Disaster Related Real Estate Issues. By Barry T. Bassis. Collecting Information

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1 Disaster Related Real Estate Issues By Barry T. Bassis Collecting Information When a disaster strikes, such as Superstorm Sandy, it may damage or even destroy homes and the surrounding property. The first question is what insurance coverage applies. More than one policy may be implicated. There may be important deadlines that could prevent a homeowner from collecting even if policies are in place and a covered loss took place. Homeowners should have copies of all their policies. There may be homeowner policies, which often have a first-party property section and a third-party liability section. Other policies may include flood coverage, which has been critical in many claims from Superstorm Sandy. First, look at the declaration page, which will include a summary of the coverage, the policy number, the issuing company, the policyholder, premium information, the mortgage company (if there is one), the amount of the deductible and a list of endorsements. A sample declaration page of a homeowner policy is attached as Exhibit A. For a homeowner policy, this is not enough. You need to review a complete copy of the policy since they differ from one another. The declaration page will list the endorsements but unless you review the actual language of the entire policy, you will not be able to determine the extent of coverage or what is excluded. For a flood policy, all you need from the insured to ascertain the policy is the declaration page. The policy language is identical in all flood policies (whether issued by the National Flood Insurance Program ( NFIP ) or by a Write Your Own insurer (which is an insurer that participates in the program). A copy of a sample flood declaration page is Exhibit B. The current flood policy (which can be accessed on-line) is attached as Exhibit C. Then, you need to review all the information regarding the damages from the storm, which includes contractor estimates and bills, receipts for work done, photographs, inventories of personal possessions (and receipts for their purchase or an estimate of when they were purchased), engineer s reports, and any reports from governmental agencies (which may have sent out engineers or architects to inspect the property to determine whether the structure is in danger of collapsing). Basics of Homeowners Coverage First Party and Third Party Homeowner policies often have two sections: a first-party property section for the owner s own property (in case a covered loss takes place and the homeowner receives the payment, e.g., for a fire or wind damage) and third-party coverage (meaning liability for injury to others who step onto the property or are injured by the insured). 1

2 Coverage generally includes dwelling coverage, other structures (such as garages), personal property, loss of use, additional living expense and fair rental value. There may be additional coverage for debris removal and reasonable repairs. Coverage may be all risk or named perils. Flood is usually excluded even in all risk." Homeowner s Obligations Under a Policy The homeowner is obligated to give timely notice of a loss and to cooperate with the insurer in its investigation. The insured s burden is to establish coverage. The insurer s burden is to establish an exclusion or show that there is no covered peril. Storm/Hurricane Deductibles The policy may tie a deductible into the finding of the National Oceanic and Atmospheric Association ( NOAA ), which is part of the Department of Commerce. As occurred after Superstorm Sandy, the Governor may issue a proclamation. Basics of Flood Insurance In 1968, Congress created the National Flood Insurance Program (NFIP) to help provide a means for property owners to financially protect themselves. The NFIP offers flood insurance to homeowners, renters, and business owners if their community participates in the NFIP. Participating communities agree to adopt and enforce ordinances that meet or exceed FEMA requirements to reduce the risk of flooding. Mortgage companies may require mortgagees to purchase a certain amount of flood insurance coverage. Flood policies do not cover loss of use of property, additional living expenses, land or land values, trees, plants, shrubs, fences, retaining walls, bulkheads and docks. Losses are valued at RCV (replacement value) or ACV (actual cash value). Personal property is always valued at ACV. The building structure can be valued at RCV if certain criteria are met. It must be a single family home used as a principal residence (where the homeowner or his or her spouse live 80% of the time). The policies (which have a maximum limit of $250,000) insure: The insured building and its foundation Electrical and plumbing systems Central air conditioning equipment, furnaces and water heaters Refrigerators, cooking stoves and built-in appliances such as dishwashers 2

3 Permanently installed carpeting over unfinished flooring Permanently installed paneling, wallboard, bookcases and cabinets Window blinds Detached garages (up to 10 percent of building property coverage); detached buildings (other than garages) require a separate building property policy Debris removal Contents coverage may be purchased separately and has a limit of $100,000. It covers: Personal belongings, such as clothing, furniture and electronic equipment Curtains Portable and window air conditioners Portable microwave ovens and portable dishwashers Carpets that are not included in building coverage Clothing washers and dryers Food freezers and the food in them Certain valuable items such as original artwork and furs (up to $2,500) The following are not covered under flood policies Damage caused by moisture, mildew or mold that could have been avoided by the property owner Currency, precious metals and valuable papers such as stock certificates Property and belongings outside of an insured building such as trees, plants, wells, septic systems, walks, decks, patios, fences, seawalls, hot tubs and swimming pools Living expenses such as temporary housing Financial losses caused by business interruption or loss of use of insured property Most self-propelled vehicles such as cars, including their parts Limitations for Coverage of Basements Coverage is limited in basements regardless of zone or date of construction. It's also limited in areas below the lowest elevated floor, depending on the flood zone and date of construction. These areas include: 3

