Umbrella Limits: How High Is Up?; Notice of Changes to Renewal Policies Required; Safety First?; An Exclusion You Don’t Want

The federal government is suing a California home owner for $25,000,000 alleging that his negligence caused a 27,500-acre wildfire that took 16 days to contain, destroyed 20 buildings and forced thousands of residents to evacuate. The suit alleges that the cause of the fire was a faulty electrical wiring box that shot sparks, starting a blaze that did over $9 million in damage and cost more than $15 million to extinguish. The defendant, Tarek M. Al-Shawaf, is the founder and president of Saudconsult, one of the oldest engineering and architectural firms in Saudi Arabia.

An attention-getting occurrence, but is it relevant to our clients? Not many Saudi Arabian potentates among my clients, nor many who own huge ranches in the West. However, all property owners have electrical connections (and many other exposures) that can cause a huge amount of damage. Do they need high umbrella liability limits?

The answer involves another question: what do they have that the plaintiff can take? A judgment-proof defendant (negligible assets and slim prospects to have any in the future) really needs only legally-required liability coverage. For those with something to protect, high liability limits make sense. How high?

Because I work with personal insurance only when consulting clients ask that I review their personal policies, I reached out to some colleagues who specialize in personal lines coverage for high net-worth families. They uniformly told me that they have clients who carry $50 million personal liability limits and limits up to $100 million are available in the marketplace. I also found that there have been many other multi-million dollar personal liability claims. One of the most interesting was one that’s still in its early stages.

The insureds were not home, so their housekeeper shut off all the lights as she was leaving. Or so she thought. In error, she had turned on the switch activating the sauna. The sauna was being used to store out of season clothing that quickly caught fire. The blaze engulfed the entire floor-through apartment, causing more than a million dollars in personal property damage and additional living expenses. But it’s the liability claims that are the most shocking. The claims from the building owner and the other apartments have already totaled $49 million. And that doesn’t include the damage to the painting collection of another tenant, which included a painting valued at $20 million. That portion of the claim is currently being handled by the other tenant’s fine arts insurer. Once it settles, that insurer will subrogate against the insured. The tenants of the apartment where the fire started carry a $50 million umbrella; if it were me, in the middle of the night I’d be thinking “I wish I had bought $100 million.”

Here are some other huge personal liability claims from insurance company brochures promoting personal umbrella coverage:[1]

$46 million, June 2013—A mother and teenage daughter were fatally injured in a two-car auto accident. The other driver had just left a bar and was driving at over 135 mph.

$31.2 million, January 2013—A motorcyclist suffered catastrophic injuries when he was struck by a car that turned left in front of the oncoming motorcycle.

$14 million, May 2013—A worker was electrocuted while working on the electric wiring in the insured’s home.

$12.4 million, May 2012—An intoxicated man was rendered totally disabled when he struck the bottom of the pool he dove into. The pool water level was two-feet below normal. There were signs saying “no diving,” but the plaintiff’s expert testified that no injury would have occurred if the pool had been at its normal level.

And that’s just the tip of the iceberg. Insurance companies you deal with can provide you many more or you can find them on the Internet. In a case just reported, two New Jersey teenagers were awarded $9.5 million in damages stemming from a boating accident that severely injured them and killed one of their friends.[2]

There are lots of answers online to the question of how high to set liability insurance limits. Some are useful, but most are unhelpful at best and others just wrong or ridiculous:

Unhelpful: “Our advice is to strongly consider buying the most coverage you can afford.”[3] Well, duh, you certainly shouldn’t buy more than you can afford, but it ducks the question of how much you should buy.

Wrong: Buy limits based on the degree of risk. Low limits for low risks, somewhat higher limits for moderate risks, and high limits for high-risk exposures.[4] Is owning a ranch a high-risk activity? Certainly not in the same class with bungee jumping (one of the examples the author gave of a high-risk activity). Low or moderate limits would have been very bad advice for Tarek M. Al-Shawaf who owned the ranch where the fire in southern California started. Degree of risk should affect the insurer’s pricing, but it’s not the answer to setting limits.

