Tuesday, August 8, 2017

The Dance of the Cyclones

On August 7, 2017, powerful Typhoon Noru made landfall in Japan, lashing the island nation with heavy rainfall and maximum sustained winds near 75 mph.  While the dangers associated with Noru ought not to be underestimated, there is a sigh of relief, considering that last week, media outlets worldwide characterized Noru as the “Earth’s strongest storm of 2017.”

What had happened for Noru to achieve such notoriety?  After its birth on July 20, 2017, Noru roamed the Pacific Ocean at a strength equivalent to a Category 1 Hurricane in the Atlantic Basin.  However, roughly four days later, Noru encountered Tropical Storm Kulap, causing the two systems to engage in what experts call the “Fujiwhara effect.”  After dancing around each other, Noru—the stronger and bigger of the two systems—simply swallowed Kulap, resulting in a much more potent storm.  After engaging in this dance with Kulap, Noru crossed over its path from earlier in the week and began heading towards southern Japan.

In layperson’s terms, what is the Fujiwhara effect?  Discovered in the 1920s by Sakuhei Fujiwhara, a Japanese researcher and meteorologist, the Fujiwhara effect—or, Fujiwhara interaction—explains a phenomenon where two tropical cyclones less than 900 miles apart rotate about a common midpoint.  As a result of this movement, the distance between the two vortices decreases.  Depending on the size of the systems, as these severe weather patterns circle each other, they have the potential to merge into one storm.  Usually, the bigger system will absorb the smaller system.  Noru and Kulap engaged in this merry-go-round-like weather pattern around July 24, 2017.  However, it is also possible that this binary interaction might deflect the original path of one, or even both, of the systems. 

This graphic explains the Fujiwhara effect:


How common is the Fujiwhara effect?  The Fujiwhara effect is relatively well documented in the annals of weather history.  More or less around the same time as Noru and Kulap engaged in their dance, tropical cyclones Hilary and Irwin engaged in a similar ritual in the eastern Pacific Basin, with Hilary’s wind shear eventually weakening Irwin.
In 1995, Hurricane Iris danced with Hurricane Humberto, before interacting with, and eventually absorbing, Tropical Storm Karen. There was also major concern back in October 2016 that Hurricane Matthew, a powerful late-season hurricane, could interact with Tropical Storm Nicole, a smaller system that formed and continued to linger in the Atlantic Basin northeast of Hurricane Matthew.  Experts feared that after engaging in their cyclonic dance, Hurricane Matthew would take aim at Florida for a second time within a few days, further devastating the area.
Superstorm Sandy, one of the largest and most costly tropical storms in the history of the United States, also experienced this effect before hitting the East Coast of the United States in late October 2012.  Sandy interacted with a low-pressure trough to its southwest that steered the storm west towards New Jersey.  Eventually the two systems merged to form the devastating “Superstorm” or “Frankenstorm” Sandy.
What are the implications for the insurance industry?  With the 2017 hurricane season in full swing—and the National Oceanic and Atmospheric Administration predicting above-normalactivity—the Fujiwhara effect plays a prominent role in severe weather patterns that the insurance industry has a vested interest in observing.  One issue to potentially consider is to what extent a system that undergoes the Fujiwhara effect changes in its meteorological makeup from the original system.  As the threat of Hurricane Matthew interacting with Tropical Storm Nicole before taking aim at Florida for a second time has demonstrated, another issue to consider is the number of occurrences.  With that said: Welcome to the dance of the cyclones!

Tuesday, August 1, 2017

Survive the Summer Sizzle! Speaking of HVAC’s…

Theories on global warming aside, the scientific community predicts there is a greater than 57% chance that 2017 will turn out to be the second-hottest year on record. During June there were 4,343 warm daily high (1,848) and low (2,494) temperature records. Specifically, high temperatures were between ten and twenty degrees higher in the upper Midwest eastward into the northeast and mid-Atlantic. Over on the west coast, southern California experienced record high temperatures. Death Valley, California hit a record-high temperature of 127 degrees, and Phoenix, Arizona suffered temperatures reaching 119 degrees.

