Sandy Lesson for Business Owners: Read Policy, Keep Track of Notice Provisions

It’s been six months since Superstorm Sandy made its landfall on the coast of New Jersey and became one of the costliest storms ever recorded in the U.S.

Many businesses in the region are still recovering from the effects of this devastating storm and for some, one sticking point is their insurance payout. Some businesses still haven’t been able to reach settlement agreements with their insurers. For those who can’t hammer out their differences, lawsuits may be next.

Insurance Journal recently spoke with attorneys from law firm Kasowitz Benson Torres & Friedman LLP who have been keeping track of Sandy business coverage disputes. The lawyers said the most common cause of dispute involves the flood exclusion and what caused the damage.

“The number-one issue that has been popping up is whether the flood exclusion in certain policies applies. The issue, really, is what caused the damage: was it exclusively caused by a flood, or was it by a wind or an explosion, or by Con Ed?” said Robin Cohen, an attorney who heads the insurance recovery group at Kasowitz Benson Torres & Friedman.

Cohen focuses her practice on representing insureds in complex insurance coverage matters. Her clients include Visa Inc., the Port Authority of New York & New Jersey and Philips Electronics.

“One of the issues that we are seeing quite a bit is the issue of whether the flood exclusion applies,” Cohen said, “and if so, does it apply in full or in part?”

The flood exclusion disagreements also tend to affect many businesses that clearly do have flood insurance but have separate flood limits or different deductibles. “The primary thing the carriers are relying upon is those policies that have some flood exclusion because they’re trying to characterize everything as basically a flood event,” Cohen said.

Often the flood exclusion in the policies has exceptions such as in cases involving an explosion. “So if, for example, a business was interrupted because Con Ed had an explosion in New York that caused all the lights to go off in your building, that is an exception to the exclusion. So it’s really important to read the policies, especially the carve-outs in the flood exclusion.”

Cohen also noted a recent class action brought in New Jersey, where the policyholders sued the insurance industry over the coverage exclusion for losses in the “basement” and whether some first floors on lower grounds of the buildings can be categorized as basements by insurers.

Also, she added, there are now a lot of cases starting to get filed as to whether the insurance industry acted in bad faith — in that they may have failed to respond in a timely manner to the claim and help policyholders out in their time of need.

Brokerages are also being targeted for potential lawsuits by policyholders.

“There’s another trend that we’ve seen. We’ve seen at least one lawsuit — but we know of many others that are contemplating them — of suing their brokers for failure to inform them adequately about the coverage or lack of coverage that they have,” Cohen said. “What we’re seeing is that a number of policyholders were very surprised by the fact that the flood coverage was either inadequate or that it was excluded completely.”

She said one case that had been filed in New Jersey is Cardolite Corp. v. Willis of New Jersey, where the policyholder, a manufacturer of industrial coatings and adhesives, sued the broker for alleged malpractice, alleging that it failed to purchase proper flood coverage.

“I know of other policyholders that are contemplating similar lawsuits both in New York and in New Jersey based upon the same set of facts — that they were not notified in an adequate manner as to the coverage that the broker was obtaining for them,” Cohen said.

And what’s more, a recent ruling in New York State could potentially make it easier for policyholders to make their case against their brokers even if the policyholders haven’t read the policy, the attorney said.

“One of the things that happened in the legal world is that there was a recent decision by the court of appeals in New York which stated that you could have a viable claim against your broker even if you, the policyholder, did not review the policy when it came in,” she said.

“So that has created openings for some policyholders who thought they had sufficient flood coverage but in fact didn’t, even if they did not read their own policies.”

Kenneth Frenchman, a partner in the insurance recovery practice at Kasowitz Benson Torres & Friedman, added that typically, insurers don’t completely deny coverage. Insurers typically don’t say to their policyholders, “You get nothing.”

He said that, instead, in most cases where the policyholder and the insurer don’t see eye-to-eye, there are long, drawn-out negotiations to reach a middle ground.

“There is an accounting and adjusting of all the costs incurred and there’s negotiation and further analysis and back and forth. So lots of times, policyholders — particularly because they have a relationship with these insurance carriers — won’t just sue in the first instance. They will try to work it out and work through the issues, which can take a long time particularly for the big businesses,” Frenchman said.

But in the end, it’s the big businesses and the big claims that are most likely headed towards litigation, he said. “We certainly have our fair share of cases that we’re still trying to resolve but certainly could end up in the courts.”

During negotiations, the two sides often approach it from two very different perspectives.

“The policyholder is looking at it from the perspective of their individual situation and how it affected them, how much loss they have experienced, and how much premium they paid for the loss,” Cohen said.

On the other hand, the insurance carriers are looking at it very differently. “They’re looking at it from the perspective that they’ve got hundreds, if not thousands, of claims against them from policyholders in New Jersey, in New York, and elsewhere,” Cohen said.

“If they take a position in one case, it could impact how they will have to deal with people in other cases. One of the things that they have to analyze is whether they want to go to court with a particular policyholder and lose the issue, which could have a significant negative impact on them with respect to all the other policyholders.”

Cohen added that if the dispute is an issue that is distinctive to one particular policyholder, insurers have generally been very amenable post-Sandy. But if it’s an issue that’s a much broader issue that affects hundreds if not thousands of policyholders, insurers have taken strident positions, “because it could cost them in the millions if not billions of dollars,” she said.

So what are the takeaway lessons for businesses after Sandy?

Cohen says one of the most important things that the policyholders can do for themselves is “read the policies” when they purchase coverage.

“You’ve got to read your policies because often these policies are very distinctive and unique and some cover some sorts of claims, and others cover other sorts of claims. You’ve got to read your policies. That’s number one,” Cohen advised.

Another important lesson is that the policyholders have got to make sure to put carriers on notice following a loss. That’s because there are often very stringent notice provisions in the first-party policies.

Cohen also recommended that the policyholders should make sure to document as much as they can about the damage, the quantification of the damage, and what caused the damage. “You often have different limits depending upon the type of damage. So it’s important when you document the damage, you quantify what it is and you put it into the various categories that fit within your policy.”

“The better the documentation, the easier time you’re going to have with your insurance carrier,” Cohen said.

And it’s also important to retain someone who is knowledgeable and who understands these policies to see what the policyholder’s rights are because these policies are very confusing, she said.

“They’re not written in plain English, usually, and they’re hard to follow at times,” Cohen said. “If you have a significant claim, it’s important to talk to someone who is very familiar with this type of coverage.”

Topics Lawsuits Carriers New York Agencies Flood New Jersey