Hurricane Matthew flood claims may not be entirely preempted by federal law

In the wake of Hurricane Matthew and its associated flooding (particularly in North Carolina and South Carolina), a recent case of first impression in the Sixth Circuit may be cited by both damaged businesses and insurers and insurance brokers in the Carolinas. Harris v. Nationwide Mutual Fire Insurance Company, __ F.3d __, 2016 WL 4174381 (6th Cir. Aug. 8, 2016).

Writing for a unanimous panel, Judge Ralph B. Guy, Jr. held that the National Flood Insurance Act (established in the wake of flooding in Florida and Louisiana after Hurricane Betsy in 1965) did not preempt claims based on state law for negligence in the procurement of an insurance policy for a home situated in a flood-prone area. Although this case was decided on principles of federal abstention, it has major ramifications for those practicing insurance law. While it is not binding on any courts in the area affected by Hurricane Matthew, policyholder counsel will likely cite to it as persuasive authority in support of negligence claims against insurance brokers and other professionals involved in the purchase of homes or insurance.  

The case arose when a married couple suffered a flood loss during a 2010 flood of the Cumberland River. They brought a claim against their mortgage bank (Regions), a flood-zone certifier, their insurance company (Nationwide) and their insurance broker (David Vandenbergh). On appeal, the issue was whether the homeowers’ state law claims for negligence during the procurement of their Standard Flood Insurance Policy were preempted by Congress when it passed the National Flood Insurance Act (NFIA) The panel unanimouslyheld that while the NFIA preempted coverage claims against the insurer, it did not preempt negligence claims regarding procurement of the policy.
The case was remanded to the district court for further proceedings and, presumably, for trial.

The Court explained that:

“The NFIA indisputably preempts state-law causes of action based on “the handling and disposition of SFIP claims.” Gibson [v. American Bankers Ins. Co.], 289 F.3d at 949. . . . . The Fifth Circuit has distinguished claims-handling causes of action from policy-procurement causes of action, and held that the NFIA does not preempt state-law claims “to the extent that they implicate [insurers'] acts or omissions regarding issuance of the policy because those claims are procurement-based, not claims-handling-based.” Spong v. Fid. Nat'l Prop. and Cas. Ins. Co., 787 F.3d 296, 306 (5th Cir. 2015). In determining whether a plaintiff's cause of action arises from claim handling or policy procurement, the Fifth Circuit looks to whether the plaintiff was “already covered” by a SFIP, or instead was a “potential future policyholder.” Id.  We agree with the Fifth Circuit's approach and hold that the NFIA does not preempt policy-procurement claims such as plaintiffs'.”

In adopting the same distinction as the Fifth Circuit, the Court noted that:

“Damages stemming from policy-procurement claims, unlike those arising from policy-coverage claims, are not “flood policy claim payments.” 44 C.F.R. § 62 App. A, Art. I. . . . . Policy-procurement damages, therefore, pose no danger to the federal interests prompting preemption in the claims-handling context, i.e., “reduc[ing] fiscal pressure on federal flood relief efforts.” C.E.R. 1988, Inc., 386 F.3d at 270.”

Addressing questions of federal abstention:

“[G]eneral conflict-preemption principles do not compel barring state-law policy-procurement claims. It is possible to comply with both state tort laws and FEMA regulations, and state laws regarding misrepresentation and breach of fiduciary duty in the policy-procurement process do not “stand[ ] as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress” in enacting the NFIA. Id. at 269Id. at 269 (quoting Green v. Fund Asset Mgmt., L.P., 245 F.3d 214, 222 (3d Cir. 2001)).”

As Hurricane Matthew's floodwaters recede from the Carolinas, Harris and Spong are likely to be cited as the parties duel over whether claims for negligent procurement in the purchase of insurance can proceed to trial. 

Charlotte-area riots and looting could be covered by insurance

Businesses in Charlotte, North Carolina will most likely be covered by property insurance for damage caused by protesters. Additionally, some may be able to recover lost business income.


Over the last two evenings, Charlotte has been the site of protests as a result of the police shooting of Keith Lamont Scott, a 43 year old man. On Tuesday night, protestors blocked Interstate 85 near the UNC-Charlotte area, and looted a nearby Wal-Mart. On Wednesday night, the Uptown area near the Epicenter was the site of most of the demonstrations. The protests, and resulting police response, have caused business disruptions in various parts of Charlotte.


