Hurricane Beryl has caused destruction in the Caribbean, Mexico and Texas. Continuing issues include power outages, both rolling and continuous, issues regarding access to clean water, severed communications, roads that remain impassable and issues accessing necessities like food and fuel.

Hurricanes cause dramatic damage to businesses and commercial properties every year, totaling some $9 billion according to the Congressional Budget Losses, and hurricanes are increasing in both frequency and severity. The 2024 hurricane season is expected to be more severe—including between 8 and 13 hurricanes, 4 to 7 of which are expected to be severe—due to La Nina and warmer ocean temperatures. Beryl was just the second of the Atlantic Tropical Cyclone storm names, so more damage can be expected.

Several Policies May Provide Coverage

While there is no stand-alone hurricane policy, riders to commercial property or business owners’ policies for named perils may be purchased, and several coverage types can address damages caused by hurricanes.  

Most “all risk” policies cover damage caused by wind and wind-driven rain, but typically exclude flood damage. Flood insurance can be purchased as a rider or stand-alone policy, and covers losses from flooding, including buildings and their contents. For named peril policies, both wind and flood may be excluded. In this case, wind insurance, sometimes called named storm or named peril coverage, can help cover damage caused by gales, winds and hail if wind is excluded.

Business Income and Extra Expense

Lost business income coverage is vital. It generally is subject to a waiting period of 24-72 hours before coverage kicks in. Since it is subject to the exclusions in the policy, businesses may need to ensure business income coverage is covered by their flood insurance. If your business depends on third parties to operate, contingent business interruption coverage is important. If you rely on suppliers or distributors, contingent business interruption coverage may help cover losses caused by property damage to contingent businesses. Similarly, if your business relies on component parts, suppliers, or distributors, specialized supply chain coverage (whether as a rider to a commercial policy or standalone) may cover hurricane-related supply chain interruptions that result in lost business income.

Extra expense coverage may help defray costs to continue operating and mitigate damages, including continuing production at the current site, moving to a temporary location, using other facilities, paying contractors, overtime, and bonuses.

Other Important Coverages

Sewer backup cover also is vital, as hurricanes frequently wreak havoc on sewer systems. Sewer backup insurance can cover losses caused by water or waterborne material discharged by a sewer, drain or sump. Offsite utility interruption coverage also is important, and frequently is excluded.

Other policies also may provide cover following a hurricane:

  • General liability can protect against injury to customers or damage to their property.
  • Workers’ compensation can help if an employee is injured by a hurricane while on the job.
  • Finished stock insurance may help cover lost inventory damaged by a hurricane.

A few years ago, a new law in Texas went into effect limiting policyholder remedies for improper insurance claims handling and added several requirements for submissions for claims arising from “damage to or loss of covered property caused, wholly or partly, by forces of nature” including hurricane, tornado, flood, wind or rainstorm. Texas policyholders also must provide a high level of detail when disputing a carrier’s coverage determination and they must consent to inspection by the carrier. Failure to meet either the detail or consent requirement can lead to dismissal of a suit. It requires a policyholder’s attorney to provide notice to a carrier that if the claim issues are not resolved within 60 days, the policyholder will file suit. Currently, policyholders are only able to get a 10% interest rate from a late-paying carrier, and there also are limits on the attorneys’ fees a policyholder can recover if they are forced to file suit. 

Tips for Policyholders Following a Hurricane

  1. Notify the insurer and the broker of any property damage and business interruption.
  2. Preserve evidence of the damage.
  3. Obtain approval from your carriers before replacing or removing damaged property.
  4. Get the proper Proof of Loss form and fill it out within the requisite time.
  5. Communicate with your carrier regarding the need to submit a partial proof of loss due to the nature of continuing investigations into losses caused by hurricanes.
  6.  Gather all documentation relating to any business interruption or extra expenses.
  7. Consider retaining an accounting firm. Some policies provide coverage for loss preparation costs.
  8. Communicate with the insurer, being sure to provide all necessary and relevant documentation, and be sure to log those communications.

