INSURANCE COVERAGE FOR CLIMATE CHANGE
First Party Claims for Fire, Wind, Landslide, and Flood
Robert Bonaparte of Shenker & Bonaparte, LLP
Kyle Sturm of Foreman, Sturm & Thede, LLP
I. Introduction
Climate change has profound actuarial implications for the insurance industry. More frequent catastrophic events such as floods, drought, fires, and hurricanes, whether or not attributable to climate change, challenge the insurance industry’s ability to predict and price risk in the first-party context. By extension, increased risk may result in increased premiums or reduced coverage.
Although beyond the subject of this paper, insurers face potential enterprise liability for failure to disclose information regarding the emerging risk of climate change to an unknowing public. By analogy, as solvent asbestos defendants become increasingly rare, plaintiffs began targeting insurers directly, claiming that insurers had a duty to disclose their knowledge of asbestos risk.
This paper narrowly focuses on first-party property claims under personal and commercial policies. All these cases are relevant to climate change because they address issues stemming from shifts in the environment.
II. The Insurance Industry Will Respond to Climate Change
According to a recent survey among actuaries, climate change is the top risk for the insurance industry, beating out cyber damages, financial instability, and terrorism. The survey demonstrates a shift from previous years, when climate change lagged well behind other risks. It has been estimated that natural disasters caused about $340 billion in damages globally in 2017, with insurance companies paying out $138 billion.
When the Camp Fire broke out in California in 2018, it became the most destructive fire on record in the state. At least 88 people died, 150,000 acres burned, and 18,000 structures were destroyed. The Insurance Information Institute estimates that insured losses from the fire will ultimately reach between $8.5 billion and $10.5 billion. In September of 2019, it was announced that PG&E agreed to an $11 billion settlement with insurance companies for the Northern California wildfires in 2017 and 2018. The insurance companies sought to recoup roughly $20 billion from PG&E due to the payouts to the wildfire victims.
Six of the 10 most destructive California wildfires have occurred in the last four years. According to the National Oceanic and Atmospheric Administration, a total of 219 weather and climate events cost $1.5 trillion from 1980 to 2017. Reports from the federal government warn these events are becoming more frequent, intense, and widespread. It is no surprise, then, that the industry will respond through a combination of premium and policy adjustments. As of the date of this paper, the authors are unaware of any specific claim change policy endorsements, but we expect that to change in the future.
III. Key First Party Considerations
1. Oregon’s one-way attorney fee statute runs in favor of insureds: ORS 742.061. Attorney fees are treated the same way in Washington pursuant to case law. Olympic Steamship Co., Inc. v. Centennial Ins. Co., 117 Wn.2d 37, 811 P.2d 673 (1991).
2. The insured need not obtain a judgment in Oregon: a mid-litigation payment by the insurer triggers its attorney fee obligation. See Long v. Farmers, 360 Or. 791, 388 P.3d 312 (2017).
3. The efficient proximate cause doctrine is applied in Oregon. The rule provides that when a loss is caused by a combination of covered and specifically excluded risks, the loss is covered if the covered risk was the triggering or “efficient proximate cause” of the loss. See Largent v. State Farm, 116 Or. App. 595, 598, 842 P.2d 445 (1992), rev den 316 Or. 528, 854 P.2d 940 (1993). The rule is also applied in Washington See Vision One, LLC v. Philadelphia Indem. Ins. Co., 174 Wash.2d 501, 276 P.3d 300 (2012).
4. Hoffman Construction Co. v. Fred S. James & Co., 313 Or. 464, 836 P.2d 703 (1992), remains the leading Oregon case holding that insurance contract interpretation is a matter of law, and setting forth the blueprint for policy interpretation. In Washington, insurance policy interpretation is similarly a matter of law, and ambiguities are construed against the insurance company. Queen City Farms, Inc. v. Cent. Nat’l Ins. Co of Omaha, 126 Wash.2d 50, 882 P.2d 123 (1989).
