Stroke-of-the-Pen Risk in Insurance Coverage

Shortly before Sandy hit New Jersey, the National Weather Service reclassified it from a Category 1 hurricane to a “post-tropical cyclone.” Id. As the scope of the damage became clear, the hardest-hit states, particularly New York, identified the storm's modified status as a way to avoid the enforcement of hurricane deductibles. Superintendent Lawsky explained, “We have informed the insurance industry that hurricane deductibles are not triggered because Sandy did not have sustained hurricane-force winds when it made land in New York.” Governor Cuomo Announces Homeowners Will Not Have to Pay Hurricane Deductibles, Press Release, Oct. 31, 2012. Interestingly, however, NOAA subsequently listed Sandy on its Chronological List of All Hurricanes: 1851 ' 2012. New York was included as a state affected by Sandy, with an asterisk indicating that Sandy's center did not make landfall over New York, but it did produce hurricane-force winds over land. See http://1.usa.gov/1md3gVm. Two days after New York's action, Governor Christie issued Executive Order 107, making it a violation of New Jersey law to apply any hurricane deductible to damage attributable to Sandy. Officials in Connecticut, Delaware, Maryland, Pennsylvania, Rhode Island and Washington, DC all subsequently agreed that hurricane deductibles were inapplicable to damage due to Sandy.

By whatever name, Sandy caused significant damage in New York and New Jersey in particular. Both states immediately issued statements instructing insurers to properly and promptly handle and pay claims. Governor Christie's Executive Order 107 regarding deductibles also warned insurers that they were to “exercise appropriate forbearances on collection, cancellation, documentation and other regulatory requirements, including, but not limited to: notifications of hospital admissions; due dates for claim filings, premium and loan payments and late fees; prior authorization requirements; and limitations on prescription refills.” New York took an additional step, issuing a moratorium on policy cancellations for 30 days in certain hard-hit counties.

The order by Superintendent Lawsky suspended all terminations, cancellations, and non-renewals of policies, and rendered ineffective any automatic renewal provisions. The policyholder, however, was still free to voluntarily terminate his or her policy. NYDFS, Amended Order Regarding Suspension of Certain Insurance and Banking Law Provisions, Nov. 5, 2012. New York's moratorium was subsequently extended six times and finally concluded at the end of February 2013. NYDFS, Seventh Amended Order Regarding Suspension of Certain Insurance and Banking Law Provisions, Feb. 12, 2013.

A few weeks later, New York announced additional measures to “expedite the payment of claims for New Yorkers affected by Hurricane Sandy.” Governor Cuomo Announces New Actions to Expedite Sandy-Related Insurance Claims and Launches Online Report Card System for Insurance Companies, Press Release, Nov. 29, 2012. Most importantly, the state mandated that insurers send adjusters to assess damaged property within six days ' more than halving the previous timetable of 15 days. To facilitate this new timetable, the governor issued an executive order allowing the issuance of expedited, temporary licenses for out-of-state adjusters. At the same time, to apply pressure to insurers, New York announced a new website that would publish report cards on insurance companies. The “grades” were based on the average number of days it took from the time a claim was filed for the insurer to send an adjuster to inspect the property, to provide an estimate of the claim payment to the policyholder, and to actually make payment; the “report cards” reflected any complaints received by NYDFS.

All of these measures were taken to protect property owners from the possibility that insurers would delay or deny compensation for the losses. Some were cosmetic and meant to apply public pressure to any recalcitrant insurers, such as the report cards. However, others had the potential to significantly alter the risk that the insurance industry had agreed to cover. The elimination of hurricane deductibles shifts additional risk from the policyholder to the insurer, and moratoriums on cancellations and non-renewals prevent insurers from shedding additional risk at a time when they are over-extended. In other words, thousands of existing policies were rewritten by state insurance commissioners with little or no recourse available to the insurers.