 Today, it is reported that many of the largest employers in the urban center of the city, including Bank of America, Duke Energy, and Wells Fargo have asked or permitted employees to work from home. Governor Pat McCrory has declared a state of emergency and requested the assistance of the National Guard.


Local news reported that a number of Uptown Charlotte businesses were damaged or looted during the violent overnight protests. These included the NASCAR Hall of Fame, the Charlotte Hornet’s team store, the Charlotte Convention Center, the United Way of Central Carolinas, the Bank of America headquarters, and several restaurants.


Property Insurance
Generally, businesses have a commercial property or business-owners property policy (sometimes called a BOP). The standard ISO commercial property and business-owners property policies have provisions that cover riot, civil insurrection property damage, and looting. This would include physical damage to a building, as well as merchandise that may have been stolen. Damage from fire will also be covered as a named peril.


On the other hand, photographs from social media and news reports show many shattered windows in Charlotte. Plate glass window insurance is usually offered as an add-on or additional insurance, and is not covered by many standard policies.


Businesses which are routinely in possession of someone else’s property – such as a shoe repair or auto repair shop – would likely need to have specific bailee insurance to cover the cost of replacement of a customer’s property which was damaged.


Business Interruption
If any curfew is imposed in Charlotte, or other restrictions on access to a business by either its customers or employees, the company may have a claim for business interruption or lost business income, depending on what coverages were selected. These policies typically provide require the insurer to pay for necessary extra expenses and lost business income as a result of a civil authority prohibiting access to the business.


The usual business interruption policy will only be triggered if there is sufficient physical damage to the business’s property such that the business must suspend its operations. Business owners should carefully read their policies however, as the trigger for business interruption may not begin for 24, 48, or 72 hours after the first civil authority prohibits access to their premises. Although the policy may not require an additional deductible prior to business income coverage being available, the 24 to 72 hour waiting period serves as a “time deductible.” Even once the business interruption coverage is triggered, it will not be retroactive to the date of the event. In other words, for damage caused on Wednesday night, business interruption coverage will not begin until Saturday night. As a result, some losses will not be recoverable under the standard policy. The business interruption during the first 72 hours could be covered by a captive insurer, however.


Often, this is a critical period of time for business owners immediately after a civil insurrection. During this waiting period, policyholders should take prompt repair measures to mitigate their damages even though lost profits will not be recoverable. Extra expense coverage, on the other hand, typically is triggered as soon as the first civil authority action.


Businesses with claims should immediately take photographs and put their insurance companies on notice. If claims are denied, there are typically internal appeals processes available to policyholders. If claims continued to be denied, business owners should consult with a knowledgeable insurance attorney about their options.

No Coverage, but Liability for Unfair or Deceptive Practices: The Question of Damages in North Carolina and a Current Case to Watch

There is a current case pending in the Western District of North Carolina that will likely add to North Carolina’s divergent case law regarding the measure of damages in an unfair and deceptive practices claims against insurers.

Background

Unlike other states, North Carolina recognizes liability for unfair and deceptive practices or bad faith even absent insurance coverage. “Thus, even if an insurance company rightly denies an insured's claim, and therefore does not breach its contract, as here, the insurance company nevertheless must employ good business practices which are neither unfair nor deceptive.” Nelson v. Hartford Underwriters Ins. Co., 177 N.C. App. 595, 609, 630 S.E.2d 221 (2006).

So, in cases where there is no insurance coverage, if an insurer is liable for bad faith or unfair and deceptive practices, one of the most important questions is: What are the Damages that get Trebled? On one hand, there is case law that supports that the full contract damages should be trebled. Cullen v. Valley Forge Life Ins. Co., 161 N.C. App. 570, 578-79, 589 S.E.2d 423, 430, (2003). On the other hand, there is case law that supports that only the damages that were proximately caused by the actual bad faith or unfair and deceptive trade practice. Gray v. North Carolina Ins. Underwriting Ass’n., 352 N.C. 61, 75, 529 S.E.2d 676, 685.

Current Case

For the purposes of the Motion to Dismiss, the Court assumed the facts in Plaintiff’s Complaint as true. Since Defendant has not yet answered, our discussion will also assume the veracity of Plaintiff’s facts in the Complaint.

