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May 21, 2013 Articles

Superstorm Sandy: Minimizing Extra-Contractual Risk in Late-Filed Claims

Several complicating factors result from later-filed claims, including the difficulty that comes with identifying losses and attributing those losses to a particular cause

by J. Randolph Evans, J. Stephen Berry, Alan Kaufman, and Michelle Swiren Zaltsberg[1]

Superstorm Sandy struck the eastern United States on October 29, 2012. The storm affected 24 states, including the entire eastern seaboard from Florida to Maine, and west across the Appalachian Mountains to Michigan and Wisconsin, with particularly severe damage in New Jersey and New York. Damage in the United States is estimated at over $63 billion. As a result, thousands of insurance claims—for both property damage and business interruption—have already been made.

Of greater significance are the thousands of claims that have not yet been made. Significantly, the insurance industry has encountered the storm’s six-month anniversary—the time when seemingly simple claims start to become complicated; unresolved claims shift from frustration to litigation; and new claims of latent (or allegedly latent but possibly fraudulent) damage are made. Several complicating factors result from later-filed claims, including the difficulty that comes with identifying losses and attributing those losses to a particular cause. This is especially true when a severe weather event causes damage in multiple ways—such as both water and wind—involving separate coverage issues.

Minimizing extra-contractual exposure has three components, which, preferably, should be implemented within six months after the event: First, early recognition of the coverage issues and respective rules in each relevant jurisdiction. Second, a good understanding, on the part of insurers, of the statutory or common-law standards for bad faith applicable in each relevant jurisdiction (with regard to Sandy, the three most relevant states are New York, New Jersey, and Pennsylvania). Third, early recognition claims-handling protocols that identify potentially problematic claims; these claims require special attention to ensure they are quickly and fully resolved. This article addresses each of these components.

Coverage Issues Common to Superstorm Sandy Claims Deductibles/sub-limits. Hurricane-specific wind deductibles increase the availability of insurance coverage for hurricane damage at lower premiums. The deductible is usually triggered by declaration of a hurricane warning by the National Weather Service. For reasons that may be political, the National Weather Service did not issue a hurricane warning for Sandy, and, as a result, state governments in the Northeast announced that hurricane-specific wind deductibles would not apply. Accordingly, it is unclear whether these deductibles will have any real application in future storms.

Business interruption. Business interruption coverage typically insures against “loss resulting directly from the necessary interruption of business caused by direct physical loss or damage, not otherwise excluded, to insured property at an insured location.” Accordingly, it is only available when the insured location has been physically damaged.[2] Recent cases from New Jersey further illustrate this rule.[3]

Civil authority. Civil authority provisions cover losses sustained “during the period of time when access to real or personal property is impaired by order or action of civil or military authority issued in connection with or following a peril insured against.”[4] New York courts have consistently applied this rule.[5]

Flood versus wind. Most major storms involve claims that center on the precise cause of loss. For example, a policy might cover damage to a home’s interior caused by wind (i.e., wind creates openings in the home’s roof, allowing water to enter) but not damage caused by flood. What happens, then, when both of these things occur during the same storm? New Jersey courts have “adopted the approach known as ‘Appleman’s rule,’ pursuant to which the loss is covered if a covered cause starts or ends the sequence of events leading to the loss.”[6] Where the causes are indivisible, the insured has the burden to prove that the loss is covered:

To prevail on a policy such as this, the insured must prove a ‘direct loss by windstorm’. If the insured introduces evidence of a loss due to windstorm, the burden is upon the insurer to come forward with evidence that the loss was due to an excluded cause; but if either in the insured’s or the insurer’s case evidence appears which tends to prove that the loss was due to a cause other than windstorm, or to an expressly excepted cause, the burden is upon the plaintiffs to overcome that evidence. In the case at bar the evidence tended to prove not only that the sea contributed substantially to cause the damage but that it was the sole cause of the damage. Therefore, it became plaintiffs’ burden to prove that the sea was not the sole or a substantial cause of the loss.[7]

Applicable Standards of Good-Faith Claim Handling
New York. New York Insurance Law section 2601 does not support a private right of action.[8] Under New York common law, extra-contractual damages are available where an insurer denies coverage in bad faith and consequential damages were reasonably contemplated by the parties.[9] However, absent any specific “consequential” damages, it is difficult for policyholders to establish penalties based just on the belated or insufficient payment of claims. In a liability insurance case, one court described the issue as follows:

[I]n order to establish a prima facie case of bad faith, the plaintiff must establish that the insurer’s conduct constituted a “gross disregard” of the insured’s interests—that is, a deliberate or reckless failure to place on equal footing the interests of its insured with its own interests when considering a settlement offer. In other words, a bad-faith plaintiff must establish that the defendant insurer engaged in a pattern of behavior evincing a conscious or knowing indifference to the probability that an insured would be held personally accountable for a large judgment if a settlement offer within the policy limits were not accepted.[10]

Punitive damages are recoverable to a plaintiff insured, but the defendant’s conduct “must be (1) egregious, (2) directed at the plaintiff and (3) part of a pattern of similar conduct directed at the public at large.”[11] Typically, attorney fees are not recoverable.[12]

Of course, the absence of a private right of action does not insulate insurers from regulatory action. The New York Department of Financial Services recently announced an investigation into the practices of three insurers that, allegedly, did not promptly adjust, process, or investigate Sandy claims.[13]

In addition, New York has recently created a mediation program administered by the American Arbitration Association. It is available to claimants who have not yet begun litigation or appraisal proceedings.

