Flood Insurance

Super Models Are Looking Better Than Ever - What Does That Mean For Insureds?

August 20, 2014 23:19
by J. Wylie Donald

A recent article in August’s Best’s Review, The Rise of the Super Models, by Kate Smith (not Kate Upton, sorry), caught our eye.  A lot is going on in the world of computer catastrophe modeling.  First, demand by insurers and reinsurers is up and modeling firms are “broadening the scope of risks and regions that they model, with RMS, AIR Worldwide and CoreLogic EQECAT all set to release new models this year.”  Among other things, all of the top 3 modeling firms are releasing U.S. inland flood models.  This blog has been hard on FEMA and the Corps of Engineers, criticizing the backward-looking nature of flood plain mapping.  It looks like the tools to remedy that deficiency will soon be at hand.

Second, modeling firms are shifting from open models to open platforms, which “offer more choice by providing access to models created by third-party suppliers.”  According to Ms. Smith, a catalyst for this change is Oasis Loss Modeling Framework, Ltd., an insurance industry-founded and -funded organization.  According to Oasis’s webpage, “Barriers to entry have restricted the ability of the insurance community to exploit large elements of available research in hazards and vulnerability.”  Such barriers include costs and knowledgeable personnel.  The goal then was to create an “open marketplace for models and data leading to much wider access to understandable tools for catastrophe risk assessment.”  Open platforms (think Linux) can have great benefits; nevertheless, some are skeptical of Oasis’s practicality in that it is not available for off-the-shelf use, is optimized for an expensive IBM platform, and runs slowly on other platforms, among other things.  

The implications for policyholders of all this modeling are three-fold:  first, rates; second, policyholders’ own business decisions; and third, others' views of those business decisions.

As insurers better understand the risks associated with particular locations their rates will be adjusted accordingly. This can be a good thing if insurers determine they have overestimated the risk, or if other insurers jump into that market and drive prices lower. But it will be a bad thing if the risk was underestimated and prices rise, or insurers flee a particular market as has regularly happened in Florida and other states.  Indeed, at least one state has seen high court approval of the use of models to limit insurance offerings in high risk areas.

Modeling can also be a boon to business planning. What does the future likely hold for a particular location? Will water supplies hold up?  Is the flood map reliable or is it outdated?  Is the company compounding its exposure by yet another franchise or mall development in a particular region?  There is no reason that modeling expertise need be restricted to insurance and reinsurance companies.  Other businesses can benefit.  However, as pointed out in Super Models, “Models are not a perfect science; there are subjective opinions involved.”  Accordingly, businesses should be cautious.

And what if a business does not bring modeling into its business planning? It is likely that if things go awry and the unpleasantness is substantial and can be attributed to an inadequate forecast, an injured party will assert the failure to model the future was negligent.  A case in point is In re PXRE Group, Ltd., Sec. Litig., 600 F. Supp. 2d 510 (S.D.N.Y. 2009), aff’d, 357 Fed. Appx. 393 (2d Cir. 2009), where a reinsurance company found its failure to rely on a particular model was the gravamen of a class action plaintiff’s security fraud suit.  PXRE was a thriving reinsurance company, whose business was conditioned on maintaining an A- rating.  Unfortunately, Hurricanes Katrina, and then Rita, and then Wilma, devastated certain portions of the Gulf Coast to its reinsureds’ detriment.  PXRE stepped in and paid on its reinsurance contracts but the losses kept increasing.  It relied on models to reassure the investment community that it remained financially sound in order to raise money.  The models it relied on, however, turned out to be inaccurate, and ultimately PXRE's rating crumbled and it succumbed to the unprecedented losses.  The class action ensued.

Plaintiff claimed, among other things, that PXRE should have relied on a higher estimated loss ($40-60 billion by RMS) rather than valuations of $30-40 billion touted by PXRE’s own models as well as by ISO and Air Worldwide.  The district court opinion gives a lengthy dissertation on the standards to be applied in a securities fraud case on a motion to dismiss and concluded that PXRE was not reckless in its reliance.  More germane to the issue here, is that PXRE was able to defend itself because it had relied on models. 

Granted, modeling was part of PXRE’s business and, no doubt, a lack of modeling would have been reckless.  But, is a prudent non-insurance business going to eschew modeling on the theory that no one else in its industry relies on them.  If models are becoming more widely available, as suggested by Super Models, the path of the prudent business is, at the very least, to consider whether modeling has something to offer. 

Climate Change Effects | Flood Insurance | Insurance

First Circuit Rules Constitution's Appropriations Clause Quashes Flood Policy Claim Lacking Proof-of-Loss

September 26, 2013 00:38
by J. Wylie Donald

You know it is not going well when the court cites the Constitution at you in a breach of contract case.  But so it went in DeCosta v. Allstate Insurance Co., where the First Circuit last Friday reversed the trial court and granted summary judgment to Allstate on a suit involving a Standard Flood Insurance Policy (SFIP) under the National Flood Insurance Program (NFIP).

The case was relatively simple on both its facts and on the law.  DeCosta suffered a flood loss in 2009 and tendered his claim to his flood insurer, Allstate, who wrote coverage under the Write-Your-Own program of the NFIP.

DeCosta submitted four sworn proofs of loss. Two were timely, submitted within 60 days of the loss.  Allstate paid those sums in full "within days." Id. at 5.  Two were untimely, but Allstate submitted a waiver request, which FEMA granted. Allstate paid those sums in full as well. DeCosta also submitted an unsigned, unsworn estimate by his appraiser, which tallied approximately $100,000 in additional building damage. Allstate refused to pay it. Suit followed in state court, which Allstate removed. 