Not only are the temperatures miserable, but the heat also has affected aspects of everyday living. In Arizona, over forty flights were cancelled in one day because of the extreme heat. On the day Arizona endured unprecedented record-high temperatures, the state also broke energy consumption recordsthree of the largest utilities all broke their records for most simultaneous electricity use. Texas has already set two monthly records in energy demand. The Electricity Reliability Council of Texas (ERCOT), which manages the power grid for most of the state, said its customers used 67,512 megawatts of power in one day. ERCOT predicts customer demand will reach 73,000 megawatts this summer. Unsurprisingly, much of the usage stems from maintaining cool temperatures in homes and businesses resulting in heavy reliance on the heating, ventilation, and air conditioning (“HVAC”) systems.

Additionally, catastrophic lightning storms during these summer months are prevelant. Property insurers receive more claims for lightning damage to the HVAC system. But often times, the purported lightning damage to an HVAC compressor has been wrongly assessed, and the actual cause of loss is wear and tear. Wear and tear is not a covered cause of loss. It is no surprise then that over 40% of claims are denied when the insured initially alleges lightning damage that is later determined to be merely wear and tear. If the HVAC is not properly maintained, the extreme summer heat only intensifies the existing stress on the compressor, and it could result in an uncovered loss. Misreporting is apparently common with both residential and commercial property HVAC damage claims. Data from 2015 sheds some light on the subject.

For 2015 commercial claims, 35% of all HVAC claims were categorized as wear-and-tear, claim withdrawn or not damaged. Of the 45% of claims originally reported as hail damage, only 33% had actual damage. Of the 9% reported as lightning damage, only 2% of claims had actual damage.

The intolerable heatwaves spreading across the nation inevitably generate heavy reliance on HVAC systems. Insurance coverage for HVAC claims probably does not include stress-related damage that has only been exacerbated by extreme heat. So, during the summer months, when our functioning HVAC systems are crucial to survival, insureds should be aware of the types of claims the policy may cover, tend to any existing wear and tear, and properly maintain the HVAC system…that is, if you want any chance at surviving the summer sizzle. 

Posted by Victoria Vish

Thursday, July 27, 2017

2017 Wildfires Expected to Cause Surge in Insurance Claims

Wildfire season in North America is off to a raging start this year. Fire activity in the western United States increased significantly in June as preexisting dry conditions and record-setting heat events created the perfect conditions for wildfires across portions of the American Southwest, southern Great Basin, and southern California. According to the governmental National Interagency Fire Center (NIFC), from January 1 to July 17, 2017, 34,586 wildfires had burned 4.3 million acres in the U.S., compared to 28,992 fires that burned 2.4 million acres in the same period in 2016.

On July 1, 2017, the NIFC predicted above normal significant fire potential through August. That prediction is proving to be accurate. Just in the past few weeks, wildfires have caused extensive damage in Alaska, California, Montana, Colorado, Arizona, and in Canada. As of July 17, 2017, 42 large fires were burning more than 867,000 acres in 12 states, including Alaska, Arizona, California, Colorado, Idaho, Montana, Nevada, North Dakota, Oregon, Utah, Washington, and Wyoming.

Multiple California wildfires have recently left scenes reminiscent of a “zombie apocalypse.” On Monday, July 18, in California’s Central Valley, residents were forced to flee their homes after authorities ordered evacuations.


Source: www.reuters.com/news/picture/wildfires-rage-across-california-idUSRTX3BHQW

Wildfires have charred more than twice as much land mass in California so far in 2017 than a year earlier, according to a Forestry and Fire Protection spokeswoman. That should come as no surprise, since California is the most wildfire prone state by nearly any measure.



In 2016, California ranked second both in terms of the number of fires and number of acres burned.


Source: www.iii.org/fact-statistic/wildfires

Historically, California also tops the list of U.S. states with the costliest wildfires. According to Munich Re, California wildfires are the second most expensive natural hazard after earthquakes.