In Biltmore Avenue Condominium Association Inc v. Hannover American Insurance Company, 1:15 CV 43 (W.D.N.C. Feb. 17, 2016), the Plaintiff was an owner of a medical office building who purchased commercial property insurance from Defendant. The policy was for $2,000,000.00, but there was a broadening endorsement that provided $500,000.00 for various potential losses. A fire occurred in the building on July 28, 2011. Plaintiff requested coverage for $2,500,000. After a series of communications, Defendant ultimately paid $2,000,000 in coverage, but denied the $500,000 under the broadening endorsement. Plaintiff wanted the additional $500,000 for reimbursement on the newly installed/upgraded sprinkler system.

Plaintiff filed a claim for breach of contract and violation of North Carolina’s Unfair and Deceptive Practices Act. For the breach of contract claim, the Court dismissed the claim pursuant to the three year statute of limitations. Because the statute of limitation for violation of North Carolina’s Unfair and Deceptive Practices Statute was four years, it was still a timely claim.

Defendant argued that because the alleged damage for the Unfair and Deceptive Practice ($500,000 endorsement value) was the same alleged for the Breach of Contract, there was actually no damages to Plaintiff for violation of N.C. Gen. Stat. § 75-1.1. Defendant argued that there must be independent damages, separate and apart from a breach of contract. Therefore, Plaintiff’s Unfair and Deceptive Trade Practice claim should be dismissed for failing to show a required element-- injury.

Resolution 

The District Court, in adopting the Magistrate’s Recommendation, dismissed the Breach of Contract claim and found that Plaintiff pled a claim for violation of North Carolina’s Unfair and Deceptive Practices Statute.

In reviewing the argument the Court emphasized that eventually, it or a factfinder will have to decide on the true measure of damages in this case. “If Plaintiff is able to prove such a claim [violation of N.C. Gen. Stat. § 75-1.1], its damages may be the same as what its contract damages would have been; and they may be different. But that inquiry is not before the Court on the present motion pursuant to Rule 12(b)(6).“ Id. 1:15 CV 43 (W.D.N.C. Feb. 2, 2016).

Defendant filed a Motion for Reconsideration, and the Court maintained its decision. “The Plaintiff’s Complaint states a claim for unfair and deceptive trade practices. If Plaintiff is able to prove such a claim, its damages may be the same as what its contract damages would have been; and they may be different. But, as stated in its prior Order, that inquiry is not before the Court on the present motion pursuant to Rule 12(b)(6). Accordingly, the Court will deny the Defendant’s motion for reconsideration and will grant Defendant’s motion for additional time to file its Answer.” Id. 1:15 CV 43 (W.D.N.C. Feb. 17, 2016).

Issues to Monitor

The District Court Judge correctly noted the current state of North Carolina’s law. In this situation, some cases allow for full contractual damages to be used and some cases recognize damages distinct from breach of contract damages. In this case, the Court twice has alluded that this inquiry will be one that will eventually be presented to the Court or fact finder.

Hopefully, this case will provide some guidance for future cases. Particularly, as it seems that the Defendant may have a viable “no causation” defense. It has suggested that Plaintiff was required to replace and upgrade the sprinkler system due to regulations and not due to any statement by Defendant.

It will be interesting if the Court provides some guidepost or insight on how to approach this issue in the future. Potential considerations could be: was the violation in the procurement of the policy as a whole? Was the violation in the adjustment after the claim occurred? Did the violation only result in a delayed award? In those cases, would interest be an appropriate measure?

Marijuana inventory covered under commercial insurance policy (D. Colo)

As the legal markets for marijuana – medicinal and recreational grow – so do the commercial insurance implications. The United States District Court for Colorado just issued an insurance coverage opinion in a case where a marijuana company sued its insurer. Green Earth Wellness Center, LLC v. Atain Speciality Insurance Company, No. 13-CV-03452-MSK, 2016 WL 632357 (D. Colo. Feb. 17, 2016). The case may have national significance going forward because Judge Kruegar, in a 27 page opinion, ruled that the inventory itself, i.e., the marijuana, was insurable under the a "Commercial Property and General Liability Insurance Policy." The ruling contains her opinions on a number of exclusions and whether they apply to commercial marijuana production.

The Plaintiff-Policyholder, Green Earth, was in the business of commercial marijuana cultivation, which it sold through its own medical marijuana dispensary. According to the opinion, smoke and ash from a nearby forest fire entered the ventilation system of Green Earth, intruding into the growing operation, and causing damage to Green Earth’s plants and inventory.

