INSURANCE HISTORY: Great Fire of New York City 1835-Insurance Facts and Consequences

 

GREAT NEW YORK CITY FIRE OF 1835 AND INSURANCE

MICHAEL SEAN QUINN, Ph.D., J.D. Etc.

The fire struck lower Manhattan in the City's commercial and financial district on December 16, 1835. The area contained many packed warehouses. 

It was a very cold and windy night. The fire lasted into the next day. It simply could not be extinguished straightaway. People stood looking over the East River at Manhattan. The fire destroyed 600-700 buildings and 17 blocks covering 13 acres.  Fighting the fire in the then normal ways was impossible. It was so cold the firemen couldn't get the needed water hoses to the rivers--burned too fast. Still, firefighters tried to contain and leveled at least one building by blowing it up. (Of course, other warehouse buildings exploded on their own. The presence of saltpeter in a building can do that.)

Even the newly erected building of the Merchant's Exchange was destroyed. The city was growing and booming, partly because of the completion of the Erie Canal a decade or so earlier. So the fire didn't slow the city down much for long. 

Two interesting and contrasting facts regarding property insurance have grown out of the disaster. 

On the negative side, 23 of the city's 26 insurance companies were put out of business. Robert McNamara, "New York's Great Fire of 1835," THOUGHTCO (April 20121)[an internet source].

On the positive side, the President of Aetna informed its board of directors that the companies losses, anticipated to be $115,000, would likely exhaust its resources. Board members apparently asked the President what he intended to do. He is reported to have said, "I will go to New York and payout every dollar of our losses, and if the company runs out of money, I shall pay them myself." The directors apparently joined him in his commitment, and the rest of the story is lore, history, and well-done advertising. "The Great New York Fire of 1835 and the Marketing of Disaster," New-York Historical Society, http://blog.nyhistory.org/the--great-new-york-fire-of-1835-and-the-marketing-of-disaster.  (As one might imagine, Aetna publicized its act of business heroism for many years. See also F.C. Oviatt, "Historical Study of Fire Insurance in the United States," THE ANNALS OF THE AMERICAN ACADEMY OF POLITICAL AND SOCIAL SCIENCE, 155, 162 (1905)

Having nothing to do with insurance, it is worth knowing that the incident resulted in a number of solid catastrophe paintings well worth seeing, including several by Nicolino Calyo. Lewis P. Clover also created a terrific map.  These also were aggressively publicized, and much sooner than Aetna made its moves. 

Speaking of insurance and business history: 

one cannot help but wonder if this Great Fire did not have something to do with the Panic of 1837;

similarly, the third of New York City's "great fires" occurred in 1845, and it is said to have reconfirmed the building codes that the City has already begun to create pertaining to wooden buildings.

Of course, none of this has really anything to do with the wartime fire which occurred in the City during the American Revolution, each side accusing the other side of arson. This happened before there was much fire insurance in America, although Ben Franklin had imported it 25 or so years before.

Finally, maybe the oddest insurance-related fact at all arose out of the famous and deadly Triangle Shirtwaist Factory Fire of March 25, 1911 (4:30 pm Saturday afternoon). This fire involved the death of 143 garment workers on several upper floors created huge scandals of several sorts, and is "celebrated" to this day as a key moment in the "progressive" fight for the rights of workers and the downtrodden. None of the many accounts of this disaster says anything about insurance on the building that partially burned or worker's comp insurance, or something like it, on the lives and injuries of those workers, 123 of whom were women and girls.  One wonders why not. 

Michael Sean Quinn, 1300 West Lynn #102, Austin, Texas 78703, mquinn@msqlaw.com

Insurance History--Property Insurance Starts in American: Did Ben Franklin Hate Trees?

 

DAWN AND GROWTH OF AMERICAN PROPERTY INSURANCE

Michael Sean Quinn, Ph.D., J.D., Austin. Texas

More or less, everyone knowing anything about insurance knows that in the 1750s Benjamin Franklin cooperated in creating the first (or among the first) fire insurance company and the first (or among the first) life insurance companies in American. The content of the fire insurance policy is less known. It is certainly one of the earliest examples of a hazard in the face of which an insurer would refuse to grant coverage. 

The context was this. There were citizen volunteer fire fighting groups. There were also fire fighting companies that went forward on the basis of using a sort of volunteer. Both types preexisted fire insurance. Owners of dwellings would pay companies to render fire fighting services should such a disaster happen. The various companies would have "marks" places upon the houses they would service. Levels of cooperation developed between the first insurers and the fire fighting companies. 

Franklin's company, Philadelphia Contribution was a conceptual outgrowth of London's Hand-In-Hand Insurance, and its mark resembled its origin, the mark being hand clasped together. 

in 1781, toward the end of the American Revolution, a number of years after its foundation, Contribution decided to refuse to issue insurance on dwellings that had trees growing in the front yard, according to one source. The reason was that the directors believed that the hazard of having a tree present in the front yard of a building would make it more difficult to fight a fire, and this would increase the size of the loss amount to which the damaged insured might be entitled. If the premises upon which this underwriting decision was made, then it might be a sound judgment, of course.  Remember, Contribution's decision-makers were working without statistical and probabilistic information or techniques.

 This was not a popular decision. Consequently, in 1784 the Mutual Assurance Company grew out of this social fact. It would insure exactly what Contribution would not. Its mark was a green tree cast in lead, fastened to a shield-shaped board attached to the front of a covered house.  (The use of insurance marks had already been around for this purpose in England for some time, and on the continent as well, though for different reasons. Obviously, this pattern of usage is a remembrance of the use of marks that is familiar from the Book of Exodus.)

The company of "Scientist Ben" has lasted down to the present day, my research shows. Mutual Assurance lasted for a very long time as well, says my source. There does not appear to be a history as to how and/or how well either of these companies performed their adjustment functions given their underwriting decisions. I have the impression that Contribution gave up its anti-tree position as time went along. 

