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November 20, 2017 Articles

Hurricane Harvey’s Aftermath: Anticipated Coverage Issues Following Natural Disasters

Following a natural disaster, idiosyncratic coverage issues will arise, including those related to flood exclusions, controlled reservoir releases, concurrent causation, business income reimbursement, and procurement claims

by Christina A. Culver and Cy Haralson

Hurricane Harvey dumped 51 inches of rain on Texas and Louisiana in just six days. That’s 27 trillion gallons of water. Estimates have put the ultimate losses at $75 billion.[1] For those living in the Houston area, the experience of Harvey was like no other. There is no doubt that thousands of claimants will be filing claims with insurance companies for losses as a result of Hurricane Harvey.

This article addresses a handful of the coverage issues that are expected to arise because of Harvey. Texas courts have not directly addressed some or all of these issues, but there are decisions that have been rendered in the aftermath of natural disasters that provide guidance. We address a few of those issues related to flood exclusions, controlled reservoir releases, concurrent causation, business income reimbursement, and procurement claims.

Excluded Flood Claims and Controlled Flooding

As Harvey filled Houston’s Addicks, Barker, and Lake Conroe reservoirs, the Army Corps of Engineers made the difficult decision to release water from the dams, knowing they would flood property downstream. A typical flood exclusion states that “this policy does not insure against loss or damage caused by, resulting from, contributed to, or aggravated by . . . water,” and then goes on to define water in its various damaging forms. This raises the question of the effect of human activity, such as the controlled release of floodwater, on coverage under a policy that excludes flood damage.

While Texas courts have not yet decided the issue, the Fifth Circuit previously addressed claims in the aftermath of Hurricane Katrina regarding flood caused by human negligence. In particular, the Fifth Circuit’s analysis in In re Katrina Canal Breaches Litigation, which raised a similar question, suggests how courts might resolve this question. Each plaintiff in this case was a policyholder with homeowners, renters, or commercial property insurance whose property was damaged during the New Orleans flooding. Despite exclusions in their policies providing that damage caused by “flood” is not covered, the plaintiffs sought recovery of their losses from their insurers. Their primary contention was that the massive inundation of water into the city was the result of the negligent design, construction, and maintenance of the levees and that the policies’ flood exclusions in this context were ambiguous because they did not clearly exclude coverage for an inundation of water induced by negligence. By contrast, the insurers maintained that the policies unambiguously excluded coverage for the inundation of water resulting from the breached levees. Indeed, the court determined flood exclusions precluded coverage of water that breached the canal levees.[2] As a matter of first impression, the Fifth Circuit made an Erie guess as to how Louisiana courts would interpret the undefined term of “flood” in typical flood exclusions. The Fifth Circuit noted that a levee is a flood-control structure and that its purpose is to prevent a more widespread flood.[3] The Fifth Circuit determined that a levee’s failure does not change the character of the water escaping through the levee’s breach. The damage still results from “floodwaters.”[4] The Fifth Circuit noted:

[T]he flood exclusions in the plaintiffs’ policies are unambiguous in the context of the facts of this case. In the midst of a hurricane, three canals running through the City of New Orleans overflowed their normal boundaries. The flood-control measures, i.e., levees, that man had put in place to prevent the canals’ floodwaters from reaching the city failed. The result was an enormous and devastating inundation of water into the city, damaging the plaintiffs’ property. This event was a “flood” within that term’s generally prevailing meaning as used in common parlance, and our interpretation of the exclusions ends there. The flood is unambiguously excluded from coverage under the plaintiffs’ all-risk policies.[5]

The most analogous case to the Army Corps of Engineers’ decision to release water from reservoirs in the Houston area occurred in Massachusetts. In In Cortina Realty Trust, a Massachusetts Superior Court determined that a flood exclusion barred coverage for water damage caused by the decision of town officials to open a flood valve.[6]

Prior to the town’s decision to open the flood valve, northeast Massachusetts suffered six days of heavy raining, commonly known as the “Mother’s Day Flood of 2006.” The six days of rain produced extensive river floods. After the plaintiff discovered sewage backing up out of the toilets and drains on the first floor of its commercial building, the Massachusetts Highway Department completely closed the street on which the plaintiff’s building was located. Days later, the police allowed the plaintiff to inspect its building, where it found 18–20 inches of water in the building. After determining the rising rivers compromised the integrity of a municipal dam, the town’s water authorities opened a flood valve to lower the Walden Pond. Consequently, the plaintiff’s building suffered more flood damage. The plaintiff’s insurer denied the plaintiff’s claim based on a flood exclusion.