Source: www.iii.org/fact-statistic/wildfires


But as that chart shows, there’s plenty of costly damage caused by wildfires elsewhere. The damage from the 2016 wildfires in the Tennessee Great Smoky Mountains killed 14 people, led to mandatory evacuations, and caused more than $500 million in damage. The 2012 Waldo Canyon fire in Colorado Springs, Colorado was the costliest wildfire in Colorado with insurance costs of $453.7 million from more than 6,600 claims.

Massive and costly wildfires are also a problem for our northern neighbors. Wildfires that broke out northeast of Vancouver nearly three weeks ago continue to spread rapidly across large areas of British Columbia. In addition to the 3,000 firefighters currently battling the flames, local authorities have asked for Canadian federal military assistance, and Australia sent 50 firefighters to assist. Local officials have declared a state of emergency, and more than 45,000 people have been forced to evacuate, including an entire town with a population of more than 10,000. Not surprisingly, the wildfires have already disrupted industry in the region. Forestry producers have suspended operations, due in part to employees who have been forced to evacuate. Pipeline operator Enbridge Inc. took a natural gas compressor station offline and has no present timeline for restarting it. And the British Columbia Cattlemen’s Association says 30,000 cattle are threatened by the fire. Authorities anticipate that the wildfires will get stronger before they are contained. From the start of wildfire season on April 1 through July 12, British Columbia has seen 604 fires, with damage estimated at US $41 million. In 2016, wildfires in the oil-rich area of Fort McMurray, Alberta displaced nearly 90,000 people and caused more than $3.58 billion in damage, making it the most expensive disaster for insurers in the country’s history.

Thirteen states in the western U.S. that are currently at high or very high risk of wildfire damage represent a combined total property value estimated at more than $237 billion. California, Colorado, and Texas have a combined property value exceeding $188 billion in areas of high or very high risk.



Source: www.iii.org/issue-update/wildfires

Most losses in a wildfire event result from destroyed or partially burned structures and their contents. Of course, damage to real property caused by fire or smoke from a wildfire, and even damage from water used to fight the fire, is usually covered by homeowners, renters, and commercial property insurance policies. The contents are typically covered up to a certain limit, and homeowners’ and renters’ policies commonly cover living expenses incurred by the insured during repair or rebuilding.

A critical coverage for business owners in high wildfire risk areas may be business interruption coverage, which—with some limitations—covers the profits a business would have earned if the wildfire had not occurred.  Business interruption coverage generally covers income loss sustained if operations are suspended because of physical damage to insured property and resulting from a peril insured by the policy. Such coverage may also cover additional operating expenses incurred as a result of the wildfire, including the expense of operating out of a temporary location even if business activities are temporarily halted. Most policies include a “waiting period” so that the loss-of-income coverage does not begin until a specified number of hours/days after the triggering event. 

In Oregon Shakespeare Festival Association v. Great American Insurance Company, No. 1:15-CV-01932-CL, 2016 WL 3267247, at *1 (D. Or. June 7, 2016), vacated by joint request of parties, No. 1:15-CV-01932-CL, 2017 WL 1034203 (D. Or. Mar. 6, 2017), the insured sought coverage for business income losses that it incurred after nearby wildfires caused smoke, ashes, and dust to infiltrate the theater, coating the seating, HVAC, lighting, and electronic systems with dust, ashes, and smoke. The plaintiff insured was forced to suspend operations and cancel performances for several days to perform cleaning, replace air filters, and allow the smoke in the air in the theater to dissipate. The court found that the insured sustained “physical loss of or damage to property” when the wildfire smoke infiltrated the theater and rendered it unusable for its intended purpose, and concluded that the policy covered the insured’s business interruption losses. The case was later vacated by joint stipulated request of the parties, but it remains an excellent example of the type of  wildfire damage that can trigger business interruption coverage.

