THURSDAY, JUNE 10, 2010 

                                                Big “I” Association News




P-C Trends
Hurricanes and Oil Don’t Mix
What are the insurance implications of the Gulf oil spill?

Usually oil and water don’t mix—until now. With hurricane season just underway and oil still gushing into the Gulf of Mexico, it might only be a matter of time before oil and water do mix to create a potential insurance claim. So, if oil ends up in/on your insureds’ property, is it covered?

First, it is important to note that insurance policies differ. This analysis is restricted to standard ISO coverage forms. Insurance practitioners and policyholders must consult the specific policy which insures the damaged property in order to make a final determination as to whether or not there is coverage. Also, in many instances, coverage will be fact dependent and the necessary generalizations in a coverage discussion such as this may or may not apply to your insured’s specific circumstances and policy forms.

Fundamental to any direct property damage claim is the requirement for damage to covered property by a covered cause of loss. (Note: Some indirect coverages such as business income may only require damage to property—not necessarily covered property—to trigger coverage.)

Numerous coverage provisions of the current ISO HO 00 03 Homeowners policy and the ISO CP 00 10 Commercial Property coverage form could come into play in a hurricane, such as direct property damage, loss arising from orders of civil authority, additional living expenses, business income and extra expenses, debris removal and so forth.

However, all these coverage provisions require that there first be damage by a covered cause of loss. Therefore, the key to determining whether or not any of these various coverage provisions would apply to a hurricane-and-oil loss would hinge on what role the hurricane played in putting oil into or onto an insured’s covered property.

Since damage by a hurricane has a water component and a windstorm component, each requires a separate examination.


Coverage for Direct Damage Caused by Waterborne Oil

This would be the result of the classic “storm surge” that every coastal resident is all too familiar with. During a press conference on the eve of the 2010 hurricane season, NOAA Administrator Jane Lubchenco commented that “if there is a hurricane in the Gulf of Mexico, and it makes landfall someplace on the Gulf Coast, it is possible that some of the oil that’s on the surface might be transported through the storm surge on the coastal area as high as the storm surge goes.”

In addition, while a meteorologist would have to gauge its feasibility, it’s conceivable that a hurricane could deposit oil farther inland in the form of heavy rains.

Coverage Under ISO HO and CP Forms. In the wake of litigation following Hurricane Katrina, ISO revised the water damage (so-called “flood”) exclusions in the Homeowners, Dwelling, Commercial Property and BOP coverage forms. The revised language is presently added to existing coverage forms by way of mandatory endorsements for each type of policy. In the future, the new language will be incorporated into the body of each policy at the next revision.

Below is the new water damage/flood exclusion (emphasis added for later discussion). This exhibit is from the HO 16 10 01 09 which is mandatory for the HO 00 03 and HO 00 05. There are different versions of this same Water Exclusion Endorsement promulgated for use with the other HO forms, as well as for Dwelling, CP and BOP forms. The other versions differ only in the reference to specific provisions in the existing forms to which the exclusion applies. The essential scope of the new water damage exclusion is the same for all coverage forms.

WATER EXCLUSION ENDORSEMENT
SECTION I—EXCLUSIONS
 

A.3. Water Damage is replaced by the following:
3. Water
This means:

a. Flood, surface water, waves, including tidal wave and tsunami, tides, tidal water, overflow of any body of water, or spray from any of these, all whether or not driven by wind, including storm surge;

b. Water which:

(1) Backs up through sewers or drains; or
(2) Overflows or is otherwise discharged from a sump, sump pump or related equipment; 

c. Water below the surface of the ground, including water which exerts pressure on, or seeps, leaks or flows through a building, sidewalk, driveway, patio, foundation, swimming pool or other structure; or

d. Waterborne material carried or otherwise moved by any of the water referred to in A.3.a. through A.3.c. of this Exclusion.
This Exclusion (A.3.) applies regardless of whether any of the above, in A.3.a. through A.3.d., is caused by an act of nature or is otherwise caused.
This Exclusion (A.3.) applies to, but is not limited to, escape, overflow or discharge, for any reason, of water or waterborne material from a dam, levee, seawall or any other boundary or containment system.

However, direct loss by fire, explosion or theft resulting from any of the above, in A.3.a. through A.3.d., is covered.
All other provisions of this policy apply.

© ISO Properties, Inc.

