Short Takes on Sunday Topics

[EXPOSURES AND COVERAGES]   By Jerome Trupin, CPCU

Short Takes on Sundry Topics: Sandy Claims Deadline, Sewer Backup, Continuing Ed Problems, Security Breach Law, and Hail & Ice

It’s Almost Midnight for Sandy Claims Most states mandate that insurance policies provide at least two years from the date of a property loss for an insured to commence suit against the insurer and that’s what most property insurance policies provide.1 Sandy made its New Jersey landfall on October 28th, 2011. That means that the clock will strike 12 for most Sandy claims in our area at the end of October. Once that happens, the claims turn into pumpkins and mice—and mice damage is always excluded.

If you have clients whose claims are still open, urge them to get an extension of time from the insurance company and, if they can’t, advise them of the deadline to start suit. The two-year time limit is strictly enforced by most courts and the fact that negotiations were still going on doesn’t toll the deadline.

Some insureds may have already missed the deadline. National Flood Insurance policies are not governed by state law. The NFIP policy reads: “If you (the insured) do sue, you must start the suit within one year of the date of the written denial of all or part of the claim…”2 That may be more or less than two years from the date of loss depending on the date of the written denial.

Water Backup from Sewers and Drains

When water poured into the first floor apartments of two buildings in an apartment complex, the insured submitted a claim. Then he called the plumber. (I don’t know for a fact that that was the sequence, but it often seems that way.) The water had entered through toilets, bathtubs and condensation drains. The insurance company denied the claim, citing the Water Damage exclusion, which excludes loss caused by “water which backs up through sewers or drains.”

The insured argued that the policy provided coverage for accidental overflow or discharge of a plumbing system as an exception to the exclusion. The lower court decided in the insured’s favor. The appellate court sent the case back to the lower court to determine the cause of the loss.3 The court said that it couldn’t find New York cases on the issue, but seemed to agree with the insured’s position. Citing cases from other states, it wrote:

“…these cases stand for the proposition that water damage caused by a backup/overflow that originates from a pipe or clogged drain located within the insured’s property line comes from the insured’s plumbing system and is covered by the policy; conversely, if the cause of the backup/overflow is from outside the insured’s property boundaries — such as a clogged munic- ipal sewer that forces water from outside the insured’s plumbing system to overflow — the sewer or drain exclusion is applicable.”4

The insured may lose when the case is retried, or the parties may settle before the next round of trials.

What intrigued me about this case was that it involved the backup of sewer and drains exclusion.5 I feel that the exclusion is often applied too broadly. That was the case with a loss a client suffered a few years ago. While he and his wife were on vacation, the drain that served all the apartments in their line became clogged just below his apartment. As a result, all the sewage from the apartments above theirs couldn’t get out of the building and instead flowed into their apartment. When they returned home, their apartment resembled Carlsbad Caverns. Stalactites of mold came down from the ceilings and stalagmites grew up from the floor. Their policy included $3,000 additional coverage for backup of sewers and drains. The insurance company sent him a check for $3,000—the damage exceeded $50,000. He called me. I told him I disagreed with the insurance company and wrote a report for him to send to the insurer making the argument that this was not a backup. The water didn’t back-up, it flowed down from the apartments above his. The insurance company reconsidered and sent him a check for the full loss.

 

What I Learned Today at Continuing Ed

I usually accumulate my CE credits at seminars that I’m involved in, but this year I was two credits short. With the license renewal deadline approaching, I signed up for a course with one of the country’s largest providers of insurance CE courses. I carefully selected a course because it was offered at a convenient time. The course dealt with ins and outs of personal auto insurance. Since my work deals primarily with commercial insurance, it’s been some time since I’ve closely studied the personal auto policy. I rationalized that this would make the course useful for a reason other than earning my needed CE credits.

The instructor, in real life a broker who seemed dedicated to doing the right thing for his clients, was personable, told a lot of good stories (some of them even related to insurance), and made the four hours pass pleasantly. (Actually only three hours and twenty minutes, since like a psychiatrist, a CE instructor’s hour only has fifty minutes.)