The plaintiff asserted that it was the negligent opening of the Walden Pond flood valve that caused the water damage and that, consequently, the flood exclusion did not apply. The defendant insurer asserted that because the damage was caused by flooding, the exclusion at issue applied regardless of the exact cause. The plaintiff’s reasoning amounted to a “concurrent cause” argument that proposed that the opening of the valve was a separate, fortuitous event from the rains that plagued the area over those six days in May of 2006. The plaintiff’s insurance policy, however, explicitly contained an anti-concurrent cause provision that stipulated that loss “caused by, resulting from, contributed to or aggravated by flood” will not be covered. The court noted that a natural flood caused the deliberate decision to open the flood valve.[7] The court further said that “the calculated decision to open the valve was not an accident. Rather, it was deemed a necessary decision caused by and resulting from actual surface flooding, and thus, would not be covered under the policy.”[8] It is noteworthy that the court quoted the Fifth Circuit’s Katrina decisions, stating that “when the inundation [of water] results from the overflow of a body of water, whether natural or artificial, the event is a flood.”[9]

While these issues remain to be decided by Texas courts, other jurisdictions have excluded controlled and intentional flooding under a policy’s water endorsement. Of course, specific policy provisions, exclusions, and facts may affect a court’s decision, but these decisions provide useful guidance on how Texas courts might rule.

Covered Losses and Excluded Damages: Concurrent Causation

In the aftermath of Harvey, insurers will receive claims relating to covered and uncovered claims. These claims are common after natural disasters because insureds will make claims with their property insurers given that disaster assistance from the Federal Emergency Management Agency is available only for uninsured losses. Undoubtedly, insurers will receive claims involving damages potentially resulting from a covered cause of loss (wind, fire, theft, etc.) and damages that are excluded (water). These types of claims also commonly lead to coverage issues focusing on causation.

Texas follows the doctrine of concurrent causation.[10] Under this doctrine, when covered and uncovered perils contribute to a loss, the insured is allowed to recover that portion of the damage caused solely by the covered peril.[11] When covered and uncovered causes combine to concurrently cause a loss and those causes of loss cannot be separated (such as storm-related damage due to wind and flood), the insured can face a more difficult challenge. This type of scenario may implicate a property policy’s anti-concurrent causation (ACC) clause. An ACC clause generally provides that a loss caused by a combination of covered and excluded causes of losses will not be covered.

Following Hurricane Katrina, ACC clauses were frequently litigated, and eventually the Fifth Circuit weighed in on their application.[12] For example, the home in question in Leonard v. Nationwide Mutual Insurance Co. was 12 feet above sea level on the southernmost edge of Pascagoula, Mississippi, less than 200 yards from the Mississippi Sound. Hurricane Katrina brought ashore a formidable 17-foot storm surge, flooding the ground floor of the two-story home.[13] Inspection of the home after the storm revealed modest wind damage, but water damage was extensive. The residence’s walls, floors, fixtures, and personal property sustained extensive damage.[14]

The policyholder’s insurer concluded that damages caused by water and the storm surge’s concurrent wind-water action were barred, respectively, by the water damages exclusion and the ACC clause. The Fifth Circuit agreed, holding that the ACC clause in the policy unambiguously excluded coverage for water damage even if another peril, e.g., wind, contributed concurrently or in any sequence to cause the loss.[15] The court noted that the plain language of the policy left the district court no interpretive leeway to conclude that recovery was available for wind damage occurring “concurrently or in sequence with the excluded water damage.”[16]

The court recognized three discrete categories of damage at issue: (1) damage caused exclusively by wind, (2) damage caused exclusively by water, and (3) damage caused by wind “concurrently or in any sequence” with water.[17] The court found that storm-surge flooding following a hurricane’s landfall is the classic example of a concurrent wind-water peril and that the only species of damage covered by the policy is damage caused exclusively by wind. But, if wind and water synergistically caused the same damage, the damage is excluded.[18]

Before Hurricanes Ike and Katrina, the Supreme Court of Texas had not decided whether or to what extent an ACC clause was enforceable. In 2015, however, the Supreme Court of Texas considered the ACC clause’s application and enforceability in JAW the Pointe, L.L.C. v. Lexington Ins. Co.[19] JAW involved a commercial property loss resulting from Hurricane Ike. The insurer and the insured did not dispute that the damage at issue was caused by wind and flood. Instead, the issue was whether the insured’s ordinance compliance repairs mandated by the city of Galveston were covered.[20] The court of appeals concluded that the ACC clause in the policy barred recovery of such ordinance-compliance costs because the property damage requiring the mandated repairs resulted, at least in part, from flooding, which was an excluded cause of loss.

