Flood Insurance Gaps More on Duty-to-Defend Case Is Email a Written Record of Settlement?

Flood Insurance Gaps More on Duty-to-Defend Case Is Email a Written Record of Settlement?

Is there a Leak in Your Insured’s Flood Coverage?

If you’re providing that coverage for your insureds, pat yourself on the back; if you were doing it before Sandy, stand up and take a bow.

If your insured requires limits higher than those available from NFIP, you’re probably using commercial insurers whose forms are often broader than NFIP’s. However, even commercial flood coverage is not as water tight as you might think.

Most commercial flood coverage forms mimic NFIP’s definition of flood, which reads as follows:

Flood, as used in this flood insurance policy, means:

1. A general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or of two or more properties (at least one of which is your property) from:

a. Overflow of inland or tidal waters;

b. Unusual and rapid accumulation or runoff of surface waters from any source;

c. Mudflow…(definition of mudflow shown in footnote)1

2. Collapse or subsidence of land along the shore of a lake or similar body of water as a result of erosion or undermining caused by waves or currents of water exceeding anticipated cyclical levels that result in a flood as defined in A.1.a. above.

It’s not an all-encompassing definition and commercial forms sometimes provide even less coverage. For example, the ISO form does not include number 2 that covers lake shore erosion.

The most troublesome gap is subsurface water. Note that the definition of flood links coverage to the inundation of normally dry land. Insureds will often call saying: “My basement is flooded.” It probably is, but if the flooding is due to subsurface water or even a broken water main that hasn’t caused inundation of normally dry land, it’s not a flood under wording like this.

A case on point is: Harleysville Ins. Co. of N.Y. v Potamianos Properties., LLC2 Potamianos Properties owned a commercial building in Syracuse, NY. Its building was severely damaged when an underground water supply line ruptured. The water line measured six inches in diameter. The water pressure resulting from the rupture, together with the washing away of the soil adjacent to the building, caused a large section of the foundation wall to fall, permitting water, mud, and debris to flow into and fill the basement.

The appellate court affirmed the lower court’s decision that there was no coverage. It ruled: “Specifically, because the loss arose when water from ‘under the ground’ pressed on and flowed through the building’s foundation walls into the basement, coverage is precluded under the endorsement.” There are insurers that will provide this coverage. See if you can get one for your clients. If not, tell them about the gap.

Another Flood Gap—This Time in National Flood Insurance

National flood insurance issued by NFIP excludes damage from earth movement. This doesn’t sound too bad at first blush, but look at the wording of the exclusion:

We do not insure for loss to property caused directly by earth movement even if the earth movement is caused by flood.

Sandy washed away the ground supporting many homes resulting in substantial damage to the structures. Adjusters working for NFIP/FEMA are interpreting this exclusion to eliminate coverage for the damage resulting from the loss of earth supporting the foundation when the flood is what moved the earth.

To make things more difficult for insureds, FEMA is reported to have advised adjusters that it will hold them responsible for errors in adjusting losses. As a result, adjusters are strictly interpreting the policy.3

Depending on the exact wording, insureds with commercial coverage may be able to make an argument that the exclusion doesn’t apply. For example, ISO’s flood form incorporates the earth movement exclusion in the basic, broad, or special form attached to the policy. It contains the following wording:

We will not pay for loss or damage caused directly or indirectly by any of the following…Earth movement… including soil conditions which cause settling, cracking or other disarrangement of foundations or other parts of realty. Soil conditions include…the action of water under the ground surface

That clearly knocks out coverage for underground water, discussed above, but an insured can argue that it creates an ambiguity as to whether it applies to surface water, if that’s what washed away the ground surrounding the foundations.

UPDATE: Shortly after this article was written, New York Governor Andrew Cuomo announced that he will use part of the federal Superstorm Sandy aid the state received to “fully compensate” storm victims who had claims denied because of the exclusion of earth movement during a flood.4 We’ll see if New Jersey Governor Chris Christie and Connecticut Governor Dannel Malloy will follow suit. However, it won’t change the exclusion for future claims.

