Those who have homes or spend time at the “Jersey shore” cannot help but be reminded of Superstorm Sandy during this brutal 2017 hurricane season. Sandy crashed into New Jersey on October 29, 2012, about seven miles north of Atlantic City. With the storm came winds of 80 miles per hour, massive storm surges, torrential rain and unprecedented flooding. Sandy’s path crossed the most densely populated area in the United States, including the financial capital of the world, New York City. The combination of the storm’s power and location resulted in one of the costliest storms in U.S. history, totaling approximately $75 billion in damages.
If there is any silver lining in Sandy, it is the expensive lessons it taught. Hopefully, by applying the knowledge obtained from that storm, recoveries from 2017’s hurricanes will be speedier and more cost-efficient.
Seaside, New Jersey: A Cautionary Tale
What is probably Sandy’s chief cautionary tale did not take place until almost a year after the storm made landfall. On September 12, 2013, just after many businesses had finished rebuilding, a fire started at an ice cream shop on the boardwalk of Seaside, New Jersey, and quickly spread to neighboring businesses. By the time the fire was extinguished, more than 60 businesses had been destroyed and damages were estimated in the millions.
After an investigation, the cause of the fire was attributed to the building’s electrical wiring, which had been compromised by corrosive seawater and sand during Sandy. Corrosion of electrical wiring creates resistance to electrical current, which, in turn, generates heat in the wire. The heat of the wire further corrodes the insulation, which can culminate in arcs of electricity passing through the air from one wire to the next. If the arcs are sufficiently hot and make contact with a flammable object, a fire like the one in Seaside may result.
The electrical wiring of the ice cream shop had been inspected after Sandy, and the business was permitted to switch on its electricity just before the start of summer. The ice cream shop then conducted business as usual until the fire broke out more than three months later.
Such delayed destruction is not an anomaly. Due to mighty storms, electrical wires are often compromised by seawater, freshwater or sediment, but operate without any noticeable effects for a substantial period of time. All the while, self-perpetuating corrosion is taking place inside the wires until they reach a breaking point.
While insurers’ standard property policies usually do not cover damage caused by flooding, the same insurers may be “on the hook” for an ensuing fire. Thus, insurers must take certain steps to prevent potentially huge losses after major flooding events like those resulting from the 2017 hurricanes.
The Importance of Expert Inspection
First, upon notice that an insured’s electrical wiring may have been compromised, insurers should consider having an expert electrical technician conduct an inspection. Sending out an adjuster is not enough, as compromised electrical wires may seem fine to the naked eye. Technicians are trained to use ohmmeters to measure the electrical resistance inside the wire. Although property insurers may not be responsible for the initial damage caused by flooding, they should nevertheless consider authorizing a technician’s inspection. The cost of the inspection is miniscule compared with the risk of a potentially covered ensuing fire.
Once a determination is made that electrical wiring has been compromised, insurers would be well advised to insist that the insured replace all potentially compromised wires. Full replacement is advisable because even an expert may have difficulty detecting the exact affected wires and obscure damage to wire insulation. Moreover, even with professional cleaning and drying, sediments and contaminants from floodwater are difficult to remove.
If an insured refuses to replace potentially compromised wires, insurers may want to consider looking to the policy and applicable state laws and regulations to determine if cancellation is permissible. All states, including those most affected by the 2017 hurricanes, allow insurers to cancel their policies in certain instances.
For example, Texas law authorizes an insurer to cancel commercial, homeowners and fire policies when “there is an increase in the hazard covered by the policy that is within the control of the insured and that would produce an increase in the premium rate of the policy.” Tex. Ins. Code Ann. §§ 551.052, 551.104 (2017). While there is little Texas case law that bears on the authorization, Kino Express, Inc. v. Consumers County Mutual Ins. Co., 990 S.W.2d 784 (Tx. App. 1999), does provide some guidance. In that case, the court noted that the word “increase” means an “augmentation or enlargement” of the hazard between time of policy inception and policy cancellation. The court also found that the insurer must make a reasonable effort to obtain information necessary to assess the change in the hazard before canceling the policy, again highlighting the need for a prompt expert inspection.
Yet, neither Kino nor any other Texas case sheds light on the phrase “within the control of the insured” in this context. Nevertheless, a strong argument can be made that the increase is within the control of the insured when the insured has knowledge of the increase and either negligently or willfully fails to take action reasonably likely to remedy the condition, such as replacing electrical wires known to be potentially compromised.
Other states more specifically describe when a midterm cancellation is permissible:
- Louisiana permits an insurer to cancel commercial policies if “the activities or omissions on the part of the named insured change or increase any hazard insured against.” La Rev. Stat. Ann. § 22:1267 (2017). With regard to other property, casualty and liability policies, Louisiana broadens the authorization by merely requiring “a material change in the risk being insured.” La Rev. Stat. Ann. § 22:1265 (2017).