See F.C. Oviatt, "Historical Study of Fire Insurance in the United States," 335-36 ANNALS OF THE AMERICAN ACADEMY OF POLITICAL AND SOCIAL SCIENCE (Sept. 1905) 

Michael Sean Quinn, 1300 West Lynn #102, Austin, Texas 78703, mquinn@msqlaw.com

Insurers' Cancellation of Home Owners Insurance -- Mold Claims Insurance Crises

 

FARMERS GROUP,  INC. v. GETER, TEX. SUPREME COURT NO. 19-0996, DECIDED APRIL 9, 2021

* * * *

TEXAS MOLD CLAIMS YEARS 2000+ CREATED STATE-WIDE INSURANCE "CRISIS": A NEARLY FINAL DECISION

MICHAEL SEAN QUINN, Ph.D., J.D., ETC.

        Beginning in 2000 the number of mold claims made by Texas homeowners increased sharply. The insurers lost a good deal of money paying these claims and decided to get out of that part of the property insurance business. The Texas Department of Insurance consented to this withdrawal, although the insurance industry didn't handle it quite right. 

    Very roughly speaking, the case to be discussed here was filed in 2002 was a class action brought by homeowners claiming that various insurers could not refuse to renew their homeowner's policies because of having had to pay a huge number of mold claims. 

    The procedural history of this case was a nightmare for all but a special species of eccentric, litigation- aficionados, insurance-loving coverage lawyers. I shall ignore the procedural details of the case, since it involved many twists and not a few turns, as well as hundreds and hundreds and hundreds of pages filed in courts, not to mention thousands of documents produced in discovery or as appendices to briefs, etc. 

    In the end, the now nearly 20-year-old case was really an almost simple breach of contract case, and that aspect of it is the only one to be discussed here.

    As already indicated in the headline hereto, there was an "avalanche" of mold and other water damage claims starting in around 2000 and a bit before. The insurance companies all operated off the same policy form approved and required by the Texas Department of Insurance. The companies sustained so many losses that they decided to get out of this business using the then approved "all-risk" form. Instead, they began using a "named-peril" form approved by TDI. It did not cover the kind of risks upon which it was losing so much money. 

Observers who remember this era may recall that insurers and lots of others believed that many of the claims being made were lacking in merit but that enterprising plaintiff's lawyers were pursuing a high volume of such claims because they knew (or thought they knew) that homeowners' insurers would settle a high volume of these small and smallish claims, if for no other reason than the fact that the price of adjustment can be high, as can the cost of litigation, even if the homeowner bears the burden of proof. 

Besides, if the companies even reasonably resisted paying such claims in mass, the industry knew that the industry would suffer big-time in the court of public opinion, and it was surely right about this, even if the prevalent claims practices were sloppy and this was part of the problem.

Hence, with TDI approval all the relevant insurers decided to "bail." In other words, they stopped selling a certain kind of homeowners insurance policy, namely HO-B, to anyone. In response, a class action was filed claiming, among other things, that the insurers were breaching their contracts of insurance with an enormous number of policyholders. It is upon that litigation that this blog shall focus. 

(A book should be written about the political and legal history of this case and its sister suit regarding insurer pricing. It was and remains a paradigm of the ironic aphorism that the wheels of justice grind very slowly. Then again, litigation lovers cheer the result and hold the time required a positive testimony to American ideals.

I shall ignore what had happened in the district court and in the court of appeals and shall discuss the decision of the Supreme Court only, even though some of the things said in the lower courts were clever, resourceful, and interesting. (The brief of the insurers and its appendices to the Supreme Court were longer than 150 pages.)

The class-action plaintiff focused on the "Refusal to Renew" section of the policy--Section 6 in the "Conditions" section of the policy.

Section 6a says this: "We may not refuse to renew this policy because of claims for losses resulting from natural causes."

Section 6d says this in part: "If we refuse to renew this policy, we must deliver to you, or mail to you at your mailing address shown on the declarations page and any mortgagee named in the declarations page, written notice of our refusal to renew not later than the 30th day before the date in which this policy expires.... If we fail to give you proper notice of our decision not to renew, you may require us to renew the policy."

What happened was that the insurers decided not to renew any of the HO-B policies everywhere in the state. 

There were two issues about this in the case under discussion. 

The first one was whether Section 6a can be interpreted as follows: "We cannot refuse to renew this policy on the basis of any claim property damages resulting from natural causes where more than one such claim is made under any HO-B policies." (The exact language set forth here is mine. The same is true as to the emphases.)

If Section 6a is read narrowly and quite literally by itself, Geter's argument that the policy language was ambiguous is not absurd. Indeed, taking the one sentence out of the context of the whole policy, there might be an ambiguity making the insureds' position the one that must be adopted. (Often where there ambiguities, the insured triumphs over the insurer. The same should be true, at least in theory, in a class action involving many insureds and several insurers.)

The Supreme Court would have none of it. The Court's opinion pointed out that when the meaning of form policies are created and/or approved by TDI, the classic ambiguity rule does not apply. Moreover,  in interpreting all contracts, including insurance policies, the law (i.e., a court) must look at common usage whenever possible, especially under circumstances like this one. As a matter of common usage, the phrase "this policy" is tied to the language found in the insurance policy before the court and not what has happened with other policies. The word "this" refers to the exact policy ostensibly covering parties to the contract, and not others.

(To put the matter slightly differently, if A is the insured, it will be the exact language to be found in his/her policy that is interpreted, and not the language to be found in a policy issued to B, a person or entity not insured under A's policy but a different one. Not even the fact that B has a policy nearly identical to that of A is relevant. The phrase "this policy" refers to the contract of insurance issued to A--the one to which A is a party.))

Next, the Court's opinion took up 6d, the "Required Notice Section."  Roughly the same argument arose. According to the opinion, "Geter argue[d] that Farmers did not give 'proper notice'   [of its decision not to renew] because its notice cited statewide losses from mold claims which she consider[ed] an impermissible basis for non-renewal." But, said the Court, this argument depends upon Geter's having a correct interpretation of Section 6a, which she did not. 

