AMTRAK, PSE&G AND NJ TRANSIT HAVE SUED THEIR
INSURERS ALLEGING SANDY DAMAGES NOT SUBJECT TO THE FLOOD SUBLIMITS. THE TOTAL DAMAGE COSTS CONTINUE TO BE REVISED
UPWARDS.
As has been expected, litigation will be centered on a few types
of disputes, from gale-force wind or wind-versus-flood determinations, flood
versus wind-driven rain determinations, to business interruption claims to
alleged negligence by insurance brokers to failure to protect one’s property
despite the storm warnings.
Flood insurance covers direct physical
losses by flood and losses resulting from flood-related erosion caused by heavy
or prolonged rain, coastal storm surge, snow melt, blocked storm drainage
systems, levee dam failure or other similar causes. To be considered a flood, waters must cover at
least two acres or affect two properties. Homes are covered for up to $250,000 on a
replacement cost basis and the contents for up to $100,000 on an actual cash
value basis. Replacement cost coverage
pays to rebuild the structure as it was before the damage. Actual cash value is replacement cost minus
the depreciation in value that occurs over time. (Excess flood insurance is
available in all risk zones from some private insurers for NFIP policyholders
who want additional coverage or where the homeowner’s community does not
participate in the NFIP.) Coverage for
the contents of basements is limited. Coverage
limits for commercial property are $500,000 for the structure and another
$500,000 for its contents.
Homeowner, renter and
business owner insurance policies DO NOT cover flooding.
Generally, policies will cover wind, rain, hail, wind-driven rain, and
lightning damage. A separate flood
insurance policy is needed to protect homes, businesses and personal property
against flood damage. If a home,
business or other residence is in a FEMA-identified high risk flood zone, a
separate flood insurance policy should have been required on a mortgage
transaction.
Rain or wind-driven
rain, and hail damage are not in the same damage category as floods. Wind-driven rain damage, regardless of the
cause, is a covered peril like wind or lightning which may have caused an
opening in which rain has entered and caused water damage to the home or
personal property.
If people affected by
Hurricanes Sandy have suffered both flood and wind-driven rain damage, it
should be reported to the flood insurance carrier as well as to the homeowner,
tenant, or business owner insurance carrier. It is likely that a separate adjuster would
have been assigned for each claim. Adjusters should have communicated with each
other to coordinate information prior to final settlement.
The burden of proof required under a
flood policy versus a wind policy will be equally important. A wind policy is
often written as an "all risk" insurance policy, and a flood policy
is written as a named peril policy.
As long as the insured presents evidence
making a prima facie showing that wind caused substantial damage to their home,
the insured will not be required to present further evidence negating the
possibility that the damage was caused by water and the burden will instead
shift to the insurer to prove the extent of damage caused by water. This, in
turn, will make it easier for the insureds to recover under their homeowner’s
policies, and more difficult for the insurers to avoid coverage under their
policy exclusions.
Hurricane (or Storm or Superstorm) Sandy
In late October 2012, Hurricane Sandy caused widespread damage
to buildings across the entire affected area, as well as widespread power
outages and interruptions in utility service.
Hurricane Sandy brought large-scale flooding to coastal and riverine
residential and urban areas, particularly concentrated along the New Jersey and
New York coastlines. Although the effects of Sandy were felt along much of the
northeast coast, New Jersey and New York sustained the worst impacts from the
storm. New Jersey was expected to
sustain such severe damages due to the almost reckless defiance of common sense
in allowing the building of numerous and expensive dwellings in the floodplains
along the coast line. New Jersey has
been aggressively pursuing for many years federal dollars to haul sand to the
beach (the so-called “sand dollars”) to “nourish the beaches. Basically they brought sand to the beach,
pilled it up over the years and built their homes, most of them not meeting
modern floodplain design standards.
Most of the damage observed was caused by flooding (hydrostatic,
hydrodynamic, buoyancy, and wave loads). These flooding forces caused inundation of the
structures, erosion and scour, and wave action.
