A recent column by Ron Lieber in the New York Times, “After the Storm: Your Homeowner’s Claim,” predicts that it will take years to settle many insurance claims arising from Superstorm Sandy. But does it have to be that way? I was heavily involved in the litigation arising from Katrina, and see some important lessons from the Katrina experience which could be applied to Sandy.
There is a sort of honeymoon period that occurs after a big storm like Hurricane Sandy, when insurance executives appear on the local news offering reassuring words. Their brightly painted vans pull into residential neighborhoods amid the standing water and debris. Everyone is hopeful. Handshakes and back-patting all around.
That period is about to end. Prices for roofers and construction materials will rise, disadvantageous parsing of policy language will commence and gangs of class-action lawyers will round up aggrieved clients who still have months of homelessness ahead of them. Many claims will take years to settle.
It happens every time, and so it will with this storm. That’s not to say that a majority of people with insurance claims won’t be satisfied with the check they receive or won’t get one quickly.
What lessons can be learned from Katrina to try to achieve more efficient resolution of disputes? Here are a few:
- Mediations can help avoid lawsuits or resolve them early: For any readers who are unfamiliar with mediation, it is a process whereby a neutral person, typically a lawyer, judge, or former judge, meets with the parties (and their lawyers if they have hired lawyers) and tries to help them resolve their dispute. The mediation can offer the parties an opportunity to air their views in a confidential setting, receive a neutral opinion on the strengths and weaknesses of their position from a disinterested, neutral mediator, and attempt to resolve the dispute. The Louisiana Department of Insurance established a mediation program for Katrina and Rita claims. Florida has a similar program for mediations to resolve property insurance claims, as provided for by statute and rule (also see the brochure used by the Florida Department of Financial Services, which regulates insurance companies). It does not appear that either New York or New Jersey currently have this type of program specific to insurance claims, but they might establish them, or courts can provide for early mediation once lawsuits are filed. Insurers also can implement mediation programs on their own and sometimes did that in the Katrina and Rita context.
- Appraisal potentially can achieve faster resolution of disputes over valuation. Homeowners’ policies generally contain an appraisal provision under which, if there is a dispute over how much it costs to repair covered damage, this kind of dispute can be resolved informally at either party’s request. The party requesting appraisal appoints an appraiser, the other party also appoints an appraiser, and the two appraisers attempt to reach agreement. They choose an umpire to resolve any issues they cannot agree upon (and if they cannot agree on an umpire, a court can appoint one). This process, however, cannot be used (except by special agreement of the parties) to decide disputes over coverage, such as the interpretation of the insurance policy. Courts have taken different approaches on the question of whether appraisers can decide whether particular items of damage were caused by a covered cause of loss (such as flood) or an excluded cause of loss (such as wind), or whether that is an issue that must be resolved in court.
- Class action suits are likely to waste time and money on both sides. I say this as a lawyer who is paid to defend these suits, but the reality is that almost none of the Katrina and Rita insurance class actions were certified, so they did not achieve any efficiency. This is because courts concluded that these claims have to be resolved on a case-by-case, claim-by-claim basis. So the class action device is unlikely to achieve efficiency in resolving these disputes, but that does not mean plaintiffs’ lawyers will not file them.
- Resolving the key issues in court early, and in a consolidated fashion, can speed up dispute resolution. In the Katrina litigation, there were two major issues which required resolution: (1) whether the word “flood,” as used in flood exclusions, was limited to purely natural events (the insureds’ argument being that the inundation of New Orleans was “man made” due to the failure of levees and floodwalls); and (2) whether a Louisiana statute known as the valued policy law required an insurer to pay the total policy limit where a structure was a total loss as a result of a combination of covered wind damage and excluded flood damage. Both of these issues were resolved in a consolidated fashion, and relatively early in the litigation, in the U.S. District Court for the Eastern District of Louisiana and then the U.S. Court of Appeals for the Fifth Circuit. The early resolution of these issues helped speed up the settlement of individual cases. By consolidating cases implicating these two critical issues, the Eastern District of Louisiana was able to avoid the possibility of various judges having to decide the same issue and potentially reaching conflicting results. Neither of these particular issues will be implicated by Sandy, but a similar process potentially could be used to resolve key issues that arise.