Despite the insured’s argument in the Texas Supreme Court that it could demonstrate separate and independent damage caused by a covered cause of loss, the court found the Fifth Circuit’s precedent on ACC clauses persuasive and held as follows:

“[T]he only species covered under [a policy with an ACC clause] is damage caused exclusively by wind. But [when] wind and water synergistically cause[ ] the same damage, such damage is excluded.” We agree with the Fifth Circuit that, under Texas law, the anti-concurrent-causation clause and the exclusion for losses caused by flood, “read together, exclude from coverage any damage caused by a combination of wind and water.”[21]

While JAW confirmed that ACC language is enforceable, it is important to note that causes of loss (wind and flood) were not disputed under the facts of the case. Situations are likely to arise when a policyholder advocates that damage was caused solely by a covered cause of loss with no damage attributed to an uncovered cause. In addition, as always, the actual wording of ACC clauses is important. Slight differences in language could affect the application of the ACC clause depending on the facts.

Business Income Reimbursement

The wind or flood dispute also will affect the handling of other significant coverages to insureds affected by Hurricane Harvey. For example, commercial property policies usually provide that business interruption coverage is tied to covered property damage. Business interruption coverage typically reimburses policyholders for the necessary suspension of business—in other words, income—during the period of restoration caused by an event that caused the insured a direct physical loss. Common business income provisions provide the following:

We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your “operations” during the “period of restoration”. The suspension must be caused by direct physical loss of or damage to property at the described premises. The loss or damage must be caused by or result from a Covered Cause of Loss.

Business income coverage is typically triggered by a suspension caused by or resulting from a direct—and covered—physical loss or damage to property. Common property policies provide coverage for a direct physical loss and also set forth numerous physical losses that are not covered under the policies.

Because business income coverage is thus contingent on a covered loss to the damaged property, where the cessation of business operations is caused by flood or another specifically excluded peril, business income coverage is also excluded. For example, the Texas Court of Appeals applied a similar provision following Hurricane Allison and concluded that Buffalo Bayou’s flooding into the Houston tunnel system was not a “mutation” from flood water to generic water after the flood water entered the convention center, collapsed a wall, and flowed into the pedestrian tunnel.[22] That is, the source of the water at that point was still the overflowing Buffalo Bayou.[23] Accordingly, because the insured’s loss was due to flood water, the court held that the policy excluded the plaintiff’s business income claim.[24]

In the wake of Hurricane Harvey, one key question will be whether an entity can recover business income due to a civil authority’s mandatory evacuation of an area. Specifically, the question arises regarding the controlled release of the Addicks, Barker, and Lake Conroe reservoirs. As Harvey’s rain filled up those reservoirs, the Army Corps of Engineers made the difficult decision to release water from the dams, knowing that property downstream would flood. Government officials say there was no better option, but the decision has sparked a wave of lawsuits from home and business owners downstream.

Civil authority endorsements commonly contain the following language:

When a Covered Cause of Loss causes damage to property other than property at the described premises, we will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises, provided that both of the following apply:

(1) Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage, and the described premises are within that area but are not more than one mile from the damaged property; and

(2) The action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property.

These provisions require a civil authority to prohibit access to the property after it is damaged by some covered loss. Consequently, an order of evacuation by a civil authority due to flood damage or a projected hurricane is not likely a covered loss. The Fifth Circuit has considered this issue with respect to Hurricane Gustav. In this particular case, the insureds were the operators of New Orleans restaurants and brought suit against their insurer following its denial of coverage for losses incurred when they were unable to conduct business during a mandatory evacuation of the city that had been ordered prior to the arrival of Hurricane Gustav. The court determined that a mandatory evacuation ordered by the city of New Orleans in anticipation of Hurricane Gustav’s landfall did not trigger business income coverage.[25] Fortunately, neither the policyholders’ properties nor their neighbors’ properties suffered damage. The Fifth Circuit affirmed the trial court’s decision that there was no nexus between the evacuation order and damage to property, “other than at the described premises,” as required for coverage under the policy’s civil authority provision.[26]

Arguably, the decision by the Army Corps of Engineers to release water from Houston area reservoirs into areas that would not have been damaged otherwise will create other tricky coverage issues. While it is clear that the release of water damaged a significant amount of property, the intentional flooding is likely characterized as a non-covered loss pursuant to the expressed terms of most policies. The following language is commonly used to describe excluded water damage:

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).

This damage is not covered whether it is caused directly or indirectly by flood, overflow, or surface water. These losses are likely excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss. Because damages arising out of a civil authority’s actions prohibiting access to a premise must also result from a covered cause of loss, the damages caused by the Army Corps of Engineers are not likely covered under a civil authority policy provision. Accordingly, Houston business owners may not be able to recover damages caused by the intentional release of water from the reservoirs under business interruption coverage.

