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By Seth V. Jackson and Kristin Suga Heres
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While 2012 will no doubt be remembered as the year of Hurricane Sandy, it is likely that 2013 will be a year notable for the proliferation of Sandy-related coverage litigation — or at least the beginning of such litigation.

This article will peer into the “insurance crystal ball,” anticipating some of the issues that may arise out of Hurricane Sandy and have an impact upon the insurance industry during the coming year. One of these issues no doubt will be the application of named storm or hurricane deductibles — an issue which has already become a focus of insureds and insurers alike.

As we look forward in time, it is also useful to take a look back at the road we have travelled in 2012, including the notable legislation, executive orders and case law that sets the stage for a busy year ahead. Specifically, this article takes a look at four cases decided over the past year that may influence the ways in which Hurricane Sandy claims are resolved.

2013 and Beyond

From Rhode Island to Virginia, businesses and homeowners alike have been devastated by the historic property damage caused by Hurricane Sandy. Current predictions are that insured losses from Hurricane Sandy could be as high as $20 billion.

As with most catastrophes, a myriad of complicated insurance coverage issues have already started to and will likely continue to arise, including whether property damage was caused by wind or flood, whether and how an insurance policy’s anti-concurrent causation provision applies and whether a hurricane or standard policy deductible applies.

The damage caused by Hurricane Sandy will also likely present time element coverage issues such as whether an insured sustained covered physical damage, whether and the extent to which the policy includes service interruption or off-premises power coverage, whether the insured suffered contingent business interruption losses due to damage to or closure of mass transit systems, bridges and tunnels and whether civil authority and ingress/egress coverage was triggered because of pre-storm evacuation orders or post-storm restricted zones. Extra expense coverage may also be implicated as businesses move their operations to temporary locations.

Although many losses are still in the adjustment process, several potential areas of dispute between insureds and insurers are beginning to emerge. For instance, the issue of whether a named storm or hurricane or standard policy deductible applies to Hurricane Sandy losses already has been a hot topic in the insurance industry and in state departments of insurance throughout the Northeast.

Many of the states in Hurricane Sandy’s destructive path, including Connecticut, New Jersey, New York and Pennsylvania, have issued executive orders and press releases barring the application of named storm/hurricane insurance deductibles because the storm was no longer a hurricane when it made landfall. Interestingly, these orders and statements appear only to be directed at homeowner insureds.

New Jersey Executive Order No. 107, which was signed by Gov. Chris Christie on Nov. 2, 2012, provides, “it shall be a violation of N.J.A.C. 11:2-42.7 [a New Jersey homeowners insurance regulation] for any insurer to apply a mandatory or optional hurricane deductible to the payment of claims for property damage attributable to Sandy.” Gov. Christie also issued a statement that “[w]e need to ensure the homeowners are not forced to pay higher out-of-pocket costs than required as they begin the rebuilding and repair process.”

Similarly, New York Gov. Andrew Cuomo issued a statement that “[h]omeowners should not have to pay hurricane deductibles for damage caused by the storm and insurers should understand the Department of Financial Services will be monitoring how claims are handled.” Unlike New Jersey, New York does not have any specific regulations relating to named storm or hurricane deductible. Nonetheless, New York’s head of insurance regulation “informed the insurance industry that hurricane deductibles are not triggered because Sandy did not have sustained hurricane-force winds when it made land in New York.”

Significantly, Connecticut is one of the only northeast states with a statute on point. Just prior to Hurricane Sandy, Connecticut enacted Public Act 12-162, Section 1(b), which permits insurers to apply a hurricane deductible only when the maximum sustained surface wind is 74 mph or more.

Notably, this law only applies to a “personal risk insurance policy,” “condominium master policy” and “unit owners’ association property insurance policy.” The Connecticut Insurance Department advised that hurricane deductibles may not be imposed because a "'Hurricane Warning' was not issued for the State of Connecticut nor did Connecticut sustain hurricane force winds as a result of Storm Sandy.”

Based upon the above orders and statements issued by New York, New Jersey and Connecticut, commercial property insurers may be exempt from these mandates, which would allow insurers to apply the named storm or hurricane deductible. However, despite the actual wording of the orders, insurers may elect not to seek to challenge these executive directives.