New Jersey. As in New York, New Jersey’s Unfair Trade Practice Act does not support private causes of action.[14] Under New Jersey law,

“a plaintiff must show the absence of a reasonable basis for denying benefits of the policy. . . .” If a plaintiff demonstrates the absence of a reasonable basis, he must then prove that the defendant knew or recklessly disregarded the lack of a reasonable basis for denying the claim. . . . . An insurance company does not act in “bad faith” if the plaintiff’s insurance claim was “fairly debatable.”[15]

In other words, a claimant who could not have established as a matter of law a right to summary judgment on the substantive claim would not be entitled to assert a claim for an insurer’s bad-faith refusal to pay the claim.

“Under the ‘fairly debatable’ standard, a claimant who could not have established as a matter of law a right to summary judgment on the substantive claim would not be entitled to assert a claim for an insurer’s bad-faith refusal to pay the claim.”[16] It was also held, “At the same time, carriers are not insulated from liability for independent torts in the conduct of their business. For example, ‘[d]eliberate, overt and dishonest dealings,’ insult and personal abuse constitute torts entirely distinct from the bad-faith claim.”[17] Further, “in order to sustain a claim for punitive damages, a plaintiff would have to show something other than a breach of the good-faith obligation as we have defined it.”[18]

Attorney fees are recoverable for third-party coverage actions. “No fee for legal services shall be allowed in the taxed costs or otherwise, except.  in an action upon a liability or indemnity policy of insurance, in favor of a successful claimant.”[19]

In New Jersey, as in Florida, a bad-faith claim cannot be brought until coverage is established.[20]

Significantly, legislators in New Jersey (as well as in New York) recently proposed a bill that would create bad-faith liability for insurers, based on the standards implemented in Pickett. As initially proposed, the bill would apply to all claims filed on or after October 1, 2012—and therefore would be retroactively applicable to Sandy-related claims.

Like New York, New Jersey recently created a mediation program for Sandy claims. This program allows property owners to submit residential and commercial property claims to a mediator for the facilitation of negotiations. The program is mandatory for insurers authorized or admitted to transact business in New Jersey, but optional for surplus lines insurers. Like most mediations, the process is confidential and the results are non-binding.

Pennsylvania. In contrast to New York and New Jersey (presently), Pennsylvania has a statutory regime that provides an additional avenue of recovery to policyholders (and, conversely, additional clarity for insurers). The Pennsylvania statutes provide that a court that finds an insurer acted in bad faith may do all of the following: “(1) Award interest on the amount of the claim from the date the claim was made by the insured in an amount equal to the prime rate of interest plus 3%. (2) Award punitive damages against the insurer. (3) Assess court costs and attorney fees against the insurer.”[21] Further, the Supreme Court of Pennsylvania ruled that there is no common-law basis for first-party bad faith.[22]

Early Recognition and Classification of Claims (Claim Triage)

Most storm claims fall into one of three categories. First, there are “standard resolution” claims, which are resolved in less than 60 days. This category includes about 70 percent of all storm claims. Second, there are “extended circumstances” claims, which are resolved within two to six months. (At the close of April 2013, New Jersey Commissioner of Banking and Insurance Kenneth Kobylowski reported that more than 93 percent of Sandy related cliams have been resolved.) These constitute about 25 percent of all storm claims. Third, posing the most extra-contractual risk, are the “delayed resolution” claims—those that take more than six months to resolve. This last group consists of two subgroups: the “patent” claims (which stay open for months or years after they are made) and “latent” claims (which appear to be resolved early but are reopened with additional claims later). The goal of the early response claims-handling model proposed below is to institute a system that quickly assigns claims to the appropriate category (similar to the “triage” system used by medics in the emergency room and on the battlefield) so that claims adjusters can provide more efficient, customized service that expedites resolution and reduces extra-contractual payout.

Standard resolution claims. Most storm claims can be closed in less than 60 days after the claim is made, because agreement can be reached quickly and without significant dispute. Claims in this category usually do not involve public adjusters, attorneys, or allegations of bad faith. These claims largely fall into two subcategories. The largest subcategory are resolved within days of the loss event. For these claims, the present system works well. The claims adjuster and the policyholder are able to identify the covered loss efficiently and agree on a payment value to the mutual satisfaction of both parties. About 90 percent of all claims that are resolved in less than 60 days are resolved in this way, without further dispute.

About 10 percent of the standard resolution claims can be more complicated. These require increased communication or negotiation between the parties. For these claims, agreements as to the extent of damage or amount of loss are not as easily made, and more time is needed for parties to reach an accord. These claims are resolved relatively quickly, but there are some additional actions that could improve standard claims-handling procedures in place. The obvious improvements include special attention by the claims team manager, full and frequent communication with the insured, and full documentation of claim closure.