Regarding the issue of oil which has been deposited by the storm surge, section A.3.d. now clearly excludes damage by “waterborne material carried or otherwise moved by any of the water...” For insurers who have not adopted the revised water damage exclusionary wording related to “waterborne material,” damage done to covered property by the oil might be covered under the exception to the pollution exclusion—discussed in the next section below.

Otherwise, this would appear to exclude claims arising from waterborne oil. In addition, note that the exclusion applies whether caused by an act of nature “or is otherwise caused” (e.g., by an oil rig mishap). The exclusion goes on to say that it applies to discharge of waterborne material from any other boundary “or containment system” (e.g., an underwater well?). Finally, any resulting “direct loss by fire, explosion” is covered; however, in this case, the waterborne material, at best, resulted from fire or explosion, not vice versa.

It is important to note that the Water Damage exclusion is found in the so-called “anti-concurrent causation” (ACC) section of the policy exclusions. Therefore, where water has been pushed ashore by the force of the windstorm (as a “storm surge”), the damage done by the water is still excluded, as stated in the introduction to the ACC exclusions [emphasis added]: “We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss. These exclusions apply whether or not the loss event results in widespread damage or affects a substantial area.”


Coverage for Direct Damage Caused by Windborne Oil

It is plausible that a strong hurricane or a waterspout could pick up oil and deposit it miles inland, onto or into a home or business. The coverage analysis now revolves around the pollution exclusion since windstorm itself is a covered peril in the ISO Homeowners, Dwelling, Commercial Property/Causes of Loss, and BOP forms. However, damage by pollution is excluded unless the release, escape, migration, etc. of the pollutant is caused by a specific named peril.

The Special Causes of Loss pollution exclusion in these coverage forms (e.g., HO 00 03 and CP 10 30) is essentially the same, with minor variations. The following policy excerpt incorporates the primary language of the Homeowners and Commercial Property pollution exclusions to illustrate the similarities and minor differences:

Exclusions.
“Discharge, dispersal, seepage, migration, release or escape of pollutants unless the discharge, dispersal, seepage, migration, release or escape is itself caused by a Peril Insured Against named under Coverage C.” [HO 00 03]…or “by any of the ‘specified causes of loss’.” [CP 10 30].

Therefore, it could be argued that fire, explosion or windstorm caused the pollutant (oil) to be released, escape, migrate, etc., and therefore any damage done by windstorm-deposited oil would be covered. Note, however, that this exception to the pollution exclusion would not apply to damage done by water (i.e., the storm surge), due to the “anti-concurrent causation” language in the water damage exclusion previously discussed. Also, keep in mind that, aside from the dispersal by windstorm, this presumes that the originating cause of the spill was explosion or fire.

And, while there is no pollution exclusion in any of the Named Peril coverage forms (HO 00 02, HO 00 04, etc., and CP 10 10 and CP 10 20), since these forms cover fire, explosion or windstorm, damage done by the oil which was deposited on the covered property as a result of fire, explosion or windstorm could be covered due to the doctrine of proximate cause. Since the pollution exclusion is not contained in the “anti-concurrent causation” section of the exclusions, the doctrine of proximate cause can be applied to loss situations.

Coverage for Indirect or Consequential Losses

In the standard ISO property coverage provisions in personal lines and commercial lines, indirect or consequential losses such as business income and extra expense, additional living expenses, civil authority, debris removal, pollution cleanup, etc. are triggered if there is first direct damage by a covered cause of loss.

For example, there have already been reports of condo rental cancellations by vacationers and hotel cancellations by conventioneers. These cancellations arise from the uncertainty of future conditions, so the resulting loss of income is not due to direct damage on premises by a covered peril.

As discussed earlier, where the direct damage coverage form excludes such damage by oil related to the action of a hurricane, then there would also be no coverage for any indirect or consequential losses that might otherwise be afforded by a particular policy.

But, where a particular coverage form provides direct damage coverage for oil damage related to a hurricane, then the precondition of damage by a covered cause of loss has been met. At that point, the other conditions precedent to coverage can be analyzed as they normally would. For example, even if the cause of loss is covered, if a dwelling is still “fit to live in” or a hotel building is still “tenantable,” there may still be no coverage.