First, over Allstate's objection the trial court ordered the parties to an appraisal. When the appraisal came back in the amount of $99,805.67 in favor of DeCosta, Allstate moved to strike the award and for summary judgment.  The court confirmed the award and denied Allstate's request for summary judgment. Throughout, Allstate had argued that DeCosta had failed to comply with the SFIP's requirement that payment under the policy could only be made upon a signed and sworn proof of loss, which had not been submitted.  The trial court found that Allstate had waived that argument by paying on the claim in the first place.  Id. at 10-11.  Allstate also asserted that the appraisal panel determined scope of coverage, rather than the value of the loss, again in violation of the SFIP's terms. The court rejected that argument as well.   Id. at 10. 

The First Circuit overturned the ruling fundamentally because "DeCosta's SFIP is not an ordinary insurance policy; rather, his SFIP's provisions are also embodied in FEMA's codified regulations ... and interpretation of DECosta's SFIP is a matter of federal law.”  Id. at 15.  The court was not considering federal common law, which might have brooked some flexibility. Instead, this was federal regulatory, statutory, and even constitutional law.

That made the Court’s decision simple.  It had “already held that federal law mandates strict compliance with the SFIP, including its proof-of-loss requirement.”  Id. Other circuits had ruled likewise.  See Mancini v. Redland Ins. Co., 248 F.3d 729, 734-35 (8th Cir. 2001); Evanoff v. Standard Fire Insurance Co., 534 F.3d 516, 520-21 (6th Cir. 2008).  Strict compliance was compelled for a number of reasons.

First, under the NFIP the insurance companies act as administrators of the federal program; they do not pay the claims, the government does.  Accordingly, the companies are “fiscal agents of the United States”.  DeCosta. at 15.  Since the Appropriations Clause of the Constitution “prohibits the judiciary from awarding claims against the United States that are not authorized by statute” and the authorizing statute “authorized payment of flood insurance funds to only those claimants that submit a timely sworn proof of loss,” a court could not “award an unauthorized money claim based on a theory of substantial compliance.”  Id. at 16-17. 

Second, sovereign immunity prohibited payment.  “The proof-of-loss provision serves as a ‘condition precedent to a waiver by the federal government of its sovereign immunity.’”  Id. at 17. 

Third, “the need for uniformity in federal law … supports strict construction of the SFIP.”  Id. at 18.  Uniformity promotes clarity both to the companies issuing the policies, and the jurisdictions construing them. 

Because DeCosta did not submit a signed and sworn proof of loss for the additional $100,000 he sought, he did not strictly comply with the requirements of the SFIP and his claim had to be denied.  Further, his argument that Allstate had waived the requirement also was rejected.  “Mere payment of claims properly submitted in a proof of loss does not waive objections to further sums not submitted as required by the SFIP’s proof-of-loss provision.”  Id. at 24.  The SFIP “explicitly precludes oral waiver or waiver by conduct.”  Id. at 25. 

Having found DeCosta not entitled to any payment of the claimed funds, the Court did not need to reach the issue concerning the appraisers' scope versus value determinations.

For practitioners, DeCosta v. Allstate is a valuable reminder that federal flood insurance policies are quite unlike the usual insurance contracts.  As the Court held, strict compliance is required even though under state insurance law "a lesser form of compliance might suffice."  Id. at 15.  As stated by the Third Circuit, “In the realm of private insurance, common law doctrines (such as `reasonable expectations,' `notice/prejudice,' and `substantial compliance') govern the evaluation of claims. By contrast, a [Write-Your-Own] insurer must strictly follow the claims processing standards set out by the federal Government."  C.E.R.1988, Inc. v. Aetna Cas. & Sur. Co., 386 F.3d 263, 270 (3d Cir. 2004).  Thus, when the policy language and even the policy handbook is federal law, one needs to take a second look at all the usual tenets. 

Flood Insurance

Top 6 at 12: Highlights of the Top Climate Change Stories in the Second Half of 2012

December 31, 2012 11:59
by J. Wylie Donald

2012 has drawn to a close.  We chronicle here six of the most significant stories on the climate change front in the last six months.  For those looking for hope that government is taking action to rein in greenhouse gas emissions, the focus is on California, where cap-and-trade stepped into reality with California's first emissions auction.  Nationally and internationally regulation is at a standstill or going backward.  In the courts, the climate change liability plaintiffs were pounded again as the Ninth Circuit confirmed the dismissal of Native Village of Kivalina v. ExxonMobil Corp.  Responding to climate change, however, is a different story.  Superstorm Sandy was a wakeup call on adaptation and the impacts of extreme weather; the National Flood Insurance Program managed to obtain statutory authority to include climate change in its considerations.

