With various hurricanes taking the Atlantic coasts by storm in recent months, there are consequently more legal disputes to be expected according to Hermes Marangos and Tom Rotherham, respectively Partner and Associate at Signature Litigation.
The 2017 Atlantic Hurricane season has witnessed a cluster of exceptionally monstrous category 4 and 5 hurricanes. Litigation experts around the world are consequently bracing themselves for the unprecedented complexity of dealing with the consecutive losses of hurricanes Harvey, Irma, Jose, and Maria.
In respect of property damage issues, one of the main considerations will be if there has been an “event” which triggers cover. For example, property damage caused by flooding is often excluded under the terms of property damage cover. Property holders with flood exclusions in the United States may well be covered by the National Flood Insurance Programme, operated through FEMA, although it is thought that only 15-25% of properties at risk have such protection.
Of particular concern to losses sustained in the south west Caribbean will be how those losses are allocated between multiple “events”, i.e. between the damage caused by Irma, Jose and Maria. Of course, issues of allocating sustained periods of hurricane-like weather into different “events” can impact greatly on policy limits and deductibles, leading to contentious proceedings where there are divergent interests in multi-layer programmes.
The largest claims are likely to result from Business Interruption (BI) policies. BI losses are almost certain to be exacerbated by the prevalence of the oil industry in Irma affected areas and the subsequent impact on global energy markets. Unfortunately, given the complexity involved in calculating losses sustained by businesses after a major hurricane, BI claims can also be some of the most contentious.
Insureds must establish both that property damage was sustained by an insured peril and that interruption to the Insured’s business resulted from that property damage. Demonstrating both “triggers” to policy coverage can be difficult in the aftermath of a hurricane, where there is also usually damage to transport and utility infrastructure which also causes interruption to businesses. Similarly, losses sustained from criminal activity such as looting in the aftermath of hurricanes are unlikely to be covered, as losses are not said to be caused by the sustained property damage.
In addition to ensuring that cedants are properly applying themselves to the types of considerations outlined above (and therefore in compliance with any claims control clause contained in the reinsurance contract), reinsurers and retrocessionaires will need to consider a number of contentious issues.
In respect of aggregating losses in such programmes, contracts typically contain an “hours” clause which define a loss occurrence as meaning all losses arising out of one catastrophe. The duration of any such loss occurrence for a named peril is typically 72 hours. Exact contractual wordings vary, but generally they provide that hurricane losses within the specified number of hours can be aggregated. Generally, the reinsured is able to select the time of commencement – usually, at the time of their first reported loss. Depending on the path and speed of a hurricane, and subject to any reinstatement of cover, it may be possible for a reinsured to recover in respect of multiple losses within the same hurricane, although periods cannot overlap. It is crucial that reinsurers carefully review wordings, definitions and factual circumstances so that issues relating to cedant’s aggregations can be avoided.
Reinsurers face the challenge of multiple jurisdictions that have sustained losses resulting from Irma, José and Maria in particular. Cover is not always provided on a “back to back” basis, meaning that important terms may be defined differently in the reinsurance contract and the underlying contract of insurance. Problems arise when each contract applies defined aggregation terms, such as “storm”, in a different way. On a more fundamental level, each contract may have different governing law and jurisdiction clauses, leading to situations where different approaches to policy coverage are likely to occur in the separate jurisdictions that govern the reinsurance and underlying insurance.
The hurricanes are also having an extensive impact on reinsurance capital. Although it is unlikely Irma, Harvey, or Maria will surpass the total insured losses of the 2005 Hurricane Katrina (estimated at $62.2billion), the losses are still very substantial. Hiscox estimates net Harvey losses of $150million out of an industry total of $25billion and the FEMA expects more than 450,000 Harvey victims to file for assistance. Furthermore, Florida policymakers have already so far filed almost $2billion in insurance claims for Hurricane Irma, with total loss occurrence estimated at $32-50billion. Florida has, unsurprisingly, struggled with this massive volume of claims due to a lack of insurance adjusters. The disasters are also reportedly providing a test of alternative capital that has redefined the reinsurance sector in recent years.
Despite the impact of these immense figures, experts have recently reined in loss estimates. AIR Worldwide, for example, has dramatically narrowed its loss estimate for Hurricane Irma and consequently, US P&C and reinsurance stocks have received a fillip, in turn pushing up European reinsurance shares. This may very well be the light at the end of the tunnel of the 2017 Atlantic Hurricane Season. However, the subsequent litigation costs for coverage disputes should not be underestimated.