Thus, the entirety of this (perhaps) billions of dollars case turns on the meanings of the word "this" considered in the social and economic context of this case.  

Hence, the Court reversed the key issue before it. (The Court also remanded the case to the trial court for decision are a different issue, having nothing to do with the insurance issue central to this case.) 

In all fairness, it must be said that only lovers of subtle semantics and its connection to contract interpretation can truly appreciate this result. A true "progressive" might be more inclined to see this decision as hinging on sophistry. Then again, aren't disputes regarding contract law often like this?

Law Office of Michael Sean Quinn
1300 West Lynn, #102
Austin, Texas 78703
(512) 656-0503
mquinn@msqlaw.com

ARE COVID PANDEMIC BUSINESS INTERRUPTION LOSSES INSURED?

 

THE WELL-KNOWN CULINARY DATING WHILST SIPPING ESTABLISHMENT, "MIKE'S MEET MARKET," IN AUSTIN, TEXAS TOOK A TERRIBLE PROFIT-WHIPPING IN 2020 AS A RESULT OF THE COVID PANDEMIC.  MMM HAS SIZABLE STANDARD FIRST-PARTY PROPERTY AND BUSINESS INCOME COVERAGE. 

DOES MIKE'S HAVE COVERAGE FOR THIS LOSS?

Michael Sean Quinn, Ph.D., JD* 

*Quinn & Carmona

1300 West Lynn, Suite 102 Austin Texas 78703
PO Box 162344  Austin Texas 78716
(o) 512.768-6840
(f) 512.768-6842
(q-c) (512) 656-0503
(email) qclaw-adr.com
(another email) mquinn@msqlaw.com 

Present answer: Don't know. Hard to tell. No rock-solid, damn-certain Texas precedent. Lots of business, economic, political opinions floating about, some posing as obvious and therefore pseudo-certitudes. Everybody knows this. 

Any case decisions anywhere that might give some clues? Yes, but--alas, as one might expect--they are going both ways, though most are saying, "No such coverage."

Here's an unusual example: In re Society Insurance Company, COVID-19 Business Interruption Protection Insurance Litigation, MDL No. 2964 (N.D. Ill., February 22, 2021).

*Quinn & Carmona

1300 West Lynn, Suite 102 Austin Texas 78703
PO Box 162344  Austin Texas 78716
(o) 512.768-6840
(f) 512.768-6842
(q-c) (512) 656-0503
(email) qclaw-adr.com
(another email) mquinn@msqlaw.com 

INSURANCE AGENT LIABILITY AND BAD FAITH

 

INSURANCE AGENTS & BAD FAITH LAW

Michael Sean Quinn, Ph.D., J.D., C.P.C.U, Etc.

VERY BRIEF SUMMARY

 

Under Texas law, retain insurance intermediaries are not normally held liable for insurance bad faith, if for no other reason because insurance agents and their customs do not usually have the "special relationship," as it is known in Texas law. As is often the case, there may be exceptions. The Supreme Court of New Hampshire has come up with a new idea with might be helpful to (or have a potential impact on) Texas jurisprudence.  It has held that sometimes some insurance intermediaries do have a duty of good faith to their customers, although, usually, it is "merely" a typical merchant-customer relationship. 101 Ocean Blvd., LLC v. Foy Insurance Group, Inc., et al,  2021/2021011 (N.H. March 19, 2021).

 

MORE DETAILED DISCUSSION

 

Setting aside the rarity of bad faith playing a role in breach-of-contract cases, the Texas insurance law of bad faith does not apply to insurance agents of various sorts, aka insurance intermediaries.  

Even the law of negligence--insurance intermediary malpractice--is applied narrowly. Often it is thought of this way: insurance intermediaries are not liable to customers on theories of negligence except when a customer has asked for a particular type of policy or a policy with certain, specific provisions, and the intermediary has failed to provide it, though it was available.  This provision of the law would not be triggered if the agent reasonably attempted to find it but could not, so long as the relevant information was provided to the customer within a reasonable period of time. 

Given the way the idea of insurance bad faith is thought of in Texas law, the non-inclusion of intermediaries is sensible. The policy underlying insurer bad faith--the existence of "the special relationship"--hinges on the power and superior knowledge of insurance companies when compared to their usual insureds. 

Some have doubts that the terminology developed to refer and quasi-describe insurers' obligation of good faith to insureds, the phrase "special relationship," is really informative or is a rhetorical device.

 The locution "special relationship" does not fit with most intermediaries most of the time.  Moreover, insurance intermediaries, many of them small businesses, should not be continually subjected to questionable lawsuits, as they might well be if the applicable law of negligence were conceptually looser as to them than it now is.

The Supreme Court of New Hampshire, however, has come up with a new idea the subtlety of which might be of interest to Texas jurisprudence. That court has held that sometimes some insurance intermediaries do have a duty of good faith to their customers, although, usually, that relationship is a typical merchant-customer relationship. 101 Ocean Blvd., LLC v. Foy Insurance Group, Inc., et al,  2021/2021011 (N.H. March 19, 2021)

There were a number of different issues in this case. My sole interest pertains to the court's holding that there is such a thing as insurance intermediary bad faith. It was a split opinion, on one of the issues decided but not this one. (The "splitting point" pertained to proof of damages, an important, independent issue in and of itself.)

In any case here is the central point about the case for this piece.

Albert J. Bellemore, Jr., a local real estate developer, etc, bought the relevant building in 2006. It had been build in the 1920s. Since the early 2000s he had purchased insurance from the Foy agency on several properties. Several years, Bellemore had worked with someone from Foy about how much insurance was needed for the 101 Ocean Blvd hotel.