5. The interpretation of certain terms (e.g., “roof”), however, cannot be decided as a matter of law, and may present a factual issue for the jury. See Dewsnup v. Farmers, 349 Or. 33, 47, 239 P.3d 493 (2010).
6. Many lawsuits filed in state courts against insurers will be removed to federal court based on diversity.
7. A federal judge serving as mediator—unlike a private mediator—can suspend mediation and order an insurer’s adjuster to resume mediation with authority to settle at a higher figure.
IV. Wildfire
a. Anatomy of a Case: Nelson v. Liberty; Nelson v. Rough & Ready
1. The Wildfire
On August 8, 2015, a fire started at a sawmill owned by Rough & Ready Lumber Company in Cave Junction, Oregon. Southern Oregon, at this time of year, was hot and windy. The fire began as a grass fire, and then spread to nearby trees, and then leaped across a road to engulf a rural acreage owned by Greg and Ronda Nelson. The fire caused superheated smoke to blast not only vertically, but also horizontally. Ironically, the Nelsons operated a fire-fighting company, and Greg Nelson was in California fighting a wildfire.
2. The Damages
The wildfire directly damaged both business property and personal property (structure and contents) on the Nelsons’ land. Although the wildfire came within 50 feet of the home, the flames did not directly come into contact with the home. However, smoke from the wildfire entered the home through open windows and doors.
3. Litigation Tip #1: Mapping the Wildfire
Plaintiffs’ counsel hired a university trained cartographer who had been employed by Apple Maps. The cartographer walked the property with the Nelsons, tracked the progress of the fire with the guidance of the Nelsons, and corroborated the progress of the fire by reference to evidence of searing, scorching, and burning of the property.
4. Litigation Tip #2: Identifying the Target Defendants
Plaintiffs’ counsel evaluated the Nelsons’ claims against Rough & Ready as well as against the Nelsons’ homeowners insurer (Liberty Insurance Corporation). Although the Nelsons operated a fire-fighting company on their property, the Nelsons did not carry business insurance. The Nelsons’ claims against Liberty were limited to personal property (structure and contents) covered under their homeowners policy.
To avoid statute of limitation issues, plaintiffs’ counsel filed two separate suits against Rough & Ready and Liberty on February 1, 2017.
5. Litigation Tip #3: Dealing with the Oregon Department of Forestry’s Claims
The Oregon Department of Forestry (ODF), through the office of the Oregon Department of Justice (DOJ), pursues cost recovery actions against potentially responsible parties. In this case, the DOJ had interviewed dozens of witnesses, and had ascertained the cause and origin of the wildfire to be negligent operations at the Rough & Ready sawmill. The DOJ’s findings were contained in a report. However, the DOJ refused to release the report based on the assertion of various statutory privileges.
When threatened with a subpoena, and following the settlement of its cost recovery action, the DOJ eventually released the report to plaintiffs’ counsel. The DOJ candidly explained that there was a limited amount of money available from the tortfeasor Rough & Ready, and that any recovery by the Nelsons could negatively impact the ODF’s recovery.
6. Litigation Tip #4: Handling the Separate Claims Against the Insurer and the Tortfeasor
Plaintiffs’ counsel proposed a global mediation to resolve the separate suits against Rough & Ready and Liberty. Rough & Ready agreed to participate. Liberty declined.
As a consequence, plaintiffs’ counsel negotiated to resolve the Nelsons’ claim against Rough & Ready, which of course demanded and obtained a full release. Plaintiffs’ counsel and Rough & Ready’s counsel agreed in the settlement document that the resolution was limited to damaged business property. Plaintiffs’ counsel then continued its claim against Liberty for damaged personal property.
7. Litigation Tip #5: Mid-Litigation Payments
In July 2018, approximately 1 ½ years following suit, Liberty issued an adjustment payment to the Nelsons in the amount of $13,676. Plaintiffs’ counsel immediately asked Liberty to acknowledge its obligation to pay attorney fees under Long v. Farmers Ins. Co., 360 Or. 791, 388 P.3d 312 (2017).