The most important step in resolving standard resolution claims is to confirm the insured’s agreement to a fair payout. This ensures that the claim does not reappear months or years later, with additional allegations of damage (which may have occurred in the meantime) or delay (which may be the insured’s fault but may be blamed on the insurer). For example, as soon as the policyholder and the adjuster agree to the amount of loss, the insurer should insist that the insured submit a sworn proof of loss for that amount.[23] This step is important for what it creates—a paper record of the agreement.

The proof of loss can be a strong defense to a later claim by the insured that it is entitled to additional or different payments. To make the proof of loss even stronger, its language can be supplemented so that it is presented as an offer by the insured for complete resolution of the claim, payment of which is acceptance of that offer by the insurer.[24] Such language may look like this:

The loss described on this form constitutes a complete and final account of damages sustained by my property related to the storm which occurred on or about October 30, 2012. Payment by the insurance company of the amount stated on this form constitutes complete satisfaction of its liability on this claim.


Confirming closure of claims in this way provides an insurer greater certainty of its potential liability for claims related to otherwise chaotic and nearly unpredictable loss events.

Another method to confirm permanent resolution of a closed but complex claim is to request in writing that the insured submit photographs or a videotape of damage to the property (both before and after repairs are performed). This step can prevent an aggressive public adjuster or attorney from later asserting that unreported and previously undocumented pre-storm or post-storm damage relates to the covered event. In especially difficult claims, the insurer may document the damage itself. Obviously, the expenses of this option should be weighed against the possibility of complicating factors when closing a relatively complex claim.

Extended circumstances claims. About 25 percent of all storm claims take between two and six months for resolution. Although coverage is largely undisputed, these claims are complicated because the amount, scope, or cause of loss is contested. To avoid unanticipated exposures and minimize excessive claims expenses and loss payments, the most important concept involves processes designed to keep the claim on a course toward resolution.

There are signs suggesting that a claim might require enhanced handling in the context of complicating or extended circumstances. The following are some of the potential factors:

· delay in submission of the claim by the insured
· retention of counsel
· retention of a public adjuster
· submission by the insured of incorrect information or potentially inflated damages
· delay in providing documents or allowing inspections

Perhaps the most effective way to facilitate the comprehensive resolution of disputed claims is for adjusters to constantly identify areas of agreement and narrow the areas of disagreement. This can be accomplished through communications to the insured that require a binary response of “yes” or “no” in order to draw lines of clear agreement or disagreement. For example, if an insured’s proof of loss attaches a reasonable roof-repair estimate and an unreasonable window-repair estimate, the insurer can offer to pay the insured’s number for the roof repair and narrow the scope of the disagreement. This should involve the use of a partial proof of loss confirming that it reflects the total loss for the roof. Eliminating the risk that the roof might become an issue again is very important. Further, if an insured’s claim includes a reasonable scope of work (“replace 10 windows”) but unreasonable unit prices, then an offer to agree on the scope on the insured’s terms should be made (hardly an offer that the insured could reasonably refuse), followed by a presentation of estimates from licensed contractors who would perform the agreed scope at a reasonable price. The constant focus is on eliminating areas of dispute where the parties agree. Assuming that the insurer’s positions are reasonably taken, this leaves the adjuster to defend only the insured’s unreasonable demands.

Once areas of agreement are defined, the insurer can use a “partial final proof of loss” describing the loss agreed upon and including the satisfaction language described above. Prompt payments on these agreements will not only keep the claim on a steady course toward resolution, but they will also better shield the insurer from potential bad-faith claims. Partial final proof of loss forms will serve to minimize disagreements that could delay final resolution.

Finally, extensive documentation of the loss with photographs, videotape, or both should be considered. The more complex a claim, or the more difficult its resolution, the more such evidence could be helpful if a public adjuster attempts to reopen a reasonable resolution.

Delayed resolution claims. About 5 percent of storm-related claims may take more than six months to achieve final and complete resolution. These can be divided into two subcategories. The first subcategory involves problems causing delay that are immediately apparent. The claim-handling mechanisms discussed below help to identify and treat these claims with special care in a timely manner.

The second subcategory involves claims that were closed early but reopened when problems surfaced much later, perhaps even several years after the claim was believed to have been resolved. Although these problematic claims are small in number, they make up about 90 percent of the extra-contractual obligations paid by insurers to policyholders. Most issues involve artificially created situational dynamics typically based on exaggerated loss by the insured (or its public adjuster), even manufactured delay by the insured’s attorneys. These claims tend to involve a small number of public adjusters focused on maximizing payments beyond actual loss (even at the risk of violating, on behalf of their client, the policy’s truthfulness requirements) and some attorneys focused on recovering more than the loss using various threats (even at the risk of violating, on behalf of their clients, the policy’s cooperation obligations). In handling these, and all claims, the insurers must remain focused on timely paying what is owed. Staying with this predicate, an improved claims-handling protocol can address inflated claims while simultaneously eliminating predicates for bad-faith claims—delay, unpaid loss, and inaccurate or incomplete files that provide no basis for the insurer’s position.