Anti-Concurrent Clauses

While not receiving the same public attention as did the measures discussed above, the position of regulators with respect to “anti-concurrent clauses” or “ACCs” can have a huge effect on the insurers' responsibility for policyholder losses as well. Many insurance policies contain such clauses, which address instances in which a covered risk and an uncovered risk cause damage at the same time and allow the insurer to deny coverage in full if any part of the loss was caused by an uncovered risk. Sandy caused both wind- and flood-related damages, the latter of which is typically uncovered in a standard homeowner's policy. In the wake of Hurricane Katrina, there was significant litigation over ACCs initiated by homeowners confronted with the same flood/wind confluence and resulting denial of coverage. See, e.g., Corban v. United Servs. Auto. Ass'n, 20 So.3d 601 (Miss. 2009); Leonard v. Nationwide Mut. Ins. Co., 499 F. 3d 419 (5th Cir. 2007). Currently, four states, California, North Dakota, Washington, and West Virginia, have statutes or regulations in place that eliminate or limit the effect of ACC clauses.

Sandy has not yet generated notable ACC litigation, but the New York legislature took up consideration of the issue based on reports that many people had difficulty securing coverage under their policies, particularly for damage to sewer lines. Senate Passes Comprehensive Hurricane Sandy Legislation, Targeted News Service, June 17, 2013. In June 2013, New York's state senate passed a package of bills to provide ongoing assistance to Sandy victims, including S5798, which instructed NYDFS to conduct a study of anti-concurrent clauses in homeowners policies with regard to sewer backup coverage. Id. The bill has thus far received no action in the state assembly.

In addition, in both New York and New Jersey, bills were introduced to eliminate anti-concurrent cause provisions (A07455 and A4467, respectively). New York's bill would limit the effect of ACCs in the state and require insurers to notify policyholders before adding such a clause to either a new policy or a renewal. The New York bill passed the assembly but has received no action in the senate. The New Jersey bill is not yet out of committee. The trend toward prohibiting ACCs is likely to affect the ability of property owners in coastal areas in particular to secure coverage in the future.

NYDFS Circular Letter

On Oct. 28, 2013, NYDFS issued a circular letter to all property/casualty insurers authorized to do business in New York entitled Post-Disaster and Natural Catastrophe Regulatory Guidance (Emergency Disaster Protocol). The letter advised New York insurers that they can expect to see much of the same during the next major disaster. Specifically, NYDFS may:

• Impose a moratorium on policy cancellations for up to three months, with an option to extend for another three months;
• Insist that insurers make “reasonable accommodations” to policyholders struggling to meet their premium obligations;
• Establish claims handling requirements or procedures to protect the health and safety of claimants, such as permitting immediate and necessary repairs and broadening proof-of-loss documentation, both measures which were implemented post-Sandy;
• Impose an expedited process for issuing temporary independent and public adjuster licenses;
• Require additional claims data reporting; and
• Establish a mediation program to facilitate resolution of disputed claims.

These measures are similar to and in some instances reflect an expansion of the actions taken after Sandy, particularly with regard to the moratorium on policy cancellations. With Sandy, the moratorium was ultimately in place for only about four months. NYDFS has now suggested it will take such action for up to six months.

Many of these measures are simply ways of regulating the claims-handling process. However, as discussed above, the imposition of moratoriums effects a change in the terms of existing coverage without regard to the rights of the parties that contracted for it. Recharacterizing a hurricane as a storm by executive order provides policyholders with thousands of dollars in coverage for losses that insurers did not underwrite and for which a premium has not been paid. Similarly, eliminating ACCs potentially forces insurers to cover damage beyond what was intended when the policy issued. These actions by regulators serve to protect consumers in the short term, but ultimately put them at risk by making it more expensive or even impossible to obtain adequate coverage. As Robert Hartwig of the Insurance Information Institute noted when commenting on NYDFS's and the governor's actions, “Insurers will comply, but the broader point is that the deductibles help keep the cost of insurance lower in coastal areas,” he said. “The cost to insurers has to be reflected in the price that is charged, and now that has to include the possibility of storms that are hurricanes being re-categorized as 'post-tropical events.'”

This phenomenon has already played out in Florida in the wake of Hurricanes Andrew and Katrina. After paying claims for Andrew worth $15.5 billion in 1992 dollars, eight insurance companies went bankrupt and others became technically insolvent, requiring transfers from parent companies in order to pay claims. Insurance Information Institute, Hurricane Andrew and Insurance: The Enduring Impact of an Historic Storm, Aug. 2012. Insurers cancelled policies or refused to renew in order to reduce their exposure, prompting a legislative response in the form of a moratorium on cancellations that wound up extending three years. Id.