Predictably, the Insurer argued that Green Earth was not entitled to coverage because the policy included language that excluded coverage for “contraband” and “property in the course of illegal . . . trade.” More broadly, the Insurer argued that general public policy prevented coverage for marijuana companies.

The Court characterized Green Earth as having two main types of claims under the policy: a claim for $200,000 for plants currently growing, and a claim for $40,000 of marijuana which was already harvested and being prepared for sale.

Regarding the $200,000 in standing or growing plants, the Insurer argued that the exclusion for “growing crops” applied (and, indeed, the insurance quote provided to Green Earth plainly stated “Coverage does not extend to growing or standing plants.”). This exclusion is straightforward enough and was applied by the Court. “Growing crops” includes “any body of plants tended for their agricultural yield, at least until they are harvested.” Simply put, the policy is not crop insurance, even if your crop is marijuana.

The claim for $40,000 in inventory was more complex. This case, as much as others, highlights that the law of the forum is incredibly important to insurance coverage disputes. As a threshold matter, the Court applied Colorado state law, and this being a contract, only applied Colorado state law. Then, applying common insurance law maxims, the Court found that the policy failed to define “contraband” and, in light of Green Earth’s legal business in the Colorado medical marijuana trade, that the “contraband” exclusion was ambiguous. The Court went on to state that the “contraband” exclusion is ambiguous in light of the conflict “between the federal government’s de jure and de facto public policies regarding state-regulated medical marijuana.” Further, in Green Earth’s favor, the Insurer knew about Green Earth’s business in the marijuana industry prior to issuing the policy but never voiced any exception to insuring plants, marijuana-in-process, or the finished inventory.

The Insurer, in a last-ditch effort, then argued that in light of federal law, its own insurance policy was an illegal contract. The Court ruled that because the Insurer entered into the contract knowing full-well the scope of Green Earth’s business, it was obligated to either (1) comply with the contract or (2) pay damages for having breached it. This argument by the Insurer seems misguided: by intentionally arguing that an Insurer is in the business of marketing and selling insurance contracts that it believes are illegal under federal law, it essentially admits to collecting unearned premium for selling “illusory coverage” or committing other unfair or deceptive trade practices which are often prohibited by state statute and subject to double or treble damages.

There are other minor issues in the opinion as well. Green Earth, having survived summary judgment, will now have to prove its breach of contract, bad faith, and delayed payment claims at trial.

This ruling is important for a number of reasons. First, for the Court applied conventional insurance law to marijuana and cannabis growing. Second, it highlights the importance of choice of law, conflicts of law, and venue. In the case of marijuana-related businesses, and in the face of this opinion, the conflicts of law issues can be outcome-dispositive in future insurance coverage disputes. If the Court would have applied another state’s law, the Court may not have found the term contraband ambiguous, and the marijuana grower may have lost. Third, commercial marijuana growers need to investigate obtaining crop insurance if they wish to insure standing and growing plants.

Hiring Cause and Origin Fire Experts

This month's ABA journal has a very interesting article about our knowledge regarding arson investigation has changed over years, and the exoneration of people wrongly convicted of criminal arson.  It is well worth the read.

This topic brings to the forefront a related issue: the investigation of cause and origin of fires in insurance cases.  The denial of a fire claim based on the determination that it is an incendiary fires will often result in a bad faith lawsuit.  Thus, the hiring of a fire investigator is a key decision by the adjuster.  Before hiring a fire investigator, be sure to keep the following things in mind:

• First and foremost, make sure his or her experience is sufficient.  Request a CV and make sure that his or her experience is in fire investigation, not simply fire suppression.  More and more, investigators should meet the requirements in NFPA 1033: Standard for Professional Qualifications for Fire Investigator;

• Be sure he or she is knowledgeable on NFPA 921: Guide for Fire and Explosion Investigations.  This publication has been at the heart of many cross-examinations of fire investigators;

•  If possible, see if he or she has the ability to present complicated explanations in a simple matter.  For instance, it is common for a fire investigator to explain that a fire needs oxygen by securing the lid on a lighted candle jar.  Often, if your fire investigator trains other investigators, he or she will be a better witness, if it is eventually needed; and

• If possible, review a sample report from investigators you think you may want to hire in the future.    Be sure the report is clear; it shows methodology; and reflects the effort it takes to do a good examination.  By vetting investigators ahead of time, there will be little delay to initiate the fire investigation. 

