Legal complexities of hurricane claims will drive up loss costs – Hermès Marangos and Tom Rotherham

The 2017 Atlantic Hurricane season has witnessed a cluster of exceptionally monstrous category 4 and 5 hurricanes. Litigation experts around the world are consequently bracing themselves for the unprecedented complexity of dealing with the consecutive losses of hurricanes Harvey, Irma, Jose, and Maria.

Leading experts in litigation and reinsurance, Hermès Marangos and Tom Rotherham at Signature Litigation, will below outline the difficulty of carving an effective litigious response to the inherently disordered event of a natural disaster and outline what the destruction means for reinsurance.

Whilst many of the issues that require consideration when determining the extent of policy response in the wake of a hurricane will be familiar to reinsurers, it is often worth reminding ourselves of the crucial aspects applying to different types of cover. In respect of property damage issues, one of the main considerations will be whether or not there has been an "event" which triggers cover. For example, property damage caused by flooding (as opposed to wind damage or subsequent storm surge) is often excluded under the terms of property damage cover. Property holders with flood exclusions in the United States may well be covered by the National Flood Insurance Programme, operated through FEMA, although it is thought that only between 15 and 25% of properties at risk have such protection.

Of particular concern to losses sustained in the south west Caribbean will be how those losses are allocated between multiple "events", i.e. between the damage caused by Irma, Jose and Maria. Of course, issues of allocating sustained periods of hurricane-like weather into different "events" can impact greatly on policy limits and deductibles, leading to contentious proceedings where there are divergent interests in multi-layer programmes.

Whilst property losses are understandably at the forefront of news coverage, the largest claims (particularly in relation to losses sustained on the US mainland due to Harvey and Irma) are likely to result from Business Interruption (BI) policies. These losses are almost certain to be exacerbated by the prevalence of the oil industry in Irma affected areas and the subsequent impact on global energy markets. Unfortunately, given the complexity involved in calculating losses sustained by businesses after a major hurricane, BI claims can also be some of the most contentious.

Prior to any attempt to calculate loss, Insureds must be able to establish both that property damage was sustained by an insured peril, in this case likely Hurricane Harvey or Irma, and that interruption to the Insured's business resulted from that property damage rather than by some other cause. Demonstrating both "triggers" to policy coverage can be difficult in the aftermath of a hurricane, where there is also usually damage to transport and utility infrastructure which causes interruption to businesses, rather than any damage sustained by an Insured's property. Similarly, losses sustained from criminal activity such as looting in the aftermath of hurricanes are unlikely to be covered, as losses are not said to be caused by the sustained property damage.

In addition to ensuring that cedants are properly applying themselves to the types of considerations outlined above (and therefore in compliance with any claims control clause contained in the reinsurance contract), reinsurers and retrocesionaires will need to consider a whole raft of additional issues, a number of which could prove to be contentious. At the time of writing, the insured losses sustained due to Harvey and Irma alone are predicted to be between USD 50 and USD 70 billion, placing them well into property catastrophe programmes.

In respect of aggregating losses in such programmes, contracts typically contain an "hours" clause which define a loss occurrence as meaning all losses arising out of one catastrophe. The duration of any such loss occurrence for a named peril such as a hurricane is 72 hours.  Of course, exact wordings will vary from contract to contract, but generally they will provide that losses caused by a hurricane within the specified number of hours (usually 72) can be aggregated. Generally speaking, the reinsured is able to select the time when the applicable hours period commences – usually, but not always, at the time of their first reported loss. Depending on the path and speed of a hurricane, and subject to any reinstatement of cover, it may be possible for a reinsured to recover in respect of multiple losses within the same hurricane, although periods cannot overlap. It is crucial that reinsurers carefully review wordings, definitions and factual circumstances so that issues relating to cedant's aggregations can be avoided.

Reinsurers also face a challenge from the number of different jurisdictions that have sustained losses resulting from Irma, José and Maria in particular. Cover is not always provided on a "back to back" basis meaning that important terms may be defined differently in the reinsurance contract and the underlying contract of insurance. This can cause problems where each contract applies defined aggregation terms such as "storm" in a different way. On a more fundamental level, each contract may have different governing law and jurisdiction clauses, leading to situations where different approaches to policy coverage are likely to occur in the separate jurisdictions that govern the reinsurance and underlying insurance.

The hurricanes are also having an extensive impact on reinsurance capital. Although it is unlikely Irma, Harvey, or Maria will surpass the total insured losses of the 2005 Hurricane Katrina (estimated at USD 62.2billion), the losses are still very substantial. Hiscox estimates net Harvey losses of USD 150million out of an industry total of USD 25billion and the FEMA expects more than 450,000 Harvey victims to file for assistance. Furthermore, Florida policymakers have already so far filed almost USD 2billion in insurance claims for Hurricane Irma, with total loss occurrence estimated at USD 32-50billion. There have also been reports that Florida is, unsurprisingly, struggling with this massive volume of claims due to a lack of insurance adjusters. The disasters are also reportedly providing a test of alternative capital that has redefined the reinsurance sector in recent years.

Despite the impact of these immense figures, experts have recently reined in loss estimates. AIR Worldwide, for example, has dramatically narrowed its loss estimate for Hurricane Irma and consequently, US P&C and reinsurance stocks have received a fillip, in turn pushing up European reinsurance shares. This may very well be the light at the end of the tunnel of the 2017 Atlantic Hurricane Season. However, the subsequent litigation costs for coverage disputes should not be underestimated.

Hermès Marangos is a Partner and has litigated and arbitrated on commercial disputes in over 60 countries worldwide and has particular expertise in insurance and reinsurance litigation.

Tom Rotherham is an Associate with experience across complex commercial litigation matters, including insurance and reinsurance.

Signature Litigation is a specialist law firm handling major and complex litigation, arbitration and regulatory investigations.