More on Duty-to-Defend Case (K2 Investments v American Guarantee)

Last month I wrote about the K2 Investments v American Guarantee court of appeals decision that held an insurer could not deny coverage based on exclusions once it had wrongfully refused to defend the insured. I added an update that a rehearing had been granted after I wrote the article. The rehearing has now been put on the calendar for January, 2014 and a decision is expected in the spring.

The case has attracted enormous attention because it may make it much riskier for an insurer to refuse to defend. The dominant interpretation of the decision is that a breach of its duty to defend is deprives the insurance company of the right to argue that the loss is excluded; it must defend the insured and pay any judgment. In effect, the breach of a duty to defend may create coverage.

I’ve just seen a different interpretation of the decision. Charles A. Booth, Michael L. Anania and Douglas J. Steinke, leading insurance defense attorneys with Ford Marrin Esposito Witmeyer & Gleser, contend that this decision is not the cataclysm that most insurance defense attorneys fear.5 They write, in part:

“K2 is best understood simply as a routine opinion that reached the right result… [T]he court’s extraordinary action…to grant reargument of K2 confirms that the perceived dominant view of that opinion is not what the court intended…The court, in recent years, has granted less than 1 percent of reargument motions, and to do so here clearly telegraphs the court’s concern over its initial opinion and how it is being construed.”

In their opinion, the question of American Guarantee’s liability for the malpractice claim was settled when the prior court entered a judgment against the attorney for legal malpractice. American could not relitigate that point. They contrast the K2 case with the leading case on breach of duty to defend, Servidone Construction Corp. v. Security Ins. Co,6 In that case, as in most duty-to-defend cases, there had been no court determination of liability. The lower courts held that the insurer could not plead exclusions to escape liability. The Court of Appeals, however ruled that “an insurer’s breach of its duty to defend does not create coverage and that … there can be no duty to indemnify unless there is first a covered loss.”

Booth, et al. point out that the Court of Appeals did not mention the Servidone case in the K2 decision. Servidone has been cited, with approval, in more than 350 cases in the 28 years since its issuance. They do not feel the Court of Appeals intended to reverse Servidone and would certainly mentioned it if that was their intent. Booth, et al. point out that there’s no need to reverse Servidone in the K2 case as the underlying facts are different.

Insurance industry trade organizations are seeking court permission to file amicus briefs supporting reversal of the decision. We’ll see how this turns out. I’ll keep you posted.

An Email Strikes Again—Provides Evidence of Settlement

Last month I wrote about a broker’s staff member who essentially pled guilty of malpractice in an email. In explaining why she didn’t notice that the application for insurance for the Cleveland Indians “Family Fun Day” indicated that an inflatable slide , which collapsed and killed a spectator, would be used, she emailed: “I’m so used to quoting up your events I think I hardly look at anything but the dates and the details of the event.” After that, the E&O claim against the broker was an open-and-shut case.7

This month, I came across an even stranger email story closer to home. On November 16, 2008, John Forcelli was seriously injured in three-car accident on the Saw Mill River Parkway in Westchester County. He claimed that a car driven by Steven Kuhn ran a red light and struck a car owned by Gelco, which in turn struck his car causing his injuries. On February 10, 2011, the insurers for all three parties moved for summary judgment.

That same day, attorneys for Gelco met in a mediation session with the attorneys for the injured driver, John Forcelli. The mediation attempt was unsuccessful. On April 22, 2011, Brenda Greene, claims adjuster for Gelco’s insurer, reopened negotiations with Forcelli’s attorney and offered $200,000 to settle the claim against Gelco. Negotiations continued and on May 3, 2011, Greene increased the offer to $230,000. The offer was accepted and she sent an email to Forcelli’s attorney as follows:

“Per our phone conversation today, May 3, 2011, you accepted my offer of $230,000 to settle this case…

“You also agreed to prepare the release…Please forward the release and dismissal for my review. Thanks Brenda Greene.”

