Insurance Companies, Not Taxpayers, Should Pave the Gulf Coast Road to Recovery
Victims of Hurricanes Katrina and Rita Continue to Battle Insurance Policy Ambiguity and the Passage of Time
by Brian J. Donovan, Esq.
TAMPA, FL (January 20, 2006) — Victims of Hurricanes Katrina and Rita are struggling to cope with the loss of their homes and businesses. For decades, many of these individuals, families and business owners faithfully paid premiums to insurance companies for homeowner's insurance and commercial property insurance. Now, in response to the claims filed by these longtime policyholders, insurance companies are slowly dispatching adjusters, requiring insurance holders to endure multiple adjuster visits, and, in the end, refusing to pay their policyholders' claims.
Insurance companies say that storm surge is "flooding" and, therefore, they shouldn't have to pay for water damage for policyholders who did not have flood policies. According to the insurance companies, payment for water damage claims from the storm surge-generated devastation of Hurricanes Katrina and Rita should be paid by U.S. taxpayers and be capped at $250,000.00 under the government-sponsored National Flood Insurance Program. Although homeowner's insurance and commercial property insurance typically do not cover floods, the homeless victims of Hurricanes Katrina and Rita contend that it was wind and the associated storm surge that destroyed their homes and businesses. Wind damage is covered by homeowner's and commercial property insurance policies.
At this late date, Gulf Coast policyholders who have been denied payment of their insurance claims by their insurance providers have no choice but to turn to the courts. Litigation, not protracted negotiation and on-going debates as to whether "storm surge" is "flooding," appears to be the only avenue that the insurance companies have left their homeless and destitute policyholders. Victims of Hurricanes Katrina and Rita should immediately seek competent legal counsel. Generally, lawsuits asserting claims under an insurance policy must be filed by the policyholder within one year of the date of loss. The following are only a few of the legal claims under which a lawsuit may be filed against insurers: "Valued Policy Law"; Declaratory Judgment; Injunction; Indemnity; Unjust Enrichment; Reformation of the Insurance Contracts; and Breach of Implied Covenant, Duty of Good Faith and Fair Dealing
1. "Valued Policy Law"
The "Valued Policy Law" may be applicable to the insurance policies held by the victims of Hurricane Katrina and/or Hurricane Rita. The "Valued Policy Law' requires insurers to pay the entire amount of loss on any insured structures, as long as any portion of the loss resulted from a covered peril. Many structures damaged by Hurricane Katrina and Hurricane Rita were insured under homeowner's insurance and commercial property insurance policies, which arguably excluded storm surge as a covered peril. It was storm surge that caused the majority of damage to these structures. However, these structures also sustained damage from wind (which is a covered peril). Under Louisiana's "Valued Policy Law," La. R.S. 22:695(a), an insurer must pay the full value of the loss, without deduction or offset, if a valuation was placed on the property and such valuation was used to calculate the premiums. If an insurer provided clear notice in the policy of a different method of calculating the loss, then the insurer would not be required to pay the full value of the loss. In other words, the insurer must pay the policy limits for a total loss unless a different method of computation was clearly set forth in the application and policy.
Although not binding on Louisiana, Mississippi, Alabama, and Texas courts, the Florida decision in Mierzwa v. Florida Windstorm Underwriting Association, 877 So.2d 774 (Fla. App. 4th Dist. 2004) is instructive. Under Florida's "Valued Policy Law," Mierzwa held that, if any portion of a total loss was caused by a covered peril under a standard policy, then the insurer was required to pay the face amount of the standard policy, even if the majority of the damage resulted from an excluded peril, such as water damage.
The Florida appellate court found that the meaning of Florida's "Valued Policy Law" was "simple and straightforward." If the building is insured by an insurer for a covered peril and the building is deemed to be a total loss, the "Valued Policy Law" mandates that the insurance provider is liable to the owner for the face amount of the policy, no matter what other facts are involved as to the cost of repairs or replacement. According to this Florida appellate court, once there is a determination that there is a covered peril and a total loss, the actual cause of the total loss is irrelevant. Since Louisiana's "Valued Policy Law" was re-enacted in 1992, there has been no reported decision interpreting its language.
2. Declaratory Judgment
Pursuant to the Federal Rules of Civil Procedure, policyholders may seek a Declaratory Judgment by a Federal Court that: (a) their insurance policy provides full insurance coverage for the damage caused by Hurricane Katrina and/or Hurricane Rita to the insured residence and/or commercial property; (b) any damage to their insured residence and/or commercial property caused by "storm surge" is not excluded under their insurance policy; and (c) the flood exclusion is not applicable because it is ambiguous and deceiving.
The insurance companies are merely attempting to evade their coverage obligations to the policyholders by wrongfully characterizing the storm surge damage as a "flood." NOAA, the National Weather Service, the National Hurricane Center, and other meteorological experts all uniformly note that "storm surge" is caused by hurricane wind and is part and parcel of a hurricane and is distinguishable from "flood" damage. Furthermore, under state law, any ambiguity in an insurance contract is strictly construed in favor of the insured and against the insurance provider/drafter.