Ridiculous: High limits lead to high claims settlements, which causes premiums to go up.[5] The implication is that you shouldn’t buy high limits because if you have a claim the settlement will be higher than if you didn’t have insurance. That’s generally true, but if you have something to protect, you’ll be glad that you had the insurance.

My take: Set limits based on what you have to protect. That doesn’t mean if you have a net worth of $500,000 you should carry $500,000 limits. That won’t work. If you’re involved in a serious accident, the plaintiff will demand a settlement equal to insurance limit plus whatever his/her attorney feels they can squeeze out of you. What’s more, if there are multiple defendants, policy limits can be used up settling with some defendants, which ends the insurer’s responsibility even to defend the remaining claims and leaves the insured holding the bag.

NY Insurers Must Give Notice of Renewal Changes to Policies

New York’s insurance law requires insurers to give policyholders notice of changes in coverage or limits at least 45 days before expiration.[6]  In October 2004, Allstate changed the required excess limits for underlying auto liability on Martin Gotkin’s umbrella policy from $100,000/$300,000 to $250,000/$500,000. The umbrella policy was renewed each year after that.  Gotkin never changed his underlying coverage, which was written with another insurer.

In July 2009, Gotkin was involved in an automobile accident. When he notified Allstate that he was being sued by a passenger in the other vehicle, Allstate told him about the gap in his underlying coverage and denied coverage for any damages between $100,000 and $250,000. It agreed to pay damages in excess of $250,000. Gotkin sued for coverage stating that he had never received the required notice of the increase in the underlying limits provision.

In commenting on this case, Daniel Kohane, a leading insurance company defense lawyer with Hurwitz & Fine in Buffalo, agreed that Allstate would not have been able to enforce the increased limits requirement during the 2004 policy period, despite correspondence setting out the increased limits requirement, because that correspondence did not meet the standards set by New York insurance law. However, he felt that Allstate was correct in its assertion that under New York law the insured is obligated to read his policy and therefore the increased limit requirement in the policy covering the 2009 accident was enforceable. The NY Court of Appeals (our highest court) disagreed. It held that the increased limit was not required despite the four renewals that the insured had received after the change was originally made.[7]

PRACTICE POINTER: If you’re an insurer, mind your ps & qs—do what the law requires. If you’re a producer whose client faces a predicament similar to Gotkin’s, point out any procedural oversight that might salvage coverage for your client. Better yet, when an insurer changes underlying insurance requirements, notify your insured and provide quotes to close the gap. The accident occurred in 2009. The court case was finally decided in 2016. That’s a long time to have a client biting his nails.

Safety First?

Here is a picture guaranteed to give safety professionals, underwriters and other insurance folks nightmares.[8]

Need I say more?

An Exclusion You Don’t Want in a Policy You’re Counting On

Courts don’t write insurance policies, they just interpret them. However, there are legal doctrines that govern how insurance policies are interpreted. The most well-known is the rule for interpreting ambiguities: ambiguities in an insurance policy are construed in favor of the policyholder.[9] Insurers bear another burden when courts interpret policy language: exclusions are strictly and narrowly construed and the insurer bears the burden of showing that the exclusion is clear, unmistakable and subject to no other reasonable interpretation.  In a case involving a Rego Park apartment building that was severely damaged by excavation on the adjacent property, Aspen Specialty was clearly thinking of the challenges an insurer faces in convincing a court that an exclusion says what it means and means what it says.