Procurement Claims Against Insurance Agents

Often forgotten elements of coverage litigation are the ancillary and alternative claims against retail agents and brokers for failure to secure adequate insurance coverage. These issues will be no less important post-Harvey, including for insurers who will have an interest in removing suits based on improper joinder of agents.

The National Flood Insurance Program estimates that almost 85 percent of residents in Harris County, which includes Houston, do not have flood insurance.[27] As the community begins to assess the extensive losses experienced in the area, there almost assuredly will be an increase in allegations that insurance agents failed to procure coverage for their insureds for such losses. Fortunately for the agents (and perhaps less so for their clients), an agent’s duties under Texas law are well established.

In Texas, an insurance agent has a duty only “to use reasonable diligence in attempting to place the requested insurance and to inform the client promptly if unable to do so.”[28] An insurer has no duty to explain the terms or coverage of an insurance policy to its insured.[29] Likewise, an insurance agent has no duty to expand the insurance protection of the customer, even if the agent has knowledge of the customer’s need for additional insurance.[30] Without a specific request from an insured, agents have no duty to procure coverage.

For example, in McCall v. Marshall, an agent sold Marshall a policy issued by the Hartford Fire Insurance Co., which covered the property where Marshall sold automobiles.[31] After the policy issued, Marshall moved his dealership and informed his agent of the new location.[32] Later, a fire destroyed seven of the cars at the new location, and Hartford denied Marshall’s claim for recovery because the policy did not cover the new location.[33] The Texas Supreme Court held that the agent had no duty to insure Marshall’s new location without being requested to do so, even though Marshall specifically informed him of the new location.[34]

Insureds often include misrepresentation causes of action along with claims of failure to procure against their insurance agents. To prevail on their affirmative misrepresentation claims, insureds must establish that the agent made a specific affirmative misrepresentation that was either false or misleading.[35] Moreover, an insurance agent’s broad, generalized statements about the coverage provided by a policy are not sufficiently material to support a fraud claim or a claim under the Texas Deceptive Trade Practices Act (DTPA).[36]

Even if an insured plaintiff could show an actionable misrepresentation, claims for fraud, fraudulent inducement, negligent misrepresentation, and violations of the DTPA’s laundry list provisions each require proof that the insured actually acted in reliance on a specific misrepresentation or omission made by the agent.[37] Insureds may find it difficult to show that they relied on an agent’s alleged misrepresentations or omissions because, under Texas law, “the policy’s language controls and the insured has a duty to read and be familiar with the terms of his own insurance policy.”[38] Because an insured is bound to the terms of the policy whether or not he or she reads it and is charged with knowledge of its coverage, the insured cannot justifiably rely on any representation by an agent that a policy would contain more coverage than a prior policy.[39]

Christina A. Culver and Cy Haralson are partners at Thompson Coe in Houston.

[1] Brandon Griggs, “Harvey’s Devastating Impact by the Numbers,” CNN, Sept. 1, 2017.

[2] In re Katrina Canal Breaches Litig., 495 F.3d 191 (5th Cir. 2007).

[3] In re Katrina Canal Breaches, 495 F.3d at 214.

[4] In re Katrina Canal Breaches, 495 F.3d at 214.

[5] In re Katrina Canal Breaches, 495 F.3d at 221.

[6] In Cortina Realty Tr. v. Pac. Ins. Co., Ltd., 2010 Mass. Super. LEXIS 307, at *4, 27 Mass. L. Rep. 461 (Sept. 27, 2010).

[7] In Cortina Realty Trust, 2010 Mass. Super. LEXIS 307, at *4.

[8] In Cortina Realty Trust, 2010 Mass. Super. LEXIS 307, at *6.

[9] In Cortina Realty Trust, 2010 Mass. Super. LEXIS 307, at *10.

[10] See Travelers Indem. v. McKillip, 469 S.W.2d 160, 163 (Tex. 1971); Wallis v. United Serv. Auto. Ass’n, 2 S.W.3d 300 (Tex. App.—San Antonio 1999, pet. denied).

[11] Wallis, 2 S.W.3d at 304.

[12] See Leonard v. Nationwide Mut. Ins. Co., 499 F.3d 419 (5th Cir. 2007) (interpreting Mississippi law).

[13] Leonard, 499 F.3d at 423–24.

[14] Leonard, 499 F.3d at 426.

[15] Leonard, 499 F.3d at 426.

[16] Leonard, 499 F.3d at 430.

[17] Leonard, 499 F.3d at 430.