1.  Superstorm Sandy –  Climatologists are confident that the changing climate will lead to more frequent and more severe storms.  Sandy, following Hurricane Irene the previous year, delivered on both predictions.   A nine-foot storm surge at Battery Park.  Transformers exploding and putting Manhattan into darkness.  The Hoboken PATH station  submerged.  $50 billion in damage.  Superstorm Sandy set records and was completely consistent with the concerns of proponents of climate change mitigation and adaptation.  Did it have anything to do with climate change or was it simply a chance confluence of events?  The weather pattern was unusual.  There was a hurricane (albeit fading), coupled with a nor’easter, intersecting with an arctic high pressure front, under a full moon.  Individually, those are independent of climate change.  But there was also a record lack of sea ice, which has a measured and observed effect on global atmospheric circulation, which could result in severe weather coming together more severely.  So quite possibly Sandy is a result of climate change.  More important than the academic debate, however, is the impact on adaptation.  Regardless of one’s views on climate change, Sandy demonstrated that a major metropolitan area is vulnerable to extreme weather.  Steps will be taken to flood-proof subways, bury electric lines, raise seawalls, improve evacuation plans  and emergency response,  etc.  All of these are part of the steps needed to adapt to climate change.   Whether it is acknowledged as linked to climate change or not (but see Bloomberg Business Week cover following Sandy:   “It’s Global Warming, Stupid!”), adaptation is going to happen. 

2.  Presidential Election - Climate change was an important part of the campaign:  "The Obama-Biden cap-and-trade policy will require all pollution credits to be auctioned, and proceeds will go to investments in a clean energy future, habitat protections, and rebates and other transition relief for families."  The 2008 election campaign that is. It was a completely different position in 2012. Or maybe not different at all.  No one could tell because nobody was talking about it.  Even Sandy wasn't enough to propel climate change into the debate in the last week of campaigning.

3.  Native Village of Kivalina v. ExxonMobil - The last filed of the original quartet (American Electric Power, General Motors, Comer, and Kivalina) of climate change nuisance cases, Kivalina finally made it to a federal appellate court, where in September it met the same fate as its brethren:  dismissal affirmed.  Plaintiffs asked for rehearing.  The Ninth Circuit wasn't interested.  As of this writing, the only case left is Comer v. Murphy Oil USA, which is on appeal following its dismissal last March (for the second time) by the Southern District of Mississippi.  According to that court, plaintiffs lose for a wide variety of reasons:  standing, political question doctrine, res judicata, collateral estoppel, displacement, statute of limitations and proximate cause.   

4.  Cap-and-trade - California, alone among the fifty states, instituted its multi-industry full-fledged cap-and-trade program auctions in November.  All of its allowances for 2013 were sold at a price slightly above the mandated floor price of $10/ton.  Regulators and environmental groups hailed the auction as a success; some business groups were less enthusiastic.  The California Chamber of Commerce sued the California Air Resources Board to invalidate the auctions.  Meanwhile, the Regional Greenhouse Gas Initiative in the northeast continues with its allowances trading at the floor price, and with less than 2/3 of its allowances selling in its August and December auctions.  Some commentary concludes that it is time for RGGI to shut down as its CO2 emission goals have been met.    From where we sit, RGGI's success or failure can't be judged until its carbon trading is done in connection with  a robust economy.  The world economic malaise suppresses business, and with it, carbon dioxide emissions.  California may face the same issue.  

5.  National Flood Insurance Program Reform - Could a poisonously partisan Congress vote for this: 

(1) IN GENERAL- The Council shall consult with scientists and technical experts, other Federal agencies, States, and local communities to--(A) develop recommendations on how to--(i) ensure that flood insurance rate maps incorporate the best available climate science to assess flood risks; and (ii) ensure that the Federal Emergency Management Agency uses the best available methodology to consider the impact of--
(I) the rise in the sea level; ..."?  

Not the Congress we know.  Or so we thought.  Somehow, somewhere, someone put this into a draft, which made it into and out of a committee, ended up on the floor of both houses, survived two votes and came out as an enrolled bill for the president's signature.  The president signed it into law in July.  This was part of the miscellaneous section of the Moving Ahead for Progress in the 21st Century Act  (aka the Transportation and Student Loan Bill), which may explain how this occurred.  In any event, climate change considerations are statutorily mandated as part of the NFIP.  42 USC § 4101a(d)(1).  We can expect a report by July 6, 2013.  Id. § 4101a(d)(1)(B).  Who'd have thunk? 

6.  Global GHG Regulation - COP-18, the Conference of the Parties to the United Nations Framework Convention on Climate Change, wrapped up in Doha, Qatar in the middle of December widely panned as ineffective.   While it extended to 2020 the Kyoto Protocol addressing global greenhouse gas emissions, major nations (Canada, Russia, Japan and New Zealand) dropped out, and the United States continued to refuse to participate.  Thus, only about fifteen percent of global emissions are now covered by the protocol (the EU and other European nations, as well as Australia, continue to support the protocol).   Developing nations (whose emissions are not restricted by Kyoto) had hoped to obtain commitments for funding "climate finance" of $100 billion, but that did not occur either.  One can see parallels between the Kyoto Protocol and the Western Climate Initiative and RGGI.  In all three members have dropped out and the commitment to address greenhouse gas emissions waivers. 
 
The fiscal cliff was the focus at the end of 2012; climate change got short shrift.  2013 may establish that that was short-sighted.

Storm Surge in Your Lobby: You Should Have Been Thinking About Hurricane Isaac Months Ago

August 28, 2012 10:43
by J. Wylie Donald

12 feet.  Water that deep comfortably inundates the front office's front door and floats the boss's desk.  And that is the predicted maximum storm surge for coastal Louisiana and Mississippi as Hurricane Isaac bears down.   So there are likely to be a few problems in that part of the country by the time the sun goes down this afternoon.  What can be done?  At this late hour, very little unfortunately, other than heading for the hills; here the adage “an ounce of prevention is worth a pound of cure” says it all.