4 Basements Crawl spaces under an elevated building Enclosed areas beneath buildings elevated on full-story foundation walls that are sometimes referred to as "walkout basements" Enclosed areas under other types of elevated buildings Exclusions in the Flood Policies Many homeowners have been shocked to discover that their flood insurance claims are rejected because of exclusions, such as earth movement. The flood policies distinguish between mudflows, which are covered and earth movement, which is excluded. FloodSmart.gov, the official site of the NFP states: Mudflows are rivers of liquid and flowing mud on the surface of normally dry land, often caused by a combination of brush loss and subsequent heavy rains. Mudflows can develop when water saturates the ground, such as from rapid snowmelt or heavy or long periods of rainfall, causing a thick liquid downhill flow of earth. Mudflows are different from other earth movements, such as landslides, slope failures, and even moving saturated soil masses in which masses of earth, rock, or debris move down a slope where there is not a flowing characteristic. Damage from mudflows is covered by flood insurance; damage from landslides and other earth movements is not. FEMA has also taken the position that sinkholes that appeared after Superstorm Sandy are excluded under the flood policies. Causation Homeowner and Flood policies require loss caused by a covered peril. Sandy perils include fire, wind and water (e.g., rain, flood, sewer/drainage backup). Efficient proximate cause means that the loss is insured if the efficient proximate cause of the loss was a covered peril. New York courts look to the proximate, efficient, and dominant cause of a loss when addressing issues of proximate causation. Album Realty Corp. v. American Home Ins. Co., 80 N.Y.2d 1008, 1010, 607 N.E.2d 804, 805 (N.Y. 2002); see also Wilner v. Allstate Ins. Co., 2011 N.Y. Misc. LEXIS 1424, 2011 NY Slip Op 30817U (Sup. Ct. Nassau Cty. March 28, 2011), aff d, 2012 N.Y. App. Div. LEXIS 6534 (2d Dep t Oct. 3, 2012); Kosich v. Metropolitan Property and Casualty Insurance Company, 214 A.D.2d 992, 626 N.Y.S.2d 618 (4 th Dept. 1995). 4

5 Anti-concurrent causation clauses appear in many homeowner policies to exclude coverage for named perils if an excluded cause plays a contributing cause of the damage. A sample clause is: We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss. There is pending legislation to limit, or at least warn consumers, about these clauses. There is also pending legislation about the effect of anti-concurrent causation clauses with respect to sewer backup. Increased Cost of Compliance Coverage Most flood policies include Increased Cost of Compliance ( ICC ) coverage, which may apply to insured buildings when flood damages are substantial. The homeowner must have building coverage to qualify for ICC coverage. ICC coverage provides up to $30,000 of the cost to elevate, demolish, or relocate the insured building or to floodproof structures with qualified basements. If the community in which the property is located declares the building substantially damaged or a repetitive loss structure by a flood(s), it may require the homeowner to bring the structure up to current community floodplain management building standards. The homeowner may use ICC coverage to help cover those costs. Payment of an ICC claim is in addition to the amount of the building claim. However, the total amount of the building claim and ICC claim cannot exceed the maximum limit available for Building Property coverage ($250,000). Having an ICC claim does not affect a personal property claim (up to $100,000), which is paid separately. Proof of Loss A Proof of Loss is a form used by the policyholder to support the amount they are claiming under their policy, which must then be signed and sworn to, and submitted to the insurance company with supporting documentation. (A copy of the form is annexed as Exhibit D.) The deadline for submitting a Proof of Loss for flood policies is usually 60 days. However, after Superstorm Sandy, FEMA extended the deadline until one year after the date of the storm (in NYC, October 28, 2013). The form should be submitted along with any proof (detailed contractor estimates, inventories of damaged property and receipts, engineer s reports, etc.) Remedies for Homeowners Homeowner Claim Mediation (11 NYCRR ) In February 2013, Governor Cuomo and the Department of Financial Services Superintendent Lawsky announced an emergency regulation directing homeowner insurers to submit to mediations for Sandyrelated claims. These mediations (for homeowner policies, not flood) are mandatory if requested by the policyholder. The difference between the positions of the insurer and claimant must be $1,000 or more. The insurer pays the cost of the mediation and must send a representative with knowledge of the claim 5

6 and authority. The insurer must inform the policyholder his or her rights under the section when it is denying a claim in whole or in part or if insurer has not offered to settle within 45 days after it has received a properly executed proof of loss and all items, statements and forms that the insurer had requested from the claimant. The mediator s recommendation is not binding on either of the parties. Suit Limitation Clauses Under flood policies, the deadline is one year after the claim is denied by the insurer in whole or in part. There is also an internal appeal within FEMA, which must be filed within 60 days after a claim has been denied in whole or in part. However, the administrative appeal does not toll the time by which a lawsuit must be commenced. The flood insurer can be sued only in federal court and the case will be decided by a judge without a jury. Under homeowner policies, NY Insurance Law 3404 states that the period is not less than two years. However, some policies set the period as one year. Broker Liabilitiy Absent a special relationship, a broker s duties are to procure the requested coverage and advise if it cannot. There is no general duty to advise. To impose a higher standard, the policyholder needs to show a special relationship. In American Building Supply Corp. v. Petrocelli Group, 19 N.Y.3d 730, 955 N.Y.S.2d 854, 979 N.E.2d 1181 (2012), the Court of Appeals held that an insured is not barred as a matter of law from asserting a claim against an insurance broker even if the insured failed to read and examine the content of its insurance contract. Other Disaster Assistance Funds may be available from FEMA for uninsured losses. Claimants may also apply for SBA loans. New York City has the Build it Back program (nyc.gov/builditback). The deadline to apply is September 30, There are also state and city buy-back programs available in certain communities. 6

National Flood Insurance Program. Summary of Coverage

National Flood Insurance Program Summary of Coverage FEMA F-679 / November 2012 This document was prepared by the National Flood Insurance Program (NFIP) to help you understand your flood insurance policy.