Trial Magazine

After a natural disaster—such as a hurricane, tornado, major storm, or flood¹—the people affected struggle to reestablish normalcy as soon as possible within their homes, businesses, and communities. In the United States, insurance claims for covered losses play a large role in recovery.² To assess and maximize coverage in your clients’ claims, it is important to understand the first-party insurance claims process.

Most policyholders’ experience with a property insurance carrier, if any, will have been related to a one-loss event such as a fire, a tree fall, or water that caused interior or exterior damage to a home or business. Under those circumstances, a call is made, an adjuster completes inspections, and the claim is underway. Partial payments usually are rendered immediately to support emergency repairs while the claim is finalized.

However, after a mass natural disaster, carriers often are understaffed or staffed with inexperienced adjusters without the training or bandwidth to properly inspect each claim. As a result, people often are still working with their carriers on unpaid claims long after the disaster occurred. Many only seek counsel after months of waiting, which means that you may become involved after the client is already several steps into the claims process.

When evaluating a claim, first determine whether retaining counsel will serve the client’s best interest and add value. You may see claims from homeowners as well as commercial entities—often larger in scale—such as businesses, schools, and churches.

Immediate Steps

If you are retained, notify the carrier or have your client do so immediately. Carriers will insist on being informed, and if they are not, may use it as an opportunity to delay the claims process. At the time of notification, also instruct the carrier, its adjusters, your client, and your client’s employees, if any, that all future contact with your client should be through you. Make sure your client and his or her employees understand this. Carriers frequently go to a damaged property and meet with people directly without notifying counsel, which clients may not realize is out of the ordinary.

After a property suffers damage from a natural disaster, the loss should be documented immediately—before cleanup— by photographing and listing any visible or suspected damage or lost items. A video of the property can supplement this documentation. Take photographs of all building interiors and exteriors, as well as the immediate surroundings before cleanup or repair. Subtle signs of building damage that seem unimportant to a layperson may be helpful evidence for consultants and engineers, and the location and type of tree damage and debris in the vicinity can inform a causation analysis as the claim develops.

Contact the insurance carrier to give notice of the claim. The ­policyholder then may be required to prepare a proof of loss, which summarizes the type, scope, and value of the loss. The carrier often assists with this, but it is ultimately the policyholder’s duty to complete and timely submit it if required by the policy.

Temporary or permanent repairs from the natural disaster should be documented as they are made, and these files should be kept separate from files on any unrelated repairs or routine maintenance. This will be particularly important for larger businesses where repairs for storm-related damage could be confused with ongoing maintenance or improvements. Clients or potential clients should be advised of this need as soon as possible after the event so they may properly document their claims and complete their proofs of loss.

Review the policy. Obtain a copy of the policy—or at least the declarations page—from the policyholder as soon as possible. He or she can request a copy from the carrier if needed. Review the policy to determine the total amount and types of coverage provided, what riders have been purchased, and what perils and losses are excluded. Additionally, review the law in your jurisdiction on various coverage matters. Typical natural disaster damage, such as from wind and flood, often happen contemporaneously and can easily become entangled despite the fact that one or the other may not be covered. Having a thorough understanding of your covered perils is critical.

Supplemental coverage from the government. The Federal Emergency Management Agency (FEMA) may help with damages the policy does not cover. The type and availability of FEMA assistance can vary depending on the natural disaster, and it can change as more information is learned about the scope of the disaster and the relief that can be made available. Property owners or their attorneys should routinely check FEMA’s website, www.fema.gov, following a natural disaster for updates and information about requirements and consequences of filing a claim.

In addition to the agency’s initial response and recovery measures after a natural disaster, FEMA also may provide significant assistance to public entities, private individuals, and businesses by paying to replace or repair uninsured or underinsured properties. This could apply, for example, to a municipality that may have insurance for its buildings but no coverage for debris removal, field or park damage, or street repairs. The buildings’ coverage also may be ­undervalued or capped because the level of risk was not anticipated.