In 2014 Bellemore increased its coverage, included replacement cost coverage, and, at the behest of his agent,  moved from Lloyds of London to AIX Speciality Insurance, a surplus lines carrier connected to Hanover Insurance. 

The AIX policy provided $10,000 law and ordinance coverage, a sort of clause designed to cover the costs in building restoration while complying with the applicable law and ordinances.

In 2015 the hotel was badly damaged by a fire. At first, Bellemore wanted to rebuild. The up-to-date building code as regards a building like this one was elaborate and stringent. The amount of the needed coverage in the AIX policy way, way, way too small. The cost of rebuilding would be $1.1M, in and of itself, and conformity with laws and ordinances would cost another $905,070 to comply with the current building code. Bellemore decided to demolish the structure, AIX paid $910,141.

Bellemore/101 Ocean sued the Foy company for the amount the policy should have included. The basis of its lawsuit was insurance-agency bad faith. To prevail on this the insured-plaintiff had prove that there was a "special relationship" between the agency and the customer, the insured. As the Court recognized, there was precedent for this view, Sintros v. Harmon, 148 N.H.478, 481-82 (N.H. 2002). In that case, the court held that an insurance agent has "an affirmative duty to provide advice regarding the availability of sufficiency of insurance coverage, [but] only when an insured justifiably relies upon a 'special relationship' with the agent."

The trial court instructed the jury as follows with respect to a "special relationship": 

"The general duty of care does not include an affirmative obligation to give advice regarding the availability or sufficiency of coverage.

"However, the existence of a 'special relationship' between the insurance agent and the client may impose upon an insurance agent an affirmative duty to provide advice regarding the availability or sufficiency of insurance coverage. An insured can demonstrate...a 'special relationship' by showing that there exists something more than the standard insurer-insured relationship between the parties.  This depends upon the particular relationship between the parties and is determined on a case-by-case basis. Examples include an express agreement between the insurance agent and the client, a long-established relationship or entrustment in which the agent clearly appreciates the duty of giving advice, the paying [of] additional compensation apart from premium payment, and the agent holding himself or herself out as a highly-skilled expert coupled with reliance by the insured. Also, a 'special relationship' between the parties may exist when the insured relies upon the agent's offered expert [advice[ regarding the question of coverage, or when there is a course of dealing over time putting the agent on notice that his or her advice is being sought and relied upon. If a 'special relationship' exists between the parties, the Plaintiff must demonstrate not only the existence of the relationship, but also that he or she was justified in relying upon the relationship."

The trial court also instructed the jury in detail about the nature and characteristics of applicable building codes as well as the nature of law and ordinance coverage. 

In any case, the jury verdict and the judgment of the court favored the insured. The Plaintiff and the agency had a long, close relationship that involved the giving and the following of advice.  The insured was taken to have proved causation and damages, and so was awarded a substantial sum, and the supreme court affirmed.

(As already indicated, there was a dissenting opinion but it had nothing to do with the nature of insurance bad faith as applied to agents but had only to do with proof of causation, an interesting topic

to be sure, especially given the case cited by the dissenting J. Emer's Camper Corral, LLC v. Alderman, 943 N.W.2D 513 (Wis. 2020). 

Michael Sean Quinn, Ph.D., J.D., C.P.C.U. Etc

1300 West Lynn

Austin Texas 78703

mquinn@msqlaw.com

(512) 656-0503

 

 

 

 

 

Cannibis & Insurance

 

SOME DOPE ON CANNABIS COMPANIES & COMMERCIAL INSURANCE 

Michael Sean Quinn, Ph.D., JD, CPCU, Etc..

Austin, Texas Attorney, Mediator, Consultant, & Expert Witness

  The recreational cannabis industry is now huge. Growth is growing; logistical consulting companies are replacing hippies as advisors on transport; jokes about greenhouse gasses are aplenty; government subsidization is being discussed among "ag-lobbying" business developers; federal law enforcement doesn't really know what to do.  

    New York state has also apparently legalized reactional consumption. Texas is far behind, but there are those who believe that the vacation trips of some Texas politicians to cannabis country indicate their inclinations. 

    Surplus insurance markets are going to attract substantial premiums, but this may be problematic, since they do a good deal of business across state lines. Also, some of these "progressive" companies are located in states that have not yet legalized consumption for having fun. Ohio seems to be like this but the press reports (or carries ads to the effect) that "l821 Insurance" and "Continental Heritage Insurance Company" are located there. 

    Of course, no state needs to legally prohibit local insurance agents, surplus lines wholesalers or MGAs from selling cannabis coverage whilst stoned.

    Of course, the principal types of insurance will be commercial auto, CGL, inland marine, D&O. Of course, there will be D&O but I am not sure how some of these policies will work where weed is being hauled across state lines. 

*******

Mr. Quinn's email is mquinn@msqlawcom, his phone is (512) 656-0503, and his address is 1300 West Lynn, Austin Texas 78703. Short and Long Resumes can be easily found on the Internet. 

PRICE OF FLOOD INSURANCE GOES UP FOR MANY

 

MAJOR CHANGE IN FLOOD INSURANCE PREMIUM PRICES (2021-22)

MICHAEL SEAN QUINN, Ph.D., J.D., C.P.C.U. Etc.*

FEMA (the Federal Emergency Management Agency) has indicated that hundreds of thousands of persons and entities owning property in flood zones will pay substantially more for property insures than they have been paying for years. Its new method of determining premiums will be phased into the National Flood Insurance Program (NFIP). 

It appears that wealthy homeowners will bear the brunt of price increases, and some of more modest means may get a reduction. FEMA has said that the premiums on at least 200,000 policies will increase by at least 4%, though 1.15 million owners will pay loss, FEMA has said that this will be more equitable pricing.  (Property owners of limited means might wish to "check" with their agents, since some might say that it is not in the interest of agents to simply reduce prices.)

New policies will be governed by the new calculative methods on October 1, 2021, while existing policies will be affected beginning on April 1, 2022, according to FEMA.