Coverage may be available for the income a business loses due to a mandatory evacuation order by civil authorities, even if the insured business itself incurs no physical property damage. Civil authority orders commonly lead businesses to suspend operations, either due to the threat of the wildfire itself, or the loss of employees or customers who have been evacuated.  As a general matter, a civil authority clause provides coverage for lost income when access to insured property is prevented or impaired by an order or action of a civil authority because of damage to property other than the insured property. Civil authority coverage varies widely by policy, but generally the insured must demonstrate that (1) a peril covered under the policy (e.g., fire) caused physical damage to some property; (2) that said peril also gave rise to an action or order of a civil authority (e.g., the denial of access to the business), that (3) proximately caused a loss of business income. When a civil authority order alone causes the business interruption loss, without any related property damage caused by a peril covered by the policy, there usually be no coverage.  See e.g., Bamundo, Zwal & Schermerhorn, LLP v. Sentinel Ins. Co., No. 13-CV-6672 RJS, 2015 WL 1408873, at *4 (S.D.N.Y. Mar. 26, 2015) (holding the plaintiff’s business interruption loss arising from New York City’s evacuation order related to Hurricane Sandy was not covered under the policy’s civil authority provision because the evacuation order was issued as a direct result of flooding, which was an excluded peril under the policy). Likewise, if the civil authority order simply makes access more difficult, without actually prohibiting access, there often is no coverage. See, e.g., Southern Hospitality, Inc. v. Zurich Am. Ins., 393 F.3d 1137 (10th Cir. 2004) (finding no coverage under plaintiff hotel’s civil authority policy because FAA order prohibiting airplanes from flying did not prohibit access to hotel operations); Kean, Miller, Hawthorne, D’Armond McCowan & Jarman, LLP v. Nat’l Fire Ins. Co. of Hartford, No. 06-770-C, 2007 WL 2489711 (M.D. La. Aug. 28, 2007) (finding no coverage under plaintiff hotel’s civil authority policy because the recommendations by Baton Rouge officials to stay off the streets did not deny access to business’s premises).

Given the substantial 2017 wildfire activity, we expect a corresponding surge in wildfire-related insurance claims.

Posted by Matt Gollinger and Laura Bartlow

Wednesday, July 5, 2017

Down…But, Not Out!

Assignment of benefits (“AOB”) have become a double-edge sword for the consuming public.  While the public policy reasoning for their creation, to allow the insured to obtain immediate, necessary assistance in meeting their mitigation obligation and getting back to pre-loss condition, remains sound, the increased level of abuse has proven to be public enemy number one.  The Florida Office of the Insurance Consumer Advocate (“ICA”) reports that the abuse of AOBs “allows unscrupulous contractors to overinflate or submit improper claims, causing legal battles between the contractor and the insurance company, with the consumer left out of the picture.”  As a result, the ICA continues to monitor the effects of AOB abuse and report on the collected data to assist in proactive resolution of practices that may adversely affect consumers. The collected data bolsters the need for proposed solutions, such as the legislative attempts to invoke reforms.
The Florida Legislature (urged by Florida court decisions) has worked on legislation designed to combat systemic AOB abuse.  Unfortunately, for the second year in a row, these legislative efforts have failed. While the immediate battle has been lost, that momentum to win the war has grown stronger.
In 2016, several pieces of legislation were proposed to address relevant AOB issues.

Similar legislative efforts were launched in 2017 to combat AOB abuse. 