Any effective strategy must begin with identifying problematic claims early so that the insurer can proceed with particular attention and diligence. There are certain key red flags to look for, including the following:

·  extended delay in submission of the claim by the insured ·  repetitively increased claims
·  attempts to reopen a previously resolved claim
·  early retention of counsel before there is a genuine dispute
·  a bad-faith demand, before an impasse or based on an unreasonable demand
·   a second proof of loss claiming amounts above those previously sworn
·  premature commencement of litigation by any party
·  submission by the insured of patently incorrect, false, or fraudulent information or inflated damages
·  continued refusal on the part of the insured to remove unfounded claims
·  continued refusal or unexpected delay in providing documents or allowing inspections

These indicators signal that the insured may be interested in something other than the reasonable resolution of its claim and payments of its loss. They also signal the potential for a delayed and contentious resolution process that often turns on issues other than payment of the loss. It must be emphasized that each claim should be considered according to its own facts and circumstances. A claim involving three or four of the red flags listed above might still be appropriate for a standard resolution or an extended circumstances claim, while the existence of just one red flag could be sufficient to indicate a delayed resolution claim. Likewise, most attorneys and public adjusters are ethical professionals who do assist resolution, so their identity and reputation, as well as the context and extent of their involvement, should be taken into consideration.

Most important, although contentious insureds, public adjusters, and attorneys can easily be labeled villains, the fact is that the most reliable indicator of extra-contractual risk is delay. Even where the insurer is not really at fault for the delay, it is often the insurer that must pay the price. The following claim-handling protocols help shorten delay and thus reduce extra-contractual liability.

When it appears that a claim might be headed toward delayed resolution status, an insurer should consider transferring responsibility to a senior or specialized adjuster, and increased supervision by management. Likewise, an insurer that reserves a group of its most effective consultants (e.g., building experts, engineers, and mold specialists) for only the most difficult claims can achieve a highly efficient system of double-checking its initial adjustment and, if necessary, advocating the company’s position to a court or appraisal panel. If litigation is anticipated, in-house (and/or outside) counsel should also be involved in the decision-making process.

Adjusters and attorneys seeking to create non-merits based leverage like delay have no incentive to move a claim along. In the end, the insurer is often blamed for the delay—regardless of who caused the delay. Accordingly, delayed resolution claims require special attention to the creation of a paper trail that confirms diligence on the part of the insurer to investigate, resolve, and pay the claim. To confirm its efforts, the insurer should set default mechanisms to expedite progress.

So, for example, the insurer should set a schedule of paced but fair deadlines to prevent both the existence and allegation of any unnecessary delay by the insurer. To the extent delay occurs, documents confirming that the company was not to blame are helpful. Such a timetable should include deadlines for submission of information and other cooperation by the insured. This should be accompanied by an initial request for information in the form of documents such as homeowners’ association minutes, repair invoices, examinations under oath of insureds, a sworn proof of loss, and property inspections. A timetable that maps a speedy resolution should be included.

Information request

When the insurer requests necessary information from the insured within the proactive model outlined in this article, it leaves the insured with a limited set of possible responses, each of which encourages a fair and expedited resolution of the claim.

A cooperative policyholder might provide a substantive response to requests for information. When presented with substantive responses, the key is to stay on course and keep the claim resolution process moving forward. This involves constant focus on confirming areas of agreement and defining areas of disagreement. The two worst enemies of effective claims resolution are ambiguity and delay. Insureds, adjusters, and attorneys whose goal is to obtain something other than getting the loss paid constantly try to create both ambiguity and delay. Insurers must be equally vigilant in preventing both. Correspondence sent to the insured confirming areas of agreement and identifying areas of disagreement are helpful. Partial final proofs of loss can be used to finalize agreements and allow for partial payments.

If the insured fails to respond at all, the insurer can appeal to the policy provisions designed to encourage cooperation. It is necessary to repeat unanswered requests on a periodic basis, noting the delayed response. Eventually, failure to respond to an insurer’s request might be grounds for voiding coverage altogether under a policy’s noncooperation provisions.[25] In New York and New Jersey,[26] an insured’s failure to cooperate can be grounds for voiding an insurance policy altogether; however, the insurer must establish that it made a reasonable effort to obtain the insured’s cooperation.[27] Most states also hold that the failure to cooperate must be material and substantial in order to constitute a breach of contract that will relieve the insurer of its obligations.[28]

If the policyholder provides an evasive or non-substantive response to requests for information, it is important for the insurer to define the “what is” from the “what is not.” In traditional terms, this involves creating binary choices; that is, mutually exclusive options that define rather than obscure. The best way to do this is to pose questions requiring “yes” or “no” responses. The process itself of just framing yes/no questions will advance claim resolution. In effect, it helps the insurer define areas of agreement and disagreement.

Typically, this can be accomplished in written communications but is most effective if asked during an insured’s examination under oath. For example, where documents are requested but not produced by the time of the insured’s examination under oath, questioning should nail down whether the documents exist, where they are kept, who has custody of them, and what they document. The framing of yes/no questions is important. Here is an illustration: “Do the documents exist?” If yes, then “will you produce them?” If the answer is no, then it is more difficult for this insured to explain later how they suddenly came into existence.