NFIP needs money. It has been around a while (since 1968); it provides $1.3 trillion in coverage through more than 5 million policies. NFIP has been losing money for quite a while now and is in the red for $20.5 billion. 

It has been reported that this is the first increase in relevant premium prices in 50 years.  If NFIP has been losing billions of dollars for quite a while, this fact entails that it has been subsidizing some people and some persons more than others. If so, then it is virtually certain that high-powered lobbying has been active for a long time.  One wonders for whom the lobbyists are advocating? Some radical left-wing progressives like AOC might advocate that it was not those of more modest means. 

A nonprofit foundation that keeps track of flood insurance prices has estimated that the average price of annual insurance premiums in flood zones for flood insurance will nearly $8000 per year--$7895 to be precise. It is not clear whether this outfit has a political orientation. 

Obviously, this whole matter is important to the coastal regions of Texas, especially since some major property insurance companies are pulling out of this market.  Imagine! Some say that climate change aka global warming is a hoax.

********

*Michael has practiced insurance law for nearly 40 years, has written and lectured on it many times, has taught it in two Texas law schools, and has appeared as an expert witness many, many times. His "Long Resume" can be easily found on the Internet, as can a shorter one.  More recently, he has taken up mediating insurance disputes through the firm of Quinn and Carmona.  

INSURANCE AGENT BAD FAITH LIABILITY

 

INSURANCE AGENTS & BAD FAITH LAW:

SHORT, "EXECUTIVE" VERSION

Michael Sean Quinn, Ph.D., J.D., C.P.C.U, Etc.

VERY BRIEF SUMMARY

 

The Supreme Court of New Hampshire, however, has come up with a new idea with might be helpful to Texas jurisprudence.  It has held that sometimes some insurance intermediaries do have a duty of good faith to their customers, although, usually, it is a typical merchant-customer relationship. 101 Ocean Blvd., LLC v. Foy Insurance Group, Inc., et al,  2021/2021011 (N.H. March 19, 2021).

For a more detailed discussion of this case click here.  

COVID-19 and INSURANCE: VERY ODD-LOOKING INSURED LOSS

 

       COVID-19 ENTERTAINMENT LOSSES

                                                            Michael Sean Quinn, Ph.D., J.D., C.P.C.U., Etc

                                                                                          Austin, Texas 

Lloyd's of London has indicated that it expects to pay out 3.4 million pounds in 2020 COVID-19 claims, net of reinsurance, and a representative of the syndicates has stated that many of those payments will result from the cancellation of major events, for example, the Wimbleton tennis tournament. The same source predicts these losses will continue into 2021. 

But also consider the Suez disaster and its aftermath. Suppose a band's prize trombone was on one of those nearly 400 ships stranded. What about its being a ship the was stuck in a U.S. port, say, L.A. or Long Beach because world sea traffic was jamed 

Source: CLAIMS JOURNAL, March 3, 2021. 

This kind of insurance is not at all odd in the entertainment industry. Sometimes concert sponsors, producers of plays, movie studies, etc. are the named insureds. Sometimes the performers are the principal insureds. Occasionally ticket purchase-and-then-sales businesses are the named insureds.  Of course, there can be all sorts of additional insureds, e.g., lenders or financiers.

In any case, so much for the false cliche that covid-19 triggers few covered losses. Obviously, adjusting these claims is not for less than the best, financial adjusters and examiners. Those familiar only with hail claims need not apply.

Moreover, what is odd about this form of insurance today is that it will cover some claims made because of the Suez blockage.

******************************************************

The author frequently serves as an expert witness in insurance cases, some of which involve evaluating the performance of professionals, and also accepts cases focusing on insurance dispute litigation.   He can be contacted at mquinn@msqlaw.com and at (512) 656-0503.

SUEZ SHIP DISASTER OF 2021 & INSURANCE

 

 

THE SUEZ CANAL SHIP DISASTER & INSURANCE:
Early Chapters

Michael Sean Quinn, Ph.D., JD, CPCU, Etc.

Austin, Texas Attorney, Mediator, Consultant, & Expert Witness

Interestingly, as of 6:00am, Monday, March 29, 2021, CDST, 400+ ships were floating idly, and a fair number of the stranded ships carried petroleum, spillage of which would be pollution. By late Monday, the ship, the Ever Given, had been loosened from the sand and rocks, and all dredgers had to do was get hundreds of thousands of cubic feet of sand out of the way. The ship, the Ever Given, ran aground on March 23, 2021. 

The NYT has called this the "most consequential shipping accidents in history[.]" "Full Moon and High Tide Free Suez Tanker" A12 (March 20, 2012). According to the trade journal INSURANCE JOURNAL's March 26, 2021 piece, "[s]hipping rates for oil product tankers...nearly doubled after the 200-meter,  1300-foot, 430-yards long Ever Given ran aground... [at least in part] due to strong wind." One such set of rate increases appears to be for petroleum products not even those going through the canal: bound from Tuapse (Russia on the Black Sea) to Southern France. Over several weeks after the accident, ports all over the world were backlogged partly because of what happened to the Ever Given.*

[*One odd thing. In the press, the ship has usually called the "Ever Given. Indeed, there has been some sneering at those who called it the "Evergreen."Today, in an AP release found in the press on June 23, 2021, in a picture on the story-site of AP-NEWS, there is a huge sign on the side of the ship that says "EVERGREEN." For now, I will follow the popular and received though odd usage, "Ever Given." It is now being reported that "Evergreen" is the name of the operating company and "Ever Given" is the name of the ship itself. So, I guess, the huge name of the side of the ship is a form of advertising.]

 

There is already considerable discussion about the role of cannabis in the global just-in-time disaster caused by "diagonalization" of the ship, the Ever Given, that ran aground in the Suez Canal on March 23, 2021. (That, however, is for a different story.) Groundings are the most common sort of major accident in the canal, and in this case, there was both considerable dust and wind. There were also very high tides, which have helped get the ship loose now, but high tides are intermittent with low tides, often the former are followed by the latter.  (Even the fullness of the moon was relevant to get-it-loose decision-making.)