Although inundation alone was a significant source of damage, some of
the more dramatic structural failures observed were a result of the added force
of wave action. Many buildings, both
residential and non-residential, were inundated at the basement and first floor
levels, which disrupted operations and damaged utilities, causing significant
repair costs and extensive loss of income.
Observations of damage caused by wind were rare, and wind damage
was much less significant than the flooding damage. This does not include the consequential effects of wind damage,
such as tree fall, which in turn caused extensive power outages and damages to the electrical distribution
grid. In our community, for example, the
two electric substations were destroyed due to the tree strikes knocking down
the power lines and transformers.
Forensic observations of the damage and review of the
meteorological records indicated that the wind speed of Hurricane Sandy was
below a design wind event. However, the
flooding caused by Hurricane Sandy was in excess of the 1-percent-annual-chance
flood event across much of the area impacted by the storm. The 1-percent-annual chance flood event is
used as the minimum NFIP design requirement by those communities that have
adopted the NFIP. The storm caused
significant flooding and erosion in most of the areas the forensic
investigators visited. Flooding caused
widespread damage to structures, critical facilities, and infrastructure. Most
damage to low-rise buildings resulted from inundation, and oceanfront low-rise
buildings were damaged by wave action, erosion, and scour. Many low-rise one- and two-family dwellings
in coastal areas were of older construction that pre-dates community adoption
of floodplain regulations. Very few of
these homes were elevated to the appropriate base flood elevation (BFE). Most damage to mid- and high-rise buildings
resulted from the inundation of mechanical, electrical, plumbing, and other
critical systems. Many of these systems were not elevated to or above the
BFE. In addition to building damage,
utility outages were widespread.
The NJ Transit Suit
On October 1, 2014,
NJ Transit filed a suit in Newark, New Jersey against its insurers (Lloyd’s of
London, et al[1])
for up to $300 million in additional coverage it says it is owed for damages
incurred during Hurricane Sandy, after the insurance companies insisted on
capping coverage at the flood sublimit of $100 million.
In addition to
Lloyds, the suit names U.S. insurers Hudson Specialty Insurance Company, Maiden
Specialty Insurance Company, RSUI Indemnity Company, Torus Specialty Insurance
Company, and Westport Insurance Corporation.
Many of NJ
Transit's trains, buses, tracks, stations and other assets were damaged by the
salt-water storm surge that overwhelmed the region in October 2012. The agency estimates total damage from Sandy
at $625 million, with the agency anticipating $342 million in federal relief
funds. Flooding of the agency's Hoboken
and Kearny rail yards alone caused $120 million in damage to NJ Transit trains.
The suit insists
that the agency's policies explicitly covered any "Named Windstorm"
for up to $400 million in damage, and challenged insurers' contention that
coverage was subject to a "Flood Sublimit" of $100 million.
The
policies sold by defendants to NJ Transit have been component of a $ 400
million complete insurance system, the lawsuit says. The policies supply
coverage in 4 layers above a per-occurrence deductible of $ 500,000.
The
1st layer of coverage is $ 50 million, the second layer of coverage is also $
50 million, the third layer is $ 175 million, and the 4th layer is $ 125
million. With the exception of the initial layer presented by AIG’s Lexington
Insurance coverage Co., which is not a defendant in this lawsuit, numerous
insurers including defendants are accountable for the coverage accessible in
every single layer, with each and every organization assuming a particular
percentage of every layers’ coverage limit.
In
wake of Sandy, NJ Transit immediately notified its broker Marsh and all of its
carriers, like defendants, of the harm it sustained. And above the following
many months, inspections, valuations, and required repairs proceeded, with NJ
Transit keeping all of the carriers informed as total harm estimates produced,
the lawsuit says.
In
April 2013, NJ Transit obtained a letter from defendants that stated the
insurers believed all Sandy-associated water injury fell with their policies’
definition of flood and that they would spend no more than the flood sublimit
of $ 25 million, or $ 50 million in excess of the initial-layer coverage
offered by Lexington Insurance coverage Co., in accordance to the complaint.
