Katrina, Sandy and Harvey – What Have We Learned and What Can We Do Better? (Part 1)
Katrina, Sandy and Harvey – What Have We Learned and What Can We Do Better? (Part 1)04.04.2018
Last month, I presented a series of risk management seminars to various insurance intermediary groups including a look back at how the insurance agency community dealt with Hurricane Harvey and other natural disasters. Specifically, I discussed what was learned from Hurricane Katrina and Superstorm Sandy, and asked “Can we do better?” With hurricane season approaching, I thought it useful to spend my next few blogs (i) examining insurance agent E&O claims following a natural disaster; and (ii) exploring risk management tools to prevent problems that lead to claims in the first place. The goal is to enhance the prospect of a successful defense, and reduce the impact of the claims that are made.
A good place to start is understanding the landscape in which an insurance agent is operating following a natural disaster. Admittedly, the nature of the E&O claim following a hurricane for example is no different than the typical E&O claims made against agent whether it be, for example, an alleged failure to advise or failure to procure. It is just that the claims are more numerous and concentrated given the number of people impacted in a particular region. It is not surprising then that there are plaintiff’s lawyers who ramp up their advertising following a natural disaster. Following Hurricane Irma last year, I was in Florida and read something to the effect as follows:
- You paid for flood coverage and later found out that you lack flood coverage because your insurance agent made a mistake.
- You can file an insurance agent negligence claim to recover the amount you would have received if you had proper insurance coverage.
A December 2017 case from the U.S. Court of Appeals (Second Circuit) concerning a Superstorm Sandy E&O claim further illustrates the point. In Cammeby’s Mgt Company v. Alliant Insurance Services, a property management company had a multi-location policy with a limit of $30 million and a sub-limit of $10 million for Brooklyn (NY) properties. The insured requested that the sub-limit be removed; however, when the policy increased in premium, the $10 million sub-limit was reinstated. As a result, following Superstorm Sandy, there were insufficient limits for the Brooklyn properties. The management company took the position that it simply inquired whether reinstatement/return premium was possible (and did not request a policy change). The broker took the position that the VP they were dealing with instructed the sub-limit reinstatement or, at least, the insured acquiesced to the reinstatement by receiving the change endorsement and depositing the return premium. The Federal Appeals Court found the broker negligent, and liable for the $20 million difference in damages that would have been available if the sublimit had not been reduced
With this background, insurance agents live (and work) where their clients live, and have to deal with the same issues following a natural disaster (no power, no cell/internet service, no workable office space). Last year, the Insurance Journal reported that 36.2% of agents recognized the need for a CAT business plan, but only 17% had one. In some respects, many agents have not learned from the problems that arose from Katrina and Sandy where (i) key employees were dispersed and hard to contact; and, (ii) client and insurer were lost, or not backed up or entered into an agency management system. The bottom line is that the inability to service your agency clients following a natural disaster increases your E&O exposure. In the next 2 blogs, therefore, I’ll turn to specific E&O claims that could be expected following a natural disaster, and then propose service standards as a risk management tool to prevent and defend against such claims.