Senate Bill 1038, filed February 17, 2017, addressed assignment of property insurance benefits by prohibiting certain awards of attorney fees to certain persons or entities in suits based on claims arising under property insurance policies and requiring specific conditions before finding that an assignment agreement is valid. Senate Bill 1038 died in the Committee on Banking and Insurance on May 5, 2017. 
Senate Bill 1150, filed February 22, 2017, related to regulation of water damage restoration.  It defined the terms “professional water damage restorer” and “water damage restoration” such that the Department of Business and Professional Regulation would be required to license applicants who are qualified to practice water damage restoration and specify the qualifications for licensure.  Senate Bill 1150 was withdrawn from further consideration on May 1, 2017.
Senate Bill 1218, filed February 24, 2017, addressed property repair, creating within the Department of Business and Professional Regulation the water damage restoration services licensing program that would provide examination requirements for applicants for professional water damage restorer licensure. It would also require the department to license qualified applicants who meet and maintain specified requirements, including requiring professional water damage restorers to maintain specified insurance coverage. Senate Bill 1218 died on May 5, 2017 in the Committee on Regulated Industries. 
House Bill 1421, filed March 7, 2017, addressed property insurance assignment agreements by providing requirements and limitations of assignments, establishing a burden of proof, providing for an award of reasonable attorney fees for certain claims arising under assignment agreements, setting forth specific notice and reporting requirements, and confirming that certain residential property insurance policies may not prohibit assignment of post-loss benefits. House Bill 1421 died in Committee on Banking and Insurance on May 5, 2017. 
While the outcome of the May 5, 2017, massacre of AOB regulatory bills may be disheartening as it marks the second consecutive legislative year that AOB reform measures failed, there is a glimmer of hope.  When the Florida House of Representatives passed HB 1421 (by a vote of 91 to 26), Commissioner David Altmaier issued the following statement: 
I applaud the Florida House of Representatives for their favorable vote on HB 1421 today, and I am especially grateful to Representative James Grant, the bill sponsor, and Representative Rene Plasencia, the prime co-sponsor. This legislation makes significant progress in protecting Florida consumers from homeowners insurance rate increases fueled by rising litigation costs associated with an Assignment of Benefits (AOB). We appreciate the support and efforts of the entire Florida Legislature as they considered this legislative priority of the Office of Insurance Regulation during the 2017 Session.
The takeaway from the past two legislative sessions ought to be that while the battle has been lost, there has been forward progress.  Several years ago, the AOB war was waged in courthouses.  Judges recognized the long-standing tradition and public-policy basis for allowing insureds to assign their indemnity benefits to expedite remediation, so they called upon lawmakers to take action.  While the recent two years of effort have not been successful, those efforts reveal the existence of an advancing campaign against AOB abuse.

Tuesday, June 27, 2017

New Tool to Detect Ransomware May Prevent a Cyber Catastrophe

We here in the CAT – Law pressroom occasionally come to have a dispirited world view due to our constant and laser-like focus on the topic of catastrophes.  However, our Magic 8 Ball has been saying “it is most probable” every time we ask if the recent “WannaCry” ransomware virus might actually be the dark just before the dawn.  So rather than our normal article on a possible catastrophe, here is our take on a type of cyber catastrophe that is now more easily prevented.

Last month, hackers attacked businesses and government entities in 150 countries with a ransomware worm known as “WannaCry.” These hackers gained access to business and government servers, infecting them with WannaCry, either by exploiting software vulnerabilities in an older, yet popular, Windows operating system or through phishing emails designed to trick users into giving hackers access. Once WannaCry was in, it spread rapidly and autonomously throughout the system, encrypting the files on the victims’ systems and thus denying the victims access to their own data. The hackers then demanded a ransom, requiring victims to pay, on average, $300 for the release of their information.

Although WannaCry is the latest cyber-attack to make the news, it is by no means the only threat. IBM President and CEO Ginni Rometty, has described cybercrime as “the greatest threat to every profession, every industry, every company in the world.” And analysts predict that cybercrime will cost consumers more than $2 trillion globally by 2019, nearly four times the estimated cost of breaches in 2015.

But massive ransomware attacks like WannaCry are now more easily prevented.

The cyber-security community has developed a sophisticated new weapon for battling malware generally, and ransomware specifically, known as Endpoint Detection and Response (“EDR”). EDR software focuses on protecting each user device, which are known as endpoints. Endpoints include not only servers but individual computers and portable devices as well. EDR software uses artificial intelligence to learn and analyze system activity. So when a virus attempts to perform a function out of the ordinary, such as encrypting all of one’s files, it becomes a red flag and the EDR software can act to detect and prevent it.