In
December 2013, excess insurers agreed to spend the $ 50 million in mixed policy
limits of the 2nd-layer policies, which, when mixed with the $ 50 million that
NJ Transit’s major insurer had previously paid, brought NJ Transit’s total
insurance recovery to $ 100 million — the flood sublimit.
The
lawsuit says NJ Transit has not received any more payment of the remaining $
300 million in coverage from defendants or any other insurer since then. NJ Transit argues in the lawsuit that it is
entitled to a declaration that the flood sublimit in the policies does not
apply to the losses triggered by Sandy and its ensuing storm surge. NJ Transit
says defendants should shell out for the total amount of NJ Transit’s losses
from Sandy, up to the policies’ general restrict.
The PSEG Damages
In
late October 2012, Superstorm Sandy caused severe damage to PSE&G's T&D
(transmission and distribution) system throughout its service territory as well
as to some of Power's generation infrastructure in the northern part of New
Jersey. Strong winds and the resulting
storm surge caused damage to switching stations, substations and generating
infrastructure. The damage appeared to
be caused by a combination of wind damage and flood damage.
The
Power division of PSEG had incurred $79 million and $85 million of
storm-related expense in 2013 and 2012, respectively, primarily for repairs at
certain generating stations in Power's fossil fleet. These costs were recognized in O&M
Expense, offset by $25 million and $19 million of insurance recoveries in 2013
and 2012, respectively.
Power
incurred an additional $10 million and $19 million for the three months and six
months ended June 30, 2014, primarily for repairs at certain generating
stations in Power's fossil fleet.
PSEG maintains insurance coverage against loss or damage to
plants and certain properties, subject to certain exceptions and limitations,
to the extent such property is usually insured and insurance is available at a
reasonable cost.
The PSEG Suit
After failing to
settle with its insurers, on June 18, 2013, Public Service Enterprise Group, a
publicly traded diversified energy company and its subsidiaries, sued 11
primary and excess insurers in a New Jersey court in Essex County, seeking a
declaration that the insurance policies cover their
losses resulting from damage caused by Superstorm Sandy's storm surge and that their
losses incurred as a result of Superstorm Sandy were caused by a "Named
Windstorm" (i.e., Superstorm Sandy) and are not subject to the flood
sublimits contained in the policies issued by 10 of the 11 insurers. The case is Public Service Enterprise Group, et al. v. ACE American Ins. Co., et
al., No. ESX-L4951-13, N.J. Super., Law Div., Essex Co.
PSEG contends that
11 insurers — whose policies together provide $1 billion in coverage — have
suggested they are only liable for $50 million of its Sandy losses. The insurers are relying on flood sublimits
that not only cap such coverage at $250 million per occurrence but further
restrict payouts to $50 million for losses in particular flood zones.
PSEG claims that apart
from an excess policy that National Union Fire Insurance Co. of Pittsburgh,
Pa., issued, their coverage for a "named windstorm" includes
"ensuing storm surge" and doesn't define "flood" to include
a storm surge. This will be very
critical for PSEG to prevail in this suit.
According to PSEG,
had the defendants other than National Union intended to subject losses caused
by a named windstorm's ensuing storm surge to the flood sublimits of their
policies, they could have adopted language similar to that adopted by National
Union, whose policy clearly states with respect to named windstorms that “ensuing flood and wind driven water damage
... shall be subject to the flood annual aggregate”. According to the suit, there is no such
language in the other policies.
Hurricane
Sandy damaged huge portions of the traditional power grid, but it also wreaked
havoc on some of the installations of New Jersey’s largest solar developer. In a filing with the New Jersey Board of
Public Utilities, Public Service Electric & Gas said its solar
installations suffered more than $3 million worth of damage, primarily from
storm surges that flooded ground-mounted solar systems, as well as wind and
lightning taking their toll on rooftop arrays.