If the insured refuses to answer questions or provide information so that resolution continues to be delayed, the insurer has put its diligent attempts to investigate on record and created a strong defense to potential bad-faith claims against it.

Another possible response to a request for information is an inaccurate, misleading, or false response from an insured. In some circumstances, such a response is grounds for voiding the policy based on a “concealment or fraud” clause.[29] Many states have statutes that allow for the cancellation or voiding of a policy based on a false claim, regardless of whether the policy contains a “concealment or fraud” clause.[30] In general, a mere overvaluation in a proof of loss is not adequate grounds for invoking a “concealment or fraud” clause.[31] Instead, courts require that the misrepresentation be material, made knowingly and willfully, with the intent to deceive or defraud the insurer.[32] Some states require that the insurer detrimentally rely on the misrepresentation in order to deny the claim, while others do not.[33] States also vary in whether a misrepresentation concerning certain items voids the policy only as to those items or the policy in its entirety.[34]

An insurer should take the applicable state law into consideration when it responds to information it believes to be inaccurate or false. An insurer should identify and isolate the misstatements and then pose binary questions to the insured, clarifying and confirming the insured’s position. An insurer might consider responding with emphasis that it is relying on the statement as it processes the claim. One thing is clear, the insurer should confirm that it is relying on the information from the insured.


Some jurisdictions have recognized that the use of appraisal, as the agreed and contracted-for dispute mechanism, can insulate an insurer from extra-contractual liability in many situations.[35] This is especially the case where the insurer has paid the undisputed amount of loss before the appraisal.[36]

Care should be taken to prevent any suggestion that the insurer has waived the appraisal clause. Of particular note in this regard is a recent opinion by the Supreme Court of Texas,[37] which held that a policyholder attempting to show a waiver of the appraisal clause must show an intentional relinquishment of a known right (as is the law in New York and New Jersey).[38] Further, that court held that an insurer’s “delay” in requesting appraisal, when being considered for waiver of contractual conditions such as the appraisal clause, must be measured from the point of impasse in negotiations, rather than from the date on which the parties first disagreed about the valuation of the loss.


Improved claims handling allows an insurer to process storm damage claims more efficiently and diligently by minimizing disagreements, confirming agreements, and framing questions until the claim is ultimately resolved. In more difficult situations, where the insured will not cooperate or provide information candidly, the insurer who has used enhanced claims-handling steps will have put itself in a stronger position—whether denying coverage, defending a bad-faith claim, contesting a claim in appraisal, or filing a declaratory judgment action against its insured.

Protocol Outline

I. Standard Resolution Claims
     • Cooperation and expedited adjustment     

     • Careful documentation of claim resolution
     • Consideration of photos or videotape in case claim is revived

II. Extended Circumstances Claims
     • Delay in submission of the claim by the insured
      • Retention of counsel
     • Retention of a public adjuster
     • Submission by the insured of incorrect information or potentially inflated damages
      • Delay in providing documents or allowing inspections     

Measures: all measures above, plus:
      • Constant attempts to narrow the scope of the disagreement
     • Partial final proof of loss
     • Demand of appraisal, if necessary
     • Documentation of conditions with thorough photography and videotape

III. Delayed Resolution Claims
     • Extended delay in submission of the claim by the insured
      • Repetitive increased and inflated claims
      • Attempts to reopen a previously resolved claim
      • Early retention of counsel before there is a genuine dispute
      • A bad-faith demand before an impasse or based on an unreasonable demand
     • A second proof of loss claiming amounts above those previously sworn
      • Commencement of litigation by any party
      • Submission by the insured of patently false or fraudulent information or inflated damages
     • Continued refusal on the part of the insured to remove unfounded claims
      • Continued refusal or unexpected delay in providing documents or allowing inspections      

Measures: all measures above, plus:
      • Transfer to a specialized or experienced claim representative
      • Involvement of management and counsel
      • Mobilization of a team of most effective engineers and consultants to verify accuracy
      • Elimination of areas of evasion or confusion manufactured by insured’s agents
      • Documented timetable of resolution attempts:
        - Examination under oath
       - Proof of loss
       - On-site investigation
        - Document requests
      • Minimization of extra-contractual risk by positioning claim for appraisal

Keywords: litigation, appraisal, bad faith, fraud or concealment

J. Randolph Evans, J. Stephen Berry, Alan Kaufman, and Michelle Swiren Zaltsberg are with McKenna Long & Aldridge LLP.


[1] J. Randolph Evans heads the Financial Institutions practice group at McKenna Long & Aldridge LLP and works in the firm’s Washington, D.C., office. He represents insurers in high-profile, complex litigation matters throughout the United States; served as general counsel of the Georgia Republican Party and as outside counsel to the Speakers of the 104th–109th Congresses of the United States; and is the author of The Practical Guide to Legal Malpractice Prevention (8th ed. 2000).

J. Stephen Berry is licensed in Georgia and Louisiana, and is a partner in the Atlanta office of McKenna Long & Aldridge LLP. His practice focuses on the areas of insurance coverage and insurance bad faith, with particular emphasis on catastrophic property damage claims. He is listed in The Best Lawyers in America in the practice area of insurance law; frequently speaks on coverage and bad-faith issues to public audiences and insurer in-house training seminars; and is coauthor of Georgia Property and Liability Insurance (2d ed. 2012).