Conclusion

Hurricane losses raise complex issues including those relating to causation and overlapping coverage provisions. Hire experienced coverage counsel to review all insurance policies for potential coverage and to evaluate potential coverage issues before submitting any claim.

For additional thoughts from Reed Smith’s Insurance Recovery Group on natural disaster coverage, we recommend listening to the recent Insured Success podcast episode titled Navigating Insurance Claims After Natural Disasters. An upcoming episode of Insured Success will focus specifically on hurricane recovery and expand on the thoughts discussed in this blog.

Key Take-aways

  1. The wording in insurance policies is often taken from precedent wording that has evolved over time. Accordingly, we often see inconsistencies in the wording of policies and/or ambiguity in the provisions setting out the scope of cover. There are often many different interpretations that can be applied to inconsistent wording in a policy, and it should not be assumed that the correct interpretation of any inconsistency is obvious or clear. When reviewing insurance policies, policyholders should look out for any inconsistencies between provisions in the policy and discuss them as a matter of priority with the broker and insurers in order to remedy the inconsistency.
  2. Parties should pay particular attention to provisions setting out the order of priority in the event of a conflict, particularly regarding the scope of cover, to ensure that they understand how the provisions of the policy will be interpreted in the event of a conflict.
  3. The English Court of Appeal’s judgment handed down in May this year, offers a timely reminder of the limited circumstances in which the English Courts will intervene in altering contractual terms agreed between the parties. In short, the Court will not re-write a bad bargain or correct drafting errors; in order for a court to intervene it must be shown that there is a clear and obvious drafting error and that there is a clear and obvious correction to that error.

Factual background

On 19 November 2019, Project Angel Bidco Ltd (the “Buyer”) acquired the entire issued share capital of a civil engineering and general construction company (the “Target Company”). The Buyer took out a buyer-side warranty and indemnity insurance policy (the “Policy”), which provided an indemnity for breach of the bribery and corruption warranties in a share and purchase agreement (“SPA“).  

The purpose of a buyer’s side warranty and indemnity policy is to insure against the risk that the target company or business was not in the state warranted by the sellers and, therefore, worth less than the purchase price at the date when the sale took place. 

Following the acquisition, the Buyer alleged that the sellers had breached certain warranties in the SPA relating to the Target Company’s compliance with anti-bribery and anti-corruption legislation (“ABC Legislation”) and made a claim under the Policy.

Nature of the drafting error

The Buyer sought to argue that the cover provided by the Policy extended to cover the warranties given in respect of compliance with ABC Legislation by virtue of the warranties being listed and marked as being “covered” in the “Cover Spreadsheet”, which was appended to the Policy.

However, the Policy included certain exclusions, including losses arising out of “any ABC Liability”, which was defined as:

“any liability or actual or alleged non-compliance by any member of the Target Group or any agent, affiliate or other third party in respect of Anti-Bribery and Anti-Corruption Laws”.

The Buyer argued that there was a plain contradiction between the “Cover Spreadsheet”, which identified the ABC Legislation warranties as being covered, and the exclusion of “ABC Liability”, which stemmed from a mistake in the draft of the definition of “ABC Liability”. The Buyer argued that the “ABC Liability” definition was missing a letter and should have read:

“any liability for actual oralleged non-compliance by any member of the Target Group or any agent, affiliate or other third party in respect of Anti-Bribery and Anti-Corruption Laws.” 

The Buyer contended that this amendment would have confined the exclusion to liability only.

At first instance, the English Commercial Court ruled in favour of the Insurers holding that in order for the Policy to be re-written in the manner suggested by the Buyer, the Buyer would have needed to have demonstrated either (i) that there was a mistake that is “obvious on the face of the document” or (ii) that the “language is clear but makes no rational sense or leads to an irrational outcome that could not possibly have been what is meant”.  This was a high threshold, that the Court held was not overcome in the circumstances of this case.

