Lapsed Flood Insurance
Hurricane Katrina destroyed Merlin’s house in August of 2005. About two weeks before Katrina hit, he had missed a deadline to pay a premium to keep his flood insurance policy in effect for 2005 to 2006. After Katrina, the Federal Emergency Management Agency extended a grace period of 90 days for paying premiums to keep policies in force.
When Merlin submitted a claim under the policy shortly after Katrina, his insurer told him that he would be covered and even sent a small advance check for the claim. Merlin had many telephone calls with the insurer’s representatives during this period, but none of them told him a critical fact: Any payments under the policy were conditioned on Merlin later paying the delinquent premium by the extended due date. When that date came and went without the payment having been made, the insurer demanded the return of its advance payment and told Merlin that he had no coverage.
Merlin sued the insurer for the state law claim of negligent misrepresentation. The insurer responded that such a claim was foreclosed, or “preempted,” by federal law. The insurer was relying on legal authorities stating that certain tort claims against an insurer participating in the National Flood Insurance Program are preempted. However, only tort claims arising from the “handling” of insurance claims are preempted. The federal appellate court considering Merlin’s lawsuit ruled that it could proceed.
When the alleged misrepresentation happened, Merlin only held the status of a former, and a potential future, policyholder. If the case was about a “claim” at all, it was a legally fictitious claim, because the policy had expired. Since his dispute with the insurer was really about whether he could even have a policy at all, Merlin’s negligent misrepresentation claim stemmed from the procuring of insurance, not from the “handling” of a claim.
Misrepresentation About Water Damage Is Not “Property Damage”
About a year after a married couple sold their home, the buyers sued them for fraudulent misrepresentation. The buyers contended that the sellers had falsely represented that the home had no moisture or water problems, no damage due to flooding, and no problems with its foundation. The sellers, in turn, asked a state court to declare that the carrier on their homeowners insurance policy was obligated to defend and indemnify them against the buyers’ lawsuit.
A state court ruled that the sellers’ insurer was within its rights to deny that there was coverage under the policy with the sellers. As with so many disputes over insurance coverage, the meaning of the terms used in the policy was crucial. The homeowners policy covered an occurrence that resulted in either bodily injury or property damage. An “occurrence” was defined by the policy as “an accident that results in damage.”
The court conceded that the commonplace use of the term “occurrence” in insurance policies generally has the effect of broadening coverage and removing the need to find an exact cause of damage, so long as damages are not intended or expected by the insured. However, the bottom line is that the occurrence must still stem from an accident.
An accident, by nature, is an unforeseen occurrence of an untoward or disastrous character, or, put a little differently, an undesigned sudden or unexpected event of an inflictive or unfortunate character. In the litigation against which the sellers wanted the insurer to defend them, the gist of the allegations was that the sellers had made false statements, not that they had caused property damage by means of an occurrence/accident.
The sellers would have to defend themselves without the assistance of their homeowners insurance company.