Sub-limits for flood and other causes of damage may not apply to losses that fall outside the sub-limit’s precise terms.
If there are multiple causes or types of losses, policyholders may be able to access multiple applicable sub-limits.
Losses that fall within multiple conflicting sub-limits may entitle policyholders to the larger sub-limit.
While Hurricane Florence has left the Carolinas, it will be weeks, months or even longer before businesses will fully recover from the massive destruction left in its wake. Hundreds of roads remain closed, power is not yet fully restored, and some rivers are still rising past major flood stage level. Wide-impact catastrophes like Florence cause not only widespread physical damage but also tremendous and long-lasting economic damages.
Policyholders starting to recover from the disaster may face challenges when trying to maximize the benefits of the insurance coverage purchased. Below we offer general answers to some key coverage questions that are likely to arise from Hurricane Florence claims.
Are sub-limits going to limit my claim for coverage?
Not necessarily. Sub-limits may look straightforward, but the way they work with each other and with different policy terms can be complex.
Identifying the sub-limits in a policy is usually straightforward because they typically appear in a list or chart in the policy’s declarations section. Sub-limits generally fall into one of two types: (1) sub-limits that apply to particular causes of loss like a Named Storm or Earth Movement; and (2) sub-limits that apply to a type of damage or cost, like debris removal, preservation of property, or decontamination.
But depending on the language in your company’s policy, a sub-limit may not cap your company’s recovery:
A sublimit may only apply to certain damages. Sub-limits are a form of policy exclusion and like any exclusion should only apply to losses that fall within the plain and unambiguous meaning of their terms. If the language is ambiguous, courts will usually construe it in favor of coverage. As an example, one court found that a sub-limit for “damage to and removal of any tree, plant or shrub” did not apply to the insured’s costs to repair a golf course’s landscaping damaged by a fallen tree because the sublimit applied to damage “to” and not damage “from” any tree. See Crestview Country Club, Inc. v. St. Paul Guardian Ins. Co., 321 F. Supp. 2d 260, 263 (D. Mass. 2004). Another court found that a sub-limit for “debris removal” did not apply to costs of demolition and engineering that were required before the debris could be removed because they were not incurred during “removal.” See Zurich Am. Ins. Co. v. Keating Bldg. Corp., 513 F. Supp. 2d 55, 64 (D.N.J. 2007).
Additional coverages and coverage extensions may be added to sub-limits. Some policies may allow the policyholder to access one or more coverages in addition to a coverage subject to a sub-limit. For example, if a policy has a sub-limit for “flood” and also additional coverages for losses like debris removal, service interruption or civil authority, the insured may be able to recover for damages falling within those coverages in addition to other flood losses under the flood sub-limit. Policyholders should look for “anti-stacking” and “anti-concurrent causation” language in their property policies—or in their absence other language aimed at preventing the insured from “stacking” coverage. They should also look for language within the sub-limits themselves, which may indicate that some additional coverages cannot be accessed—and thus, by their omission, that others are. And as with all coverages, the facts surrounding the loss matter.
Where limits conflict, the larger limit may apply. If losses could fall within two or more coverages, the policy may be ambiguous such that the limit most favorable to the policyholder should apply. For example, the U.S. Court of Appeals for the Eighth Circuit held that because it was ambiguous whether business interruption losses caused by flood were subject to a policy’s flood sublimit or a larger “All Other Perils” sublimit, the larger sublimit would apply. Mark Andy, Inc. v. Hartford Fire Ins. Co., 233 F.3d 1090, 1092 (8th Cir. 2000).
Policyholders should carefully evaluate the facts, the policy and the law to determine the extent of coverage. Before agreeing to accept a lower amount as your full recovery, it is advisable to consult with coverage counsel.
Do I need to have suffered damage to my property in order to file a claim?
No, not necessarily. Property insurance policies often provide coverage extensions for business interruption losses that are caused by off-site damage. Carefully consider any mileage or other restrictions that may exist in your particular policy.
Ingress/egress coverage applies to losses sustained when a covered cause of loss prevents ingress to or egress from an insured location—such as flooded or damaged roads or railways. An often hotly contested issue is whether or not access to the property was completely or only partially restricted. See Fountain Powerboat Indus., Inc. v. Reliance Ins. Co., 119 F. Supp. 2d 552, 557 (E.D.N.C. 2000) (holding that ingress/egress coverage applied to income a boat manufacturer lost when Hurricane Floyd flooded roads, partially limiting access to the insured’s facility).
