Precious Metals Exclusion; Per Claim Deductible; Adjuster Has the Right to See the Damage; Fixing Federal Flood Insurance

Precious Metals Exclusion

Thieves pried open seven air conditioning units at Celebration Church and stole seven condenser coils. Stolen coils can sell for more than $1,000 each because of their copper content. Copper theft is big business. It’s estimated at almost a billion dollars a year, with theft from a/c units accounting for three-fourths of it.1 ISO Special Form coverage includes theft, so you’ve probably seen some of these claims. However, Celebration Church’s claim was denied. The reason: precious metal exclusion.

Special Form coverage limits theft of precious metals coverage to $2,500, but let’s look at the actual wording: $2,500 for jewelry, watches, watch movements, jewels, pearls, precious and semiprecious stones, bullion, gold, silver, platinum and other precious alloys or metals. This limit does not apply to jewelry and watches worth $100 or less per item.

I don’t think that copper, even at its present price levels, is a “precious metal.” But even if it is, I’d argue that the doctrine of ejusdem generis would result in full coverage for the insured. Ejusdem generis is the “birds of a feather” doctrine—that is, when interpreting an item in a series, only those meanings that are similar to the other are used. Thus, a policy condition applying to “automobiles, trucks, tractors, motorcycles, and other motor-powered vehicles” might not apply to an airplane even though it’s a vehicle, because the other items are all land-based vehicles.

I was about to call the attorney who posted the information, but I decided that I’d better first read the case. It turns out that the church’s policy was not an ISO form. It contained a different exclusion, which read:

…Theft or attempted theft, and any vandalism caused by or resulting from such theft or attempted theft, of any copper, aluminum or any other precious or semi-precious alloys or metals that are attached or connected to buildings or structures, or are part of any machinery or equipment attached or connected to buildings or structures.”2

That pretty much rules out any coverage for Celebration Church.

PRACTICE POINTERS: There are several lessons here:

1. (For me) Get your brain in gear before you open your mouth.
2. Watch out for non-standard policy terms when you’re dealing with forms you don’t know.
3. Remember “ejusdem generis” when interpreting a policy. Or remember to refer coverage declinations to experts. They may see interpretations that are not immediately obvious to us.

Per Claim Deductible

Deductibles make eminent sense economically, but not emotionally. From the insured’s point of view, retaining as much of the exposure as possible is the best way to lower insurance premiums. But the satisfaction of lower premium at policy inception is no match for the pain of not collecting in full when the loss occurs, no matter how clear the arithmetic; it’s the way we’re programmed. Economists call it “loss aversion.” Loss causes more pain than gain generates satisfaction. Furthermore, some deductibles can really be painful, as Rensselaer County discovered. The county had a practice of strip-searching every suspect who was jailed for any offense. Federal courts ruled that was unconstitutional if the alleged crime was only a misdemeanor and there was no reasonable suspicion that the suspect was concealing weapons or contraband.

A class action ensued claiming damages for all the people arrested in the county and charged with misdemeanors between 1999 and 2002. The county was insured for public officials and police liability by Selective Insurance Company. Selective agreed to defend the county up to the limits of coverage and subject to the deductible. And there’s the rub. The county’s policies in 1999 and 2000 had a $10,000 per claim deductible; the 2001 policy had a $15,000 per claim deductible. The case eventually settled for just a nominal award to the claimants: $5,000 to the lead plaintiff and $1,000 to each of the others. There were 800 plaintiffs— that’s about $800,000 plus attorneys’ fees of $442,700. The $10,000 deductible should be no problem for a large county, right? Wrong.

Selective said the deductible applied per claim. Since there were 800 claims, in its opinion each of the claims was below the applicable deductible—the entire $1,242,700 was the county’s obligation. The county argued that it was all one claim and only one deductible should apply. Selective also asserted that because the injuries to the class members did not constitute one occurrence, the attorneys’ fees likewise should be allocated among the various “occurrences.” The County responded that the attorneys’ fees should be attributed entirely to the lead plaintiff because there was only one set of lawyers for all class members.

In a truly Solomonic decision, the court held that the individual damage awards were subject to one deductible each, meaning the insurer would make no payments for the damage awards. However, because the policies were silent as to how fees should be allocated in class actions, the court held that the policy was ambiguous as to the attorneys’ fees, ruling that all the defense costs should be allocated to the lead plaintiff. That meant that only the remaining $5,000 of the $10,000 deductible applying to the lead plaintiff’s claim would be paid by the insured; the insurer would pay almost all the attorneys’ fees.

The lesson here is that liability deductibles can be dangerous. Liability deductibles come in two versions: per claim or per occurrence. Per occurrence is preferable. If a fire caused by the insured’s negligence damages the property of 10 claimants, that’s one occurrence and therefore one deductible, but if the deductible applies per claim, there are 10 claims and therefore 10 deductibles. Further, both types apply per occurrence; multiple occurrences mean multiple deductibles. Rensselaer County had the less desirable per claim deductible, but even the per occurrence wouldn’t have helped them in this case. The court would most likely have ruled that the strip-searches were separate occurrences just as they held they were separate claims. Make sure you look at worst-case scenarios when evaluating deductibles.