This article is a collaborative effort of the VU faculty, led by Mike Edwards, CPCU, AAI, and assisted by Bill Wilson, CPCU, ARM; John Eubank, CPCU, ARM; and David Thompson, CPCU, AAI.

NOTE: Policy coverages and circumstances can change at any time, so the information above may not be accurate at the time of reprinting or subsequently to that time. The Big “I” does not assume and has no responsibility for liability or damage which may result from the use of any of this information. The most current, up-to-date version of this article can be found at the Big “I”Virtual University at http://www.iiaba.net/VU or e-mail bill.wilson@iiaba.net.





P-C Trends
Oil, Flood and the NFIP
How does the NFIP address pollutants like oil?

Since the standard ISO policies exclude damage from both “water” (“flood”) and “waterborne material,” it is important to examine how the NFIP flood policies (Dwelling Form and General Property Form) address the issue of pollutants such as oil which are often present in a flood. In fact, flood waters are frequently a witch’s brew of all sorts of pollutants, including sewage, household, lawn care and industrial chemicals, automotive fuels and lubricants, medical waste, garbage and myriad other kinds of gunk.

In the Dwelling Form, the only exclusion in Section V—Exclusions that references pollution is the following:

Exclusions. F.  We do not pay for the testing for or monitoring of pollutants unless required by law or ordinance.

In Section III—Coverage D Increased Cost of Compliance, the following pollution-related exclusion is included, related to testing and monitoring, etc. of pollution:

Exclusions. 5.b. The cost associated with enforcement of any ordinance or law that requires any insured or others to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of pollutants.

In the General Property Form, there is no pollution exclusion in Section V—Exclusions. However, in Section III—Other Coverages, there is a sublimit of $10,000 for pollution damage, as follows:

3. Pollution Damage
We will pay for damage caused by pollutants to covered property if the discharge, seepage, migration, release, or escape of the pollutants is caused by or results from flood. The most we will pay under this coverage is $10,000. This coverage does not increase the Coverage A or Coverage B limits of liability. Any payment under this provision when combined with all other payments for the same loss cannot exceed the replacement cost or actual cash value, as appropriate, of the covered property. This coverage does not include the testing for or the monitoring of pollutants unless required by law or ordinance.

As in the Dwelling Form, the General Property Form also has a pollution exclusion in Section III—Coverage D Increased Cost of Compliance, related to testing and monitoring, etc. of pollution that is identical to Exclusion 5.b. above.

In the Dwelling Form, damage to covered property from a flood that is otherwise covered by the flood policy is not impaired by the presence of pollutants such as oil from the oil spill in the Gulf. In addition, testing or monitoring of pollutants which is required by a law or ordinance is also covered. For claims covered under Coverage D Increased Cost of Compliance (ICC), the testing, monitoring, clean up, etc. that is required by ordinance or law is not covered. Note that ICC only has a limit of $30,000.

Under the General Property Form, there is no pollution exclusion for damage to covered property, but there is a sublimit of $10,000 for damage by a pollutant where a flood caused the discharge, seepage, migration, release, or escape of the pollutant—in this case, oil from the Gulf. It is unclear exactly how a claims-adjustment expense specifically related solely to damage by the pollutant (oil) can be determined in situations like a storm surge. However, to the degree that such costs can be isolated and assigned to the presence of a pollutant such as oil, the sublimit of $10,000 would apply.

This article is a collaborative effort of the VU faculty, led by Mike Edwards, CPCU, AAI, and assisted by Bill Wilson, CPCU, ARM; John Eubank, CPCU, ARM; and David Thompson, CPCU, AAI.





P-C Trends
State Farm Bails Its Way Out of Flood Insurance
Exit by major player creates market opportunity for independent agents.

The second largest individual writer of flood insurance is out of the market. When The Sarasota Herald-Tribune reported that State Farm is leaving the national flood insurance program (NFIP), it set off a flurry of handwringing in the industry as to what it means. While it could be a big opportunity for independent agents, the departure also marks the disappearance of a good comparative measure for Big “I” members and their flood insurance operations.



Source: 2009 Annual Statement for State Farm Fire and Casualty and 2009 Best’s Key Rating Guide for Texas, Florida and California Homeowners Premiums. Bottom 26 is available; just email  paul.buse@iiaba.net.