When Liberty’s counsel refused to acknowledge its obligation, plaintiffs’ counsel filed a motion for partial summary judgment. By that stage, Liberty had amended its answer to include a defense of subrogation prejudice (due to plaintiffs’ release of Rough & Ready). Plaintiffs’ motion for partial summary judgment also sought dismissal of Liberty’s subrogation prejudice defense.
Josephine County Circuit Court Judge Robert Bain issued his ruling on April 9, 2019. Judge Bain ruled that: (1) Liberty owed attorney fees to the Nelsons due to its mid-litigation payment; and (2) Liberty was estopped from asserting its subrogation prejudice defense.
8. Litigation Tip #6: Make Repeated Settlement Overtures
Following the summary judgment ruling, plaintiffs’ counsel again requested Liberty to resolve the case and to negotiate or litigate the attorney fees. Liberty refused.
9. Litigation Tip #7: Proceed to Trial
Five days before trial, Liberty issued a second adjustment payment to the Nelsons in the amount of $12,194. Plaintiffs’ counsel again asked Liberty to acknowledge its obligation to pay attorney fees under Long v. Farmers Ins. Co., 360 Or. 791, 388 P.3d 312 (2017). Liberty again refused.
By the time of trial (May 7, 2019) there were only $23,000 of damages in dispute. Plaintiffs’ counsel proposed to compromise the damage claim, and to negotiate or litigate the attorney fees. Liberty refused.
The trial proceeded on the factual issue whether smoke from the wildfire had damaged the home. Liberty argued strenuously that it was not obligated to pay for dry cleaning the clothes of an insured who sits close to the campfire, and likewise was not obligated to pay for smoke damage from a wildfire that did not directly come into contact with the home. There were industrial hygienists on both sides of the case. The jury awarded $10,000 to the Nelsons. The Grants Pass Courier published a front-page article with the headline: Jury’s smoke damage award to Cave Junction couple may be unprecedented.
10. Litigation Tip #8: Pursuing Attorney Fees
Plaintiffs’ counsel then proceeded to file a petition for attorney fees under ORCP 68. The attorney fee trial was held September 25, 2019, and the matter remains under advisement.
b. Anatomy of a Case: Oregon Shakespeare Festival Association v. Great American Insurance Company, D. Or. Case No. 1:15-cv-01932-CL (2016)
1. The Wildfire
In late July and early August, 2013, smoke from several nearby wildfires filled the Allen Elizabethan Theater, causing the Oregon Shakespeare Festival (OSF) to cancel performances and lose business income. The fires caused smoke, soot, and ash to accumulate on the surface of the hard plastic seats and concrete ground of OSF’s open-air theater. The smoke, ashes, and dust permeated the interior of the theater, coating the HVAC, lighting, and electrical systems. OSF canceled four separate evening performances due to health concerns from the poor air quality caused by the wildfire smoke.
2. The Damages
OSF suffered loss of business income due to the cancellations.
3. Litigation Tip #1: Damage to Air in the Theater is “Physical Damage”
The insurer disputed whether the smoke that filled the partially-enclosed, open-air facility constituted “direct physical loss or damage.” OSF claimed that the wildfire smoke caused injury or harm to the interior of the theater, which included the air within the theater. The insurer argued that the air in the theater was not “property,” and that air is not physical. The Court summarily rejected the insurer’s assertion of three exclusions, and cited Oregon cases finding coverage for smoke and vapors from a meth lab in a rental home. See Farmers Ins. Co. v. Trutanich, 123 Or. App. 6, 858 P.2d 1332 (1993); Largent v. State Farm F&C Co., 116 Or. App. 595, 842 P.2d 445 (1992), rev den 316 Or. 528, 854 P.2d 940 (1993).
V. Wind
a. Anatomy of a Case: MacDonald v. American Family Insurance Company
1. The Wind Event
In November 2012, the barn of plaintiffs Tom and Karen MacDonald suffered heavy damage during a severe wind storm. Plaintiffs lived in a valley in Lake County, Oregon with vertical bluffs rising 7,200 feet in elevation. Plaintiffs promptly reported the damage to the insurer, which assigned a new adjuster, whose only prior work experience was as a physical therapist, to inspect the loss and to adjust the claim.