The cause and origin expert is a central figure in  a fire investigation.  His or her opinion will help determine whether fire damage is covered by the policy.  If the claim is denied based on his or her opinion, the investigator will be one of the key witnesses in a potential bad faith lawsuit.

Quiet October for Hurricanes in the Atlantic States

The National Hurricane Center released its Monthly Atlantic Tropical Weather Summary yesterday.  In October, no new storms developed in the Atlantic.  Hurricane Joaquin had formed in September 2015.  Typically, there are two storms formed in October, with one developing into a hurricane. 

The National Oceanic and Atmospheric Association had predicted in May 2015 that this would be below-normal season this year.

Hopefully, this record and prediction will continue through November 30, when hurricane season officially ends. 

All Risks Covered: what's in a (blog) name?

All Risks Covered is Womble Carlyle’s new blog devoted to business insurance issues in North Carolina. This includes commercial property insurance, commercial general liability insurance, employment practices liability, insurer bad faith, directors & officers insurance, agents and brokers issues, errors & omissions insurance, cyber insurance, captive insurance, and insurance regulatory matters.


The blog’s name, All Risks Covered, will sound family to anyone who has ever bought an “all risk” insurance policy. “All risk” was, for a long period of time, considered the desirable property insurance policy for homeowners and many small and middle-market businesses. But understanding “all risk” coverage means understanding some of the basics of property insurance.


An insurance policy is a written contract between two parties; the insurance company and the policyholder. A property policy obligates the insurance company to pay for certain losses if they fall within the scope of the policy, subject to certain exclusions and conditions. Because all commercial policies have some exclusions, even policies named “all risk” do not actually cover all possible risks. These policies are still subject to certain exclusions.


The use of “all risk” differentiates certain property policies from policies that only cover specific named risks. As a result, policies are either “named peril” or “all risk” (which is now often called “comprehensive” or “open peril” to avoid confusion and to account for the exclusions).


A named peril policy only provides coverage for risks which are specifically named in the policy. The quintessential example would be a 19th century fire insurance policy; that was a property insurance policy that insured a property owner against loss by “fire” but nothing else. Today, popular commercial property insurance named perils policies typically provide coverage for physical losses as a result of:

• Fire
• Lightning
• Explosion
• Windstorm or Hail
• Smoke
• Riot or Civil Commotion
• Sinkhole Collapse
• Volcanic Action

As a result, if a loss is sustained by perils which are available as additional coverage, such as “weight of snow, ice, or sleet,” “water damage,” or “flood,” those would not be covered under the named peril policy. Any recovery must fall within one of the named perils. However, because the insurance policy only covers certain discrete categories of risk, it will be less expensive to purchase compared to an “all risk/open perils” policy.


An “all risk” or “open perils” policy works in the opposite way. It is designed to cover all types of physical loss, only excepting items that are specifically excluded in writing by the insurer. In other words, the named peril policy is a contract of inclusion (future losses are only covered if they are specifically included) while an all risk or open perils policy is a contract of exclusion (all future physical losses are covered unless they are specifically excluded).


Because the scope of coverage for an all risk policy is so much greater, these policies are more expensive than a named perils policy. The choice between the two policy types is often dictated as much by the policyholder’s financial condition as anything else. Lenders often have specific insurance requirements to protect the collateral which secures their loans. If a lender requires your business to have a comprehensive, open perils policy, that is simply a reflection of the lender’s desire to protect their investment against a broader array of risks and accidents which could occur.
 

As a legal matter, if there is a dispute as to insurance coverage under a property policy, the burden of proof at trial is different between an all risk policy compared to a named perils policy. Under a named perils policy, the burden of proof is on the policyholder to prove that the loss falls within one of the specifically named perils contained in the policy. In contrast, under an all risk policy, the burden of proof at trial rests on the insurance company to prove that one of the exclusions applies.
  

As I mentioned above, there has been a shift in the industry away from using the term “all risk” for these policies because they do not literally cover all risks which a policyholder may face. Indeed, the scope of coverage is really determined by the exclusions (and any exceptions to the exclusions). Most all risk/open peril policies continue to have numerous exclusions, including flooding (which can include or exclude sewage backup), ground shifting or earth movement (which can include or exclude earthquakes, mine subsidence, and mudslides), nuclear hazards, government action, war, and many others.