Rego Park Holdings (RPH) was building an eight-story multiple dwelling and health care facility at 65-11 Booth in Rego Park. RPH contracted with Anton Developers. The contract specified that Anton would add RPH as an additional insured on its liability policy, which Anton did. The excavation work for the new building caused serious damage to the adjacent building. The NYC Buildings Department issued a stop work order and 20 tenants were moved out of the adjacent building. The owners of the adjacent building sued RPH. When RPH demanded coverage as an additional insured under its contractor’s policy with Aspen Specialty Ins. Co., Aspen denied coverage based on the following endorsement:

This policy does not apply to any liability for Bodily Injury, Personal Injury, disease or illness, including death, or Property Damage or loss of, damage to, or loss of property, directly or indirectly arising out of, caused by, resulting from, contributed to or aggravated by the subsidence, settling, sinking, slipping, falling away, caving in, shifting, eroding, mud flow, rising, tilting, bulging, cracking, shrinking, or expansion of foundations, walls, roofs, floors, ceilings, or any other movements of land or earth, regardless of whether the foregoing emanates from, or is attributable to (emphasis added), any operations performed by or on behalf of any insured. The foregoing applies regardless of whether the first manifestation of same occurs during the policy period or prior or subsequent thereto.

It is further agreed that there is no coverage nor defense under this policy for any claims, loss, costs, or expense arising from allegations against any insured resulting from or contributing to or aggravated by (emphasis added) subsidence as described in the first paragraph of this endorsement.

Notice the underlined words: emanates from, or is attributable to, and resulting from or contributing or aggravated by. That greatly expands the scope of an exclusion; just about any connection will trigger the exclusion. Such language is objectionable in all exclusions, but it’s particularly dangerous in a subsidence settling, caving-in, etc. exclusion.

In the RPH case, both the original court and the appellate division ruled that the exclusion clearly meant no coverage for RPH for the excavation damage.[10] This is not an exclusion you want to have in your clients’ policies or in policies clients are depending on for coverage.

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[1]    Large Loss Journal 2013© Fireman’s Fund Insurance Company Novato CA  http://www.halcyonuw.com/active/WebDoc.asp?s=684417408&P=580018560

[2] Allison Pries “Jury awards $9.5M to Mahwah sisters who were injured in boating accident.” http://www.northjersey.com/news/jury-awards-9-5m-to-mahwah-sisters-who-were-injured-in-boating-accident-1.1637340
[3] Joshua Taylor, “How Much Coverage Should I Buy?”  https://wallethub.com/edu/bodily-injury-liability/8607/#how-much-to-buy

[4]    Derived from James Lynch, “Pushing the Limits: An Examination of Liability Insurance Limits for National Park Service Concessioners” https://www.americaoutdoors.org/america_outdoors/files/docs/NPSlimits_final.pdf

[5]    Derived from Tom Hammitt, “Caught in the Squeeze—Insurance costs are claiming a growing part of every flying dollar…” https://books.google.com/books?id=YqjhJHhC87MC&pg=PA83&lpg=PA83&dq=setting+liability+insurance+limits&source=bl&ots=NlT_fnPXa5&sig=9MNnX58LCZyf1Q8_LRv9EipQ7WY&hl=en&sa=X&ved=0ahUKEwjsus6D-f_NAhXCbz4KHYMAAwA4RhDoAQghMAE#v=onepage&q=setting%20liability%20insurance%20limits&f=false

[6]   NY Insurance Law Section 3425(d)(1)

[7]   Daniel Kahane “A Cautionary Tale: Mind the Gap or Take the Rap” http://www.hurwitzfine.com/news/coverage-pointers-volume-xviii-no-2  The case is Gotkin v Allstate Ins. Co., 2016 NY Slip Op 05359 July 6, 2016 Appellate Division, Second Department

[8]    David R. Adams Labor Law Pointers, Volume V, No. 9 July 6, 2016 http://www.hurwitzfine.com/news/abor-law-pointers-volume-v-no-9

[9]    This rule is derived from the general rule for interpreting contracts that holds that ambiguous provisions are interpreted against the party that drafted the contract. Since insurance policies are generally drafted by insurers, the insured gets the benefit of the doubt.

[10]  Rego Park Holdings, LLC v Aspen Specialty Ins. Co., Appellate Division, 2d Department 2016 NY Slip Op 05137,  Decided June 29, 2016.