Despite saying he wouldn’t, he frequently read aloud the generalities (prepared by the provider) shown on the screen. What was worse, some points were just wrong and when I raised questions about them, he insisted I was in error. No one in the class expressed an opinion one way or the other. He didn’t have a copy of the policy form available to settle the questions. Here are the more serious items that I think he got wrong.

He claimed that:

• One of the reasons insureds need high limits of auto insurance is that defense expenditures can use up the policy limit. That’s not correct. Insureds do need high limits and defense costs mount up rapidly. Defense expenses erode the limit available for paying claims in some policies, but personal auto insurance is not one of them. The auto policy clearly states that the insurer’s duty to defend ends only when the limit of liability is exhausted by payment of judgments or settlements. I thought every insurance broker knew that defense expenses, in insurance jargon, are typically outside of limits.
• Auto liability judgments are not discharged in bankruptcy. That’s not true. Only judgments arising from DUI incidents survive bankrupcy. There aren’t many items that aren’t discharged in personal bankruptcy, the most well known are probably student loans. (I did learn something here. I didn’t know that judgments as a result of a DUI accident weren’t discharged. All other auto liability judgment awards are discharged in bankruptcy.)
• Business use is not covered. That’s true only for auto-business related parties—parking lot owner, garage, repair shop, etc. He may have just misspoken on this one because before class he was discussing with a student how she should write auto insurance for a stockholder/owner of a corporation, whose car is registered in his individual name.

Nevertheless, the PowerPoint on the screen showed that business use was excluded and that’s what he read to us. On the positive side, I did learn some things:

• An exception to the rule that insurance information is not admissible at trial is when it bears on question of liability. An example: The injured passenger alleges that he told the driver to be careful and that the driver responded “Don’t worry. I have insurance.” That will indicate to the jury that the defendant probably had insurance, but because it bears on the driver’s attitude towards safety courts allow it. (Prior to trial the opposing counsel is entitled to the insurance information including limits; I knew that. It’s felt it saves the court time by encouraging settlements.)
• Both Collision and Other than Collision for a newly acquired car is provided even when no presently insured car has such coverage. The coverage is subject to a $500 deductible and the insured must notify the insurer within four days after the insured acquires ownership.6
• Uninsured Motorist (UIM) coverage is triggered when the other car owner’s insurer becomes insolvent. I’ve never thought about this. Since umbrella policies do not drop down when the underlying insurance company becomes insolvent, my guess would have been that UIM wouldn’t be available, but that’s not the way it is.

Security Breach Laws

Forty-seven states, the District of Columbia and Puerto Rico all have laws requiring notification of cyber breaches and other loss of personal information. Personal information is typically defined as an individual’s first name or first initial and last name in combination with any one or more of the following data elements:

• Social Security Number;
• Driver license number or identification card number; or
• Account number or credit card number or debit card number in combination with any required security code, access code, or password that would permit access to an individual’s financial account.

New York, New Jersey, Connecticut, Massachusetts and 14 other states require notification to the state attorney general or regulator as well as the individual or entity whose information has been compromised. (The three states that don’t are Alabama, New Mexico and South Dakota—probably not your prime markets.) 7

If more than 5,000 New York residents are to be notified at one time, consumer reporting agencies must be informed of the timing, content and distribution of the notices and approximate number of affected persons.8

The laws apply to all firms doing business in the state, not just those domiciled there. In the event of a breach, there may be a mountain of paper work. One argument for carrying insurance is that the insurance company can be very helpful in advising the firm how to comply with the laws. And, depending on the exact coverage, the expenses of complying may be covered.

Hail & Ice

Bill Wilson, CPCU, the IIABA insurance guru, has this question on his excellent Virtual University (VU) website.9

“A large hailstorm and heavy rain resulted in substantial interior damage to a commercial building. There was no wind or hail damage to the metal roof but it is the opinion of several roofers and contractors that hail stones clogged up the drains causing the water to back up into the interior of the building. Our question is whether we could find coverage for this type of situation under the Commercial ISO Special Cause of Loss form CP 10 30? Could this still be considered ‘Hail damage’?”