On May 4, 2011, Forcelli signed a release, notarized by his attorney. On May 10, 2011, the court granted Gelco’s motion for summary judgment, dismissing all claims against Gelco. Gelco’s attorney notified the other parties of the court’s decision on May 11, 2011. That same day, Forcelli’s attorney sent the signed and notarized release to Greene; she received it on May 16, 2011.

In New York, agreements to settle are governed by law, CPLR 2104. It provides that an agreement between the parties or their attorneys, other than one made between counsel in open court, is not binding unless it is in writing.8 If the agreement to settle was binding, the summary judgment exonerating Gelco would not set it aside. The question for the court was whether the email satisfied the requirement that the release be in writing.

In deciding in favor of Forcelli, the court wrote “On these appeals we address the question of whether an email message can satisfy the criteria of CPLR 2104 so as to constitute a binding and enforceable stipulation of settlement. Under the circumstances of this case, we conclude that the subject email settlement agreement was enforceable.” Therefore, the $230,000 release was binding even though the insurer had obtained summary judgment exonerating its insured.8

Second Thought: My first reaction to this case was: Why did the adjuster offer to settle a case where her insured had a good defense and why didn’t she wait until the declaratory judgment issue was resolved?

On reflection, I see some possible reasons:

1. The insured’s defense may not be as strong as the brief description in the decision makes it appear.

2. The claimant’s injuries may have been so severe that an adverse decision would be very costly.

3. The third party may have low limits while Gelco has very substantial limits so that a joint and several award might leave Gelco’s insurer holding the bag.

4. Most summary judgment motions are denied. An adverse decision on the summary judgment motion would eliminate the negotiating leverage of a pending summary judgment case.

Nevertheless, when the insurance company asks for a premium increase on renewal, citing “adverse experience,” you’ll be able to hear the insured’s screams without the need of a telephone.

Learning Point: Emails equal writing. Be careful what you write and tell your staff to be careful, too. Emails can bite. Don’t feed them.

1 Mudflow is defined as follows: a river of liquid and flowing mud on the surfaces of normally dry land areas, as when earth is carried by a current of water. Other earth movements, such as landslide, slope failure, or a saturated soil mass moving by liquidity down a slope, are not mudflows.

2 2013 NY Slip Op 05154 [108 AD3d 1110] Appellate Division, Fourth Department July 5, 2013 3Ken Serrano “When the Earth Moves, Insurance is Denied” Asbury Park Press August 23, 2013 http://www.app.com/article/20130822/NJNEWS/308220094/sandy-fema-insurance-earth-movement (accessed 9/18/13)

4 “Cuomo Announces Aid For Homes Damaged By Soil Movement During Irene, Lee, Sandy” NY1 News September 29, 2013 http://www.ny1.com/content/news/189600/cuomo-announces-aid-for-homes-damaged-by-soil-movement-during-irene—lee—sandy (accessed 9/29/13)

5 Charles A. Booth, Michael L. Anania and Douglas J. Steinke “Another View On K2 Investment V. American Insurance” Law370 September 10, 2013 http://fmew.com/media/law360_k2_booth.pdf (accessed 9/18/13)

6 64 N.Y.2d 419 (1985) 7 Cleveland Indians Baseball Co. v. N.H. Ins. Co., et al. US Court Of Appeals 6th circuit No. 12-1589 (8-23-13)

8 McKinney’s CPLR Rule 2104. Stipulations www.newyorkinjurycasesblog.com/uploads/file/ CPLR%202104.doc (accessed 9/24/13)

9 Forcelli v Gelco Corp. 2013 NY Slip Op 05437 July 24, 2013 Appellate Division, 2nd Department http://www.courts.state.ny.us /reporter/3dseries/2013/2013_05437.htm accessed 9/24/13