In particular, the Court found that there was no contradiction between the Cover Spreadsheet and the Policy wording, when read together. In reaching this conclusion, the Court pointed to the introductory wording of the Cover Spreadsheet, which expressly addressed the order in which the sections of the Policy were to be read if there was a conflict:  

“Notwithstanding that a particular Insured Obligation is marked as “Covered” or “Partially Covered”, certain Loss arising from a Breach of such Insured Obligation may be excluded from cover pursuant to Clause 5 of the Policy.”

The Court of Appeal’s Judgment

The Buyer went on to appeal. The crux of the appeal was whether there was a drafting error so stark that it gave the Court permission to wade into the commercial realm of negotiations and alter the terms that had been recorded between the parties. For the Court to change the wording of the Policy, the a) drafting error needed to be clear; and b) the correction needed to be obvious.

Lord Justice Lewison of the Court of Appeal held that there was an apparent conflict between the inclusion of the whole of the relevant warranty in the Cover Spreadsheet on the one hand, and the scope of the definition of “ABC Liability” on the other. Nevertheless, Lewison LJ concluded that the alleged drafting error was not clear enough to warrant the Court’s intervention. In particular, it was noted that the Insurers had coherent and rational reasons for wanting to exclude losses arising out of ABC Liability and, as such, it was not clear whether, if there was any mistake, it lay in the drafting of the ABC Liability exclusion or the inclusion of the relevant warranty in the Cover Spreadsheet. Lewison LJ also noted that the ABC Liability clause had been specifically negotiated and that the Court should not lose sight of the fact that the provision may have been a compromise or that the parties were unable to agree more precise terms; inconsistency can exist in such complex policies and the Policy in question should be considered as a whole, within its contractual context.  Accordingly, the appeal was dismissed.

Conclusion

Buyers of complex commercial insurance should read policies carefully. The English courts are reluctant to intervene in cases where lengthy negotiations would, or should, have taken place. Policyholders should work closely with their brokers and insurers to understand the exact scope of coverage and what would happen in the event of an inconsistency between the policy provisions.  

In this post, we take a look at an insurer’s right to subrogation – the mechanism that allows them to step into the shoes of the insured – and how, in particular circumstances, that right can be restricted.

We look first at how subrogation applies where there are joint or co-insureds, depending on the specifics of that cover and then consider the interaction between a contractual prohibition on assignment and the insurer’s right to subrogation.

Joint and Co-Insureds

In cases where there is joint insurance cover over a common interest, an insurer is prevented from pursuing a subrogated claim against one insured for a loss sustained by a co-insured. It is not difficult to see the barrier to an insurer pursuing a subrogated claim – if they are successful, they will have to indemnify the defendant as well.

This restriction on an insurer’s right to subrogation is applied practically and rather narrowly. If the two parties are co-insured under the same policy, but each have a different scope of cover, then where the loss is something which is covered for one party but not the other, a subrogated claim can still be brought between them. The onus is on the insurer to establish that the defendant to the proposed subrogated claim is not covered for the loss.

This requires close analysis of the detail in the scope of cover for each insured under an insurance policy. It may be common ground that the parties are each insured under the policy, but the crucial question is the extent of that cover in relation to the specific loss.

It is the intention of the parties, with respect to the scope of the cover and position on subrogation, that will be the court’s primary consideration when determining whether or not a right of subrogation exists. If the position is not clear from the policy, then the court will look at all contractual documentation in the round and give weight to factors such as the relationship between the parties and any evidence that the parties had intended to prevent subrogated claims. If the evidence is that the intention of the co-insured parties in obtaining insurance for certain losses was to displace claims based on civil liabilities between them, then a term preventing subrogated claims against a co-insured will be implied into the policy.

Contractual Prohibition on Assignment

It is not uncommon for an agreement governed by English law to include, as part of the boilerplate clauses, a non-assignment clause, preventing any assignment of rights to a third party (such as an insurer). The interaction between a non-assignment clause and a subrogation clause, generally found in separate contracts, is an important one but perhaps too often overlooked.