Before receiving this assistance, insured property owners will be expected to verify that they are also actively seeking full recovery from their insurance carrier with only supplemental payments to be made by FEMA. As with any substantial property damage claim, an agent likely will be assigned to the claim and will work with the property owner or counsel to determine what may or may not be covered by FEMA. A claim that includes dual coverage from private insurance and FEMA must be evaluated, tracked, and processed carefully to properly assign the different damages to private insurance or to FEMA, depending on coverage. If there is dual coverage or if private coverage is disputed, FEMA may advance payment. If the private carrier ultimately pays for the same loss, the funds must be reimbursed to FEMA.³

Inspect the site. Inspect the site to determine what losses are covered under the policy or might be covered by FEMA. Firms that routinely handle these types of claims often have a team in place that includes a wind engineer and a property damage consultant to inspect the premises and document and evaluate the claim quickly. The inspection should be comprehensive, but the claim should not include any loss that falls outside of coverage.

Gather information. During initial meetings with the client—whether immediately after the disaster or months later—determine the following:

• Was a claim timely made? Should it be supplemented?
• What steps were taken to document the claim?
• Was a public adjuster or other insurance consultant involved?⁴
• How much has been paid to date by the carrier? To the extent the carrier has committed to further payment, how much is expected, and when will it be paid?

If it becomes apparent that the carrier is not properly adjusting the claim, you should begin to document facts supporting a claim for bad faith, the elements of which vary from state to state.⁵ Common examples of bad faith include failure to acknowledge the claim promptly, failure to properly and timely investigate the claim, and failure to timely approve or deny the claim.

Work with the client’s employees. Some businesses may have maintenance personnel or civil engineers in house or on retainer. Meet with them to determine their evaluation of the loss and whether they have met with carriers or provided any reports or documentation. It is important to elicit cooperation from the client’s staff early on. Explain that your wind engineer and property damage consultants are there to augment the work the staff may have already done and to determine whether there are latent damages.

Even if a public adjuster or the client’s own personnel completed fulsome documentation and reporting to prepare the initial claim, without the proper experience with wind damage or concurrent perils,⁶ these reports may assess superficial damage only, bypass covered losses, or include items not covered under the policy, such as preexisting conditions. However, incomplete or inaccurate reports typically can be amended and corrected after a more thorough investigation. Work closely with personnel throughout the inspection and claims process, instruct them not to volunteer information to the carrier’s representatives, and insist on being present during future meetings with the carrier.

Claim Payments

If you were not retained immediately following the loss, you should review your client’s documentation on what was done to repair damage and whether those repairs were temporary emergency repairs for mitigation or safety reasons or permanent repairs. Most policies should cover and pay for both temporary emergency repairs and permanent repairs. Well-documented emergency repairs—such as having a damaged roof patched pending permanent roof replacement—should result in an early interim payment from the carrier.

Many policies will provide coverage for the replacement cost value (RCV) of the damaged property or the needed repairs. Under this coverage, the property should be completely restored to its original condition with materials of “like kind and quality” such that building materials, paint, and other items “match” within the line of sight.⁷ Meeting this standard can require, for example, repainting an entire room that had only one damaged wall.

Submitting receipts to the carrier for work completed should result in prompt payment. Estimates and requests for interim payments can be submitted as more permanent repair work begins and larger items are replaced in line with your consultants’ guidance. A carrier in good faith should begin to advance significant payments as the repairs progress, similar to progressive payments under a new construction loan. Final invoices should be submitted to the carrier to replace estimates along with demands for payment, continuously keeping the carrier informed of the progress.

Your client may decide that a particular repair should not be made. For example, the needed repairs may be so significant or costly that they are impractical. In these instances, your client usually can receive an actual cash value (ACV) payment equivalent to the value of the cost to repair or replace a building—the RCV—minus an amount for the depreciation of the property. Your client can use these funds in any manner.

Potential roadblocks. If coverage is disputed and the carrier refuses to make any interim payments, your client may not have the funds to undertake significant repairs. In this situation, document all estimates based on your consultants’ reports, the instances of the delay, and the consequences suffered by your client as a result. You can use this information to calculate damages from the delay as part of the primary claim or to substantiate a claim for bad faith.⁸

Carriers may use depreciation to try to reduce claims. No depreciation should be factored in to an RCV claim, whereas an ACV claim is subject to a deduction for reasonable depreciation.⁹ For example, in an ACV claim, the carrier’s adjuster may try to apply a higher depreciation factor for a 20-year-old building, assuming the entire building is aged and worn. However, if the interiors have been recently remodeled, then a much lower depreciation factor should be applied to the building’s interiors.