In April 2014, Following
the Answer to the Complaint, PSEG revised upwards the Damages
In
that lawsuit, PSEG stated that its estimate of the total costs related to
damaged facilities was approximately $426 million. Of these costs, $364 million and $62 million
related to Power and PSE&G, respectively. In August 2013, the insurance
carriers filed an answer in which they denied most of the allegations made in
the Complaint. Discovery is ongoing. In April 2014, PSEG notified the insurance
carriers of a revised estimate of $579 million for total costs related to
damaged facilities, of which $484 million and $95 million related to Power and
PSE&G, respectively.
Amtrak Wants $500M from Insurers for
Sandy Coverage
On September
17, 2014, Amtrak filed suit against a number of insurers in New York federal
court to recoup the total $504 million in losses the rail giant claims to have
suffered from Superstorm Sandy, telling the court it has only received $30
million in compensation from the insurers thus far. The case is National Railroad Passenger
Corporation v. Ace Bermuda Insurance, Ltd. et al, 1:2014cv07510, U.S. District
Court for the Southern District of New York, Sept. 17, 2014.
The National Railroad Passenger Corp. told the court in its complaint
that the railroad operator, known as Amtrak, informed its more than one dozen
insurers in December that it suffered an estimated $504 million in losses from
Sandy and submitted more than $270 million in claims. But the insurers have only paid a token
portion of that amount and have maintained that Amtrak isn’t entitled to more
than $125 million under their plans, the suit says. “Amtrak seeks a declaration
as to the meaning of certain policy provisions that are actively in dispute.
Amtrak also seeks a judicial determination that defendants have breached their
contractual obligations in connection with Amtrak's outstanding claim for
losses following Superstorm Sandy,” the complaint said. The insurers say most of the damages sustained
had been induced by a flood while Amtrak says damages were brought on by the
storm surge and that losses were induced by a number of occasions.
The suit lists
17 insurers as defendants, including ACE Specialty Insurance Co., Federal
Insurance Co., Lexington Insurance Co., Certain Underwriters at Lloyd's of
London and more. Amtrak says the insurers have contractual obligations to cover
the rail operator under more than 25 first-party all-risk property insurance
policies they sold to Amtrak in 2011 for substantial premiums. After Sandy made
landfall in October 2012, inflicting more than $72 billion in damages across
the Eastern Seaboard, Amtrak reached out to its insurers. According to the complaint, Amtrak’s “critical
physical assets” around New York City, including tunnels, bridges, track
systems and power stations, had been substantially impacted by the storm. The affected properties are “essential” to
Amtrak’s operation of trains along the Northeast Corridor, the business
railroad in North America, and are also essential to other commuter rail
services provided by the Long Island Railroad and New Jersey Transit, the
complaint says. In addition to rail
damage because of excessive flooding and gale force winds from the storm,
Amtrak suffered losses from business interruption when it was forced to shut
down its services for several days after the storm, the suit says. In total, it
says it lost around $504 million from the storm. The rail operator says that while it informed
the insurers of the damage in a timely fashion after the storm, the insurers
engaged an adjuster of their own and have forced Amtrak to facilitate
inspections at its facilities.
But despite
Amtrak’s cooperation, it says it has been unable to recover more than “a token
amount” of insurance proceeds. Most of
the insurers claim Amtrak is not entitled to receive more than $125 million
under the various policies, but the “plain language of those policies calls for
defendants to pay Amtrak’s claim up to the limits of each policy,” with the pre-occurrence
limit set at $675 million, the complaint says. Amtrak asked the court to declare that the
insurers have breached their contracts and that the rail operator is entitled
to full coverage up to the limits of each of the policies.
This Oct. 31, 2012, aerial photo shows damage from Superstorm
Sandy in Mantoloking.
One Critical Issue to be decided by the Courts is whether Superstorm Sandy was a "Named Storm?"
Property
insurance policies commonly contain a “Named Storm” deductible, which provides for
a substantially higher deductible than other causes of loss. For example, the policy in AFP 104 Corp. v.
Columbia Casualty Company1 contained a base deductible of
$10,000 and a Named Storm deductible of $1 million per occurrence.
