Responding to Catastrophic Storm Losses
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CONSTRUCTION LAW A Case Study of Hurricane Katrina Responding to and Sandy Claims Catastrophic By Aaron R. White, Storm Losses Frank Di Grande, and Michael S. Beach Court decisions resulting Since the turn of the millennium, the insurance industry from Hurricanes Katrina has learned significant and valuable information from and Sandy have further claims associated with major catastrophes, including defined policy terms and Hurricane Katrina in 2005 and Hurricane Sandy in 2012. Hurricane Katrina and Hurricane Sandy ations greatly affected the scope of losses the rights, responsibilities were the costliest and the third- costliest sustained by the residents and busi- natural disasters in U.S. history, respec- nesses of the geographic areas hit by and obligations of insurers tively. Since 1970, half of the 15 costliest the hurricanes. natural disasters in the United States have This article analyzes the critical mete- and their policyholders. occurred in the past 10 years. Hurricanes orological information causing these two Katrina and Sandy were caused by what catastrophic hurricanes, as well as the experts consider meteorological anoma- important legal precedent developed after lies, compared with predictable and known each weather event. This forms the basis weather threats. Some of the more fre- from which insurers now predict cata- quently occurring meteorological events, strophic weather events, underwrite cov- including Katrina and Sandy, affected areas erage, and handle and consider special of the country previously thought to be rea- circumstances based on changes in condi- sonably protected by geographic, natural, tions—including previously unanticipated and manmade barriers. or under recognized risks that may cre- The meteorological patterns of Hur- ate ambiguities in the way that insurers, ricane Katrina and Hurricane Sandy insureds, and the courts, interpret insur- deviated from the norm, and these devi- ance policies. ■ Aaron R. White is a shareholder at Boyle, Shaughnessy & Campo, P.C., in Boston, whose prac- tice focuses on business litigation, the representation of legal and real estate professionals and their professional organizations, private and public corporations, including land developers and construction contractors, international insurance and reinsurance companies, and the nation’s largest international environmental services corporation. He is the chair of the DRI Con- struction Defect Specialized Litigation Group. Frank Di Grande is the vice president of Property Claims for Privilege Underwriters Reciprocal Exchange (PURE Insurance) in White Plains, New York. He has more than 25 years in the insurance industry. Michael S. Beach is the national property director/vice president/executive general adjuster at McLa- rens in Glen Ellyn, Illinois. He joined McLarens in 1990 and specializes in large property damage and construction claims. 52 ■ For The Defense ■ February 2017 © 2017 DRI. All rights reserved. The Situation Room southern tip of Florida, passing across and the entire Mississippi Gulf Coast, including Recent catastrophic natural disasters, some into the warm waters of the Gulf of Mexico. towns such as Waveland, Bay Saint Louis, greater than ever historically recorded, Katrina next strengthened over the warm Pass Christian, Long Beach, Gulfport, have caused insurers to develop systems waters of the Gulf of Mexico. Originally Biloxi, and in Alabama, Bayou La Batre. to assist to manage risk and exposure, forecasted to strike land along the Flor- The storm surge peaked at 28 feet in Saint through the use of tactical, ground zero, or ida panhandle and Alabama, the forecast Bay Louis, Mississippi, and towns such as situation rooms, as front line tools. Most, later in the day on August 26, 2005, shifted Pass Christian, and 13 feet as far away as if not all, insurers have established inter- the track to the west, placing Louisiana, Mobile, Alabama, the highest storm surge nal divisions responsible for predicting, and its largest city, New Orleans, directly in Mobile since 1917. monitoring, and advising about poten- in the path. The change in Katrina’s track tially catastrophic events, including hurri- caused states of emergency to issue in Lou- canes, tornados, torrential rainfalls, floods, isiana, Mississippi, and Alabama, which snow storms, and periods of deep freeze. placed significant focus on the potential Recent catastrophic Through the use of technology, many insur- direct strike on New Orleans, a city with ers are developing procedures for providing an approximate population of 1.3 million natural disasters, advance notice, instructions, and warnings residents in its greater metropolitan area. to their insureds through Twitter, Face- On