This exact scenario played out in a private school in New Orleans after Hurricane Katrina. The interiors had been completely remodeled and should have depreciated no more than 5 percent—yet the entire building, which had a somewhat dated exterior, had been depreciated at 40 percent. After this error was pointed out to the carrier, a simple readjustment of that factor resulted in a much more significant interim payment.

Preparing for Litigation

Unlike most litigation, these insurance claims typically start with consultant reports. While these reports are less formal and may be supplemented later in litigation, you should be comfortable using at trial the initial reports and the team you chose to prepare them.

Unless a policyholder has been represented by experienced counsel from the beginning of the claims process, he or she usually does not have the proper reports and claims evaluation processes in place. While you must review and understand the carrier’s adjuster’s reports, start documenting your client’s insurance claim with new reports prepared by your consultants or engineers. Make sure any preexisting issues are noted and excluded from the reports—this is important for credibility and a clear understanding of the causation issues.

Provide the reports to the carrier and request a meeting or a joint inspection. If they do not have appropriate adjusters and engineers in place for a significant loss months after the event, that alone indicates the claim has not been well adjusted. After reviewing the consultant reports and conducting a joint inspection, a carrier acting in good faith will typically make an interim payment and agree to do further joint inspections.

In some instances, an insurer may request an examination under oath (EUO) of your client to more formally obtain the facts underlying the claim and to evaluate its obligations to adjust or further adjust and make payment on a claim before normal discovery. An EUO allows an insurance carrier to question your client under oath before a court reporter, and you may be present.

Anti-concurrent causation. Insurers insert anti-concurrent causation language in policies so they will not be held liable for any damage that results from multiple causes if one of those causes is an excluded peril. A typical homeowners insurance policy, for example, will cover wind damage but exclude flood damage. If the home suffers both wind and flood damage, an anti-concurrent causation clause will deny all coverage for any place that has been damaged by flood—even if there is also wind damage.¹⁰ In this way, insurers can force homeowners to turn to their flood insurance carrier to try to cover the entire cost of the damage. Some jurisdictions have held these clauses to be ambiguous and therefore unenforceable,¹¹ but others have upheld the language, greatly disadvantaging the policyholder.¹²

The use of anti-concurrent causation clauses is a direct response to jurisdictions recognizing the efficient proximate causation doctrine, which provides coverage for sequential causes if the initial catalyst is a covered peril,¹³ and the concurrent causation doctrine,¹⁴ which broadens the proximate causation doctrine by removing the sequential requirement and covering all damage if one of the concurrent causes is covered.

For your clients to benefit from either of these doctrines, you must have a clear understanding of the policy in question, and your consultant must thoroughly assess the causes of the damage. It is imperative that you take the time to assess the case law in your jurisdiction to determine whether it follows the efficient proximate causation or concurrent causation doctrine. Notably, even jurisdictions that have enforced anti-concurrent­ causation clauses have refused to uphold them when they are ambiguous.¹⁵

With some claims, the smooth formal and informal exchange of information results in several interim payments and then final resolution and settlement of the claim. In other cases, no interim payments are made, and litigation becomes inevitable. Most instances are a hybrid of the two scenarios.

Mediation may be appropriate if the parties reach an impasse during the adjustment process. Motion practice in these cases will be similar to other cases, except that—as described above—much of the expert work and some discovery will be done already.

Depositions of fact and expert witnesses will proceed as usual but with much of the work completed. The court may allow for acceleration of dispositive motions and trial. Summary judgment motions typically determine coverage issues and can narrow issues for mediation or trial. After coverage and scope issues are resolved, trials are infrequent, but when they do occur, the outcomes often hinge on the preparation by and testimony of the expert witnesses.

While the insurance claims process can vary as much as the natural disasters that trigger it, these general steps will put your clients on the path toward rebuilding their lives.