Alan F. Kaufman is licensed in New York, New Jersey, and Pennsylvania, and is a partner in the New York office of McKenna Long & Aldridge LLP. His practice involves a wide range of matters, including business tort disputes, breach of contract actions, insurance coverage cases, and appeals.

Michelle Swiren Zaltsberg is an associate in the Atlanta office of McKenna Long & Aldridge LLP. She is licensed in Georgia and Florida, and her practice focuses on insurance coverage and insurance bad-faith litigation.

[2] United Air Lines, Inc. v. Ins. Co. of State of Pa., 439 F.3d 128 (2d Cir. 2006) (business interruption coverage was not available for lost earnings caused by the disruption of flight service after the September 11, 2001, attacks, because insured could not show that lost earnings resulted from physical damage to its property (office at Reagan airport) or to adjacent property (the Pentagon was not considered adjacent, nor was airport’s closure a direct result of physical damage at the Pentagon—the closure would have likely happened had the plane missed its target)).
[3] Arthur Anderson LLP v. Fed. Ins. Co., 3 A.3d 1279 (N.J. Super. Ct. 2010) (no contingent business interruption coverage where insured could not show losses were caused by damage to property that prevented flow of goods or services resulting in interruption of business); Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co., 968 A.2d 724 (N.J. Super. Ct. 2009) (holding term “physical damage” in coverage extension that insured against power interruption ambiguous and finding that loss of function or value need not be permanent to constitute physical damage).
[4] Zurich Am. Ins. Co. v. ABM Indus., Inc., 397 F.3d 158 (2d Cir. 2005) (factual question remained as to whether civil orders or insured’s own company policies impaired access to properties it serviced).
[5] E.g., Abner Herrman & Brock, Inc. v. Great N. Ins. Co., 308 F.Supp.2d 331 (S.D.N.Y. 2004) (no coverage under civil authority provision once access to building was restored, even though traffic in area continued to be diverted and firm’s employees were confused about access); 54th St. Ltd. Partners v. Fid. & Guar. Ins. Co., 306 A.D.2d 67 (Sup. Ct. N.Y. 2003) (coverage under civil authority provision limited to loss of income while access to premises is denied by act of civil authority, not when vehicular and pedestrian traffic is merely diverted).
[6] Flomerfelt v. Cardiello, 202 N.J. 432, 447, 997 A.2d 991, 1000 (2010).
[7] Newman v. Great Am. Ins. Co., 86 N.J. Super. 391, 403–4, 207 A.2d 167, 175 (App. Div. 1965). See also Steve’s Pier One, Inc. v. Ins. Co. of N. Am., 131 A.D.2d 834 (Sup. Ct. N.Y. 1987) (flood exclusion barred coverage, because proximate cause of damage was that water from Long Island Sound, driven by wind, propelled objects into damaged building); Seward Park Hous. Corp. v. Greater N.Y. Mut. Ins. Co., 43 A.D.3d 23, 28, 836 N.Y.S.2d 99, 102 (2007) (because “weight of rain” was a partial cause of damage, loss was covered; no requirement in the contract that weight of rain be the dominant cause).
[8] GuideOne Specialty Mut. Ins. Co. v. Congregation Bais Yisroel, 381 F. Supp. 2d 267, 282 (S.D.N.Y. 2005).
[9] Bi-Economy Mkt., Inc. v. Harleysville Ins. Co. of N.Y., 886 N.E.2d 127 (N.Y. Ct. App. 2008).
[10] Pavia v. State Farm Mut. Auto. Ins. Co., 82 N.Y.2d 445, 453–54, 626 N.E.2d 24, 27–28 (1993) (internal citation omitted).
[11] Seynaeve v. Hudson Moving & Storage, Inc., 261 A.D.2d 168, 169, 690 N.Y.S.2d 16, 17 (1999).
[12] Mighty Midgets, Inc. v. Centennial Ins. Co., 47 N.Y.2d 12, 22, 389 N.E.2d 1080, 1085 (1979) (distinguishing instant case brought by insured from cases where insurer compels insured to defend against declaratory judgment suit brought by insurer).
[13] Press Release, N.Y. Dep’t of Fin. Servs., Governor Cuomo Announces Department of Financial Services Investigating Insurers for Unacceptable Claims Practices Related to Storm Sandy (Feb. 21, 2013).
[14] N.J. Stat. Ann. § 17:29B-1 et seq.; ProCentury Ins. Co. v. Harbor House Club Condo. Ass’n, Inc., 652 F. Supp. 2d 552, 563 (D.N.J. 2009).
[15] Tarsio v. Provident Ins. Co., 108 F. Supp. 2d 397, 400–401 (D.N.J. 2000) (quoting Pickett v. Lloyd’s, 131 N.J. 457, 470, 621 A.2d 445 (1993)).
[16] Pickett, 131 N.J. at 473.
[17] Pickett, 131 N.J. at 475.
[18] Pickett, 131 475–76.
[19] N.J. Court Rule 4:42-9 (emphasis in original).
[20] See also N.J. Court Rule 4:27-2 (“if a claim is one heretofore cognizable only after another claim has been prosecuted to a conclusion, then the 2 claims may be joined in a single action, but the court shall grant relief therein only in accordance with the relative substantive rights of the parties”).
[21] 42 Pa. Cons. Stat. Ann. § 8371 (West).
[22] D’Ambrosio v. Pa. Nat’l Mut. Cas. Ins. Co., 494 Pa. 501, 507, 431 A.2d 966, 970 (1981).
[23] Under the standard policy language, as well as many claims-handling statutes, the insurer is entitled to a sworn proof of loss. The standard policy language provides as follows:

Duties in the Event of Loss or Damage.
a. You must see that the following are done in the event of loss or damage to Covered Property: …Send us a signed, sworn proof of loss containing the information we request to investigate the claim. You must do this within 60 days after our request. We will supply you with the necessary forms.
[24] See generally New Dance Grp. Studio, Inc. v. St. Paul Fire & Marine Ins. Co., No. 92 CIV. 8488 (JFK), 1995 WL 434314 (S.D.N.Y. July 24, 1995) (“Plaintiff’s submission of the Sworn Statement of Proof of Loss in the amount negotiated by both parties’ adjusters shows that Plaintiff accepted the agreement as a final settlement offer.”).
[25] A typical cooperation clause states, in relevant part:
Duties in the Event of Loss or Damage.
a. You must see that the following are done in the event of loss or damage to Covered Property: . . .(2) Give us prompt notice of the loss or damage. Include a description of the property involved; (3) As soon as possible, give us a description of how, when and where the loss or damage occurred; . . . (5) At our request, give us complete inventories of the damaged and undamaged property. Include quantities, costs, values and amount of loss claimed; (6) As often as may be reasonably required, permit us to inspect the property proving the loss or damage and examine your books and records; (7) Send us a signed, sworn proof of loss containing the information we request to investigate the claim. You must do this within 60 days after our request. We will supply you with the necessary forms; (8) Cooperate with us in the investigation or settlement of the claim.
b. We may examine any insured under oath, while not in the presence of any other insured and at such times as may be reasonably required, about any matter relating to this insurance or the claim, including an insured’s books and records. In the event of an examination, an insured’s answers must be signed.
[26] For purposes of this article, legal research was done for the following jurisdictions affected by Superstorm Sandy: New York and New Jersey.
[27] Effort by Insurer. SCW W. LLC v. Westport Ins. Corp., 856 F. Supp. 2d 514, 522 (E.D.N.Y. 2012) (quoting BaghalooWhite v. Allstate Ins. Co., 270 A.D.2d 296, 704 N.Y.S.2d 131 (2d Dep’t 2000)) (Under New York law, “To effectively deny insurance coverage based upon lack of cooperation, an insurance carrier must demonstrate (1) that it acted diligently in seeking to bring about the insured’s cooperation, (2) that the efforts employed by the carrier were reasonably calculated to obtain the insured’s cooperation, and (3) that the attitude of the insured, after his cooperation was sought, was one of willful and avowed obstruction.”); Dougherty v. Hanover Ins. Co., 114 N.J. Super. 483, 488, 277 A.2d 242, 244 (Ch. Div. 1971) (“The obligations under a cooperation clause are reciprocal. The insured must cooperate; but the insurer is under a duty to exercise diligence and good faith in bringing that about.”).
[28] Materiality. N.Y. Cent. Mut. Fire Ins. Co. v. Rafailov, 41 A.D.3d 603, 605, 840 N.Y.S.2d 358, 360 (2007) (insured’s duty to cooperate is satisfied by substantial compliance; in order to establish breach of cooperation clause, insurer must show insured refused to supply material information); Mariani v. Bender, 85 N.J. Super. 490, 500, 205 A.2d 323, 328 (App. Div. 1964) (Under New Jersey law, “In order to relieve itself of liability under the policy the insurance carrier must show that the cooperation clause was deliberately breached in a material or essential particular.”).
[29] A typical concealment or fraud clause states:

Concealment, Misrepresentation or Fraud. This Coverage Part is void in any case of fraud by you as it relates to this Coverage Part at any time. It is also void if you or any other insured, at any time, intentionally conceal or misrepresent a material fact concerning: (1) This Coverage Part; (2) This Covered Property; (3) Your interest in the Covered Property; or (4) A claim under this Coverage Part.
[30] See N.J. Stat. Ann. § 17B:24-3 (false statements in policies for health or life insurance that materially affect insurer’s decision to accept risk or hazard may bar insured’s right to recovery); N.J. Stat. Ann. § 17:36-5.20 (requiring concealment/fraud clause in fire insurance policies); N.J. Stat. Ann. § 17:33A-4 (authorizing state to prosecute violations of New Jersey Insurance Fraud Prevention Act, including making false or misleading statements in claim or application ); N.Y. Ins. Law § 3404 (requiring concealment/fraud clause in standard fire insurance policy); N.Y. Ins. Law § 3425 (auto and personal lines policies may be cancelled due to “discovery of fraud or material misrepresentation in obtaining the policy or in the presentation of a claim thereunder”).
[31] Overvaluation. Sturm v. Atl. Mut. Ins. Co., 63 N.Y. 77 (1875) (“An overvaluation does not per se render a valued marine policy void; in the absence of fraud, accident or mistake, the valuation agreed upon is binding and conclusive, however largely in excess of the true value.”); cf. Clerical Apparel of New York, Inc. v. Valley Forge Ins. Co., 209 F.R.D. 316, 320 (E.D.N.Y. 2002) (fire insurance policy voided where insured made material misrepresentations by doubling value of merchandise damaged); Chubb & Son Inc. v. Consoli, 283 A.D.2d 297, 299, 726 N.Y.S.2d 398, 401 (2001) (“concealment or fraud” provision precludes defendants from obtaining recovery under their policies for fraudulently inflated claims submitted by agent); Singer v. Home Ins. Co. of Am., 135 A. 274, 275 (N.J. Sup. Ct. 1926) (“there must be fraud to vitiate the plaintiff’s claim, and that the overvaluation in the proofs must be knowingly and intentionally made, in order to avoid the policies”).
[32] Intent. Azzato v. Allstate Ins. Co., 99 A.D.3d 643, 646, 951 N.Y.S.2d 726, 731 (2012) (“a key issue in determining whether a concealment and fraud provision of an insurance policy has been breached is whether the inaccurate proof of loss was created or submitted with ‘a willful intent to defraud or to misrepresent the material facts’”; finding husband breached concealment and fraud provision of policy by submitting significantly inflated values for damaged appliances; however, insurer could not prove that wife participated in, or had knowledge of, husband’s fraudulent actions, or that she otherwise made any material misrepresentations); Longobardi v. Chubb Ins. Co. of N.J., 121 N.J. 530, 540, 582 A.2d 1257, 1261 (1990) (“For an insurer to void a policy because of a post-loss misrepresentation, the misrepresentation must be knowing and material. A mere oversight or honest mistake will not cost an insured his or her coverage; the lie must be willful.”).
[33] Detrimental reliance. Hager v. Gonsalves, 398 N.J. Super. 529, 534, 942 A.2d 160, 163 (App. Div. 2008) (generally, “an insurer must show that it was appreciably prejudiced by its insured’s failure to cooperate in order to disclaim coverage based on that failure”); Mariani v. Bender, 85 N.J. Super. 490, 501, 205 A.2d 323, 328 (App. Div. 1964) (“Even though an insured may have given his insurance carrier an untrue statement of the accident, no breach of the cooperation clause results if the untrue statement is promptly and seasonably corrected.”); but see Longobardi v. Chubb Ins. Co. of N.J., 121 N.J. 530, 542 , 582 A.2d 1257, 1263 (1990) (“Prejudice from a post-loss misrepresentation, therefore, is unnecessary to relieve the insurer of its liability.”); GuideOne Specialty Mut. Ins. Co. v. Congregation Bais Yisroel, 381 F. Supp. 2d 267, 276 (S.D.N.Y. 2005) (insurer need not show prejudice as a result of the lack of cooperation of its insured to be entitled to summary judgment).
[34] Severability. Willis v. N.Y. Cent. Mut. Fire Ins. Co., 2002 WL 205881 (N.Y. Sup. Ct. 2002) (insured’s fraudulent taxicab receipts to auto insurer did not preclude recovery for loss of the vehicle).
[35] Most policies contain such clauses, which read similarly to the following:
If we and you disagree on the value of the property or the amount of loss, either may make written demand for an appraisal of the loss. In this event, each party will select a competent and impartial appraiser. The two appraisers will select an umpire. If they cannot agree, either may request that selection be made by a judge of a court having jurisdiction. The appraisers will state separately the value of the property and amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding. Each party will: (a) Pay its chosen appraiser; and (b) Bear the other expense of the appraisal and umpire equally. If there is an appraisal, we will still retain our right to deny the claim.
[36] 316, Inc. v. Md. Cas. Co., 625 F. Supp. 2d 1187 (N.D. Fla. 2008); see generally Rastelli Bros., Inc. v. Netherlands Ins. Co., 68 F. Supp. 2d 440, 446 (D.N.J. 1999) (“an agreement for an appraisal extends merely to the resolution of the specific issues of cash value and the amount of loss, all other issues being reserved for settlement by negotiation, or litigated in an ordinary action upon the policy”).
[37] In re Universal Underwriters of Tex. Ins. Co., 345 S.W.3d 404 (Tex. 2011).
[38] SR Int’l Bus. Ins. Co., Ltd. v. World Trade Ctr. Props., LLC., No. 01 CIV. 9291(MBM), 2004 WL 2979790 (S.D.N.Y. Dec. 1, 2004) (“Waiver is generally defined as an intentional relinquishment of a known right[,]” and “a party asserting a waiver defense bears the burden of proof in establishing that defense.”); Allstate Ins. Co. v. Howard Sav. Inst., 127 N.J. Super. 479, 487, 317 A.2d 770, 774 (Ch. Div. 1974) (same); Amerex Grp., Inc. v. Lexington Ins. Co., 678 F.3d 193, 199 (2d Cir. 2012) (“under New York law, waiver of the right to an appraisal is not lightly inferred”).

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