Because EDR software focuses on the behavior of a program, it can detect malware other more traditional virus protection programs cannot. For example, traditional signature-based virus detection programs function by blocking malware when the program’s coding—or signature—reveals that it’s malware. Thus, traditional malware detection programs can only stop known viruses. But because EDR software focuses on a program’s behavior, rather than its signature, it’s able to detect malicious software (including unknown viruses) that affect the function of the endpoint. In short, EDR software is a more effective, proactive tool against cyber-attacks.

Entities looking to improve their odds against cyber-criminals should consider adding EDR software to their arsenal, to compliment their other weapons against cyber-crime such as ongoing training of personnel and restricting user privileges. And insurers covering the risk of loss from cyber-attacks should consider recommending—or even requiring—that policyholders use EDR software to better prevent or minimize loss from cyber attacks, thereby lowering their exposure to such losses. The use of EDR software as part of a diligent cyber-security plan may dramatically reduce the risk of loss from a number of cyber attacks.

Tuesday, June 20, 2017

Hold on to Your Hats: Another Active Hurricane Season Forecasted

Some wait for football season in the Fall while others anticipate baseball season in the Spring. Some sports fans are disappointed that basketball season just ended. But those in the insurance industry often anxiously anticipate the Atlantic Hurricane Season.
June 1 kicked off the official start of the Atlantic Hurricane Season, which incorporates property located in the North Atlantic, Gulf of Mexico, and Caribbean Sea. The season officially runs through November 30, but does not always abide by the parameters of the season’s timeline. For example, the first Named Storm of the season came early – Tropical Storm Arlene developed on April 20 in the central Atlantic region.
Like sports, the Hurricane Season has forecasters who provide watchers with guidance on what to expect this year. On May 25, 2017, the National Oceanic and Atmospheric Administration (NOAA) issued a press release outlining its 2017 Atlantic Hurricane Season outlook. The NOAA predicts that there will be 11-17 Named Storms and 5-9 Hurricanes – categorizing 2-4 as “major”. Named Storms are defined as having top winds of 39 mph or higher. A Hurricane has top winds of 74 mph or higher. And a Major Hurricane has wind speeds of at least 111 mph.
If the NOAA’s forecast is accurate, there will likely be at least 3-4 storms that will impact insured property. Hurricanes and Tropical Storms pose significant property risks – both direct and indirect. For example, high winds associated with these storms wreak havoc on roofing systems and windows, and cause damage from blown debris. The storms may stall over an area, unleashing downpours of rain and leave water with no place to go except into an insured building. And storm surge has proven to be a significant risk to property. The waves and water from a storm surge can level homes and, in extreme circumstances, reach further inland than anticipated or protected against. The over-all effect of these storms can damage local economies, affect power to neighborhoods and cities, and cause business interruption losses.
The question, therefore, is whether the NOAA’s forecast is reliable. Based on the last five years, the answer is yes. Below is a chart that compares the NOAA’s forecast with the season results:
 
Predicted
Actual
Total Named Storms
9-15
 
Tropical Storms
 
9
Hurricanes
4-8
10
Major Hurricanes
1-3
2
 
Predicted
Actual
Total Named Storms
13-20
 
Tropical Storms
 
11
Hurricanes
7-11
2
Major Hurricanes
3-6
0
 
Predicted
Actual
Total Named Storms
8-13
 
Tropical Storms
 
2
Hurricanes
3-6
6
Major Hurricanes
1-2
2
 
Predicted
Actual
Total Named Storms
6-11
 
Tropical Storms
 
8
Hurricanes
3-6
4
Major Hurricanes
0-2
2
 
Predicted
Actual
Total Named Storms
10-16
 
Tropical Storms
 
9
Hurricanes
4-8
7
Major Hurricanes
1-4
4

With the exception of 2013, the NOAA’s predictions have been relatively accurate. Therefore, Hurricane Watchers should be prepared for over 10 Tropical Storms and a potentially large number of Hurricanes during this year’s Atlantic Hurricane Season.
Posted by Shannon O'Malley