2012 in Review

Anti-concurrent Causation: Majority Rule Gains Momentum in Massachusetts

In two separate opinions issued this year, Massachusetts’ highest court confirmed its willingness to enforce anti-concurrent causation provisions contained in property policies.[1] In both cases, the Massachusetts Supreme Judicial Court construed surface water exclusions — both of which incorporated anti-concurrent causation language — as precluding coverage for property damage where surface water (an excluded peril) was a direct or indirect cause of the property damage.

Significantly, the court observed that there is no overarching concern “to protect some aspect of the public welfare” that would prevent anti-concurrent causation provisions from being enforced as written under Massachusetts law.[2]

Appraisal: Broadening Scope and Evolving Definitions of “Disinterested”

In recent years, there has been extensive litigation focusing on the scope of appraisal. Specifically, courts have grappled with whether appraisers may consider loss causation in addition to their traditional role of determining the amount of loss. This year, Minnesota’s highest court entered the fray, taking an expansive view of the scope of appraisal.

In Quade v. Secura Insurance, the Supreme Court of Minnesota determined that an appraisal could go forward even though an insurer had denied coverage for roof damage that it concluded resulted from “continual deterioration over a period of time rather than a specific storm occurrence.”[3] Noting that “the line between liability and damage questions is not always clear,” the court reasoned:

The [insureds] assert that the damage to the roofs is a covered loss for wind damage. [The insurer] asserts that the damage to the roofs is due to wear and tear and is excluded under the policy. We believe that under the circumstances of this case a determination of the “amount of loss” under the appraisal clause necessarily includes a determination of causation ... The [insureds] are incorrect that appraisers can never allocate damages between covered and excluded perils.[4]

Quade and other recent decisions regarding the scope of appraisal could have a significant impact on whether insurers and/or insureds elect to resolve disputes through appraisal in the wake of Sandy.

2012 also saw litigation regarding appraiser qualifications, including the requirement under some appraisal provisions that appraisers be “disinterested.” The U.S. District Court for the Eastern District of Missouri, applying Missouri law, went so far as to void an appraisal award where it found that an insurer’s party appraiser was not “disinterested” as a matter of law.[5]

The court reached this conclusion even though the insured had permitted the appraisal proceeding to continue through resolution without formally objecting to the appointment of the insurer’s appraiser. In rejecting the insurer’s argument that the insured had waived its right to object to the insurer’s appraiser, the court noted that the insured had previously expressed concerns about his appointment.

In Tamko Building Prods Inc. v. Factory Mutual Insurance Co., the court found that the insurer’s appraiser was interested as a matter of law because he had sought advice from the insurer on whom he should select as an umpire, allowed the insurer to review and comment on a draft of his appraisal presentation and sought approval on whether he should agree to the amount ultimately calculated by the umpire.

The court also concluded that the appraiser’s prior dealings with the insurer rendered him interested because of an indirect financial interest in the outcome of the appraisal. The appraiser had previously worked on 26 matters for the insurer. In addition, he held a significant ownership interest in his accounting firm, and business from the insurer constituted between 4 and 7 percent of his firm’s annual business.

The court also observed that the appraiser had personally cultivated the relationship between the insurer and his firm by hosting lunches, dinners, sporting events and office visits, noting that his “ongoing and future business prospects” with the insurer rendered him interested as a matter of law.[6]

--By Seth Jackson and Kristin Suga Heres, Zelle Hofmann Voelbel & Mason LLP

Seth Jackson and Kristin Suga Heres are associates in Zelle Hofmann's Waltham, Mass., office.

The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Surabian Realty Co. Inc. v. NGM Ins. Co., 971 N.E.2d 268, 272-74 (Mass. 2012); Boazova v. Safety Ins. Co., 968 N.E.2d 385, 395 (Mass. 2012).

[2] Boazova, 968 N.E.2d at 394.

[3] Quade v. Secura Ins., 814 N.W.2d 703, 704 (Minn. 2012).

[4] Id. at 706–07.

[5] Tamko Building Prods Inc. v. Factory Mut. Ins. Co., No. 4:10CV891, -- F.Supp.2d – , at *5-7 (E.D.Mo. Aug. 21, 2012).

[6] Id. at *8.