Other than sand bags and plywood sheeting what preventive steps have some taken?  We’d like to focus on some things lawyers and businesspeople can address ahead of time:  modeling, insurance and contracting.

Modeling – Besides wreaking record havoc, Hurricane Andrew in 1992 was the coming of age for catastrophe modelers. As reported by Business Insurance last week, when AIR Worldwide reported an estimated $13 billion in damage to its clients following the storm's passage, reaction ranged from “skepticism to outrage.”   Now modeling is big business and well accepted.  Indeed, modeling was approved by the Maryland Court of Appeals as an appropriate way to make business decisions in January of this year.  See People's Insurance Counsel Division v. Allstate Insurance Co., 36 A.3d 464 (Md. 2012). There is no reason to believe that Maryland’s lead would not be followed elsewhere.

Today the public can get the benefit of some of the modelers’ insight in email alerts from companies’ such as AIR, or simply downloading them from the internet.  Those following Hurricane Isaac were able to learn that its ultimate effect was unsettled: 

Isaac reaching hurricane status tonight leaves 24 hours of time for additional development prior to landfall; within that window, Isaac could reach Category 2 intensity. How much stronger Isaac will become will depend in part on the storm's track—that is, how much time it will spend over the warm waters of the Gulf of Mexico.  Further adding to the uncertainty around Isaac’s forecast intensity is the fact that the storm will be moving over some of the warmest waters it has encountered to date, so a period of rapid intensification that leads to even stronger winds cannot be ruled out.

Subscribers to services offered by modeling firms can assess their exposures long before a hurricane makes landfall and take steps to diversify or minimize risks, can optimize their response to a looming hurricane by shifting production or scheduling a shutdown, and can make time-critical decisions as the catastrophe unfolds with the best data available concerning not only the storm’s effect on one’s own facility, but on the infrastructure and other plants on which one’s facility depends. Including such modeling in business planning leads to improvement of the bottom line.

Insurance – It is well-documented that insurers don’t particularly care for flood risk, including storm surge.  Following Hurricane Katrina dozens of cases sought insurance coverage for storm surge. The courts were not sympathetic; most found flood exclusions and anti-concurrent causation clauses valid and applicable. For example, where homeowners did not purchase flood insurance through the National Flood Insurance Program after being told by their carrier “Your policy does not cover flood loss. You can get protection through the National Flood Insurance Program,” the Fifth Circuit affirmed the trial court’s ruling and stated, among other things, “The omission of the specific term "storm surge" does not create ambiguity in the policy regarding coverage available in a hurricane and does not entitle the Leonards to recovery for their flood-induced damages.”  Leonard v. Nationwide Mut. Ins. Co., 499 F.3d 419, 438 (5th Cir. 2007).  Commercial insureds fared no better.  E.g., Northrop Grumman Corp. v. Factory Mut. Ins. Co., 538 F.3d 1090, modified, 563 F.3d 777 (9th Cir. 2008).

All of which is not to say that flood coverage is not available, but one has to actively seek it out, and pay for it.  This has important implications for supply chain coverage because if one's policy does not cover flood, and one's key supplier (scheduled under the contingent business interruption coverage) is shut down (as happened to many last year with Thailand's epic flooding), then there will be no coverage.  In other words, flood risk must be assessed at all relevant locations, not simply the insured's locations. 

Contracting away risk – Considering storm surge, one researcher has written:  "In many places, only inches separate the once-a-decade flood from the once-a-century one; and separate the water level communities have prepared for, from the one no one has seen.  Critically, a small change can make a big difference, like the last inch of water that overflows a tub."  Ben Strauss et al., Surging Seas 4 (Mar. 14, 2012).  We saw just above that insurance may not be available for a storm surge.  Is there any other path to recovery? 

Some that have purchased properties that have subsequently suffered flood damage have pursued their transaction professionals for the loss based on the theory that there should have been some disclosure.  They have had some success.  See, e.g., Perri v. Prestigious Homes, Inc., Docket No. A-0403-10T1 (N.J. Super. Ct. App. Div. Jan. 13, 2012) (suing broker for flood damage); Stonacek v. City of Lincoln, 782 N.W.2d 900 (Neb. 2010) (suing realtor, developer, engineer and city for ensuing water damage from flood); Loya v. Howard Hanna Smythe Cramer Co., 2009 Ohio 448 (Ohio Ct. App. 2009) (suing realtor for ensuing water damage from flood); Potter v. First Real Estate Co., 844 So. 2d 540 (Ala. 2002) (suing realtor based on flooding); Clay v. Walden Joint Venture, 611 So. 2d 254 (Ala. 1992) (referring to suit against realtor for flood damage).  It is relatively easy, however, to inoculate oneself against that kind of suit:  make the disclosure in the contract.  Realtors and sellers in Norfolk, Virginia apparently already do that. For a more detailed discussion see J. Wylie Donald, Getting Ahead of Storm Surge, Especially in an Era of Climate Change.

Sand bags and plywood sheeting are irreplaceable as a hurricane roars in.  Maybe one should start including other preventive steps as equally necessary in order to avoid the proverbial several pounds of cure.