Whether the "pilot" of the vessel and/or its captain or other officers were stoned, drunk, sleep, playing cards, or something else, may be less interesting than the number of ships, 360 or so, which have been "stalled" as a result of the canal's having been rendered impassable.  Then again, maybe not, depending on how much liability insurance the operating company has. The operator, as well as the owner, may face enormous liability.

The ship is a quarter of a mile long and probably the largest - or nearly the largest - container ship ever. It has no doubt suffered damages.  The ship carried 18,300 containers, according to INSURANCE CLAIMS JOURNAL (April 14, 2021). Given its size, it is no wonder that it damaged the canal itself, some of which can be repaired quickly, other of which cannot.  Although the vertical size of the ship when loaded is 6 stories, at least, that size boggles many a mind.

As to damage to the ship itself, the dredging process caused the center of the ship to sag, while the bow and stern were lifted. Obviously, some of the giant dredging equipment will suffer some physical damages, and it would be amazing if there were no bodily injuries suffered, for example, by persons trying to get the Ever Given loose. All sorts of insurance professionals, among many others, were involved in this process.  In the more remote aftermath, many insurance professionals will be involved in investigating losses amongst dredgers and tugboats. According to an April 5, 2021 piece in INSURANCE JOURNAL five new tugboats have been ordered from a Chinese company.

The number of idle ships, of course, has financial consequences for world trade: goods don't arrive on time; Just-in-Time systems are undermined; revenues are cut, profits diminished, customers lost, new customers not sign up, and so forth. Syria is having to ration oil on a national basis, and shipping companies are taking seriously the idea of utilizing arctic shipping. European ports will be "welcoming" many more ships per day than usual, and there may be some petroleum shortages. Keep in mind that the Canal gives route to 13% of global maritime trade and 10% of ocean-bound petroleum shipments.  Interestingly, some of the ships were carrying livestock, and food, water, and vets have had to be rushed to them.

Ultimately, the insured losses will be quite large, especially when the losses of the huge number of trapped vessels are included.

Insurance claims have begun; adjusters have already arrived in Egypt and wherever the ship owners and operators have relevant offices. (The ship appears to have been owned by a Japanese shipping firm, Shoel Kisen KK, and operated by a Taiwanese company, Evergreen Marine Corporation.) Lawfirms have been hired; their research has begun; associates have begun looking into who will be parties to lawsuits and demands for arbitrations. Coverage lawyers are opening their "Maritime Subrogation" files. Divisions of "High Tech" companies are adapting whole banks of algorithms. 

Teams of investigators–some private, some public–have also shown up at various places to try and determine what containers contain goods being smuggled and the identity of those goods. Even drugs are being smuggled these days, the principal once being cocaine. Insurance companies also care about this sort of thing, given relevant exclusions.

There will probably be some pollution claims. The first one that occurs to me is "What besides water flowed out of the ballast of the Ever Given when it was drained, probably only in part?" Interestingly, the Ever Given will be dragged to Great Bitter Lake north on the 120-mile canal. I suspect that there will be pollution there too. (If any of the ships carrying livestock like cattle were already in the canal itself, there is certain to be a certain type of pollution. This is true even if those ships were just outside the canal.)

Obviously, there are huge amounts of insurance and reinsurance for this whole set of events, though probably not enough to cover the whole thing. Billions of dollars–$10-15B, at least–will change hands or be contested, loss negotiations have already begun, experts of marine catastrophes have arrived or on their way; salvage companies have people there; arbitration letters have been issued, and probably lawsuits have been filed in what is thought, by some, to be favorable jurisdictions.  In thinking about the coming insurance controversies, it must be kept in mind that there will be diverse exclusions as well as coverages. The suit is brought against Evergreen Marine Corporation, the charterer and operator of the ship Ever Given, and everyone else that might seek damages. [Which is is: "Ever Given" or "Evergreen"?]

Indeed, lawsuits began not long after traffic resumed. The ship's owner filed suit on April 1 in London's High Court seeking limitation of liability. Of course, insurers were involved in this plunge, as they will be for the next several years.

It will turn out that there are dozens and dozens of policies relevant. UK P&I Club has stated to Reuters that it has coverage, so it is likely that its policies are reinsurance by the International P&I Group of P&I Clubs. Interestingly, these companies seem to be non-profit mutual companies owned and utilized by members of the relevant parts of the shipping industry. "Insurers Face Host of Claims On Delays," WSJ, A6, 3/29/2021. According to this article reports that the damages against the owner will exceed its $3.1B in coverage. (Of course, some shipping companies will file against their own insurers first, and then the owners, as well as the operator, and yet others.)

There are also uninsured losses.  The president of Egypt, for example, has come under considerable pressure to get the canal working again, as have those who run the Suez Canal Authority.  Their mental anguishes are unlikely to be insured. One wonders whether wage and anxiety losses for those waiting aboard ships will be compensable. 

The accomplishment of refloating the Ever Given has been good for almost everybody. If Plan B had been compelled, it would have been necessary to use and perhaps install cranes and lift off all the 18,000  containers, one by one, each weighing 40 tons or more. 

As is not unusual, political figures have stated that their facility and equipment were not at fault. This time it's the canal is "known" apriori, to be innocent, according to important Egyptian political authorities. No matter that there has been no completed investigation. No matter that the Ever Given faced extraordinary high winds and dust. What about the Egyptian pilots who were supposed to board the vessel and help guide it? What accounts for the "bank effect" in this case?

One interesting question is "Who will be in charge of the investigation?" The ship flew the Panamanian flag. It was in Egyptian territory. The United States is often brought into investigations of this sort. My guess is that all these powers plus the EU, especially the Dutch, will be involved and that the politics will be firm but relatively quiet. 

