October 01, 2011

Representing Homeowners after a Natural Disaster

Andrea McKellar


Tragedy has struck. And now your friends, acquaintances, and members of your community have looked to you for assistance. Representing a homeowner after a natural disaster is certainly not something you were taught in law school, and, thankfully, experience in this area is generally not commonplace among the bar (except, perhaps these days, in New Orleans).

The Federal Emergency Management Agency (FEMA) sponsors an “Individuals and Households Program” aimed at assisting private homeowners and renters after a natural disaster. FEMA has structured the response to a natural disaster into three phases: emergency, relief, and long-term recovery. As you may expect, the emergency phase is typically provided by the local government and volunteer organizations and consists of providing food, shelter, clothing, and medical care for those in need. The relief phase consists of several layers of assistance, including an individual’s personal insurance, FEMA housing assistance, disaster loans from the Small Business Administration, and “other than housing needs” assistance from FEMA. The final phase, long-term recovery, is provided by volunteer agencies and interfaith organizations.

Attorneys are typically sought to provide assistance in maneuvering through the relief phase to ensure that their clients are obtaining the most relief possible.


Insurance Coverage

Insurance policies and the coverage they provide are strict contracts. So, as painful as it is, read the policy and then read the policy again. Generally, the only time that courts will venture outside of the four corners of the contract is in the case of ambiguity. Condominium owners should look at coverage provisions in both their individual unit owner’s insurance policy and their association insurance policy.

Most homeowner’s policies provide coverage for losses from tornadoes and hurricanes, which often fall under the classification of “windstorm.” Some policies, however, address hurricanes separately. All property insurance policies provide coverage for losses resulting from fires.

Homeowner’s insurance from the private sector generally does not cover flood damage. It may cover water damage inside the home, but damage from floods or surface water is generally excluded. However, insurance for both is available for an additional premium from most insurers under the National Flood Insurance Act. If a client buys a house in a designated high-risk flood zone and obtains a mortgage loan from a federally regulated or insured lender, the lender is legally bound to require the homeowner to get and maintain flood insurance.

The National Flood Insurance Program offers two types of flood insurance coverage: (1) coverage for the building and physical property up to $250,000 and (2) coverage for personal property (or contents) up to $100,000. A standard flood insurance policy is a single-peril (flood) policy that pays for direct physical damage to the insured property up to the replacement cost or actual cash value of the actual damages of the policy, whichever is less. Thus, just because a client has “flood insurance” does not mean the insurance covers damage to the contents of the home, such as furniture or appliances. Rather, an insured must have a separate policy that specifically addresses and covers the contents of the home. This came as a shock to many homeowners in Nashville, Tennessee, who thought they were fully covered by insurance when struck by a flood in 2010.

Homeowner’s insurance also does not typically extend to damage from an earthquake. Earthquake coverage can be purchased as an endorsement or a separate policy.

Normally, auto insurance will cover damage to a vehicle under the comprehensive policy coverage, although the particular language and exclusions of the policy will control. Even if an exclusion from comprehensive coverage exists for damage caused by natural disasters, coverage may exist under a collision policy if the natural disaster and event causing the damage could be construed as a collision.

A tricky and often-litigated question is what caused the damage for which your client seeks coverage. The direct cause of damage is not always clear, and the vague and ambiguous wording of insurance policies gives insurance companies the ability to manipulate the language to avoid such coverage. For example, insurance companies commonly denied coverage in the aftermath of Hurricane Katrina, claiming that the damage was from the storm surge and not the hurricane. Similarly, flood insurance will typically only cover damage from sewage backup if such damage is directly caused by flooding.

Courts generally have ruled that there is insurance coverage if the covered risk was the efficient or proximate cause, even if it was not the only cause of the loss and even if other concurrent causes are expressly excluded from coverage. The benefit to homeowners in such claims is that ambiguities in the policies are construed against the insurance carrier as the drafter. Furthermore, a plaintiff has a good chance of prevailing against an insurance company if he or she can survive summary judgment and try the case before a jury, whose members have likely suffered from the disaster as well and likely view insurance companies unfavorably. For example, a federal jury in Gulfport, Mississippi, awarded homeowners $2.5 million in punitive damages against State Farm for denying the homeowners’ claim for coverage after Katrina. The judge took part of that case from the jury’s hands, holding that State Farm was liable for $223,292 in storm damage to the home. Less than two weeks after the judgment, State Farm agreed to settle hundreds of lawsuits by policyholders and reopen and pay thousands of other disputed claims.

In order to preserve their claim and protect their right to repayment, clients should immediately report a loss that may be covered—both by telephone and in writing. Many insurance policies exclude coverage for failure to timely report a claim (although this is unlikely during a natural disaster). The insurance carrier should send an adjuster out to inspect the damage within days. If your client is not satisfied with the timeliness of the response, you or your client should contact your state’s Department of Insurance.

In preparation for the adjuster, your client should make a list of all damaged or destroyed property, take pictures of such property, collect contact information for witnesses, obtain repair estimates, keep a record of expenses (such as alternative housing), and locate original bills and receipts for lost items. You or your client should determine whether your client’s insurance policy provides for reimbursement for temporary housing relocation costs while the home is being repaired and for car rental costs while the car is being repaired or replaced. You should advise your client not to replace property or incur expenses until he or she confirms that such costs will be reimbursed by the insurance company.