The result was a shift to reliance on the state-run Citizens Property Insurance Corporation, which grew exponentially in the years after Andrew. It became Florida's largest property insurer but it has recently drawn criticism for, among other things, being $9 billion undercapitalized and charging rates judged not to be actuarially sound. Id.; Fla. Chamber of Commerce, Into the Storm: Framing Florida's Looming Property Insurance Crisis, Jan. 2010. Florida is now the most expensive state in the country for homeowners insurance, with rates that are double the national average. The Gainesville Sun, Florida Most Expensive in Nation for Home Insurance, Dec. 17, 2013.

New York's consumer-friendly measures taken in the wake of natural disasters represent the state's near-term effort to shift additional risk onto insurers that would otherwise be borne by consumers or by state or federal disaster relief. Florida's experience indicates the longer-term outcome: a shift back to government responsibility when private insurers decide they can no longer tolerate the risk they are being asked to bear. More generally, the actions taken by New York in the wake of Sandy, and the recent news that such measures will be the new normal, suggest a move from the rule of law to the “rule of man” that should be troubling for insurers going forward.

Robert D. Goodman, a member of this newsletter's Board of Editors, is a partner in the New York office of Debevoise & Plimpton LLP, where he co-chairs the firm's Insurance Litigation Practice Group. Miranda H. Turner is an associate practicing in the same group.

Superstorm Sandy, which struck the East Coast in October 2012, is estimated to have caused $19 billion in private insurance losses and an additional $12-to-$15 billion in losses covered by the National Flood Insurance Program. In the immediate aftermath of the disaster, Governor Andrew Cuomo and Department of Financial Services Superintendent Ben Lawsky in New York, and Governor Chris Christie in New Jersey, promulgated a number of emergency measures that effectively rewrote insurance coverage in their states. This “stroke of the pen” altered existing policies in significant ways and put insurers on notice going forward that elected officials and regulators may respond to natural disasters by unilaterally and retroactively changing the rules of the game. Indeed, New York's Department of Financial Services (“NYDFS”) has stated as much in a recent circular letter describing the “post-disaster regulatory measures” it may take in the future, including a moratorium on policy cancellations and non-renewals and expedited handling of claims.

Aftermath of Sandy

The first issue to receive attention in connection with Sandy was that of hurricane deductibles, which emerged as an issue almost before Sandy made landfall. Hurricane deductibles came into widespread use after Hurricane Andrew, which caused approximately $15.5 billion in damage in 1992 ' at the time, the most expensive storm in U.S. history. NAIC, The Debate over Hurricane Deductibles, Apr. 2013. Insurers, encouraged by reinsurers, looked for ways to better manage catastrophic risk, and the inclusion in policies of higher deductibles, triggered by both hurricanes and other “named storms,” was a solution. Id. The deductibles commonly are one to 10% of the property's insured value, a significant increase over the more standard $500 to $2,000 deductible. NAIC, Hurricane Deductibles, available at http://bit.ly/1lI3u3E. Currently, some form of hurricane deductible is in place in 20 states, including New York, New Jersey, and Connecticut. (NAIC, The Debate over Hurricane Deductibles.)

Shortly before Sandy hit New Jersey, the National Weather Service reclassified it from a Category 1 hurricane to a “post-tropical cyclone.” Id. As the scope of the damage became clear, the hardest-hit states, particularly New York, identified the storm's modified status as a way to avoid the enforcement of hurricane deductibles. Superintendent Lawsky explained, “We have informed the insurance industry that hurricane deductibles are not triggered because Sandy did not have sustained hurricane-force winds when it made land in New York.” Governor Cuomo Announces Homeowners Will Not Have to Pay Hurricane Deductibles, Press Release, Oct. 31, 2012. Interestingly, however, NOAA subsequently listed Sandy on its Chronological List of All Hurricanes: 1851 ' 2012. New York was included as a state affected by Sandy, with an asterisk indicating that Sandy's center did not make landfall over New York, but it did produce hurricane-force winds over land. See http://1.usa.gov/1md3gVm. Two days after New York's action, Governor Christie issued Executive Order 107, making it a violation of New Jersey law to apply any hurricane deductible to damage attributable to Sandy. Officials in Connecticut, Delaware, Maryland, Pennsylvania, Rhode Island and Washington, DC all subsequently agreed that hurricane deductibles were inapplicable to damage due to Sandy.