Interesting question. I’ve encountered claims for interior damage from rain that leaked into the building when it couldn’t get down stopped up drains allegedly clogged by vandalism. If vandals stopped up the drains, I think there is coverage for the interior damage. Hail might be another story.

The ISO Commercial Property Special Form (CP 10 30) contains this exclusion: c. The interior of any building or structure, or to personal property in the building or structure, caused by or resulting from rain, snow, sleet, ice, sand or dust, whether driven by wind or not, unless:

(1) The building or structure first sustains damage by a Covered Cause of Loss to its roof or walls through which the rain, snow, sleet, ice, sand or dust enters.

My first reaction was there’s coverage because the exclusion doesn’t mention “hail.” But hail might be excluded by ice exclusion. If so, it’s excluded. The dictionary definition of hail is: “precipitation in the form of small balls or lumps usually consisting of concentric layers of clear ice and compact snow.”10 The definition says “usually,” which gives the insured the opportunity to argue that it’s at least ambiguous that the “hail” is always included by the word “ice.”

One of the responses that VU printed11 pointed out that the Basic Form (and of course Broad Form) covers hail together with windstorm. The hail coverage reads: …hail, but not including: …b. Ice (other than hail), snow or sleet, whether driven by wind or not;”…

As the responder pointed out, it’s generally held that the Special Form is at least as broad as the Basic and Broad forms. That would argue for coverage from a fairness point of view since the Basic and Broad forms cover hail damage and the insured paid an additional premium to get the special form coverage. Predicting how a court would react is not so simple. As Oliver Wendell Holmes, Jr. said: “The life of the law has not been logic; it has been experience.”

To clarify the coverage ISO should except “hail” from the ice exclusion by changing the wording to read “ice (except hail)” in the Special Form exclusion just the way “ice” is excluded from hail coverage in the Basic and Broad forms. That would make the Special Form coverage clearly equal to Basic and Broad. A good idea, even if it violates AFEA (Attorneys Full Employment Act).

 

1 If the policy is silent on the question of a time limit, the state statute of limitations on commencing suit

would apply. In New York the statute of limitations for contracts is six years, although there are

exceptions.

2 There are other policies that are not subject to the two-year requirement and some of them grant only

one year from date of loss to commence suit.

3 Pichel v Dryden Mut. Ins. Co. 2014 NY Slip Op 03575 Decided on May 15, 2014 Appellate Division, Third

Department

4 op.cit.

5 I advise clients to be sure their policies cover losses resulting from the backup of sewers or drains, but that’s another story. 6 The ISO business auto policy handles newly

acquired autos differently. Many of the business auto coverage symbols, e.g. Symbol 1 Any Auto, provide automatic coverage for newly acquired autos, but the one commonly used for physical damage is Symbol 7, Specifically Described Autos. Symbol 7 states that unless the insured carries physical damage coverage either on all insured autos or on the replaced auto and the insurer is notified within 30 days, there is no physical damage coverage for newly acquired vehicles.

7 Melissa J. Krasnow “Changes in State Breach Notification Laws” © 2000-2014 International Risk Management Institute, Inc. (IRMI) http://www.irmi.com/expert/articles/2014/krasnow08-cyber-privacy-risk-insurance.aspx

8 Security Breach Notification Chart, Perkins Cole http://www.perkinscoie.com/files/Uploads/Documents/Sec%20Breach%20Chart/Security%20Breach%20Notification%20Law%20Chart%20—%20June%202014%20rev.pdf

9 If you’ve never seen the Virtual University

newsletter take a look: http://www.iiaba.net/ad_profile/accountrequestaspx?p=vupoint. It’s a wonderful resource.

10 Merriam-Webster Dictionary http://www.merriam-webster.com/dictionary/hail

11 http://www.independentagent.com/Education/VU/Insurance/Commercial-Lines/Property/Perils/FacultyHailYesNo.aspx