Hurricane/Tropical Storm Harvey Update

Over the weekend, Texas Governor Greg Abbott issued a proclamation declaring a disaster due to the catastrophic effects of Hurricane Harvey. Shortly thereafter, the Texas Department of Insurance issued a bulletin dated August 26, 2017, that “reminds carriers that Insurance Code § 4101.002(b) and § 4101.101 authorize carriers to immediately use nonresident and emergency adjusters to handle claims.”

Under the Insurance Code, nonresident and non-licensed insurance adjusters “do not have to be licensed in Texas when acting as a temporary substitute for a licensed adjuster for the adjustment of losses arising out of a catastrophe common to all such losses.”  The emergency license can be obtained online and is good for 90 days with an “allowable” 90-day extension.  In addition, the emergency adjuster is not required to receive a Texas license before commencing work as long as the application is submitted within five days.

Evacuation Orders and Time Element Losses

On Friday and over the weekend, evacuation orders were issued in several counties along the Texas coast. Notably, the mayor of Houston chose not to order evacuation of the city. Evacuation orders raise the issue of coverage under the Civil Authority extension to business interruption insurance.  

The issue was addressed in the often-cited case, South Texas Medical Clinics v. CNA Financial Corp.,¹ which involved the evacuation of areas of south Texas as Hurricane Rita formed in the Gulf of Mexico. A local judge ordered the evacuation of Wharton County where South Texas Medical operated three clinics. The judge ordered the evacuation based on reports of property damage in Florida and to oil rigs in the Gulf, as well as projections of the path of the hurricane. He opined the damage was relevant only as a basis for anticipating the harm that could come to Wharton County if Rita came to the county. Rita took a different path, however, and Wharton County did not sustain any damage.

The CNA policy included the common civil authority extension that provided time element coverage for loss “caused by action of civil authority that prohibited access to the described premises due to direct physical loss or damage to property, other than at the described premises, caused by or resulting from any covered cause of loss.” CNA denied South Texas Medical’s time element claim arguing the civil authority order was issued as a precaution against anticipated damage and not “due to” the hurricane damage to Florida and the oil rigs. The Court agreed and affirmed that since the mandatory evacuation order was only issued because of the threat of damage to the evacuated area, and not due to any property damage that had already occurred, there was no coverage under the civil authority extension.  

Hurricane Damage and Ingress/Egress Coverage

Ingress/Egress coverage is similar to civil authority coverage but does not require an order of civil authority.  Rather, it requires physical impediment of ingress and egress for a specified period of time.  Typical wording includes “loss of business income sustained during the period of time when, as a direct result of a peril not excluded, ingress to or egress from real and personal property not excluded hereunder, is thereby prevented.” Ingress/egress coverage applies where, for example, flooding closes the only road leading to the insured’s premises thereby preventing all entry to the business.   
Ingress/egress coverage was last addressed by a Texas court in a hurricane evacuation case in Houston Casualty Co. v. Lexington Insurance Co.,² where an evacuation order due to Hurricane Floyd prevented access to the Universal Studios theme park. Although the hurricane missed the evacuated area, Universal claimed coverage under the Ingress/Egress coverage extension. The Texas court applied Louisiana law and held that it was reasonable to interpret the extension to not require property damage to trigger coverage.

Wind and Flood Coverage:  Anti-Concurrent Cause Provisions

An issue likely to arise in Harvey insurance claims will be the segregation of damage due to the covered peril of wind from the damage caused by the typically excluded perils of flood and surface water.  Texas courts will generally enforce an anti-concurrent cause provision which excludes coverage for loss caused by an excluded peril regardless of whether a covered peril contributes concurrently to the loss.

The issue was addressed by the Supreme Court of Texas after Hurricane Ike in the context of Ordinance or Law and DICC extensions in JAW The Pointe, L.L.C. v. Lexington Insurance Co., ³ The insured’s apartment complex was deemed by the local building authority to be more than 50% damaged and was therefore subject to the city’s floodplain ordinance. The ordinance required raising the apartment building three additional feet. The damage was caused by a combination of wind, a covered peril, and flood, an excluded peril. The Texas Supreme Court framed the issue as what peril triggered enforcement of the ordinance. The court determined the ordinance was triggered by both perils and pursuant to the anti-concurrent cause provision, the costs of compliance were excluded.

Flood Sub-Limits

The issue of sub-limits will also likely arise as a result of Harvey. Following Tropical Storm Allison, in Baylor College of Medicine v. American Guarantee & Liability Insurance Co.,⁴ the court allowed Baylor to stack coverage extension sub-limits on top of its $50 million flood sub-limit. The judge relied on broad policy wording stating that the coverage extension sub-limits “are in addition to the Limits of Insurance shown in the Declarations and Declarations Schedule.”  The court read the provision to mean the coverage extension sub-limits were in addition to all other sub-limits, including the flood sub-limit. 

The insurer argued that Baylor’s flood sub-limit was explicitly stated as an aggregate “Limit of Insurance” for “all flood loss or damage.”  The court was unconvinced, finding that the same term—Limits of Insurance—was expressly made stackable by the coverage extension wording and the policy was at least ambiguous regarding stacking. 

Baylor College creates uncertainty, but should not be read as a green light for stacking of sub-limits in Texas. Most policies now include specific anti-stacking and coverage extension wording that should distinguish the Baylor College ruling. 

Apply the Policy Language

The legal precedent discussed above provides insights into how Texas courts have viewed certain hurricane and tropical storm claim issues in the past.  As always, it remains that every loss must be analyzed by applying the policy language to the individual facts of the claim.