2. The Damages
The untrained adjuster dramatically underestimated the damages, and plaintiffs hired counsel to bring an action against the insurer.
3. Litigation Tip #1: Consider the Association of Co-Counsel
Plaintiffs engaged experienced counsel (Carl Burnham of the Yturri Rose firm in Ontario) who filed an action. Subsequently, Carl Burnham associated as co-counsel Robert Bonaparte of Shenker & Bonaparte based on the firm’s insurance coverage expertise. The case proceeded to successful mediation.
VI. Landslide
a. Anatomy of a Case: Hendrickson v. Farmers Insurance
1. The Landslide Event
At 5:00 a.m. on October 8, 2008, the home of plaintiffs Kathei and David Hendrickson, perched on the top of a hill, slid down the hill without warning. The descent of the home was arrested mid-slope for a few minutes by a stump, allowing a neighbor to extend a ladder over the cliff-side and haul Kathei Hendrickson to safety. Plaintiffs’ home continued its descent, and crashed into two neighboring homes at the foot of the hill.
2. Litigation Tip #1: Use Experts Creatively to Challenge the “Earth Movement” Exclusion
Like most homeowners policies, plaintiffs’ policy devoted a full page or more to its “earth movement” exclusion. Virtually no domestic homeowners policies cover landslide.
Plaintiffs’ counsel engaged Portland expert Scot Mills, whose firm GeoDesign, Inc. had done work on the OHSU tram, to analyze the claim. Just 10 days before the loss, plaintiffs had hired an arborist to cut down an 80-year-old cedar tree. There was evidence that a water line had been severed in the process, causing water equivalent to that of a 30,000 gallon swimming pool to be trapped at the top of the hill, walled in by plaintiffs’ west retaining wall. Plaintiffs’ expert argued that the home was destroyed when its west retaining wall failed as a result of “earth pressure.” See, e.g., Simon v. Encompass Insurance Company, 2005 Ohio App. LEXIS 5164 (2005), discretionary appeal not allowed, 108 Ohio St.3d 1489, 843 N.E.2d 795 (2006) (“hydrostatic pressure and earth pressure are not the same as earth movement, as defined in Encompass’ policy. Therefore, the earth movement exclusion is inapplicable”).
3. Litigation Tip #2: Separate Claims for Structure and Contents
Plaintiffs’ policy provided coverage for water damage to personal property caused by broken pipes. The court allowed both the earth pressure claim for damaged structure and the water damage claim for damaged personal property to proceed to a jury.
The jury found in favor of the insurer on the structure claim, and in favor of plaintiffs on the water damage claim to personal property, and awarded damages. The court entered a JNOV. The Oregon Court of Appeals affirmed without opinion.
4. Litigation Tip #3: Pursue Tortfeasors
Plaintiffs filed a third party action against the arborist, and obtained a settlement.
VII. Flood
The typical homeowners policy does not cover flood damage. Flood insurance may be purchased through the National Flood Insurance Program (NFIP), and a few private insurers, subject to a 30-day waiting period. The NFIP provides coverage up to $250,000 for structure, and up to $100,000 for contents.
a. Anatomy of a Case: Hatley v. Truck Insurance Exchange, 261 Or. 606, 494 P.2d 426 (1972)
1. The “Flood” Event
A vandal left a hose on all night, causing damage to the insured’s home.
2. Litigation Tip #1: Parse the Asserted Exclusion Carefully
The insurer asserted that the damage was excluded from coverage under a surface and flood water exclusion:
“This policy does not insure against…Loss caused by, resulting from, contributed to or aggravated by any of the following…flood, surface water, waves, tidal water or tidal wave, overflow of streams or other bodies of water, or spray from any of the foregoing, all whether driven by wind or not.”