In
AFP 104 Corp.,
the insured claimed damages in the amount of $774,562.32 for direct property
damage and time element losses related to the interruption of electrical
services following the storm. The carrier denied coverage for AFP’s claim on
the grounds that the total loss did not exceed the applicable Named Storm
deductible of $1 million per occurrence. AFP thereafter brought suit against
Columbia and Columbia filed a motion to dismiss based on the Named Storm
deductible.
The
policy defined “Named Storm” as:
A
storm that has been declared to be a named tropical storm or hurricane by the
U.S. National Weather Service or other government authority including hurricane
or tropical storm spawned tornado(s) or microburst(s). The named tropical storm
or hurricane ends when the National Weather Service officially declares the
named tropical storm or hurricane permanently downgraded to a tropical
depression.
AFP
claimed that upon landfall in New Jersey, Sandy was characterized as a
post-tropical storm, and thus it was not a “tropical storm or hurricane” as
defined in the policy and the Named Storm deductible was never triggered.
Ultimately,
the Court denied Columbia’s motion to dismiss, finding that AFP had
sufficiently alleged a facially plausible claim that AFP was entitled to coverage
under the policy.
While
this opinion did not resolve the question of whether Superstorm Sandy was a
Named Storm as defined by the policy, it did find that the insured could pursue
its claim and offer evidence to show that the Named Storm deductible was
wrongfully applied to its claim.
Whether
a Named Storm deductible applies to a claim and how the courts decide this
issue could mean the difference of thousands of dollars for insureds.
1 AFP 104 Corp. v. Columbia
Casualty Co., No. 13-4077, 2014 WL 793780 (D. N.J. Feb. 26,
2014).
If the Claim Damage Estimates are Too Low for Hurricane Sandy Damages, the Insurer and the Inspector/Cost Estimator Could be Liable for Bad Faith Damages
One
recent case in Louisiana sends a caution to the firms or individuals who
provide flood or storm damage inspections and repair estimate about potentially
significant liability for errors or omissions during the course of their
investigation.
The case
is SHELTER MUTUAL INSURANCE COMPANY v. RIMKUS CONSULTING GROUP, INC. OF
LOUISIANA, ET AL. (Parish of Lafayette), 2013-CC-1977.
Shelter
Mutual Property Insurance Company (Shelter) retained Rimkus Consulting Group,
Inc. (Rimkus) and Craig Rogers of Rimkus to provide an engineering evaluation
and expert witness services in connection with its defense of litigation
resulting from a claim for hurricane damages brought by a corporation (Patriot
Corporation) insured by Shelter. Rimkus
sent Shelter a letter confirming the engagement and indicating Rimkus’ services
were subject to its “Terms and Conditions” attached to the letter. The “Terms
and Conditions” included a forum selection clause which required venue for any
suits arising out of the contract to be in Harris County, Texas. When a dispute arose, Shelter filed suit
against Rimkus in the 15th Judicial District Court for the Parish of Lafayette.
Shelter essentially asserted Rimkus
issued an erroneous opinion relative to the cause of the property damage and
failed to properly estimate the underlying repair costs, causing Shelter to
incur liability for bad faith damages and additional costs relative to further
litigation. Rogers has already conceded
to Shelter, after reading a contractor’s cost estimate, that his (Rimkus/Rogers’)
estimates were erroneous and that Shelter should have paid Patriot almost $554,000
instead of the original damage estimate of $143,000. Shelter paid Patriot a bad faith settlement
amount of $797,000, in addition to the original cost of $143,000. Shelter now seeks these damages from Rimkus
and Rogers.
The Supreme
Court ruling only pertained to the forum selection clause, resolving a split in
the circuit courts of appeal regarding whether forum selection clauses are per
se violative of public policy in Louisiana.
The Court answered that question in the negative and reversed the
rulings of the lower courts.