3. Injunction
Since the policyholders have suffered and will continue to suffer substantial and irreparable injury if the insurance companies continue to rely on the flood exclusion or the separate flood policy to deny them full insurance coverage for their loss, the policyholders may also seek an Injunction enjoining and/or equitably estopping the insurance companies from: (a) denying coverage for damage to their insured residence and/or commercial property caused by storm surge; and
(b) utilizing the flood exclusion to exclude coverage for damage to their insured residence and/or commercial property.
The policyholders may further argue that the water damage exclusion provisions are void and unenforceable as violations of state public policy in that such exclusion provisions attempt to invalidate long-standing state law and judicial precedents governing the issue of proximate causation and attempt to immunize the insurance providers from contractual liability on insured perils, i.e., wind, which may be a proximate cause or contributing cause of loss, all in contradiction of state law.
4. Indemnity
As a direct and proximate result of the insurance companies' denial to pay their policyholders' claims, the policyholders have been and will continue to be forced to pay a substantial amount of money out of their own pockets for their loss of use of the insured residence. Policyholders will also be required to pay hundreds of thousands of dollars to rebuild and/or replace destroyed property. Policyholders are therefore entitled to indemnity from their insurance providers for all sums they have expended and will be required to expend, as well as debt they will be required to incur in order to repair, refurbish, and/or replace their insured residence and property.
5. Unjust Enrichment
Despite realizing substantial premiums from their policyholders, the insurance companies have withheld the insurance proceeds owed to their policyholders for the hurricane damage to their insured property.
The insurance companies have therefore been unjustly enriched at the policyholders' expense. The policyholders are therefore entitled to damages resulting from the insurance provider's unjust enrichment, including the imposition of a Constructive Trust, on all premiums policyholders paid to their insurance providers and on the insurance proceeds wrongfully held by the insurance providers under the insurance policy.
6. Reformation of the Insurance Contracts Reformation of the insurance contracts may be granted to the policyholders based on inequitable conduct, equitable fraud, and/or fraud on the part of the insurance providers.
The insurance companies were thoroughly familiar with the physical location of their policyholders' properties, and more specifically, were familiar with the close proximity of policyholders' property to the Gulf Coast. The insurance companies knew or should have known the types of risks against which the policyholders needed property insurance, especially relating to hurricanes, which commonly form and/or appear in the Gulf of Mexico.The insurance companies held themselves out to the public and to their policyholders as experts in insurance matters. Therefore, the policyholders placed complete confidence in their insurance companies and relied upon them exclusively to formulate an insurance program sufficient to protect the policyholders from risks to their property, such as damage caused by hurricanes. The insurance companies should have known that the policyholders were relying on them to provide adequate insurance coverage and that the policyholders were relatively unsophisticated in insurance matters. Through inequitable conduct in combination with actual or equitable fraud by the insurance companies, the insurance policy does not embody the insurance contract entered into by and between the parties, in that the insurance companies have taken the position that the policies do not provide full insurance coverage for damage to the policyholders' insured residences and/or businesses.
The policyholders may further argue that the insurance policies purchased from the insurance providers are adhesion contracts, unduly and unreasonably complex in their provisions and language and difficult to understand by the average consumer and policyholder, which resulted in a lack of knowledge in the provisions of the policies and a lack of understanding on the part of the policyholders. The policies were all in preprinted form, nonnegotiable and contained substantially identical exclusion provisions. These policies thereby deprived the policyholders of meaningful choice of coverage. Moreover, the water damage exclusion provisions are unreasonably favorable to the insurance companies and oppressive to the policyholders and bear no reasonable relationship to the risks and needs of the business of insurance providers, thereby rendering such exclusion provisions substantially and procedurally unconscionable and void.
The policyholders have no adequate remedy at law, but may allege that they are entitled in equity to a reformation of their insurance policies so as to expressly insure the policyholders for property damage caused by Hurricanes Katrina and Rita. The policyholders may allege that they are entitled to have their insurance policies reformed to conform with the agreement they entered into with their insurance companies. The policyholders would therefore request that the Court exercise its equitable power and reform, rectify, correct, and/or amend their insurance policies to reflect the parties' true intentions that the insurance policies provide full insurance coverage to the policyholders for the hurricane wind and storm surge damage.
In marketing their insurance policies, some insurance companies and their agents allegedly represented to policyholders that they would provide full and comprehensive coverage to any and all property damage that could be caused by a hurricane, including damage proximately caused by hurricane wind and storm surge damage proximately caused by hurricanes. Many insurance policies contain a separate "hurricane deductible."
Despite these representations, the insurance companies fraudulently and intentionally failed to provide full and comprehensive coverage for the property damage caused by Hurricanes Katrina and Rita. The alleged representations made by the insurance companies, which were intended to induce reliance on the part of the policyholders, were false, misleading, and deceptive, and were made with knowledge of the falsity of the representations or with reckless disregard of their untruthfulness. Policyholders detrimentally relied on the insurance provider's fraudulent misrepresentations.