By whatever name, Sandy caused significant damage in New York and New Jersey in particular. Both states immediately issued statements instructing insurers to properly and promptly handle and pay claims. Governor Christie's Executive Order 107 regarding deductibles also warned insurers that they were to “exercise appropriate forbearances on collection, cancellation, documentation and other regulatory requirements, including, but not limited to: notifications of hospital admissions; due dates for claim filings, premium and loan payments and late fees; prior authorization requirements; and limitations on prescription refills.” New York took an additional step, issuing a moratorium on policy cancellations for 30 days in certain hard-hit counties.

The order by Superintendent Lawsky suspended all terminations, cancellations, and non-renewals of policies, and rendered ineffective any automatic renewal provisions. The policyholder, however, was still free to voluntarily terminate his or her policy. NYDFS, Amended Order Regarding Suspension of Certain Insurance and Banking Law Provisions, Nov. 5, 2012. New York's moratorium was subsequently extended six times and finally concluded at the end of February 2013. NYDFS, Seventh Amended Order Regarding Suspension of Certain Insurance and Banking Law Provisions, Feb. 12, 2013.

A few weeks later, New York announced additional measures to “expedite the payment of claims for New Yorkers affected by Hurricane Sandy.” Governor Cuomo Announces New Actions to Expedite Sandy-Related Insurance Claims and Launches Online Report Card System for Insurance Companies, Press Release, Nov. 29, 2012. Most importantly, the state mandated that insurers send adjusters to assess damaged property within six days ' more than halving the previous timetable of 15 days. To facilitate this new timetable, the governor issued an executive order allowing the issuance of expedited, temporary licenses for out-of-state adjusters. At the same time, to apply pressure to insurers, New York announced a new website that would publish report cards on insurance companies. The “grades” were based on the average number of days it took from the time a claim was filed for the insurer to send an adjuster to inspect the property, to provide an estimate of the claim payment to the policyholder, and to actually make payment; the “report cards” reflected any complaints received by NYDFS.

All of these measures were taken to protect property owners from the possibility that insurers would delay or deny compensation for the losses. Some were cosmetic and meant to apply public pressure to any recalcitrant insurers, such as the report cards. However, others had the potential to significantly alter the risk that the insurance industry had agreed to cover. The elimination of hurricane deductibles shifts additional risk from the policyholder to the insurer, and moratoriums on cancellations and non-renewals prevent insurers from shedding additional risk at a time when they are over-extended. In other words, thousands of existing policies were rewritten by state insurance commissioners with little or no recourse available to the insurers.

Anti-Concurrent Clauses

While not receiving the same public attention as did the measures discussed above, the position of regulators with respect to “anti-concurrent clauses” or “ACCs” can have a huge effect on the insurers' responsibility for policyholder losses as well. Many insurance policies contain such clauses, which address instances in which a covered risk and an uncovered risk cause damage at the same time and allow the insurer to deny coverage in full if any part of the loss was caused by an uncovered risk. Sandy caused both wind- and flood-related damages, the latter of which is typically uncovered in a standard homeowner's policy. In the wake of Hurricane Katrina, there was significant litigation over ACCs initiated by homeowners confronted with the same flood/wind confluence and resulting denial of coverage. See, e.g., Corban v. United Servs. Auto. Ass'n , 20 So.3d 601 (Miss. 2009); Leonard v. Nationwide Mut. Ins. Co. , 499 F. 3d 419 (5th Cir. 2007). Currently, four states, California, North Dakota, Washington, and West Virginia, have statutes or regulations in place that eliminate or limit the effect of ACC clauses.

Sandy has not yet generated notable ACC litigation, but the New York legislature took up consideration of the issue based on reports that many people had difficulty securing coverage under their policies, particularly for damage to sewer lines. Senate Passes Comprehensive Hurricane Sandy Legislation, Targeted News Service, June 17, 2013. In June 2013, New York's state senate passed a package of bills to provide ongoing assistance to Sandy victims, including S5798, which instructed NYDFS to conduct a study of anti-concurrent clauses in homeowners policies with regard to sewer backup coverage. Id. The bill has thus far received no action in the state assembly.