The Adjuster Has the Right to See the Damage

“The insured, as often as may be reasonably required, shall exhibit to any person designated by this company all that remains of any property herein described” is how the 1943 NY Standard Fire Insurance policy put it. A similar requirement was in most earlier property insurance policies and is in every current one. ISO’s commercial property puts it this way: “As often as may be reasonably required, permit us (the insurer) to inspect the property proving the loss or damage…

”It’s Insurance 101, but somehow one insured, TV Realty, LLC and, more surprisingly, its public adjuster didn’t get the message. TV Realty claimed that its building was damaged by high winds and rain during a storm on December 26-27, 2012. On December 27, TV Realty’s CEO called a public adjuster to handle the claim on its behalf. The public adjuster reported the claim to Tower Insurance on January 10, 2013. An appointment for the adjuster to inspect the loss was set for January 18, 2013, but, at the insured’s or the public adjuster’s request, was postponed to January 24. When the adjuster arrived at the building on January 24, he found that the roof had been completely repaired and all the debris disposed of. Tower denied the claim, stating that the insured had breached two policy requirements. It had failed to promptly report the loss and it failed to make the damaged property available for inspection.

The insured argued that the delay was caused by the public adjuster’s busy schedule of year-end obligations and other winter losses. The court was not impressed. It ruled: “…the public adjuster and his schedule are irrelevant to plaintiff ’s obligations to provide prompt notice to Tower of a potential covered loss. There is not a single valid excuse for plaintiff ’s failure to notify Tower of the damages just before or just after notifying plaintiff ’s public adjuster of the damages. The notice to Tower was required under the policy, notice to plaintiff ’s public adjuster was merely at the plaintiff ’s discretion.”3

The court noted that Tower did not have to show that it was prejudiced by the late notice. Although the court didn’t point it out, the requirement to show prejudice only applies to liability claims in New York.

Fixing Federal Flood Insurance

August’s flooding in Louisiana is projected to have caused $8.5 to $11 billion in damages. The loss estimates do not reflect:

• Losses to land and infrastructure
• Business interruption losses
• Losses to Marine Hull, or Marine Cargo lines of business
• Loss adjustment expenses
• “Demand surge” (the increase in costs of materials, services, and labor due to increased demand following a catastrophic event).4

Much of this damage occurred to property not located in FEMA’s special flood hazard zones. Whether you believe in global warming or Santa Claus or not, flood is a serious exposure for all insureds. The ruling that mortgagees must require evidence of flood insurance from borrowers when the property is located in a special flood hazard zone has resulted in those who are not in those zones feeling that they don’t need flood insurance. Nothing could be further from the truth. You don’t have to be a special flood hazard zone to be at risk. Louisiana, Katrina, Sandy, and other storms have proven that. There is a private flood insurance market for mid-size and larger commercial properties as well as some high-end homeowners. But for smaller risks, private insurers have not been able to find a way around adverse selection. (Adverse selection is insurance-speak for the tendency of those at greater risk of loss to be most likely to purchase coverage.5)

National flood insurance is not working. Flood insurance is purchased primarily by those at high risk. To overcome the adverse selection that it faces, NFIP tried to increase premium rates, but the outcry from those facing huge premium increases doomed that solution.

There are several suggestions floating around to cope with the problem. An interesting one is to include flood insurance in all homeowners’ policies. Advocates of that approach cite several reasons to support that technique:

• Bundling flood coverage with other homeowners’ coverage spreads the risk very effectively.
• Accumulation problems for insurers would be mitigated. (“Accumulation” refers to the total of risks that could be involved in a single loss event.6) The biggest losses for the NFIP have been the accumulation nightmares from Sandy and Katrina.
• Bundling flood with the other covered perils would reduce the flood premium by spreading the risk across uncorrelated perils.

It would make flood insurance viable and closing the protection gap would make it attractive.7

Legislation permitting bundling coverage has been introduced in congress and passed on bipartisan vote, but is stalled in the Senate.8

My take: The added cost to all homeowners, whether in flood-prone areas or not, will make it a very hard sell. I haven’t seen any good estimates of how much it would add to current homeowners’ premiums, but I think it will be meaningful. Further, given the roadblocks we call legislatures, it’s hard to see the needed legislation being enacted.

There are other proposals to cope with the problem. I’ll discuss some of them next month. In the meantime, stay dry.

Endnotes

1 “Copper Theft Is A Billion Dollar Industry With Air Conditioning Theft Accounting For 75% Of The Total.” Copper Watcher Store http://www.copperwatcher.com/

2 Celebration Church v. United Nat’l Ins. Co., 2016 U.S. App. LEXIS 16061 (5th Cir., Aug. 30, 2016).

4 “AIR Estimates Insured Losses for Louisiana Floods to Range Between USD 8.5 Billion and USD 11 Billion” Globe Newswire Sept. 19, 2016 https://globenewswire.com/news-release/2016/09/19/872886/10165183/en/AIR-Estimates-Insured-Losses-for-Louisiana-Floods-to-Range-Between-USD-8- 5-Billion-and-USD-11-Billion.html

5 Economists and financial markets call “adverse selection” asymmetric information. “Asymmetric information…is present whenever one party to an economic transaction possesses greater material knowledge than the other party. This normally manifests itself when the seller of a good or service has greater knowledge than the buyer (or vice versa)…” http://www.investopedia.com/terms/a/asymmetricinformation.asp

6 “IRMI Online” https://www.irmi.com/online/insurance-glossary/terms/a/accumulation.aspx

7 Adapted from Ivan Madox “Not Just Private Flood—Universal Flood” http://www.intermap.com/risks-of-hazard-blog/2016/09/not-just-private-flood-universalflood

8 John Romano “Either Fix Flood Insurance Problems or be Prepared for Disaster” Tampa Bay Times 8/20/16 http://www.tampabay.com/news/business/banking/romano-either-fix-flood-insurance-system-or-be-prepared-for-disaster/2290280