Similarly, civil authority coverage applies when, as a result of a covered cause of loss, a government order restricts access to the insured’s location. Insurers will often argue that evacuation orders issued in advance of anticipated property damage are not due to property damage that has happened but instead a result of the fear of future damage. See S. Texas Med. Clinics, P.A. v. CNA Fin. Corp., No. CIV. A. H-06-4041, 2008 WL 450012, at *10 (S.D. Tex. Feb. 15, 2008). As state and local governments become more proactive in evacuating areas to minimize injury and death, such an interpretation tends to limit the value of this coverage. Some courts recognize, however, that any evidence of existing property damage from a hurricane—even hundreds of miles away—can be sufficient to trigger this coverage. Assurance Co. of Am. v. BBB Serv. Co., 265 Ga. App. 35, 36 (2003).
Service interruption coverage applies to losses resulting from the lack of incoming electricity or other vital services. Policyholders will often need to work with their utility or other service company to understand and document the reason(s) the service interruption occurred, as coverage often turns on the specific cause of the interruption. See Great American Ins. Co. v. Mesh Café, Inc., 158 N.C. App. 312 (2003) (holding that service interruption coverage applied so long as there was direct physical damage to the utility supply stations, even though the cause of the loss—flooding—was not covered by the policy). Note that services may not be restricted to utilities—in one case we handled the court ruled that an oil refiner’s service interruption coverage was triggered by damage to a crude oil supply pipeline.
Finally, contingent business interruption and contingent extra expense coverage applies when a policyholder suffers losses because suppliers or customers are unable to provide or purchase goods or services because of covered property damage at their locations. These are difficult claims because in many instances, the information most relevant to the claim may be in the custody and control of a third party (such as a supplier or customer), not the policyholder. When this happens, it can be difficult to obtain the necessary information the carrier’s adjuster may be demanding: How can you access it? Will the third party simply provide it? Nevertheless, it’s important to remember that generally, the policyholder merely has to show it suffered a loss of the type covered by the policy. While a policyholder must meet its obligations to cooperate with its insurers in the investigation of a claim, a policyholder should not be held responsible for information it doesn’t have the right to possess or control.
What about mold that may develop once the water has receded?
It’s common for water-damaged property, if not promptly remediated, to incur further damage from mold. This can be particularly worrying if your policy contains a typical mold exclusion:
This policy does not apply to any loss or damage caused by or resulting from the actual or threatened existence, growth, release, transmission, migration, dispersal or exposure to mold, spores or fungus.
In most policies, mold that happens over time from general humid conditions may be excluded. However, mold may be covered as “ensuing loss” when it is the result of an otherwise covered peril. See Eckstein v. Cincinnati Ins. Co., 469 F. Supp. 2d 455, 462 (W.D. Ky. 2007) (holding that when mold ensues from covered water damage, the mold damage is covered despite the exclusion).
And if your property has been damaged by water because of a covered cause of loss—you should insist your insurer promptly investigate the damage and pay to replace or repair the property so that mold does not later arise. See Kielbania v. Indian Harbor Ins. Co., No. 1:11CV663, 2012 WL 3957926, at *11 (M.D.N.C. Sept. 10, 2012), report and recommendation adopted, No. 1:11CV663, 2012 WL 6554081 (M.D.N.C. Dec. 14, 2012) (holding that policyholder could pursue claim against insurer that failed to adequately investigate potential water damage and offered amount that did not include all of the expected water damage); C.f. Nelson v. Hartford Underwriters Ins. Co., 177 N.C. Ap. 595,608 (2006) (holding that insurer’s allegedly delayed investigation into a water leak was not a proximate cause of mold contamination that had been ongoing for several years).
These are just a few of the many insurance coverage issues that may arise as businesses in the Carolinas start the long process of recovery from the destruction Florence left behind. With the assistance of experienced coverage counsel, policyholders can be sure they understand the applicable law and how their policy’s coverages apply so they are able to properly characterize their losses to achieve an appropriate recovery.