In addition, in both New York and New Jersey, bills were introduced to eliminate anti-concurrent cause provisions (A07455 and A4467, respectively). New York's bill would limit the effect of ACCs in the state and require insurers to notify policyholders before adding such a clause to either a new policy or a renewal. The New York bill passed the assembly but has received no action in the senate. The New Jersey bill is not yet out of committee. The trend toward prohibiting ACCs is likely to affect the ability of property owners in coastal areas in particular to secure coverage in the future.

NYDFS Circular Letter

On Oct. 28, 2013, NYDFS issued a circular letter to all property/casualty insurers authorized to do business in New York entitled Post-Disaster and Natural Catastrophe Regulatory Guidance (Emergency Disaster Protocol). The letter advised New York insurers that they can expect to see much of the same during the next major disaster. Specifically, NYDFS may:

• Impose a moratorium on policy cancellations for up to three months, with an option to extend for another three months;
• Insist that insurers make “reasonable accommodations” to policyholders struggling to meet their premium obligations;
• Establish claims handling requirements or procedures to protect the health and safety of claimants, such as permitting immediate and necessary repairs and broadening proof-of-loss documentation, both measures which were implemented post-Sandy;
• Impose an expedited process for issuing temporary independent and public adjuster licenses;
• Require additional claims data reporting; and
• Establish a mediation program to facilitate resolution of disputed claims.

These measures are similar to and in some instances reflect an expansion of the actions taken after Sandy, particularly with regard to the moratorium on policy cancellations. With Sandy, the moratorium was ultimately in place for only about four months. NYDFS has now suggested it will take such action for up to six months.

Many of these measures are simply ways of regulating the claims-handling process. However, as discussed above, the imposition of moratoriums effects a change in the terms of existing coverage without regard to the rights of the parties that contracted for it. Recharacterizing a hurricane as a storm by executive order provides policyholders with thousands of dollars in coverage for losses that insurers did not underwrite and for which a premium has not been paid. Similarly, eliminating ACCs potentially forces insurers to cover damage beyond what was intended when the policy issued. These actions by regulators serve to protect consumers in the short term, but ultimately put them at risk by making it more expensive or even impossible to obtain adequate coverage. As Robert Hartwig of the Insurance Information Institute noted when commenting on NYDFS's and the governor's actions, “Insurers will comply, but the broader point is that the deductibles help keep the cost of insurance lower in coastal areas,” he said. “The cost to insurers has to be reflected in the price that is charged, and now that has to include the possibility of storms that are hurricanes being re-categorized as 'post-tropical events.'”

This phenomenon has already played out in Florida in the wake of Hurricanes Andrew and Katrina. After paying claims for Andrew worth $15.5 billion in 1992 dollars, eight insurance companies went bankrupt and others became technically insolvent, requiring transfers from parent companies in order to pay claims. Insurance Information Institute, Hurricane Andrew and Insurance: The Enduring Impact of an Historic Storm, Aug. 2012. Insurers cancelled policies or refused to renew in order to reduce their exposure, prompting a legislative response in the form of a moratorium on cancellations that wound up extending three years. Id.

The result was a shift to reliance on the state-run Citizens Property Insurance Corporation, which grew exponentially in the years after Andrew. It became Florida's largest property insurer but it has recently drawn criticism for, among other things, being $9 billion undercapitalized and charging rates judged not to be actuarially sound. Id.; Fla. Chamber of Commerce, Into the Storm: Framing Florida's Looming Property Insurance Crisis, Jan. 2010. Florida is now the most expensive state in the country for homeowners insurance, with rates that are double the national average. The Gainesville Sun, Florida Most Expensive in Nation for Home Insurance, Dec. 17, 2013.

New York's consumer-friendly measures taken in the wake of natural disasters represent the state's near-term effort to shift additional risk onto insurers that would otherwise be borne by consumers or by state or federal disaster relief. Florida's experience indicates the longer-term outcome: a shift back to government responsibility when private insurers decide they can no longer tolerate the risk they are being asked to bear. More generally, the actions taken by New York in the wake of Sandy, and the recent news that such measures will be the new normal, suggest a move from the rule of law to the “rule of man” that should be troubling for insurers going forward.

Robert D. Goodman, a member of this newsletter's Board of Editors, is a partner in the New York office of Debevoise & Plimpton LLP, where he co-chairs the firm's Insurance Litigation Practice Group. Miranda H. Turner is an associate practicing in the same group.