The court found that the hose water was not “surface water” because “[t]he term ‘surface water,’ particularly when used in conjunction with flood, waves, and tidal water, was intended to mean water ‘diffused over the surface of the ground, derived from falling rains or melting snows.’ We have been cited to no cases either in the field of property insurance or that of water law in which water from any but a natural source is held to be surface water.”
b. Anatomy of a Case: Veloz v. Foremost Insurance Co. Grand Rapids, 306 F. Supp.3d 1271 (D. Or. 2018)
In Veloz, Sabino Veloz’s rental property was damaged after a water main burst and water flowed downhill to Veloz’s house. Foremost Insurance Company denied Veloz’s claim based partly on a flood and surface water exclusion in Veloz’s insurance policy that provided:
“Loss caused by…Flood Water, surface water, waves, tidal water, tidal waves, storm surge, tsunami or overflow of a body of water or spray from any of these whether or not driven by wind…This exclusion applies whether or not there was widespread damage and whether or not it was caused by a human activity or an act of nature.”
Foremost claimed that the damage was caused by “surface water” or “flood water” from the water main. Foremost argued that it did not matter if the cause of the released water was man-made because the insurance policy provides that the exclusion applies to “human activity,” citing Citi Gas Convenience v. Utica Mut. Ins. Co., No. 15-6691, 2016 U.S. Dist. LEXIS 15503 (E.D. Pa. Feb. 9, 2016), which involved similar policy language.
The Veloz court was not convinced by Foremost’s arguments and reliance on Citi Gas. Instead, it held “that the terms ‘surface water’ and ‘flood water’ unambiguously refer to natural water sources and that no reasonable insured would interpret those terms to refer to water that escapes from a man-made source such as a water main.” In coming to its decision, the court relied on the finding in Hatley that flood and surface water is water arising from a natural source. The court distinguished Citi Gas based on subtle differences in the policy wording. The court held that the “it” in Foremost’s policy “refers to structural damage,” not to the source of the water. In other words, if the Veloz policy had excluded “flood and surface water caused by a man-made source” rather than excluding “damage… caused by a human activity,” the court may have found that the water damage was excluded from coverage.
c. Anatomy of a Case: Barnard v. State Farm
1. The “Flood” Event
On August 14, 2015, the failure of an under-sink water heater resulted in flooding of the home, causing structural damage to the insureds’ home and damage to the insureds’ personal property.
2. Litigation Tip #1: Consider Tort Claims
The insureds alleged both misfeasance and malfeasance by State Farm’s adjuster, including the unauthorized removal of the water heater. The removal of the water heater may have compromised the potential claim against the manufacturer.
The insureds brought the following claims: (i) for breach of contract and for breach of the implied covenant of fair dealing, in two separate counts, (ii) for tortious interference with business relationships, (iii) for negligence, (iv) for negligent misrepresentation, (v) for intentional misrepresentation, (vi) for bad faith and unfair dealing, (vii) for intentional infliction of emotional distress, and (viii) for conversion.
State Farm filed a Rule 12 motion to dismiss the sixth claim for bad faith and unfair dealing. The court declined to dismiss the insureds’ bad faith claim based on the following:
Further support for that conclusion may be found in the Barnards’ allegations that State Farm’s claims representative, in an act of expressly conceded impropriety, removed from the insured premises the water heater the failure of which caused the water intrusion at issue, thereby compromising the key evidence which would otherwise have supported a claim against the manufacturer of the heater…A finder of fact assuming the truth of that allegation and drawing all reasonable inferences therefrom in the Barnards’ favor could reasonably conclude that State Farm, by and through its conduct in compromising or eliminating the Barnards’ alternative avenue of recourse for seeking compensation for their loss in the event resolution of their claim on the policy proves insufficient to compensate them completely, created a special relationship with the Barnards that carried with it an extra-contractual duty of care to ensure that the insured premises were restored to their pre-loss condition without exceeding the limits of coverage under the policy. Again, the Barnards have alleged that State Farm breached that extra-contractual duty of care…For this reason, also, State Farm has not established that it is entitled to dismissal of the Barnards’ bad faith claim at this pleading stage of these proceedings.
See Barnard v. State Farm, D. Or. Case No. 3:17-cv-01340-PK (2017) (Findings and Recommendation) (Judge Paul Papak).