Is Wind Blown Water With Oil Covered?

In "Wind Versus Water Versus Oil", an article featured in the July issue of Claims Magazine, CPCU Diana Reitz ponders the question of coverage under standard Homeowner's policies if damage is caused by oily water blown ashore by a hurricane. In a somewhat quick and conclusory manner, Ms. Reitz disposes of the matter by suggesting that such damage would not be covered, as the cause (i.e. peril) would not be windstorm, but instead the rupture of BP's underwater well. I must strongly disagree.

Unfortunately, and sadly, as financial markets gain more power and influence over the role of insurance, our industry is not what it used to be. The number of people who truly understand the application and adjustment of coverages, perils, and damages under property policies has shrunk to an alarming low, especially at levels of influence and authority. Today, when complex issues such as these arise, many companies find it easier to just deny claims and turn them over to lawyers. Unfortunately, this strategy just increases costs, reduces the credibility of our industry and its adjusting forces, and causes more confusion, adversity and litigation across the nation.

Commentary such as Ms. Reitz has given, as a fellow CPCU and as Editorial Director of National Underwriter Company, can, and often does, stick in the minds of readers, from adjusters to executives and their attorneys, and can easily be taken as the proverbial "gospel", from which a blind-eye is then turned to the issue and global decisions are made that adversely impact potentially thousands of insured homeowners and businesses. Taken without objection or further analysis, her opinion could carry great weight, thus increasing the potiential of a gross injustice. The last thing in the world our industry needs is another Katrina debacle over the issues of wind vs. flood. For this reason, I offer the following:

Keeping in mind that insurance policies differ, the following analysis is limited to standard ISO Homeowners coverage forms. As part of any investigation and coverage analysis, adjusters and other insurance professionals should first review the actual policy which insures the damaged property in order to determine whether or not there is coverage. The following is an excerpt taken from f a standard HO-3 Homeowners policy. I have underlined terms that are key to this anlaysis:

SECTION I - PERILS INSURED AGAINST

     A. Coverage A - Dwelling And Coverage B - Other Structures

          1. We insure against risk of direct physical loss to property described in Coverages A and B.

          2. We do not insure, however, for loss:

               c. Caused by:

                    (6) Any of the following:

                         (e) Discharge, dispersal, seepage, migration, release or escape of pollutants unless 
                               the discharge, dispersal, seepage, migration, release or escape is itself 
                               caused by a Peril Insured Against named under Coverage C.

      B. Coverage C - Personal Property

          We insure for direct physical loss to the property described in Coverage C caused by any of
          the following perils unless the loss is excluded in Section I - Exclusions:

               2. Windstorm or Hail

The underwater explosion at the BP Horizon rig has released millions of gallons of oil and other pollutants into the Gulf of Mexico. But those pollutants, unless otherwise deterred, would remain in the Gulf and cause no damage to most property owned by policyholders or insured by their carriers. Of course, everything hinges on the facts. A trapper or sportsman who finds oily residue on the pilings and piers of his South Louisiana fish-camp, or on his boat, traps or nets might not find coverage. After all, was it "windstorm" or just normal wave action and tidal flow that brought the sickening residue to his world?

But what about the homeowner in Biloxi, Mississippi or Pensacola, Florida who, after a tropical storm or hurricane, finds oily residue all over the outside of his home, dripping down through the hole in his roof, or blown in through broken windows or doors and coating carpets, furniture and electronics? How did this oil get there? Assuming there was no flood or storm surge to which the damage could be attributed (which would not be covered under most policies), "but for" the windstorm, the oily water would not have been dispersed onto the insured property, nor damage done. The oil and other pollutants released by the "rupture of the underwater well" would not have caused any damage to insured property if it weren't for the covered peril of windstorm.

Ms. Reitz suggests that damage caused by these pollutants would be a consequential result of the ruptured well and thus not covered. When considering consequential vs. direct damage, one must review the doctrine of proximate cause. Ms. Reitz's analysis would require a finding that the ruptured well was indeed the proximate cause of the consequential damage to the insured's property.

For damage to be indirectly caused, or consequential to a proximate cause, it must be directly connect to, or grow or result directly from, that which is considered proximate. Furthermore, there must be an unbroken chain of events, or series of consequences, that brings about the damage. In this case, there is a very wide break in the chain of events, not the least of which is time. In fact, an extremly strong argument can be made that it is the windstorm itself that breaks the chain and results in a new proximate cause.

What is my point? It is that, generally speaking, damage that is caused by oil that is blown off the Gulf and inland, onto and inside properties covered under homeowners and business property policies, should, under most factual scenarios, be considered covered damage. The proximate cause would be the covered peril of "windstorm", not the BP blowout or rupture. It is also important that each individual claim be considered under the weight of its own facts, and not as part of a global policy statement such as that made by some carriers (to their adjusting staff and/or their policyholders) following Hurricane Katrina.

Certainly, if a hurricane or topical storm passes over the Gulf and comes ashore in the areas affected by the oil spill, there will be many claims for damage, both direct and indirect, that will find no coverage in the policies insuring many business and commercial interests. This commentary is intended primarily for the hundreds, if not thousands, of garden variety homeowners claims that could result from "windborne oily rainwater" brought ashore with such an event. I would hope that our adjusting forces, and those who authorize payment of claims that may ensue should such a catastrophe occur, would make the right coverage decision and take appropriate action to ensure timely and appropriate payments to policyholders.

These words notwithstanding, let us pray that the insurance industry does not have to grapple with these decisions. But if they do, I hope the money men read these articles.

James W. Greer, CPCU
President, AE21 Incorporated & AE21 Online
Association of Property & Casualty Claims Professionals (PCCP)
Association of Workers' Compensation Claims Professionals (WCCP)
(800) 820-4550