First, here are the facts. When the State Farm spokesperson announced the company was leaving the NFIP, he was referring to the insurance company’s participation in the Write Your Own (WRO) program. A WRO insurer collects NFIP premiums and—after reimbursing itself for administration costs and paying agents’ commissions—it passes the remaining premiums and losses to the Federal Emergency Management Agency (FEMA) and the NFIP.

State Farm agents will continue to have access to NFIP directly through FEMA. That means after this transition, quotes and policies will come from NFIP and when a loss occurs, State Farm agents will still accept the report of claim. Going forward, however, if a claim involves both possible wind and flood loss, State Farm will adjust the wind/homeowners insurance claim, but flood damage will be sent as an NFIP claim. With multiple cause losses, State Farm and NFIP will battle for who pays for what in a more arms-length approach.

Third, the fact that State Farm and its flood policy issuing insurer, State Farm Fire and Casualty Company (along with the 17,700 State Farm agencies), are changing their flood approach is a big deal. State Farm represents about 15% of the NFIP policies in force nationally, and it received about $140 million in NFIP reimbursement (of which $56 million was sent to State Farm agents). Those agents average $22,000 in flood premiums per agency (compared to about $800,000 in standard homeowner’s premiums per agency). State Farm pays its agents an average of 14.3% commission on NFIP business and, interestingly, the average does not vary much state to state.

Finally, State Farm did not significantly out-perform flood insurance penetration averages. State Farm writes about one-fifth of the nation’s homeowners premiums and about one-sixth of the NFIP business. Being able to take that information from publicly-filed insurance statements and compare it state-by-state makes for interesting comparisons for other agents in both the homeowners and flood insurance placement business.

So what does this mean for independent agents?

First, look at your state of operations and ask if your agency is above or below the State Farm average in capturing NFIP premiums. Flood insurance implications for agency E&O are minimized in agencies that write more flood insurance. By the numbers, for every $100 of homeowners premiums, are you meeting the standard set by State Farm for penetration of NFIP premiums?

Second, think strategically about the State Farm agent facing an involuntary book role from State Farm to the NFIP. How can you take advantage of that? Every book roll creates turmoil with customers as cancellation notices arrive—and business can unexpectedly arrive on the doorstep of competitors. In addition, the WRO operation model is vastly more successful than dealing directly with NFIP. For every NFIP policy written, there is a 97% chance it was written with a WRO program and not directly with NFIP. State Farm agents are joining now the minority processing platform. History would indicate if independent agents are using a quality WRO insurer, the ability to rate, quote and issue should be better than the process State Farm agents will face going forward. When someone needs a policy quickly for loan closing or just better service on getting coverage issued, independent agents should have a clear advantage.

Paul Buse (paul.buse@iiaba.net) is president of Big “I” Advantage® and a licensed p-c agent.


On the Hill
Financial Services Reform Bill in Final Stages
Senate and House conference committee begins to reconcile differences in two versions.

This week the Senate and House began reconciling the financial services regulatory reform bills through the conference committee process.

The negotiation process is expected to last approximately two weeks, which would allow members to meet their goal of sending the bill to President Barack Obama’s desk before the July 4 recess. The major issues of contention will likely focus on the regulation of derivatives trading, authority of a new consumer financial protection entity and financing of the resolution fund to unwind large failing financial firms.

The Senate conferees hail from the Committee on Banking, Housing, and Urban Affairs and the Committee on Agriculture, Nutrition, and Forestry. The conferees are Senators Chris Dodd (D-Conn.), Tim Johnson (D-S.D.), Jack Reed (D-R.I.), Chuck Schumer (D-N.Y.), Richard Shelby (R-Ala.), Bob Corker (R-Tenn.), Mike Crapo (R-Idaho), Judd Gregg (R-N.H), Blanche Lambert Lincoln (D-Ark.), Patrick Leahy (D-Vt.), Tom Harkin (D-Iowa) and Saxby Chambliss (R-Ga.).