Policyholders agreed to purchase the subject policy in reasonable and justifiable reliance that the insurance policy would provide full and comprehensive hurricane coverage. The policyholders' detrimental reliance on the insurance provider's fraudulent misrepresentations proximately caused them damage. Had the insurance providers advised the policyholders that it would not provide full and comprehensive coverage for all hurricane damage, the policyholders would not have purchased the insurance policy and would not have agreed to pay a separate "hurricane deductible."
7. Breach of Implied Covenant, Duty of Good Faith and Fair Dealing Under state law, in every contract entered into between an insurer and an insured there are implied covenants of good faith and fair dealing.
These implied covenants prevent one party from exercising judgment in such a manner as to evade the spirit of the transaction or to deny the other party the expected benefits of the insurance policy contract.
The policyholders may allege that their insurance provider's conduct in failing to timely investigate the policyholder's insurance claim constitutes a breach of this implied covenant of good faith and fair dealing. Therefore, the policyholder may be entitled to recover from the insurance company monetary damages to compensate the policyholder for such property damage, monetary loss and emotional distress in an amount to be determined at trial. If the insurance company's conduct is found to be willful, wanton, malicious, outrageous, beyond the bounds of reasonableness and was undertaken with reckless disregard for the right of the policyholder, the policyholder may also be entitled to recover punitive damages from the insurance company in an amount to be determined at trial.
Procrastination by the insurance companies is intentional. The insurance companies assume that by slowly dispatching adjusters and requiring policyholders to endure multiple adjuster visits, the policyholders will become desperate and willing to accept whatever minuscule payment that is offered by the insurance company. Douglas Heller, executive director of the Foundation for Taxpayer & Consumer Rights, says delays actually make money for the insurance industry.
According to Heller, "A month-long delay in claims for 50 destroyed homes could bring in more than $30,000 in investment income to the underwriter."
The focus of insurance "bad-faith" litigation is adjuster conduct.
Mistakes in processing covered claims constitute the essence of "bad-faith." An insurer can be liable for the tort of bad-faith when it fails to properly investigate the insured's claim.
In Alabama, "bad-faith" is not simply bad judgment or negligence, but rather requires a dishonest purpose and conscious wrongdoing.
An insurer has a duty to conduct a thorough, well-documented investigation, followed by a thoughtful decision-making process before it refuses to pay a policyholder's claim.
Louisiana courts require that "the insurer take some substantive and affirmative step to accumulate the facts that are necessary to evaluate the claim." Moreover, the insurer must investigate the claim within the statutory time period. The Louisiana Supreme Court has held that "arbitrary and capricious" actions subject the insurer to liability under two statutes, La.R.S. 22:658 and La.R.S. 22:1220.
In Mississippi, although an adjuster has a duty to investigate all relevant information and must make a realistic evaluation of a claim, an adjuster is not liable for simple negligence in adjusting a claim. The adjuster can only incur independent liability when his conduct constitutes gross negligence, malice, or reckless disregard for the rights of the insured.
Conclusion
Gulf Coast insurance policyholders must not allow themselves to be victimized by an insurance industry which has collected premiums from its policyholders for decades and now, in their time of need, refuses to pay the claims of these very same policyholders for damage caused by Hurricanes Katrina and Rita. Victims of Hurricanes Katrina and Rita should immediately seek competent legal counsel. As demonstrated by the Florida decision in Mierzwa, the insurance industry is not a "sacred cow!" It must honor its obligations. The Gulf Coast road to recovery is through the insurance companies, not the pockets of U.S. taxpayers!.
About the Author:
Brian J. Donovan is an attorney and engineer with thirty years of international business experience. He received his B.S., cum laude, in Marine/Mechanical and Nuclear Engineering.from the U.S. Merchant Marine Academy and his J.D. from Syracuse University College of Law where he was the recipient of Syracuse University's "Global Law & Practice Award" as the outstanding graduate in the areas of International Law and International Business Law. A member of The Florida Bar, The U.S. District Court, Middle District of Florida and The United States Court of Appeals for the Eleventh Circuit, Mr. Donovan is listed in Who's Who in America, Who's Who in American Law, Who's Who in Science and Engineering, Who's Who in Finance and Industry and Who's Who in the World. His law firm concentrates on international business development, business law (U.S. and international), securities law, admiralty law, insurance law and corporate law.
For More Information Contact:
Brian J. Donovan
Attorney at Law
P.O. Box 13272
Tampa, Florida 33681
Phone: 813-956-2827
Fax: 813-831-4788
E-mail: donovanb@gte.net
United Policyholders is a non-profit organization founded in 1991 and dedicated to educating the public on insurance issues and consumer rights. UP publishes educational materials and serves as a resource for individual and business policyholders and residents of communities with insurance problems. UP’s Amicus Project provides information to courts of law to support policyholders’ legal rights. UP unites policyholders and their advocates by sharing information. Write to UP at 110 Pacific Ave., PMB 262, San Francisco, CA. 94111, call us at (510) 763-9740, or visit our website at www.unitedpolicyholders.org.
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