The question that arises is, is subrogation a form of assignment of a right? If so, is a subrogated claim prohibited under such a non-assignment clause?

Under English law, if the insured assigns rights to a claim contractually, for example, by way of security, then the insurer can bring the claim in its own name. On the other hand, a subrogated claim is brought by the insurer stepping into the shoes of the insured and brought in the name of the insured. It should be noted that this position may differ in other jurisdictions, where the English law concept of subrogation is not available.

It is important to know whether the right to subrogation has arisen as a matter of law, or through another channel, such as through contract. If the right to bring a claim was transferred to the insurer by the party contractually, then it would appear to fall under the non-assignment clause. The prohibition on assignment in a contractual clause typically explicitly refers to the assignment by one party or another.

However, if the right to subrogation arises by operation of law in the jurisdiction, then it would not be prevented by the non-assignment clause.

The wording of the contract between the parties and specifically the non-assignment clause will be critical. When looking at the contract between the parties as a whole, if there is provision for each party to obtain their own insurance, then it appears likely that the court will not find that a non-assignment clause was intended to prevent subrogated claims. Rather than relying on boilerplate language, it would be wise to make sure that any non-assignment provisions are drafted with particular clarity and considered in the context of any relevant insurance cover.

In 1942, the Luftwaffe dropped a 1000kg high-explosive bomb onto farmland in the outskirts of Exeter.

Some 82 years later, the Court of Appeal has dismissed the University of Exeter’s appeal against the High Court decision in Allianz Insurance Plc v University of Exeter (see our previous commentary) The Judge at first instance (HHJ Bird) had found that damage to halls of residence caused by the bomb’s controlled detonation was not covered under the University’s insurance policy with Allianz.

Continue Reading A blast from the past – unearthed: Court of Appeal dismisses University of Exeter’s appeal

The shocking and tragic collapse of the Francis Scott Key Bridge over Baltimore Harbor on Tuesday is already having significant impacts on trade and transportation throughout the East Coast region, with ship traffic in and out of the Port of Baltimore suspended until further notice. As a result, businesses that depend on the Port of Baltimore and its supporting infrastructure for shipment and distribution of cargo are facing significant financial losses in the coming weeks and months. Similarly, as the issues surrounding liability related to the collapse become more clear in the coming weeks and months, companies may find themselves at the center of legal liability claims arising from various aspects of the disaster.   

Continue Reading Francis Scott Key Bridge collapse implicates several insurances types

Online retailers have changed the way we shop. No longer do we spend hours in line queuing for a can opener or, perhaps more appropriately in current times, an air fryer. Nowadays, at the click of a button, we have items expeditiously delivered straight to our door. And soon, it will be straight to our door without a human touch.

Last year, certain retailers began trialling drone delivery, marking the dawn of a new era of deliveries.

This latest development is one the insurance market cannot ignore. The drone insurance market is growing, and it looks like it will continue to do so as technology develops and retailers rely on drones to deliver parcels.

Continue Reading Delivery by drone? Insurance needed!

The “Four Corners rule” (a.k.a. the “Eight Corners rule”) is the foundation for many states’ common law regarding the Duty to Defend under liability policies. Under that regime, the court treats “the underlying complaint and the insurance policy” as “the only documents relevant” to deciding whether an insurer owes the policyholder a duty to defend.  Badger Mining Corp. v. First Am. Title Ins. Co., 534 F. Supp. 3d 1011, 1020 (W.D. Wis. 2021); 1 General Liability Insurance Coverage § 5.02 (5th ed.) (providing a “50-State Survey: Duty to Defend Standard: ‘Four Corners’ or Extrinsic Evidence?”).

The rule presents a problem for policyholders when the complaint’s allegations do not raise a duty to defend on their face, however, during the course of the litigation, it becomes apparent that claims that do give rise to a duty to defend are, in fact, at issue.  If the case is pending in federal court, policyholders can assert the “constructive amendment doctrine”; that is, that the complaint has been effectively amended to include the unpleaded claims and, therefore, the insurance company should provide a defense.

