policyholders had filed this complaint with the ADOI regulator’s office against their insurance companies.
The most effective way for a carrier to avoid a complaint of delay in adjusting a claim is to maintain systematic and clear communication with the insured. This sounds like common sense, but it can be extremely difficult for a carrier overwhelmed by the sudden deluge of claims following a natural disaster. However, ensuring that phone calls are returned in a timely fashion, making a good-faith effort to formulate a plan for temporary housing that meets the insured’s needs, and responding to the insured’s needs for advance payments can solidify the relationship between the parties. See Thompson, 875 F.2d at 1462 (citing Christian v. Am. Home Assurance Co., 577 P.2d 899 (Okla. 1978)).
Other Coverage Issues
Most property-coverage policies provide coverage for the removal of debris from the policyholder’s property following a covered occurrence. However, these debris-removal clauses are subject to limitations that are not always clear to the home or business owner. See St. Paul Fire & Marine Ins. Co. v. Snitzer, 358 S.E.2d 925 (Ga.App. 1987).
In addition, many home and business owners find that their policies cover only a portion of their actual replacement costs. See id. at 926-27. In such instances, insurers faced with disputes or disagreements over the amount of coverage must be clear in explaining the actual coverage available and must do so in a manner consistent with the language of the written policy.
Beware of Supplements
Quick action by carriers both in response to policyholder claims together with the immediate issuance of mandates from the Departments of Insurance in affected states have served to quell a number of potential disputes. Some states, including Alabama, assisted carriers with a mediation program designed to resolve potential disputes in a timely fashion before the claims ended up in potentially costly litigation.
Going forward, however, carriers should be mindful of claims that are still pending, as well as those claims that are re-submitted as supplemental claims or appeals of prior decisions. In Alabama, for example, such claims can subject the insurer to potential damages for bad faith, even where the initial claims process was handled in good faith.
Such a tort—known as “abnormal bad faith” in Alabama—generally arises when the insurer fails to properly investigate a claim or fails to submit a claim to appropriate cognitive review. See State Farm Fire & Cas. Co. v. Slade, 747 So.2d 293 (Ala. 1999). This situation tends to occur more frequently in settings where a claim has been pending for some period of time and the insured submits new information, or in situations where an insured denies the original claim or pays it only in part and the insured presents a supplemental claim seeking additional coverage.
The supplemental or “re-opened” claim can present unique issues. Even where a potentially arguable basis for denial initially existed, the insurer can still face potential liability if it fails to assemble all facts necessary for a reasonable claim determination upon the presentation of a supplemental claim.
In addition, the insurer should submit any new information to a “cognitive review process,” which means more than merely getting approval from a supervisor. See, e.g., Nat’l Ins. Assoc. v. Sockwell, 829 So.2d 111 (Ala. 2002). The prudent insurer will seek multiple levels of review, including potential review by the insurer’s legal department or outside counsel.
Insurers cannot be comfortable relying solely on previous information when making supplemental or appellate claims decisions. An insurer’s failure to consider any new facts is potentially actionable, and insurers should be constantly vigilant when it comes to the sometimes lengthy and tedious claims handling process. See Scottsdale Ins. Co. v. Prayer Tabernacle Early Church of Jesus Christ Number 1, 2011 WL 3320544 (S.D. Ala. Aug. 2, 2011). See also Galindo v. ARI Mut. Ins. Co., 203 F.3d 771 (11th Cir. 2000).
What Lies Ahead
Natural disasters such as the April 2011 tornadoes carry special risks for carriers because the resulting damages are widespread and catastrophic. Despite the best efforts of carriers and their adjusters, the sheer volume of claims can make it difficult for carriers to adjust claims in a timely manner. Moreover, these claims can extend well beyond their normal life, especially where insureds seek to maximize their previous recovery while seeking the advice of legal counsel or independent/public adjusters.
Carriers can best defend themselves by carefully documenting the steps taken in the investigation of each individual claim, maintaining regular and carefully worded written contact, and providing prompt oral notification of any significant developments in an investigation where immediate correspondence may not be viable. They also must keep in mind that while the workload may be overwhelming, it pales in comparison with the degree of emotional distress its claimants are likely to be experiencing in the aftermath of the disaster.
2012: A Carrier in Action
For a week, forecasters had been warning residents of the Ohio and Tennessee Valleys of dangerous weather expected to arrive last month on March 2. The same warnings that had given residents time to prepare did the same for insurance companies.
When March 2 arrived, the forecasts proved devastatingly accurate. More than 130 tornadoes were reported by the end of the day, and more than three dozen lives were lost. Overall, EQECAT estimated that the weather system caused insured losses of $1-$2 billion.
Particularly hard hit was West Liberty, Ky., where six residents died when an EF-3 tornado with winds of approximately 140 mph struck just before 6 p.m. CST. The small town of 3,200 residents had more than 8,000 homes and businesses damaged or destroyed.
“At the same hour, State Auto’s catastrophe claims team was producing data through the use of various predictive modeling tools that would pinpoint customers who could have been affected, and we were making decisions on deployment of CAT team associates,” says State Auto’s Chief Claims Officer Stephen Hunckler.
Hunckler says that within 15 hours, adjusters were on the streets of West Liberty, going door to door and working alongside the staff of Ison Insurance, the largest independent insurance agency in Morgan County, Ky. Adjusters visited homes and businesses using vehicles equipped with wireless technology, laptops, and GPS.
Three days later, State Auto says it established its own office in West Liberty in a construction trailer placed near Ison’s agency. For nearly a week, Hunckler says they were the only insurance company with personnel in the town. With no hotels, few undamaged buildings, and unreliable power and communication, the town relied on the office to provide refuge for insureds, claimants, and others who had been affected.
Within three weeks after the storm, State Auto says more than 60 percent of its claims were closed and the rebuilding of West Liberty was underway.
“If it takes four hours to make sure we answer not only our questions, but the policyholder’s questions, then we do it,” says Mike Puia, a claims adjuster for State Auto. “That’s part of doing our job, so they can have a place to call home when we’re finished.”