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Conlee Whiteley is the managing member and Caitrin Reilly is a research attorney at Kanner & Whiteley in New Orleans. They can be reached at c.whiteley@kanner-law.com and c.reilly@kanner-law.com.

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Notes

1.  A typical property insurance policy will cover damages resulting from fire, wind, and other perils associated with natural disasters. Certain policies may have specific provisions relating to a named storm, and some policies may exclude earthquake or flood perils. Many property owners also have flood insurance to supplement their coverage.
2. Insurers will pay record claims of around $135 billion for 2017 following a year of devastating natural disasters. Tom Sims & Alexander Hübner, Insurers to Pay Out Record $135 Billion for 2017 After Hurricanes, Reuters (Jan. 4, 2018), www.reuters.com/article/us-disaster-insurance/insurers-to-pay-out-record-135-billion-for-2017-after-hurricanes-idUSKBN1ET0ZT.
3. See 42 U.S.C. §5155(c) (2012); see also Hawaii ex rel. Atty. Gen. v. FEMA, 294 F.3d 1152, 1160 (9th Cir. 2002); Pub. Util. Dist. No. 1 of Snohomish Cnty., Wash. v. FEMA, 371 F.3d 701, 711 (9th Cir. 2004). FEMA also may require the property owner to acquire additional insurance for future claims as a condition of providing funds for the current loss.
4. Policyholders may hire a public adjuster or claims consultant to represent them in the claims process. A public adjuster can assist with the preparation and negotiation of the claim but cannot file suit. 
5. See, e.g., Fla. Stat. Ann. §624.155 (West 2017); Tex. Ins. Code Ann. art. 541.060 (West 2017); La. Rev. Stat. Ann. §22:1973 (2017).
6. Concurrent perils in this context are multiple perils that have caused a loss, one of which is covered under the policy and at least one of which is not.
7. Some policies include “like kind and quality” clauses, and courts also have construed RCV policies to include replacement with materials of like kind and quality. See, e.g., Wilson v. Am. Fam. Mut. Ins. Co., 472 S.W.3d 579, 589–93 (Mo. Ct. App. 2015); Brouillette v. Fireman’s Fund Ins. Co., 563 So. 2d 1343, 1345 (La. Ct. App. 1990).
8. In Sher v. Lafayette Ins. Co., 988 So. 2d 186, 206–07 (La. 2008), for example, the Louisiana Supreme Court found that the defendant acted in bad faith for, among other things, refusing to reconsider damage estimates after receiving extensive estimates and invoices from the plaintiff and failing to tender the undisputed portion of the plaintiff’s lost rents.
9. See, e.g., Riggins v. Am. Fam. Mut. Ins. Co., 217 F. Supp. 3d 1017, 1021 (W.D. Mo. 2016) (The court found that “ACV payments according to the policy are tied to estimates of repair or replacement ‘at the time of loss’ less depreciation and less the deductible.”).
10. Water damage itself—from, for example, a building’s water heater bursting—is typically not excluded.
11. See, e.g., Molycorp, Inc. v. Aetna Cas. & Surety Co., 78 A.D.2d 510, 510 (N.Y. App. Div. 1980) (anti-concurrent causation clause was ambiguous because it did not make it unmistakably clear that the insurance company would deny any claim in which an excluded peril contributed to the loss).  
12. See, e.g., JAW the Pointe, LLC v. Lexington Ins. Co., 460 S.W.3d 597, 608 (Tex. 2015).
13. See McDonald v. State Farm Fire & Cas. Co., 837 P.2d 1000, 1004 (Wash. 1992) (en banc) (defining the catalyst as the cause that “sets other causes into motion which, in an unbroken sequence, produce the result for which recovery is sought.” Under the efficient proximate causation doctrine, if the catalyst is covered then the “loss is covered, even though other events within the chain of causation are excluded from coverage.”).
14. See Sebo v. Am. Home Assurance Co., 208 So. 3d 694, 700 (Fla. 2016) (applying concurrent causation doctrine when it was not clear which cause of the loss was the predominant cause). 
15. Molycorp, 78 A.D.2d at 510.