Flood Insurance | Insurance | Rising Sea Levels | Weather

The NFIP is Renewed and Reformed, and Climate Change Is Very Much in the Picture

July 8, 2012 17:18
by J. Wylie Donald

President Obama signed the Moving Ahead for Progress in the 21st Century Act, aka "MAP-21", this past Friday.  Support was broad:  the House voted 373-52; in the Senate it was 74-19 in favor.  The bill is a potpourri.  The bulk of the enactment addresses surface transportation topics, but it also includes measures to keep down student loan interest rates, overflights of the Grand Canyon, sport fish restoration, and extensive reform of the National Flood Insurance Program (including significant climate change provisions).  Interestingly, the White House eschews both statutorily-provided titles and chooses a simpler nomenclature, the Transportation and Student Loan Bill.  According to the White House, the Bill "accomplishes two important goals -- keeping thousands of construction workers on the job rebuilding America's infrastructure and preventing interest rates on federal student loans from doubling."

These features are important, but we think the bill's significance will come from the unheralded feature:  reform of the National Flood Insurance Program (NFIP).  Reform is sorely needed.  As stated on the FEMA "Rethinking the NFIP" website, "The NFIP was designed as a means of discouraging unwise occupancy of flood prone areas, yet occupancy of these areas has expanded since 1968. Additionally, as risks continue to increase, the cost of flood insurance mirrors that increase, making it unaffordable for many Americans."  Criticism of the NFIP was nearly universal following Hurricane Katrina.  The program was underfunded - premiums came nowhere near the amount needed to cover claims (the NFIP is over $15 billion in debt).  Floods were repeatedly damaging the same properties, which had been rebuilt sometimes three or four times in the same location.  Fewer than half the properties at risk were covered; in some areas uninsured properties were the substantial majority.    The Washington Post in a 2005 editorial called for compulsory insurance and the end of subsidized rates.  A Wall Street Journal article reached similar conclusions.  Notwithstanding, reform could not be obtained.  The NFIP limped along living (and, on occasion, even dying) on borrowed time.   Since 2008, it has been extended no fewer than 15 times.  Four times the program lapsed as lawmakers could not come to terms.   

Somehow, however, with the most recent extension due to expire on July 31, reformers prevailed and the act was revised and extended for another five years to September 30, 2017.  The reform act, known as the Biggert-Waters Flood Insurance Reform Act of 2012 (sec. 100201)), can be found at Title II of Division F (Miscellaneous) of MAP-21.  

The reforms are extensive (and they will leave many wondering how any of these reforms were opposed in the first place).  Among other things, the bill provides:

  • Subsidies for many properties are being phased out.  For example, a "severe repetitive loss property" (i.e., where payments for flood-related damage exceed fair market value of the property) is no longer eligible for a subsidized rate (sec. 100205(a)(1)).
  • In setting rates the principles and standards of the American Academy of Actuaries and the Casualty Actuarial Society are to be followed, including "an estimate of the expected value of future costs" (sec. 100205(b)(3)).  The "average historical loss year" is to include "catastrophic loss years" (suggesting that previous averages did not include catastrophic losses, which is a calculus many would like to use with their insurers) (sec. 100211).
  • Insurance premiums can now rise up to 20% per year (sec. 100205(c)).  10% was the earlier cap on premium increases.
  • Multifamily properties (greater than 4 residences) can now  purchase NFIP policies (sec. 100204).
  • There are now minimum deductibles for flood claims (sec. 100210).
    .
  • A Technical Mapping Advisory Council is established to address flood map revision and maintenance  (sec. 100215(a)).
  • A variety of studies are required:  among others, a study of the addition of business interruption and additional living expenses coverages; a report on graduated risk behind levees; a report on privatizing the NFIP; a report on "nationally recognized building codes as part of the floodplain management criteria", and a study on participation in, and affordability of, the NFIP (secs. 100231, 100232, 100233, 100235, 100236).

In light of the politicization of the climate change topic, perhaps the most astounding of all the changes in the NFIP is the acknowledgement in the bill that climate change is a critical consideration in establishing a program that works.  (We and others have called for this for some time, see Underwater?  What Climate Change Means for a Loan Portfolio Near the Flood Plain).  The Technical Mapping Advisory Council must report to the FEMA Administrator within one year of enactment on the following:

100215(d) Future Conditions Risk Assessment and Modeling Report-

(1) IN GENERAL- The Council shall consult with scientists and technical experts, other Federal agencies, States, and local communities to--

(A) develop recommendations on how to--

(i) ensure that flood insurance rate maps incorporate the best available climate science to assess flood risks; and

(ii) ensure that the Federal Emergency Management Agency uses the best available methodology to consider the impact of--

(I) the rise in the sea level; and

(II) future development on flood risk; ...

And this report cannot just sit on the shelf.  The Administrator is obligated to, "as part of the ongoing program to review and update National Flood Insurance Program rate maps ..., shall incorporate any future risk assessment submitted [in the required report] in any such revision or update." (sec. 100215(d)(2)).

We note that the statute speaks definitively about sea level rise.  It is not something indefinite; rather, the report must consider the impact of the rise in the sea level.  We also note that "best available climate science" is standard phrasing at NOAA, and the National Park Service, as well as among NGOs.  How it will fare in the ultimate report is, of course, unknown.  But we do not expect the effects of climate change will be shouted down, turned away or buried.  At the end of the day, the conclusions in the report will influence how money is to be spent and who will profit.  The best way to figure that out is to use the best information.  Certainly some will have an interest in obscuring the best available science, but the bipartisan support of the bill suggests that many more may have an interest in just getting the best answer.

