With estimates of economic losses, both insured and noninsured, from the winter storms in Texas rising, Zelle law firm hosted a one-hour webinar on March 2 to help insurers and agents understand the claims issues brought by the mid-February hard freeze event. By mid-March, estimates for Uri’s economic impact, the winter storm named by The Weather Channel, climbed beyond $130 billion.
“It’s been almost 80 years since Texas experienced these temperatures,” said Todd Tippett, an attorney with Zelle’s Dallas office, in the presentation titled Texas Commercial Freeze Claims: Overview of Adjustment, Coverage and Subrogation Issues. Tippett laid out some of the known facts and figures of the cold weather catastrophe when prevailing estimates of Uri’s insured losses were up to $30 billion. He was joined by Zelle attorneys Jennifer L. Gibbs and Steven J. Badger, who reviewed the predictable claims and coverage issues, along with the potential for litigation and ultimate subrogation of the claims to responsible third parties.
Building contractors in Texas weatherize for hot temperatures, not extreme cold. The sustained below freezing temperatures experienced in Texas from Feb. 12 to Feb. 18 are simply not typical for the state, said Tippett. Some major areas, including Dallas-Fort Worth, in Texas experienced 139 straight hours of below freezing temperatures, he said. “Bad things happened.”
Rolling power outages left millions of Texans without power, and about half the state lost some access to water services, said Tippett. This combination of events caused broken pipes, water damage, cracked foundations, collapsed roofs, spoiled food, and closed businesses, all of which can give rise to insured claims. (The Zelle webinar did not address crop damage.)
The rolling blackouts were ordered by the Electric Reliability Council of Texas (ERCOT), a nonprofit organization that works as a cooperative of its member electric suppliers, independent generators, power marketers and municipally owned electric utilities. Investigations are ongoing to determine why the blackouts became necessary. ERCOT representatives said the system was strained by reduced supply and high demand, said Tippett. At the time, ERCOT said the intermittent deliberate power outages were necessary to avert the catastrophic failure of the entire grid that would have left 90 percent of Texas without power for months. All 254 counties of Texas were included in the federally declared disaster area, as no county was left untouched by freeze damage.
In early March, the Insurance Council of Texas estimated insured losses in Texas at $32.6 billion, a number that exceeds the $20 billion in Texas losses from Hurricane Harvey in 2017.
In her review of coverage issues, Gibbs said the unprecedented weather event would lead to complex facts and complex commercial claims. The simpler claims to adjust, she said, are property losses where coverage would respond to water damage caused by burst water pipes, collapse claims resulting from the weight of ice and snow, and foundation and building cracks. Insurers can expect large food spoilage claims from restaurants, grocery stores and schools, she said. Business interruption claims will be more complex.
Gibbs commented generally on typical coverage issues, noting that the actual terms and conditions of each policy would control how the claims will be paid. Insurers need to look at the causes of the interruption of the business, she said, as like the coronavirus BI claims, most policies require the basic trigger of coverage: physical loss or damage.
Offering a hypothetical chain of occurrences at a single location small restaurant, Gibbs said that a business that closed for two days due to bad weather and/or no employees reporting to work would likely not trigger a covered BI claim. Case law in Texas is specific regarding what constitutes “physical loss or damage.” A recently decided case required there to be some “distinct, demonstrable, physical alteration of the property,” not merely economic losses, in order to trigger BI coverage.
When the power went out, said Gibbs, same result: No BI coverage. But, what if the transformer close to the building blew out and caused damage to the business? Coverage could be triggered.
With power out, a pipe in the building freezes and breaks, flooding out the store, Gibbs continued her hypothetical scenario. The damage caused by the water is likely covered; sometimes repairs to the pipe itself will be covered. BI coverage is likely triggered.
Before continuing her example, Gibbs pointed out that how the insurer viewed the number of occurrences that transpired to cause the loss would play a role in determining the amount of the claim. The definition of an occurrence will be policy-specific, she said. Some policies pay policy limits per occurrence; however, multiple occurrences will cause multiple deductibles to be applied.
Gibbs cited three examples of how occurrence is defined differently in different insurance contracts. Her examples:
-A series of losses arising from the same event;
-All losses whenever occurring which directly result from such perils during a continuous period of 72 hours;
-Arising out of or caused by one discrete event of physical loss.
Even though power is restored to the sample restaurant, the BI loss of income continues until repairs are made from the water damage and the business can reopen.
Spoilage coverage in commercial policies is typically an extension of coverage. Policy wording is important here, said Gibbs, because the coverage may be denied if the policy excludes power lost by an intentional decision of an electric utility company, as the rolling blackouts were planned outages. Spoilage coverage in an extension of a residential policy will be worded differently, said Gibbs, and found under the heading of Consequential Loss. Coverage exists only if the loss results from a covered peril and, again, it is questionable when the power is out from a planned event, she said. Regardless, Gibbs added, there is likely a $500 limit for a residential food spoilage loss.
The time element in business interruption losses is defined in commercial policies, said Gibbs. Typically, there is a waiting period of 24 to 72 hours before the coverage begins. Then generally coverage extends only during the period of restoration; some coverage extensions grant loss of income coverage for a reasonable time until the prior level of business resumes. Still, she reminded attendees, the physical loss trigger would have to be met.
