The Mudslide tragedy-insurance aspects.
The insurance question is: what coverage might there be for the dozens of homes that were destroyed and for homes and businesses that might be destroyed in future mudslides?
With regard to the homes destroyed in Washington, ISO and most other homeowners policies contain earth movement exclusions that shut the door on mudslide claims. Here's some of the ISO exclusion wording:
Earth Movement Earth Movement means:
a. Earthquake, including land shock waves or tremors before, during or after a volcanic eruption;
b. Landslide, mudslide or mudflow; (emphasis added)
That doesn't leave much room for landslide or mudslide claims on homeowners policies. How about National Flood Insurance, doesn't it provide some coverage for mud? It does. Here's the pertinent wording:
Flood, as used in this flood insurance policy, means:
1. A general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or of two or more properties (at least one of which is your property) from:
a. Overflow of inland or tidal waters;
b. Unusual and rapid accumulation or runoff of surface waters from any source;
c. Mudflow, (emphasis added) (5)
You might think that triggers mudslide coverage from NFIP until you read the definition of mudflow:
Mudflow (is a) river of liquid and flowing (emphasis added) mud on the surfaces of normally dry land areas, as when earth is carried by a current of water. Other earth movements, such as landslide, slope failure, or a saturated soil mass moving by liquidity down a slope, are not mudflows (emphasis added).
The key words are "liquid and flowing." What happened in Washington does not meet the NFIP definition of mudflow.
What about commercial coverage? Commercial property policies are quite similar to the homeowners when it comes to excluding mudslides and mudflows. NFIP commercial flood coverage is identical to NFIP personal coverage. Even the ISO commercial property flood endorsement limits coverage for mudslide to "a river of liquid and flowing mud." There's no coverage in those forms.
So what is one to do? Many insurers provide flood and earth movement coverage by endorsement to their commercial property policies. Most mimic the coverage provided by the NFIP or ISO flood coverage and cover only earthquake, not mudslide or landslide. Some however, provide the coverage by eliminating the earth movement and water exclusion. The forms have to be carefully reviewed, but that might solve the problem.
Otherwise, Difference in Conditions (DIC) coverage is a possibility. (6) DIC policies were originally used to provide an insured with all-risk coverage wrapped around a named peril policy. With widespread availability of "all-risk" forms, they're now mostly used to add flood and earthquake coverage.
Unfortunately many DIC policies are no longer as broad as they once were. Many just mimic ISO and NFIP wording, which limits earth movement coverage to earthquake and flood coverage to the NFIP definition. That leaves a gap in coverage for events like the Washington mudslide.
Many insurers use their own DIC forms, but that is becoming less common now that the American Association for Insurance Services (AAIS) and ISO have produced their DIC forms. The AAIS form is the most widely used. In that form, the mudslide and mudflow coverage reads as follows:
c. mudslides or mudflows if caused by (emphasis added):
1) unusual and rapid accumulation or runoff of surface waters or waves; or
2) currents of water exceeding anticipated cyclical levels. (7)
Although the wording lists mudslides and mudflows, the "if caused by" wording that follows restricts the coverage to NFIP-type flood claims. This wording would not provide coverage for an event like the one in Washington.
The ISO form has arguably better coverage. It includes coverage for water damage, which is defined to mean:
a. Flood, surface waters, waves, tides, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not;
b. Mudslide or mudflow;
c. Water that backs up from a sewer or drain; or
d. Water under the ground surface pressing on, or flowing or seeping through:
(1) Foundations, walls, floors or
(2) Basements, whether paved or not; or
(3) Doors, windows or other openings.
Furthermore, there's no exclusion for landslides, so even if the event isn't a mudslide it would be covered as a landslide.
I haven't seen any DIC policies written on ISO forms, have you? If you have or if you can find companies that use the form, let me know. I'll check to see what I can turn up. Anything I find out will be in my next column.
In the way of independently developed coverage, Poulton Associates located in Salt Lake City, Utah offers a catastrophe insurance program through underwriters at Lloyds for both homeowners and commercial firms on independent forms. (8) The forms are not all-encompassing, but they do offer landslide coverage in addition to earthquake and flood. Landslide is defined as "physical damage caused by the sudden movement of earth and/or rock... including sliding of land, mudflow, (and) land sinking, rising or shifting ..." (9)
A quick review of the forms turned up an 80% coinsurance provision and a segmentation of the occurrence into 72 day pieces, which could trigger additional deductibles if the flooding lasted more than 3 days. Neither limitation is typically found in DIC forms
There's also a difference in the debris removal coverage. The Lloyds form provides debris removal coverage equal to the greater of $25,000 or 10% of the loss. The debris removal provision in ISO's DIC form follows ISO's other commercial property forms: 25% of the loss plus $10,000.
For a loss that's less than $60,000, the Lloyds form will provide more coverage for debris removal. Above $60,000, the nod goes to ISO. For a $1,000,000 loss, Poulton's form would cover $100,000 of debris removal expense. ISO's formula would provide $260,000 of coverage. Furthermore, Lloyds is non-admitted so there's no guaranty fund coverage if the insurer becomes insolvent.
The excess/surplus lines brokers you work with may have other forms available. Check with them and carefully review any form that you offer to your clients.
Despite the shortcomings, let your insureds know that this coverage is available.
(1) Deborah Voss et al v CH Insurance Brokerage Services, Co., Inc. et al, NY Court of Appeals 2014 NY Slip Op 01259 Decided on February 25,2014
(2) IBM's Thomas Watson is often quoted as having said: "My legal staff has an unlimited budget and every year they exceed it."
(3) Extract from 4/14/14 email from David B. Karel, partner Wilkofsky, Friedman, Karel & Cummins
(4) The wording of the actual policy did not exactly duplicate ISO business income form language, but to make my answer more useful for general readers, I've used ISO wording. My opinion based on the actual wording would be the same in this case.
(5) National Flood Insurance Program General Property Form Standard Flood Insurance Policy December 31,2000
(6) Some independent (non-ISO) forms provide broader coverage than standard or NFIP forms for earth movement and water damage obviating the need for DIC coverage.
(7) AAIS DIC form M 7801 04 07 Copyright, American Association of Insurance Services, Inc., 2007
(8) See: https://www.catcoverage.com/faq.aspx (accessed 4/24/14)
(9) From specimen homeowners and commercial forms supplied by Poulton Associates.
Jerome "Jerry" Trupin, CPCU, is a partner in Trupin Insurance Services located in Briarcliff Manor, NY. He provides property I casualty insurance consulting advice to commercial, nonprofit and governmental entities. He is, in effect, an outsourced risk manager.
Jerry has been an expert witness in numerous cases involving insurance policy coverage disputes and has taught many CPCU and IIA courses.
Jerry has spoken across the country on insurance topics and is the co-author of over ten insurance texts used in CPCU and IIA programs, including Commercial Property Risk Management and Insurance and Commercial Liability Management and Insurance. He regularly contributes articles to CPCU Society publications, the Insurance Advocate *, and others. He can be reached at firstname.lastname@example.org. Thanks to Jerry Trupin for this article and to the CPCU Society for letting us reprint it.
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|Title Annotation:||EXPOSURES AND COVERAGES|
|Date:||May 12, 2014|
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