Successive Hurricanes: Potential Windfall for Insureds?

The 2008 hurricane season came very close to presenting, on a large scale, the potential quandary caused by successive losses. On Sept.1, 2008, Hurricane Gustav came ashore and caused substantial damage from the Louisiana coast on inland, although not to the same degree as Hurricane Katrina. Barely a week later, Hurricane Ike entered the Gulf of Mexico with the possibility of following a similar track through Louisiana as that taken by Hurricane Gustav. Ultimately, Hurricane Ike came ashore on the Texas coast, causing severe damage to Galveston Island and its neighboring communities, through Houston and on north through the mid-western United States.

Had Ike followed Gustav’s path, it is a virtual certainty that the overwhelming majority of the damage caused by Hurricane Gustav would not have been repaired by the time of Ike’s arrival and much of it may well have been made substantially worse by Ike. If this situation of successive losses over a short period of time from successive hurricanes had occurred, adjusters would undoubtedly still have been forced to deal with the troublesome issue of whether damage was caused by wind or water.

But, among other potential unique issues, this situation would also present the possibility that insureds could effectively profit from their losses by attempting to require insurers to pay twice for damage that is repaired only once. In other words, the insured may argue that if their property was damaged in the first hurricane, the insurer must pay the cost to repair that damage, and then if there is additional damage from the second hurricane, the insured may argue that the insurer must pay the total cost of repair irrespective of the first hurricane.

While the tracks of Hurricanes Gustav and Ike ultimately did not converge, the potential of large scale successive losses caused by multiple hurricanes over a short period of time is not a far fetched hypothetical. In 2004, four hurricanes and one tropical storm made landfall in the state of Florida. In 2005, Hurricanes Katrina and Rita both made landfall in Louisiana only a few hundred miles apart. In recent years, hurricanes affecting the United States have not only increased in number, but in size and intensity. Thus, the question of how insurance policies respond to successive losses from such storms is not entirely academic.

Coverage of Successive Losses
There are two issues to address when considering the coverage of successive losses under property insurance policies. The initial issue is whether the policy limits are reduced by successive losses incurred during the same coverage period. Although not in the context of successive hurricanes, the treatment of successive losses by insurance policies has been addressed in other contexts, such as fire and theft losses. A leading commentator has described the “Historical View” and the “Modern View” of the treatment of successive losses as follows:

Historical View: Each loss reduces coverage.
By the older view, where successive losses coming within the policy coverage are sustained, the maximum amount for which the policy is written is not increased by the number of losses or any other multiple, but remains constant. Hence, after each loss is paid, the amount of insurance remaining is reduced by the amount of such payment.

Modern View: Policy limit applies to each loss.
Contrary to the view that total amount available for recovery for each successive loss is reduced by the amount of prior losses, other jurisdictions hold that the insured may recover up to the face value of the policy regardless of the number of successive losses provided that the insured sustains an actual loss. [12 Couch on Insurance 3rd §175:15 & 175:16 (1998).]

The “Modern View” is similar to the approach followed under liability policies which are typically trigger by an “occurrence” and provide a certain coverage limit per “occurrence.”

Even if the “Modern View” is the applicable approach to determine the amount of coverage available for property damage incurred after the initial loss, there is still the issue of the value placed on the loss. It is highly doubtful that an insured would be allowed to “profit” from having incurred successive losses due to successive hurricanes in a short time period.

As one court has noted, the “universally recognized rule” is that “a policy of insurance on property is predominantly a contract of indemnity the purpose of which is to protect the assured against a loss he may sustain by virtue of its loss, damage or destruction.” [Wright v. Assurance Co. of America, 728 So. 2d 974, 975-6 (La. App. 2nd Cir. 1999).] Under a “contract of indemnity,” the insured “should neither reap an economic gain, nor incur a loss, if adequately insured.” [Vest v. Gulf Ins. Co., 809 S.W. 2d 531, 534 (Tex. Civ. App. – Dallas 1991, writ denied).]

Thus, if property is completely destroyed in one hurricane and a second hurricane strikes before it is repaired, the insured should not be entitled to make two separate claims and recover for the cost of repair as though the repair had been performed twice. Similarly, if property is damaged during one hurricane and then damaged more severely in a successive hurricane before repairs from the first hurricane have been made or completed, the insured should be entitled to recover only the additional cost to repair following the second hurricane.

Indicative of this result is a ruling made by Judge Senter of the United States District Court for the Southern Mississippi in one of the many Hurricane Katrina decisions issued by him. In Tajedor v. State Farm Fire & Casualty Co., Judge Senter was asked to decide whether State Farm acted properly in deducting payments made under a flood insurance policy from the payments it made for wind damage pursuant to the homeowner policy at issue. In ruling that State Farm had acted properly, Judge Senter stated:

“The court uses this occasion to rule that the Plaintiff’s actual loss is the maximum recovery he may receive from all applicable policies of insurance for both his dwelling and personal property. Insurance contracts insure only against covered losses, and it is a basic proposition that ‘[i] insurance law is based on the principal of indemnification and is aimed at reimbursement. The benefit derived from insurance should be no greater in value than the loss.’ These well established principals of indemnity and insurable interests apply to all insurance claims under policies that are not ‘valued policies.'” [Tajedor v. State Farm Fire & Casualty Co., 2006 WL 3257526 (S.D. Miss. 2006).]

This rationale applies equally in the circumstances of successive losses due to successive hurricanes or other successive perils. When an insured is paid the value of the loss after an initial hurricane, and a second hurricane strikes before the property, the insured has not suffered a loss of the value for the repairs not yet made because the insured has the money for those repairs still in his or her possession. As one Texas court noted in the context of a fire loss:

“The Griffins could have been paid indemnity for that amount only a second time following the fire only if they had lost that amount a second time. They did not lose that amount a second time; however, because that $16,978.75 had not yet been expended on repairing the Griffins’ house, it was still in the form of money in the bank and therefore safe from the fire and not lost a second time when the house burned.” [State Farm Fire & Casualty Co. v. Griffin, 888 S.W. 2d 150, 157 (Tex. Civ. App. – Houston 1994, no writ).]

No Lemonade from Lemons
Thus, the existing law suggests that insureds can recover only once for property damage even when the property is subjected to successive hurricanes over a short period of time, but before it is repaired. While this result would seem to be commonsense, it would not be surprising for insureds who suffer through successive hurricanes in a short period of time to attempt to make lemonade from lemons by “profiting” from their misfortune through their insurance coverage.

Robert Redfearn, Jr. (Redfearnjr@spsr-law.com) is a partner in Simon, Peragine, Smith & Redfearn, a regional law firm with offices in New Orleans, La., and Mississippi.

This article previously appeared in the Nov. 17, 2008, edition of Insurance Journal – South Central.