- Similarly, Florida for an admitted carrier’s property and casualty policies and Georgia for residential property policies also forego the requirement that the hazard increase be within the insured’s control or due to the insured’s acts or omissions, and instead simply require “a substantial change in the risk covered by the policy.” Fla. Stat. § 627.4133(b) 2. (2017); see 2017 Ga. Code. Ann. § 33-24-46 (West).
- Each state also requires that the insured be given a certain amount of notice and time to cure before cancelling the policy. While only 10 days’ notice of cancellation must be given in Texas, Florida and Georgia generally require 45 days’ notice, and Louisiana mandates 60 days’ notice for commercial policies. See Tex. Ins. Code Ann. §§ 551.052, 551.104; Fla. Stat. § 627.4133; 2017 Ga. Code. Ann. § 33-24-46 (West); La Rev. Stat. Ann. § 22:1267. Given these requirements, admitted carriers should insist on full replacement as soon as possible after compromised wires are detected.
Application Denial, Conditional Renewal and Nonrenewal
Equally important, insurers must determine if electrical wires have been compromised when deciding whether to issue new coverage or renew an expiring policy. Again, expert inspection is needed at these crucial junctures for the aforementioned reasons. Additionally, an insurer needs to ask more than, “Has anything changed in the information we asked for in your proposal form?” Instead, the insurer should consider asking pointed questions designed to uncover potential damage to electrical wiring that occurred during storms and flooding. As previously explained, a policyholder may be completely unaware that their electrical wiring is compromised if it is still operative. However, the policyholder will be aware of any major recent storms or flooding that affected their property.
Upon discovering the existence of compromised electrical wiring, insurers have several options. If the policy is in the application stage, the insurer can first offer the policy at premiums commensurate with the increased hazard. Although this may result in losing business to other insurers offering lower premiums, factoring the increased risk into premiums is necessary to ensure long-term profits. Additionally, the insurer may find that it is in its best interest to simply deny the application without full replacement of the electrical wiring.
When the policy is in the renewal stage, the insurer again can insist that the insured make full replacement of the electrical wiring. If the insured refuses, the insurer can offer the insured a conditional renewal. The conditional renewal offer should make clear that the policy will renew only if there is a reduction in coverage or an increase in premiums proportionate with the new hazard. Any reduction in coverage should consider exclusion of fire damage ensuing from compromised electrical wiring. If the insurer chooses to increase the premium instead, the new premium should factor in the increased hazard. Again, the insurer may simply determine that nonrenewal is the best course of action when electrical wiring is not replaced.
Regardless of the decision reached, the insurer should keep in mind the notice requirements prescribed by state laws and regulations. As with midterm cancellations, states may require insurers to give specific notice of conditional renewal and nonrenewal. For example:
- Thirty days’ notice is required in Texas for a reduction in coverage and nonrenewal, in Louisiana for any rate increase or reduction in limits or coverage to commercial policies, and in Georgia for nonrenewal. See Tex. Ins. Code Ann. §§ 551.205, 2002.001, 2002.102; La Rev. Stat. Ann. § 22:1267(E)(1); 2017 Ga. Code. Ann. § 33-24-47.
- Similarly, 45 days’ notice must be given in Florida for any premium increase or nonrenewal. Fla. Stat. § 627.4133 (1)(a)(admitted carriers).
- While a Georgia statute also mandates 45 days’ notice for a reduction in coverage and any increase in premium exceeding 15 percent, the provision does not apply to “an increase in premiums due to a change in risk or exposure.” 2017 Ga. Code. Ann. § 33-24-47(a).
- Moreover, Louisiana requires 60 days’ notice of the nonrenewal of a commercial policy. La Rev. Stat. Ann. § 22:1267(E)(1).
These notice requirements further highlight the need for prompt detection of compromised electrical wiring and prompt reporting of such a condition to the insured. If sufficient notice is not given, coverage provided at the expiration date may remain in effect, leaving the insurer exposed to potentially huge losses from ensuing fires.
Lessons for Handling 2017 Hurricane Claims
Might these procedures seem extreme to an insured? Perhaps, at first glance. Nevertheless, following these procedures could significantly decrease the likelihood of delayed, compounded catastrophes. Prompt replacement of compromised electrical wires can prevent destruction of an insured’s valuable possessions, health and well-being. Moreover, there is no better time to replace electrical wiring than after a major storm such as Harvey or Irma, when the walls of damaged structures may already need to be torn apart to address other property damage. Insurers should make all reasonable efforts to explain the rationale for their policies and the policies’ associated benefits to help insureds understand. If done correctly, the insured should appreciate the information and take the precautionary measures essential to avoiding tragedies like those inflicted by the Seaside boardwalk fire.