Climate Change | Climate Change Effects | Flood Insurance | Legislation | Regulation | Rising Sea Levels

Force Placed Insurance When the Flood Plain Fails to Consider Climate Change

May 8, 2012 22:22
by J. Wylie Donald

An interesting case crossed our desk last week from the Texas Court of Appeals. The amount at issue, $4,410.69, belies its significance. In Alvarado v. Lexington Insurance Company, Nos. 01-10-00740-CV, 01-10-01150-CV, slip op. (Tex. Ct. App. 1st Dist. Apr. 19, 2012) (attached), the court thoroughly examined (with extensive citations) the issue of whether a homeowner, subject to "force placed" insurance, has any rights in the policy obtained by his lender.  The majority concluded that the terms of the policy established that the homeowner was an intended beneficiary and could claim under the policy.  The dissent strongly disagreed (attached).

This issue is likely to have increasing prominence for lenders (and their insurers) as the correspondence between the mapped flood plain and reality becomes more and more in error.  See Underwater? What Climate Change Means for a Loan Portfolio Near the Flood Plain, Massachusetts Banker (2011).  The proposition is fairly simple. As a result of climate change, storms in many areas will become more frequent and more severe. The effect of this is to make the current 100-year flood plain an under-estimation of the actual area at risk for a 100-year flood. When the Federal Emergency Management Agency (FEMA) or the Army Corps of Engineers finally gets around to preparing accurate flood plain maps, scores of homeowners will find themselves waking up one morning subject to requirements for flood insurance.  See 42 U.S.C. § 4012a(e)(1)

Their lenders may do more than just wake up. Pursuant to federal National Flood Insurance Program (NFIP) requirements, they may send letters advising their borrowers of the requirement to obtain flood insurance. Id.  Some will comply. Some will not. For those choosing not to comply, the lenders will buy the insurance for them and bill their borrowers back.  See 42 U.S.C. § 4012a(e)(2).   Even where NFIP requirements do not apply, lenders may still have the right to place coverage for their borrowers as a result of breach of covenants agreed to by those borrowers.

This is force placed insurance.  It is defined by one internet source as:  "The insurance that a lien holder places on a property, to provide coverage in the event the borrower allows coverage to lapse. Forced place  [sic] insurance is intended to ensure that the property remains insured, protecting both the homeowner and the lien holder. The costs associated with forced place insurance are paid upfront by the lien holder, but added to the balance of the lien."   A borrower will covenant to insure the mortgaged property adequately.  When the borrower breaches (either by not purchasing required insurance, cancelling insurance or allowing insurance to lapse, or failing to procure the right type and amount of insurance), the lender may force place the required policy(ies).   All manners of property coverage may be purchased; liability coverage is typically restricted to only general liability.  A detailed discussion of the subject was prepared by the Mortgage Bankers Association in 2006. 

In Alvarado, the carrier issuing the force placed policy argued the subject policy was clear about

who was named as insured:  the lender (and not the borrower),

whose interest was protected:  the lender (and not the borrower), and

to whom loss was payable:  the lender (and not the borrower). 

The borrower disagreed and pointed to Endorsement 12,  "Special Broad Form Homeowners Coverage," which provided coverage to "You and residents of your household," defined the insured property as the "residence premises" (the "one family dwelling where you reside"), and provided coverage for living expenses and personal liability.  None of these could apply to a bank.

The majority concluded that the endorsement clearly established that the borrower was an intended beneficiary of the contract.  "All of these provisions of this endorsement are meaningful only if the "Insured" and "you" referenced in the Definitions and Property Coverages of Endorsement #12 mean the homeowner of an owner-occupied property reported by Flagstaff [the lender] to Lexington [the insurer] on Lexington's reporting forms as having force placed Homeowners Coverage and if the Homeowners Coverage part of the Policy is interpreted as directly insuring the homeowner against loss to property, both real and personal, as well as insuring him against personal liability and certain other personal losses, such as loss of use of the property and additional living expenses."  Alvarado at 35-36.  "We conclude ... that the additional coverage in Endorsement #12 for which the homeowner is forced to pay additional premiums "ha[s] no purpose whatever" and is meaningless unless the "Special Broad Form Homeowners Coverage" was intended by Lexington, the insurer of the property, and Flagstaff, the mortgagee, to directly benefit the mortgagors and homeowners of the properties specifically described ... on Lexington's reporting forms, including Alvarado." Id. at 41. Coverage practitioners will recognize the majority's decision as a simple application of one of the basic rules of coverage:  contra proferentem  -  the policy will be construed against the one who drafted it.

The dissent rejected all that:  "The borrower nonetheless is not a third-party beneficiary to [the force placed policy]: he is neither named as an additional insured nor expressly contemplated to be a beneficiary under it, as defined by its terms—most particularly, its liability limits. To rely on provisions that provide homeowner-types of coverage to conclude that the borrower is insured for these homeowner risks would provide more insurance coverage to the borrower than it does to the named-insured lender, whose coverage is limited to losses in which the lender has "a mortgage or ownership interest." But it is axiomatic that a third-party beneficiary cannot claim more rights under the contract than that of the first-party rights it relies on for enforcement." Alvarado (Bland, J., dissenting) at 11.

We take two lessons from Alvarado.  First, it teaches that force placed policies may provide more coverage than a lender or insurer will later argue they anticipated.  Policyholders in the unfortunate position of being subject to force placed coverage should not relinquish this possible source of coverage without closely examining the force placed policy for which they are being billed.