Continue Reading Expanding the “Four Corners” rule through constructive amendment

On December 29, 2023, an Arkansas court in the case of Walmart, Inc. v. ACE Am. Ins. Co., 04CV-22-2835-4, 2023 WL 9067386, (Ark. Cir. Ct. Dec. 29, 2023) found that defendant insurers owe Walmart a duty to pay or reimburse defense costs that Walmart incurred while defending prescription opioid liability lawsuits. 

Like many in the pharmaceutical supply chain, Walmart is a defendant in thousands of lawsuits filed by state and local government entities acting in their parens patriae capacity. These lawsuits allege that Walmart knowingly, recklessly, or negligently caused bodily injuries, like addiction, death, and property damage, by failing to monitor, detect and report suspicious orders of prescription opioids. In 2022, Walmart entered into a “National Settlement” that resolved many of those governmental suits. The settlement reimbursed costs the government plaintiffs alleged they incurred for treating its citizens’ bodily injury and property damage.  Walmart sought defense and indemnity coverage from AIG and other insurance companies providing excess coverage under its general liability policies. The insurers denied coverage.

Continue Reading A win for Walmart! An Arkansas court finds insurers have a duty to defend certain prescription opioid liability lawsuits

Navigating the complex landscape of California’s insurance regulations, particularly when dealing with non-admitted insurers, is a challenge many policyholders face. At the heart of the non-admitted insurer challenge lies a powerful but underutilized tool: The Unauthorized Insurers Process Act, codified at California Insurance Code Section 1610, et seq. Section 1616, is a key component of the Act and yet is often overlooked by policyholders faced with a coverage dispute involving a non-admitted insurer.  

Admitted versus non-admitted insurers in California

An “admitted” or “licensed” insurer is an insurance company that must file its rates with the Department of Insurance (“DOI”) and is required to participate in the California Insurance Guarantee Association (“CIGA”). In the event that an admitted insurer becomes insolvent, CIGA is supposed to step in and pay covered claims, subject to various statutory limitations. 

Conversely, a “non-admitted” or “surplus lines” insurer is allowed to conduct business in California but is not required to file its rates with the DOI and is not a member of CIGA. By not filing rates with the DOI, non-admitted insurers sometimes have more flexibility in the coverage offered and the prices charged.  The DOI maintains a List of Approved Surplus Lines Insurers (“LASLI”) that has met certain capitalization requirements, but the DOI also permits non-U.S. domiciled alien insurers to issue coverage in California that has not met those standards. Thus, the financial strength and stability of a non-admitted insurer can sometimes be significant issues.

Continue Reading Empowering policyholders: Forcing non-admitted insurers to post a bond before answering a complaint

Increased litigation alleging exposure to per- and poly-fluoroalkyl substances (PFAS) present potential significant losses for companies in a wide range of industries. PFAS are a group of chemicals commonly used in consumer products and manufacturing applications. After health studies linked PFAS exposure to adverse health impacts, there has been increased regulatory attention and significant litigation. The risks from this litigation to companies that manufactured or sold PFAS-containing products is manifest. And with that increased litigation risk, so too, the need to secure insurance coverage has grown. As is often the case, the ability to secure coverage for PFAS-related claims will depend on the specific facts and language of the policies at issue. Through this post, we identify several of the coverage issues associated with these claims.

What are PFAS?

PFAS are chemicals commonly used in manufacturing, industrial and consumer products such as food packaging, nonstick cook-wear, and cosmetics. PFAS have been used since the 1940s and are commonly referred to as “forever chemicals” due to how long they take to degrade naturally. Because of their popularity, PFAS are found virtually everywhere, including in drinking water, household products, personal care products, and soil and groundwater near waste sites. And because they are slow to break down, PFAS can build up in people and the environment over time. According to the EPA, research suggests that exposure to certain PFAS may lead to adverse health outcomes. See Our Current Understanding of the Human Health and Environmental Risks of PFAS. 

Continue Reading Insurance coverage implications for PFAS-related liabilities