[18] Leonard, 499 F.3d at 430.

[19] JAW the Pointe, L.L.C. v. Lexington Ins. Co., 460 S.W.3d 597 (Tex. 2015).

[20] JAW the Pointe, L.L.C., 460 S.W.3d at 608.

[21] JAW the Pointe, L.L.C., 460 S.W.3d at 607–8 (quoting Leonard, 499 F.3d at 430).

[22] Valley Forge Ins. Co. v. Hicks Thomas & Lilienstern, L.L.P., 174 S.W.3d 254, 258 (Tex. App.—Houston [1st Dist.] 2004, pet. denied).

[23] Valley Forge Insurance Co., 174 S.W.3d at 258.

[24] Valley Forge Insurance Co., 174 S.W.3d at 259.

[25] Dickie Brennan & Co., Inc. v. Lexington Ins. Co., 636 F.3d 683 (5th Cir. 2011).

[26] Dickie Brennan & Co., 636 F.3d at 684; see S. Tex. Med. Clinics, P.A. v. CNA Fin. Corp., No. H-06-4041, 2008 U.S. Dist. LEXIS 11460 (S.D. Tex. Feb. 15, 2008).

[27] Aamer Madhani & Roger Yu, “Some Harvey-Battered Homeowners Thought Skipping Flood Insurance Was Low-Risk Gamble,” USA Today, Aug. 31, 2017.

[28] May v. United Servs. Ass’n of Am., 844 S.W.2d 666 (Tex. 1992) (emphasis added).

[29] Hudspeth v. Enter. Life Ins. Co., 358 S.W.3d 373, 392 (Tex. App.—Houston [1st Dist.] 2011, no pet.).

[30] See McCall v. Marshall, 398 S.W.2d 106, 109 (Tex. 1965); Critchfield v. Smith, 151 S.W.3d 225, 231–32 (Tex. App.—Tyler 2004, pet. denied); FG Holdings, Inc. v. London Am. Risk Specialists, Inc., No. 09-05-522, 2007 LEXIS 9674, at *5 (Tex. App.—Beaumont Dec. 13, 2007).

[31] McCall, 398 S.W.2d 106.

[32] McCall, 398 S.W.2d at 108.

[33] McCall, 398 S.W.2d at 108.

[34] McCall, 398 S.W.2d at 109.

[35] See Ernst & Young, L.L.P. v. Pac. Mut. Life Ins. Co., 51 S.W.3d 573, 578 (Tex. 2001) (fraud); In re First Merit Bank, N.A., 52 S.W.3d 749, 758 (Tex. 2001) (fraudulent inducement); Tex. Farm Bureau Underwriters v. Rasmussen, 410 S.W.3d 335, 340–41 (Tex. App.—Houston [1st Dist.] 2013, pet. denied) (Insurance Code); E.R. Dupuis Concrete Co. v. Pa. Mut. Life Ins. Co., 137 S.W.3d 311, 321 (Tex. App.—Beaumont 2004, no pet.) (negligent misrepresentation); Sledge v. Mullin, 927 S.W.2d 89, 94 (Tex. App.—Fort Worth 1996, no writ) (Texas Deceptive Trade Practices Act and Texas Insurance Code).

[36] See Avila v. State Farm Fire & Cas. Co., 147 F. Supp. 2d 570, 581 (W.D. Tex. 1999) (fraud); Rodgers v. Ins. Co. of State of Pa., 513 S.W.2d 113, 119 (Tex. Civ. App.—Fort Worth 1974, writ ref’d n.r.e.) (fraud); State Farm Cty. Mut. Ins. Co. v. Moran, 809 S.W.2d 613, 620–21 (Tex. App.—Corpus Christi 1991, writ denied) (holding that “general claims . . . concerning the adequacy or sufficiency of coverage . . . are not generally actionable under the DTPA”).

[37] See Ernst & Young, 51 S.W.3d at 578 (fraud); Haase v. Glazner, 62 S.W.3d 795, 798–99 (Tex. 2001) (fraudulent inducement); E.R. Dupuis Concrete Co., 137 S.W.3d at 321 (negligent misrepresentation); Doe v. Boys Clubs of Greater Dallas, Inc., 907 S.W.2d 472, 478 (Tex. 1995) (DTPA).

[38] Howard v. Burlington Ins. Co., 347 S.W.3d 783, 792 (Tex. App.—Dallas 2001, no pet.).

[39] Howard, 347 S.W.3d at 792; Mid Century Ins. Co. v. H & H Meat Prods. Co., 822 S.W.2d 747, 750–51 (Tex. App.—Corpus Christi 1992, no writ).



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