More importantly, however, is the need to recognize principles and considerations applicable in one situation, and to bring them to bear on new circumstances (such as those accompanying climate change).  Lending institutions may be in the crosshairs as flood risks develop in the coming years and bank real estate portfolios are threatened.  The numbers on which these portfolios were underwritten will no longer represent reality in that the risk of loss will be higher than anticipated. To protect themselves, banks may attempt to force place coverage. As Alvarado shows, however, the bank may come up short as the bank's borrower may have a claim on that protection. 

20120419 Alvarado v. Lexington Ins. Co., slip op. (Tex. App. Apr. 19, 2012).doc (98.00 kb)

20120419 DISSENT Alvarado v. Lexington Ins. Co., slip op. (Tex. App. Apr. 19, 2012).doc (47.00 kb)

Climate Change | Climate Change Effects | Flood Insurance

Flooding from Irene: Whither the Flood Plain?

August 30, 2011 23:50
by J. Wylie Donald


My train this morning usually continues to New York. Today it terminated in Philadelphia, a victim of the deluge delivered by Hurricane Irene. Amtrak explained:

Most Northeast Regional service will operate south of Philadelphia, but no Acela Express, Northeast Regional or other Amtrak trains can operate north of Philadelphia to New York.

As of early this Monday evening, about a half-mile of Amtrak right-of-way remained submerged near Trenton, N.J. As the water levels recede, Amtrak engineering forces will make repairs to the track and signal control infrastructure. Updates will continue to be provided and an estimate for restoration of full service south of New York is not yet available.

Many attribute the recent spate of natural disasters (heat waves, droughts and wildfires in Texas, tornadoes in Missouri and Alabama, Hurricane Irene) to the effects of climate change. We reserve judgment. Climate change is about trends, not individual events.

One trend we are watching closely is the status of flood plains. We dug up the Flood Insurance Rate Map for the Trenton train station. The Amtrak right of way mentioned above is in the 100 year flood plain. We weren't able to determine how many times it had flooded recently, but the mayor of nearby Lambertville noted that they have been flooded out 5 times in the last ten years.   The flood at the train station was a record, nearly seven feet above flood stage.  Id. And  a study out of the University of New Hampshire  reports New Hampshire has experienced 4 100-year floods in the last four years.  Some may discern a trend.

Fortunately, we are not the only ones watching. FEMA is in the process of preparing a report on climate change impacts on the National Flood Insurance Program. Preliminary information indicates that some Special Flood Hazard Areas (the 100-year flood plain) will double in size and that by the next century the nation's flood plain will be 40%-45% larger.  Look for The Impact of Climate Change on the National Flood Insurance Program to be out this fall.

FEMA currently does not directly address climate change in the NFIP, because its practice is to make its assessment based on the historical record.  But that does not mean communities and businesses cannot.  For example, a community may request that the applicable Flood Insurance Rate Map address future conditions.  44 CFR 64.3(a)(1).  Where business continuity planning is standard practice (and we hope that is everywhere) vulnerability assessments need to ask not only where is the flood plain, but where is it likely to be.  Many have been off to a slow start on climate change planning.  But, as with trains, late is better than never.

View of Trenton Amtrak right of way (c) Times of Trenton

Climate Change | Climate Change Effects | Flood Insurance | Regulation

Legislative Initiatives to Reduce Stormwater Runoff, Part 2

March 16, 2011 16:48
by Frank Kirk

Yesterday we discussed the proposed legislative response in New Jersey to the problems of flooding and stormwater management.  Some have speculated that increasing frequency and severity of flooding and stormwater is a by-product of climate change, and certainly these events are consistent with climate change.  Other studies have pointed to the decreasing amount of pervious cover in urban areas as increasing stormwater runoff.  Regardless of the causes, the problem is quite real.  Although the legislation is pending in New Jersey the problems are not unique to this State nor to the United States.  This post will examine another of the five companion bills.  This proposed law would have the greatest impact upon the design and development of private projects. 

A3680: Requires any projects subject to municipal land use approvals to incorporate green or blue roofs.
 
In New Jersey this bill would have the most wide-reaching implications for private development.  The bill would require that all new construction projects for which approvals are required under New Jersey’s Municipal Land Use Law, which would include most new construction projects in the State, particularly in developed urban areas, incorporate Green or Blue roofs, unless the applicant can demonstrate that it would not be feasible to build with such a roof. 

The bill further requires the Department of Environmental Protection (“DEP”) to develop, within one year, rules and regulations concerning incorporation of Green or Blue roofs to limit the release of stormwater runoff.  One interesting, but un-answered question, revolves around the statutory mandate that requires such roofs unless an applicant demonstrates to the DEP that such roofs are not feasible for a particular project.  This may be the result of the legislative sponsors failing to recognize that most municipal land use applications are approved at the local level, and not by DEP even though some projects require DEP approvals in order to receive municipal approvals.  Perhaps the statute should be revised to require an applicant to demonstrate to the body that is reviewing a land use application why it would not be feasible to build such a roof in accordance with the criteria established by DEP.

The bill provides an incentive for those projects that require some form of DEP approval because it requires the DEP give priority consideration to any permit or authorization that it must issue for a project that incorporates Green or Blue roofs.  This bill seeks to achieve compliance with the desired goal by using both the “carrot” and the “stick”. 

The motivation for this series of companion bills is certainly meritorious.  One of the sponsors of the bills, assemblyman John McKeon, set forth the rationale: “We know that there’s a problem with water discharge and an overburdened sewer system.  So green roofs and blue roofs are a way to systemically discharge water so that it goes out in a regimented manner and doesn’t end in the overflow that ends in all the problems that we have with pollution”.