Not too long ago, there was a congressional inquiry into the
changing of the results section of a flood damage report also prepared by
Rimkus. The issue appeared to be similar
to the ones that have been raised by Plaintiff’s lawyers, as was detailed
here: https://sites.google.com/site/metropolitanforensics/fraudulent-superstorm-sandy-flood-expert-reports
In
addition to these erroneous damage estimates, many victims of Superstorm Sandy
have found that the settlement offered by their insurance company falls short
of the actual costs associated with rebuilding and restoring the damages
incurred. There are several reasons for
this disparity.
Most
insurance carriers employ outside claims adjusters to conduct site inspections
of the damaged homes, condominiums and businesses. These outside claims adjusters are typically
overwhelmed with insurance claims, so this work load may result in errors in
the scope and pricing of repairs. Another reason the settlement offered maybe
short is that the software used by the insurance company to calculate the
claims does not adequately reflect the reality of the actual field conditions
caused by the storm.
In
the past decade, there have been computer software programs used by insurers to
estimate construction costs. These
programs calculate structural damage, repair and rebuilding expenses. Unfortunately the models are based on tract housing
and do not take into consideration such things as historic, custom or expensive
dwellings. Furthermore, Super Storm
Sandy ravaged areas and communities comprised of high valued real estate.
As a result, the estimates produced by these software programs will most likely
be insufficient to reimburse the claimant for the actual cost of rebuilding or
replacing his damaged property.
Builders
and contractors retained by property owners (not by insurers) do not use this
type of software program to produce their estimates. They base their cost estimates on
sub-contractor bids and their general knowledge about the costs and time
involved in a potential job as well as the current cost of materials found
locally.
Another
factor that these software programs do not take into consideration is the principal
of supply and demand. The amount of
damage produced by Super Storm Sandy was cataclysmic. As a result,
contractors are inundated with requests for bids and estimates. The
demand for skilled labor far exceeds the supply, so contractors and builders are
not able to compete for work. Therefore
those left to rebuild have little room to negotiate pricing, often creating a
gap between the claim settlement offered by the insurance company and the
actual cost of restoring and repairing their homes.
Finally,
there are always the allegations of the conflicts of interest for cases where
the WYO (Write Your Own) policy insurer determines the damages to itself (due to wind, wind-driven rain
or other isnured peril) and the NFIP. Key concerns raised from the Superstorm Sandy event include
whether or not some property-casualty insurance claims for wind-related damages
were improperly shifted to NFIP at the expense of taxpayers. For properties subjected to both high winds
and flooding, determinations must be made to assess the damages caused by wind,
which may be covered through a property-casualty homeowners policy, and the
damages caused by flooding, which may be covered by NFIP. The property-casualty insurer, NFIP, and the poliholder
all have a financial stake in the outcome of these determinations. Under NFIP, most flood damage claims are
adjusted by private property-casualty insurers, known as the write-your-own
(WYO) insurers, which sell and service flood insurance policies on the program's
behalf. Concerns over the processing of
these flood claims are heightened when the same insurance company serves as
both NFIP's WYO insurer and the property-casualty (wind) insurer for a given
property. In such cases, the same
company is responsible for determining damages and losses to itself and to
NFIP, creating a potential conflict of interest. Based on an audit done by FEMA personnel of the Superstorm Sandy and other storm property assessments regarding the proper allocation of wind versus flood damages, there is no evidence that such situation exists.
Metropolitan Engineering,
Consulting & Forensics (MECF)
Providing Competent, Expert and Objective
Investigative Engineering and Consulting Services
P.O. Box 520
Tenafly, NJ 07670-0520
Tel.: (973) 897-8162
Fax: (973) 810-0440
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[1]
New Jersey Transit Corporation v. Certain
Underwriters at Lloyd’s Hudson Specialty Insurance Co. Ironshore Specialty
Insurance coverage Co. Maiden Specialty Insurance coverage Co. RSUI Indemnity
Co. Torus Specialty Insurance coverage Co. and Westport Insurance Corp.
Superior Court of New Jersey Law Division, Essex County, Oct. 1, 2014.