The House conferees are members of the Committee on Financial Services, Committee on Energy and Commerce, Committee on the Judiciary, Committee on Oversight and Government Reform, Committee on Small Business and Committee on Agriculture. The conferees are Representatives Barney Frank (D-Mass.), Paul Kanjorski (D-Pa.), Maxine Waters (D-Calif.), Carolyn Maloney (D-N.Y.), Luis Gutierrez (D-Ill.), Mel Watt (D-N.C.), Greg Meeks (D-N.Y.), Dennis Moore (D-Kan.), Mary Jo Kilroy (D-Ohio), Gary Peters (D-Mich.), Collin Peterson (D-Minn.), Leonard Boswell (D-Iowa), Henry Waxman (D-Calif.), Bobby Rush (D-Ill.), John Conyers (D-Mich.), Howard Berman (D-Calif.), Edolphus Towns (D-N.Y.), Elijah Cummings (D-Md.), Nydia Velazquez (D-N.Y.), Heath Shuler (D-N.C.), Spencer Bachus (R-Ala.), Ed Royce (R-Calif.), Judy Biggert (R-Ill.), Shelley Moore Capito (R-W.V.), Jeb Hensarling (R-Texas), Scott Garrett (R-N.J.), Frank Lucas (R-Okla.), Joe Barton (R-Texas), Lamar Smith (R-Texas), Darrell Issa (R-Calif.), and Sam Graves (R-Mo.).

Yesterday, the Big “I” sent a letter to conferees to weigh in on the part of the bill that would have the largest impact on independent insurance agents. Both the House and Senate bills, H.R. 4173, the “Wall Street Reform and Consumer Protection Act of 2009,” and S. 3217, the “Restoring America’s Financial Stability Act,” respectively, include provisions that would establish a non-regulatory insurance office within the Treasury Department that is authorized to obtain and review industry data, advise federal officials on national insurance issues and coordinate efforts on international insurance matters. Although the two versions are similar, the Big “I” prefers the House language to the Senate. The House FIO language increases the level of insurance knowledge at the federal level and allows the U.S. to play a stronger role in negotiating international insurance agreements without the creation of a federal insurance regulator.

Additionally, the House proposal includes several due process protections that are missing from the Senate bill. The House bill also ensures that international insurance agreements are properly developed and vetted, preventing the unnecessary and arbitrary preemption of state law thereby ensuring that insurance consumers are better protected.

As a reminder, this legislation leaves the day-to-day regulation of insurance in the hands of state regulators. The Big “I” has advocated for this position along with many others in the property/casualty community who argue that state regulation has operated effectively and that the property/casualty industry was not the cause of this financial crisis and insurers do not pose any systemic risk. In another major win for the Big “I,” insurance agents are explicitly excluded from any mandatory data collection requests from the insurance information office.

As the reconciliation process moves forward, the Big “I” Capitol Hill team will continue to advocate on behalf of sound legislation and keep members posted on developments.

To read the most recent letter from the Big “I” to congressional leaders on the financial services regulation legislation, click here.

Margarita Tapia (margarita.tapia@iiaba.net) is Big “I” director of public affairs.


On the Hill
Big “I” Continues to Press Congress for Long-Term Extension of Flood Program
NFIP is still “expired” with little hope of reauthorization until next week.

Lack of congressional action allowed the National Flood Insurance Program (NFIP) to expire on the eve of opening day of hurricane season (June 1) and the program has now been lapsed for over a week. Though Congress has returned from their Memorial Day recess, the House and Senate at this time have made little progress in moving on their broad “Extenders” legislation that would extend the NFIP along with other programs such as unemployment insurance, COBRA subsidies, and Medicare physician payments. It now appears likely that the NFIP (as well as the other programs) will remain expired until at least the middle of next week.

In its continuing efforts to reauthorize the program and advocate for a long-term extension, yesterday the Big “I” sent a pointed letter to Senate Majority Leader Harry Reid (D-Nev.), Speaker of the House Nancy Pelosi (D-Calif.), Senate Minority Leader Mitch McConnell (R-Ky.) and House Republican Leader John Boehner (R-Ohio) urging “Congress to immediately pass a reauthorization of the NFIP with retroactivity to June 1, 2010.”

The association firmly believes that lapses in this program cause confusion and leave many homeowners and small businesses unprotected during a delicate economic period and a dangerous time of the year. June 1 was the first day of the 2010 hurricane season which weather forecasters and scientists estimate will be very active.

The Big “I” letter says, “These repeated expirations have caused confusion in the marketplace for consumers, agents, companies, and even regulators. Residential and commercial real estate transactions in flood zones across the country face the prospect of coming to a virtual stop, as federally-backed mortgage loans for properties in flood zones cannot be secured without this critical protection.”

Margarita Tapia (margarita.tapia@iiaba.net) is Big “I” director of public affairs.