August 27, 2005, Katrina was up- some greater than ever book, e-mail, text message, and automated graded to Category 3 intensity, and it be- phone messages. The notices and warn- came the third major hurricane in the historically recorded, ings provided to insureds include informa- season. Soon afterward an eye-wall replace- tion about potential catastrophic weather ment cycle disrupted the intensity of the have caused insurers events that may affect the insureds’ respec- maximum winds and doubled the radius tive geographic locations. of the storm. Early on August 28, 2015, Ka- to develop systems to These tactical and situation divisions trina was upgraded to a Category 4 hurri- also assist insurers to highlight and pin- cane with maximum sustained winds of 145 assist to manage risk and point geographic areas of potential concern miles per hour. By 7:00 a.m. on the 28th, Ka- and allow the insurers to cross- reference trina became a Category 5 hurricane with exposure, through the those areas with the locations of their cus- maximum sustained winds of 175 miles per tomers. This assists the insurers to evalu- hour and gusts of 215 miles per hour, with use of tactical, ground ate potential risk, but also to mobilize, in central pressures as low as 902 nbar. At the advance, claim and adjusting teams, and to time, Katrina’s minimum pressure was the zero, or situation rooms, prepare them for adjusting these potential fourth most intense on record (surpassed catastrophic events. Many of these insurers later in 2005 by Rita and Wilma). as front line tools. also use the tactical and situation divisions On the afternoon of August 28, Katrina to communicate with their insureds imme- was positioned 180 miles from the mouth diately after significant weather events to of the Mississippi River with tropical force Statistics and Damages ensure their safety and to initiate the claim winds extending 230 miles from the cen- FEMA estimates that the total damage for process when necessary. ter of the storm and hurricane force winds Katrina was $108 billion, resulting in the extending 105 miles from the center. “costliest hurricane in U.S. history.” Deaths Hurricane Katrina Katrina made its second landfall, first related (directly or indirectly) to Katrina The Federal Emergency Management along the Gulf Coast, near Buras- Triumph, totaled 1,833, with more than 1,500 occur- Agency (FEMA) maintains that Katrina Louisiana, at approximately 6:00 a.m. on ring in Louisiana. More than half of the was “the single most catastrophic natural August 29, 2005, as a Category 3, with deaths in Louisiana were of individuals disaster in U.S. history.” hurricane- sustained winds of 125 miles per over the age of 74. hour. At landfall Katrina’s hurricane winds Meteorological History extended 120 miles from center. Katrina Private Insurance Payments The 2005 hurricane season was one of proceeded up the eastern Louisiana coast- Insurance companies have paid an esti- the most destructive and busy hurricane line, and communities in Plaquemines, Saint mated $41.1 billion on 1.7 million different seasons in history. Hurricane Katrina Bernard Parrish, and Saint Tammy Parrish Katrina- related claims for damage to vehi- was an extremely destructive Category 5 were severely damaged by storm surge and cles, homes, and businesses in six states. hurricane, which began its deadly path strong winds in the eye wall. The eye wall Sixty-three percent of the losses occurred on August 23, 2005, near the Bahamas. eventually grazed eastern New Orleans. in Louisiana and 33 percent occurred in According to the National Hurricane Cen- Because Katrina was so large, highly Mississippi. By 2007, 99 percent of the 1.7 ter (NHC), Katrina first strengthened off of destructive eye-wall winds and strong million personal property claims had been the east coast of Florida, becoming a trop- winds on the northeastern side of the storm settled by insurers. Courtesy of Insurance ical storm and then making landfall at the pushed record storm surges onto shore into Information Institute (2010). The efficiency For The Defense ■ February 2017 ■ 53 CONSTRUCTION LAW of the claim process was affected by impassi- Sandy became a hurricane, made landfall miles from the center, and 12-foot-high ble roads, severe utility disruptions, curfews, near Kingston, Jamaica, reemerged a few seas covered a diameter of ocean 1,500 and the displacement of entire communities. hours later into the Caribbean Sea, and miles across. Tropical storm force winds strengthened into a Category 2 hurricane. at landfall were felt in a 1500-mile diam- National Flood Insurance Payments On October 25, 2012, Sandy hit Cuba as a eter. Despite its size, the winds were not The National Flood Insurance Program Category 3 hurricane, then weakened to extreme, and rainfalls were not