Obviously, you should advise your client not to sign any release or waiver or cash any check that could be deemed full and final payment before seeking your advice. Your client should understand the full extent of the damage and get multiple estimates before settling his or her claim.


Mortgage Liability

Homeowners should be advised to pay their mortgage even though they cannot live in their house because of the damage. If an owner has homeowner’s insurance, the insurance company should pay for living expenses while the owner cannot live in the home. Furthermore, many lenders offer a grace period of several months to delay payment, even though interest will likely be accruing, so homeowners should check with their lender to determine if forbearance is an option. Any agreement in this regard should be put in writing. As described below, homeowners may qualify for FEMA payments to help with the mortgage. Homeowners who have an income and want to stay in their home, but who have trouble making mortgage payments, should consider filing for Chapter 13 bankruptcy. In a Chapter 13 bankruptcy, the homeowner proposes a plan of how he or she will make regular mortgage payments, living expenses, and pay an amount each month toward the mortgage arrears.

Similarly, condominium owners should still pay maintenance fees to their homeowner’s association, even if the homeowner’s association is not fixing the common areas or the condominium owner is not satisfied with how the association is handling the repairs. In this instance, condominium owners should make sure they attend homeowner’s association meetings to voice their concerns and consider joining other residents to obtain legal advice to address their common situation. Failure to pay maintenance fees could subject the condominium owner to foreclosure and other financial penalties.


Assistance from the Federal Government

If your clients’ insurance does not cover all the damage to their home or personal property, and if they are unable to pay for the repair or replacement of essential parts of their home or essential personal property, they may be eligible for benefits under the FEMA program. FEMA provides money for temporary housing and to repair or replace the home. The maximum amount that FEMA will provide for temporary housing and repairs or replacement varies depending on the maximum grant that is available for the applicable disaster. In rare circumstances, such as remote areas where there is no other housing assistance available, FEMA will assist with the construction of a home or provide money toward construction of a home. FEMA also offers money for necessary and serious needs, also called “other needs assistance,” caused by the disaster, including disaster-related medical and dental costs, disaster-related funeral and burial costs, clothing, household items, work-related tools, and necessary educational materials. The maximum amount of “other needs assistance” that FEMA will provide is $29,900.

The Small Business Administration offers disaster loans wherein homeowners can borrow up to $200,000 for their house, up to $40,000 for their personal property, and up to $2 million for their business.


Other Recourse

If clients are without insurance coverage to cover their total losses, other recourse may be available.

If clients thought they had insurance coverage for a loss, but did not, there may be a cause of action against their insurance agent for negligence. Courts have held that an agent’s failure to sell you the proper insurance or to instruct you as to the type of insurance available, if a policy could be readily purchasable, is negligent and the agent is responsible for losses that would have otherwise been covered. Factors that come into play in such a lawsuit are the relationship between the agent and the insured and the communications, or lack thereof, regarding the coverage sought. There are several lawsuits pending in the wake of Nashville’s 2010 flood regarding insurance agents’ alleged failure to explain that the flood insurance obtained did not cover the contents of the home and to specifically offer and/or explain the availability of flood insurance coverage for personal property.

A homeowner may also have recourse against a builder, seller, or real estate agent for fraud or negligent misrepresentation if the professional made an affirmative misrepresentation concerning the possibility for flooding or other susceptibility to natural disasters, assuming all other elements of fraud or negligent misrepresentation are present.

There may be an action against other third parties for causing or contributing to the disaster, such as oil and gas companies for contamination that occurs during or in the aftermath of a disaster or for eroding the environment that provides protection against such natural destruction. The government is another potential target, but in many instances the government is protected by sovereign immunity. For example, the Flood Control Act of 1928 immunizes the government when flood control projects fail, such as the levees in New Orleans. Some Katrina lawsuits were able to avoid the sovereign immunity by focusing on the alleged negligent failure of the Army Corps of Engineers to maintain the Mississippi River Gulf Outlet, a navigation canal, that they claimed caused the breaching of the levee and the catastrophic flooding. See In re Katrina Canal Breaches Consol. Litig., 647 F. Supp. 2d 644 (E.D. La. 2009).

There is generally no remedy against your client’s neighbor whose property ran into or fell onto your client’s property during a natural disaster. Under the law, a person is not liable for injuries or damages caused by a disaster or an “Act of God” where there was no fault or negligence. There can only be liability where there is concurrent negligence and that negligence was the proximate cause of the damage.

If your client’s property was carried away (by a flood, for example) and comes to rest on the land of another, it remains your client’s property, and your client may enter and retrieve it. If the landowner refuses to let your client enter or appropriates the property for the landowner’s use, the original owner of the personal property will have an action against the landowner. That being said, the landowner, as the involuntary bailee, has the right to possession of the property against all others, save the true owner. The landowner has no obligation to preserve the property and may move the property in a reasonable manner if necessary to use the land.



In sum, attorneys representing homeowners after a natural disaster should investigate all potential resources for their clients, study the precedent being set in this expanding body of law, and use that precedent to attempt to expand their clients’ recovery.



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