By April 5, 2021, Egyptian authorities had indicated that it might seek a billion dollars in damages or compensation to it, presumably for "floating" the Ever Given, which is now "resting" in Great Bitter Lake, a bit north of where it ran aground. The ship is still "maned" by the Indian crew of 25 that was with it when it went aground. "Egypt Asks Ship Owner for $1 Billion," WSJ B3 (Friday, April 9, 2021). The Egyptian authorities will not let it sail away until an agreement as to compensation for the Egyptian government and Suez Canal Authority has been reached. Egypt has started by demanding $1  billion from the ship's owner. Some of the claims are for physical damage; some is for $95 million in lost transit fees. (Of course, if the ships stranded pass through the canal, some of those transit fees won't actually be lost to the Canal Authority.)

Reportedly a key insurer made what it described as a "generous offer" on April 12th. It also stated that much of the Suez Canal Authority's demand was unsupported. Apparently, this includes a $300m "salvage bonus" and another $300m for "loss reputation." On April 15, 2021, the Ever Given remained "arrested," in a Lake which is part of the Sue Canal system.  INSURANCE CLAIMS JOURNAL April 14, 2021. According to Jai Shama, a lawyer at Clyde & Co., it is surprising that a claim could be quantified this quickly  

"Accidents involving large container ships can cause property claims of over $1 billion each, according to the credit-ratings firm Fitch Ratings. Insurers covering the Ever Given will act on claims over losses related to perishable goods and supply-chain disruptions," as well as claims from branches of the Egyptian government. Id.  (This strikes me as a very low estimate if reinsurers are counted as insurers.)

Initially, many amateur observers thought that the main damages that were not physical were (or would be) suffered by shippers immediately blocked from the Suez passage. That is not the case. Ports all over the world are bottlenecked to some degree--some more than others. Ports on the west coast of the United States can't clear themselves for two months or more reports the CLAIMS JOURNAL in its April 8, 2021. Its article asserts that these are not losses for which there is coverage. (Well, maybe so, maybe not. Maybe some, but maybe others are different.) Not all reports are the same, however. On April 16, 2021, NYT reported something a bit different. regarding the U.S.  "[T]he nation's ports are handling record cargo volumes s consumers stock up March was the busiest month on record for the Port of Oakland, while the Port of Los Angeles, the main point of entry for good from Asia, said the first three months of the year were the busiest first quarter in its 114-year history." Sydney Ember et al, "Economic Pace Hints Rebound Is on Horizon," NYT A-1. (Of course, one needs to keep in mind that shipments from Singapore to L.A. do not use the Suez Canal, through entities up the supply chain might.)

One must concede that there is a "romantic" piece of this story. One reason the ship was effectively floated was that the tide was particularly high on two key days. This was true not just because the moon was full but because it was a "supermoon," as it will be whenever–but only whenever–the full moon is at the closes point to Earth in its elliptical orbit. It causes tides in the Canal to be as much as 1.5' higher than when there is just an ordinary full moon." (The first supermoon of the year is also known as the "worm moon," though I doubt this will have any influence on the insurance claims process. Probably, the unusual tides in the canal at the time of the accident will matter when it comes to evidence, but the presence of worms will not.)

Too bad there is unlikely to be any jury trials anywhere. The idea of a jury thinking about a full supermoon is intriguing, to say the least.  Then again, we must all wake up to the realities of speedy negotiation. As of April 26 crew members of the Even Given are now free to leave the ship, so long as the captain remains on board. The Chairman of the Suez Canal Authority seems to be saying that "ordinary" crew members were always free to leave. Only two have left, so only 23 such individuals--all Indian nationals--remain on board.* Yusri Mohamed, "Suez Canal Chief Hopes Insurer, Owner of Detained Cargo Ship Reach Deal," INS. J. (April 26, 2021). Of course, one may wonder if any sane person in the Chairman's position would say anything else. Consider the following headline "Canal Chief Hopes That Boat Owner, All Insureds, All Insurers, All Reinsurers, and Nearly All Important Iranians, Will Publically Agree Soon That the Earth Is Not Flat."

*Recently, the Syrian first-mate on a cargo ship impounded-for-debt has retained on board "his" ship for several years, in waters near the Suez Canal. See "Trapped On An Abandoned Ship: A Sailor's Ordeal," WSJ A1 (May 1-2, 2021). I wonder if there is not some sort of lawsuit he might have against somebody? In U.S. it might be intentional infliction of emotional distress. And what about insurance?

CONTAINERIZED SHIPPING--SOME HISTORY

For a sketch of the short history of containerized ocean shipping–last 40 years or so–see “Why Cargo Ships," NYT, Biz p.B1 (March 31, 2021). Did you know that using these sorts of ships in New York harbor required the Port Authority of New York and New Jersey to "spearhead a $1.7 billion project to raise the Bayonne Bridge to accommodate mammoth ships laden with cargo from Asia and elsewhere," (insurance not explicitly mentioned in this piece.) Since the Suez Canal disaster, components of the press like CLAIMS JOURNAL, have reported that the accident rate for container ships has been extraordinarily high recently. Several reasons have been given, e.g., that the enormous number of containers are stacked higher than ever, and voyage scheduling is so hurried that ship captains are virtually required to sail into and through serious storms rather than go around them.  See Ann Koh, "Shipping Containers Fall Overboard at Fastest Rate in Seven Years," CLAIMS JOURNAL (April 27, 2021).

Here is what one expert claims handler apparently said to Koh: "AIG's Ranger says companies should be prepared to go around storms and main vessels properly. These vessels are designed to carry the boxes, and to have these losses is--dare I say it--unacceptable." 

Another Addition. On Sunday, May 24, 2021, the court of appeals for Ismaila Economic Court turned an "Ever Given" case back to a trial level indicating that it lacked jurisdiction. The principal issue appears to be the seizure of the ship and holding it until compensation is decided and paid.  