Tomorrow, more about positive financial incentives for Green or Blue roofs.

Climate Change | Flood Insurance | Legislation

Legislative Initiatives to Reduce Stormwater Runoff, Part 1

March 15, 2011 08:53
by Frank Kirk

Yesterday I had a negative experience that caused me to think about some of the practical consequences of climate change.  Instead of taking my usual route home, I and many others were forced to use an alternate route because a major state highway was closed due to flooding from an adjacent river.  This condition will exist for several days, and its occurrence has been increasing in frequency and severity within the last ten years.  Worse than that inconvenience to me and other drivers is the flooding of homes and business that occurs with greater regularity in my area of New Jersey including the communities of Wayne, Little Falls, and Fairfield.

Is anyone thinking about potential legislative solutions to our storm water problems?  The answer in New Jersey is, “yes Virginia”.  Three primary sponsors in the New Jersey Assembly have introduced five companion bills that are aimed at improving our storm water management and greening our built environment.  We will examine each of these bills in turn over the next few days.  They could provide guidance to other States considering how to respond to this increasing problem. 
 
All of the proposed bills provide various incentives for Green roofs or Blue roofs.  A “Green roof” is one that includes, among other things, a growth medium and a vegetation layer of drought resistant and hardy plant species, designed to improve stormwater management.  A “Blue roof” is constructed with mechanical controls, such as gravel beds, perforated pipes, or rooftop detention systems, that drain stormwater to improve stormwater management.

A3679:  Requires incorporation of Green or Blue roofs on new State buildings

Bill A3679 would require any new building, facility or structure having at least 15,000 square feet in total floor area that is constructed for the sole use of a State governmental entity to include a functioning Green roof or Blue roof.

The bill directs the Division of Property Management and Construction to consult with the Department of Environmental Protection to ensure that designs for such roofs comply with this Act.  As currently drafted the law would be effective one year after passage, allowing appropriate lead time for all concerned parties to comply with this fundamental design shift.

A3681: Requires Green or Blue roofs on new buildings using State, EDA, or Schools Development Authority Funds

This bill is nearly identical to A3679 in terms of substantive requirements.  However, it expands the scope of the legislation to include any new construction projects that are funded by the State, or that are funded by the NJ Economic Development Authority, or any schools that are built through the Schools Development Authority.  The number of such structures that are built each year is almost always greater than the number of structures that are built for the exclusive use of State government. 

As the bill states, in most instances projects that use Green or Blue roofs will also achieve operational cost savings from increased energy efficiency.  The question that some might raise in this context, or with respect to other green building mandates, is whether the costs of construction to comply with the heightened standards will increase, thereby decreasing the number of projects can be built.  That is a topic of much debate that is beyond the scope of this series.  Tomorrow, more about the wide reach of this body of legislation.

Climate Change | Flood Insurance | Legislation

FEMA Flood Maps are All Wet - They Don't Consider Climate Change

November 2, 2010 19:52
by J. Wylie Donald

Last week brought another edition of the Flood Insurance Rate Maps. FEMA announced on October 29 that it was releasing new preliminary flood maps for Montgomery County, Maryland. Click here.

 It has been 14 years since the last flood plain map was created and the good citizens have seen substantial changes in that period. Montgomery County's planning arm sets forth in its 2007-2009 report that the population has boomed over the last thirty years with an anticipated increase of 14% this decade, the fastest growing in Maryland. Click here.

The effect of all this growth is telling. "Several factors—including sustained job and population expansion, declining supplies of greenfield space, and land use policies favoring in-fill and transit-oriented development—have reinforced this pattern of concentrated development in recent years. Growth, density and mixed-used development are transforming former commuter suburbs into increasingly more urban-like environments." So with all that change, re-doing the flood plain maps is necessary, and overdue.

Unfortunately, these maps are outdated even as they are issued. This is not simply because additional development affects them. It is because they do not consider climate change. This bears repeating. The FEMA flood maps do not consider climate change. And it is not just some blogger saying it. The Delaware River Basin Commission wrote in 2009: "Future development and the impacts of climate change are not taken into account during the development of FEMA flood hazard area mapping." Click here.

Why is this significant? One of the fundamental predictions of climate scientists is that climate change is going to deliver more extreme weather. In the Northeast, for example, there will be more frequent storms and more severe storms. It should be obvious that these will increase the frequency of flooding and the 100-year flood will now become the 50-year flood or the 25-year flood. As most know, the FEMA flood map shows the 100-year flood plain. Inside the flood plain, certain construction requirements are imposed, and flood insurance is required of all who would be involved in federal programs (such as loan guarantees from Fannie Mae or Freddie Mac). Outside the 100-year floodplain, neither condition applies. Accordingly, if the 100-year floodplain is inaccurately set forth, numerous properties just outside the erroneous line are more likely to be subjected to a flood than the occupant or owner anticipates, and are more likely not to have flood insurance.

If this sounds like a recipe for disaster, it is. The spring floods in Nashville caused over $1 billion in damage. FEMA reported only 100 National Flood Insurance policies in the the entirety of Davidson County (where Nashville is located).1 

Why so few? Because no one believed they were in the flood plain. This mentality is only going to get worse, particularly if FEMA publishes flood maps without pointing out that it is ignoring an undeniable substantial factor: climate change.

 

 

 

1 Jeff Casale, Significant losses expected after floods soak Nashville, Business Insurance (May 10, 2010).

Climate Change | Flood Insurance | Weather


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