The potentially catastrophic losses associated with natural disasters present significant challenges for both insurers and policyholders. In the United States, insurance is available for certain risks associated with natural disasters through a combination of private insurance and governmental programmes. Some risks associated with natural disasters are uninsurable.
Hurricane damage may be covered under first-party property insurance policies, depending upon the cause of the damage. Hurricanes typically involve one or more different perils, including wind, rain, storm surge, flooding, mould and power outages. Some perils, such as wind and windstorm, are routinely covered under property insurance policies. Others, such as flooding, generally are excluded. Thus, the underlying cause of the damage for which coverage is sought is critical. Identification of the cause is a fact-intensive inquiry and may require the use of experts. Moreover, specific policy provisions may come into play in assessing hurricane damage coverage under a property insurance policy. An ‘anti-concurrent causation clause’, for example, may limit coverage for hurricane damage arising from multiple perils, if one of the perils is excluded. Specific exclusions, for example, for wind, flooding or mould, may bar coverage.
In addition to seeking coverage for property damage, policyholders impacted by hurricane damage frequently invoke ‘business interruption’ coverage, which provides reimbursement for lost income when business is interrupted by the loss of property owing to an insured peril. Business interruption coverage typically extends to the period of restoration, or the reasonable amount of time it takes for business operations to return to normal following physical damage to property or equipment. Litigation often revolves around the date on which the insured could have repaired, rebuilt or replaced its property to resume operations, which may precede the date on which the policyholder actually did return to business. Litigation also frequently involves the correct measure of recovery for business interruption losses. Courts have typically found that recovery should reflect what the insured business would have earned had no interruption occurred, using the earnings minus expenses of the business before the interruption to determine lost income recovery.
Property insurance policies typically exclude coverage for floods. Courts in the United States enforce flood exclusions to bar coverage for damage caused by naturally occurring floods, burst dams and other natural flood events. By contrast, courts consistently refuse to apply the flood exclusion to bar coverage for damage caused by human negligence, for example, a burst water main or pipe. Conflicting conclusions may arise with respect to flood damage that arises, in part, from human conduct. After Hurricane Katrina, for example, a flood exclusion was held to bar coverage for damage caused by breaches in the levees surrounding New Orleans, despite the involvement of human negligence in that flood.
Flood insurance is available from insurers in the United States through the National Flood Insurance Program (NFIP) together with a recently expanded private insurance market. Federal courts have exclusive jurisdiction to hear actions under the NFIP. Under the NFIP, the Federal Emergency Management Administration subsidises and administers flood insurance at affordable rates to homeowners and business owners in participating communities. Various coverage limits exist for homes, businesses and personal property. Additionally, coverage is subject to a number of exclusions, including losses: ‘substantially confined to the insured premises’ (as opposed to widespread), caused by ‘earth movement’ (except where such losses arise from mudslides proximately caused by flooding), resulting from the policyholder’s neglect to use reasonable protective measures, caused by normal erosion, and caused by a flood in progress at the time of purchase of the insurance policy.
The future of the NFIP is uncertain. Following Hurricanes Katrina, Sandy and Harvey, the programme has been heavily in debt. The government is continuing to debate reforms that include requiring greater participation by the private market and restricting coverage for severe repetitive-loss properties. The government recently removed a non-compete clause from the NFIP to encourage private insurers to enter the flood insurance market. As a result, private insurers are now able to service NFIP flood policies and offer primary flood insurance.
Most first-party property insurance policies cover fire damage, including losses resulting from catastrophic wildfires. Coverage traditionally also extends to losses resulting from smoke, soot and ash. In some high-risk areas, however, insurers will exclude coverage for wildfires, requiring policyholders to purchase a rider or separate policy for such coverage. As with any policy, coverage is determined based on the applicable policy language and the facts of the case. Among other issues, courts have grappled with whether wildfire losses caused by smoke, soot or ash are excluded under common exclusions for damages caused by smog or pollution, with inconsistent results.
First-party property insurance policies typically exclude coverage for earthquakes. Instead, policyholders may purchase a separate policy or an endorsement from their private insurer or, in California, the California Earthquake Authority. Notably, first-party property insurance and earthquake insurance policies are not intended to overlap. Accordingly, earthquake policies typically do not cover fire or water damage initially caused by an earthquake. Furthermore, most earthquake policies contain an exclusion for earthquakes that are ‘not naturally occurring’ or ‘human-made’. Recently, insurers and regulators have disputed coverage for earthquake losses in areas adjacent to natural gas extraction, or ‘fracking’, which has been shown to cause or contribute to an increase in seismic activity.
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