Interestingly, the claim for compensation has been reduced from $916 million to $550 million. The damages the Authority is seeking include costs of salvage, the cost of stalled canal traffic, and lost transit fees. To get a feel for damages involved, "[a]bout 10% of world trade passes through the canal, a pivotal source of foreign currency to Egypt. Some 19,000 vessels passed through the canal last year, according to official figures." (See cite below.) These numbers divide up to approximately 52 ships per day, on average. 

One or more of the defendant is seeking $100,000.00, probably in loss of shipping profits. Some ships waited in place, and others turned south and went around the Cape of Good Hope requiring additional fuel and other costs. This number is way too low and will almost certainly rise substantially at least because of how the "Ever Given" is held. 

[Does this sound anything like a type of auto or trucking accident? Does this sound like the inevitable place for insurance and insurance claims-handlers? Why has there been no discussion of them?]

Also interesting is the Suez Canal Authority's indicating Sunday publically that a salvage boat capsized during the operation, leaving one worker dead. 

Issues in the lower court, as one might expect, include "Who is really at fault? To use American legalese, the Canal Authority has sued owners, the shipping company, the operators, and others. At least some of them have counter-claimed asserting that the Authority was the one really at fault for letting the ship to said in such bad weather and strong winds. Two pilots from the Authority were on board to guide the ship. 

See Samy Magdy, "Suez Canal's claim Over Once-Stuck Ship Referred by Court" CLAIMS JOURNAL (May 25, 2021)

Negotiations are continuing. The defendants (owner, shipping company, operator, and maybe others) have now offered $150m, and the Authority (SCA) is down to $550. The Lloyds syndicates providing coverage and those providing reinsurance are working feverishly. The lawyers are having a wonderful time.

Maybe the hurry is because there's to be a hearing next Saturday (June 5). Letting the ship leave will be one of the issues. 

Arguments now being given by SCA include: 

Evergreen was going too fast (25 kpm which is 3 or so times the "speed limit" at the south end of the canal), 

• The vessel negligently entered the canal when it didn't have to; 
• Evergreen's [Ever Given's] rudder was the wrong size and in the wrong position, and so on;
• The ship suffered from the "bank effect," as the result of pilot error, as one might expect the Suez authority blames the captain since formally speaking he has final authority   

It seems obvious to me that that the speed of Evergreen would be at least partly in the control of the pilot supplied by SCA, and that the pilot should have realized that the rudder had problems and slowed the ship down. 

Still, if SCA's demand is now $550m, and the offer is $150m, negotiation prospects are promising. Maybe what's needed here is a mediator. I might be willing to take a whack at it, so long as it's not virtual. The contemporary virtual is not always virtuous. 

Face to face is what's needed here. Hawaii might be a good place. Or Iceland, maybe.

Or maybe it could be done in stages. On Wednesday, June 23, 2021, the AP NEWS indicated that some sort of preliminary, partial settlement agreement had been reached between the owner of the ship "Evergreen," the Suez Canal Authority, and at least some insurers, though other parties and other insurers were not parties to that agreement. A key carrier involved in this agreement was the UK Club. According to AP the Japanese shipowner said "it is working with other insurers and the canal authority to sign a final agreement as soon as possible." 

AP "Early Agreement Reached in Dispute Over Suez Canal Ship," June 23, 2012.

See also Aidian Lewis et al, "Suez Canal Blames Ship's Grounding on Speed, Rudder," Claims Journal (May 28, 2021).

Something of the same problem arises in the June 24 issue of CLAIMS JOURNAL. In an article entitled "Agreement in Principle Reached" the ship is called "Ever Given." (As in "The Ever Given containership has been anchored in a lake...." The accepted name of the confinement lake is "Great Bitter Lake.")

Interestingly--or oddly, perhaps--immediately above that sentence is a good-sized photograph of the ship, with a tug boat nearby. On the side of the ship is a huge, easily visible copy of a name, "Evergreen."

The ship was released to leave by the Suez Canal Authority on Wednesday, July 6, 2021. The following language is quoted from a release by the Associated Press entitled "Suez Canal Releases Hulking Vessel After Settlement Deal: "Ismailia, Egypt--Suez Canal authorities announced Wednesday the release of the hulking shipping vessel that blocked the crucial east-west waterway for nearly a week earlier this year. The Ever Given [aka "EVERGREEN"] after its Japanese owner, Shoei Kisen Kaisha Ltd., reached a settlement with the canal authorities over a compensation amount after more than three months of negotiations and a court standoff. The settlement deal was signed in a ceremony Wednesday in the Suez Canal city of Ismailia, after which the vessel was seen sailing to the Mediterranean" (Published 7:30 a.m. ET July 7, 2021)

For other information on containerized shipping see my blog entitled "Cargo's, Containers, Computers and Insurance" and "Insurance and Containerized Shipping--Some History," Published June 23, 2016. (The preceding title triggers a link. Why one might ask oneself, would a single article have two titles? Non-answer: It's a digital secret and a cyber mystery.)

An excellent article and good photos were published in NYT Sunday, July 18, 2021. Much more thorough than anything else. Nothing about insurance, however.

Nevertheless, this article states that "Evergreen" is the name of the ship's operating company and that the ship's actual name is "Ever Given."

According to the NYT piece

For other information on containerized shipping see my blog entitled "Cargo's, Containers, Computers and Insurance" and "Insurance and Containerized Shipping--Some History," Published June 23, 2016. (The preceding title triggers a link. Why one might ask oneself, would a single article have two titles? Non-answer: It's a digital secret and a cyber mystery.)

One of the facts mentioned in the NYT article referred to above is the size of the "Ever Given." It's one of the largest container ships ever. It is only a few feet shorter than the Empire State Building is tall. This is much larger than large container ships were 15 years ago. Then such ships could routinely carry 10,000 containers. "Ever Given" could carry 20,000. Carrying fully cargo of containers, the ship's stack by itself stands 14 stories tall.