Gibbs considered it unlikely that civil authority coverage would apply to the rolling power outages. She reasoned that such provisions typically require that access to the insured’s property be prohibited or impaired; the rolling outages did neither. Gibbs admitted that the civil authority issue is not without questionable application, as ERCOT might be cast as a governmental entity/civil authority. Under this interpretation and depending on policy language, the court might still need to determine if the civil authority issued an order, prohibited access, and was triggered by a physical loss within a proscribed zone.
Many commercial policies contain a typical service interruption exclusion, Gibbs said. Failure of the utility company to supply power may exclude loss or damage that results. The rolling outages could be interpreted as separate occurrences, complicating the claim even more.
Contingent business interruption coverage is tapped when a business’s processes stop because a supplier’s service is interrupted. This could be a source of litigation and complex claims, Gibbs said. Insureds may present contingent BI claims arising from Texas-based suppliers who suffered physical damage.
Gibbs reminded the virtual attendees of Texas’s concurrent causation doctrine that limits an insured’s recovery to the amount of damage caused solely by a covered peril when there were multiple causes of the loss. It is the burden of the insured to segregate the damage attributable solely to the covered event to prove the claim. Gibbs cautioned insurers that even though the burden of proof rests with the insured, the insurer must conduct a reasonable investigation.
Not all of the coverage issues will be resolved by Texas law, Gibbs said. Some policies contain forum selection clauses or arbitration clauses that will move the contested claims out of this state’s jurisdiction. Given all of the potential fact and coverage variables, Gibbs said she does not foresee “cookie cutter claims” from the winter storms.
Claims and litigation
Badger said the industry expects the winter storms to be a huge claim event for Texas. He compared it to a hurricane that hit the entire state. Some of the issues are unique, he said, which he expects will unquestionably result in new law. Results of the winter storm will play out over the next 36 months, said Badger.
Most claims will be reported in the next six months, Badger said. Unlike hail, where damage may not be discovered immediately, freeze claims will be reported quickly. There will be a normal adjustment process. Insureds and insurers will retain consultants who can evaluate the scope of the damage and repair. Most claims, Badger predicted, will be resolved amicably.
Badger said that he is seeing some plaintiff activity, including a few publicity seeking lawsuits.
His caution to insurers, who would deny coverage quickly when the insurer knows there is clearly no coverage, is to conduct a reasonable investigation nevertheless. Put together some reasonable questions to ask the insured, said Badger:
-What was the reason for the closure?
-When and how long did the power outages occur?
-Do you have knowledge of why they occurred? Were there electrical wire repair crews in the area?
Badger also advised watching for bulletins coming from the Texas Department of Insurance and meeting all deadlines even though some are extended due to the disaster declaration.
Badger anticipates that some disputes will occur over the scope of the damage and cost to repair, not especially different from the historical experience of large claims events. He foresees some conflict between insurers and policyholders where estimates become inflated by unnecessary involvement of a general contractor.
One trend that Badger has seen is plaintiff law firms marketing themselves as “super public adjusters.” They want to be involved in the claim from the beginning for a reduced contingency. “Pay particular attention to these claims,” Badger said. “Be mindful of attorney involvement.”
Badger reminded attendees of three recent state laws that are in effect: Contractors are prohibited from acting as a public adjuster, assignment of benefits under a property policy is not allowed, and deductibles cannot be waived.
When dealing with an actual public adjuster, Badger advised insurers not to be lured into paying a claim, however small, that is not owed. This leads, he said, to progressive claim syndrome. “As soon as you commit to a covered cause of loss, a small claim becomes a big claim,” he said.
Appraisals will also come into play when disputes on the scope of the damage and costs to repair occur.
Texas law is unclear if business interruption disputes are subject to the appraisal process, said Badger. Recent court rulings narrow the scope of appraisals, he said, citing Jerlene Tippett v. Safeco, a court of appeals decision delivered in February 2020. This case, he said, lays out all the recent rulings on the scope of appraisals. Important words in this decision are: “Appraisers have no power or authority to determine questions of causation, coverage or liability. Appraisers are not arbitrators. They have no power to arbitrate disputes between the property owner and the insurance company other than to value the property damage.”
To the extent that the winter storm losses come to be understood as losses caused by force of nature, as Badger interprets the statute and the event, pre-lawsuit notice provisions of the Insurance Code apply. He reminded insurers that the pre-suit notice requires a written response and gives the insurer the opportunity to inspect. Consider the pre-suit notice an opportunity to resolve the dispute, Badger advised.
Without a better handle on the volume of litigation that may come from this event, it is unclear if class actions or multi-district litigation will be used, Badger said. “The best approach to resolving the claim is to do so quickly and fairly,” said Badger.
Subrogation can occur if insurers paying the claims can point to a third party that is legally responsible for the damages sustained by the insured. Clearly, the power grid can be blamed for some of the damage, he said. Two obvious avenues for subrogation against power companies are business interruption losses due to closure and property damage caused by pipes which froze and burst due to lack of heating.
But, one lesson Badger learned early in his legal career is that there is no point of attempting subrogation against a defendant who has no assets or insurance, and that seems to be the condition of the nonprofit ERCOT. “Never chase a subro case if there isn’t a pot of gold at the end of the rainbow,” he said. “That is a real, significant consideration here.”