by ~ Rachel M. Davison (Email) (Web Site)
The Interactive Workshop is a perennial highlight of the Symposium, and this year's program did not disappoint. Enthusiastic moderator Bill Erickson and facilitators Jessica Park and Rob Whitney created a fact pattern that generated a lively discussion of property-related reinsurance topics arising from hurricane damage to a historic building. The problem set, which touched upon many of the issues that commonly arise in connection with hurricane losses, allowed the audience to step into the roles of cedant and reinsurer and analyze how each party might handle the claim.
The problem set featured a hypothetical insurer that provided coverage to colleges and universities. At issue was an "all risk" property policy which, subject to a list of exclusions, covered costs for materials of like kind and quality on a replacement cost basis. It also required that any repairs be performed as soon as practicable following the loss. The standard policy offered by the insurer provided a $5 million sublimit for any loss caused by the enforcement of ordinances or laws affecting the cost of repair of insured property damaged as a result of a covered peril, and included business income coverage.
The insurer reinsured its property program for all losses in excess of $10 million per occurrence. The reinsurance agreement limited the reinsurer's liability to $5 million per loss occurrence for losses caused or increased by the enforcement of building laws and ordinances. Otherwise, the reinsurance agreement was subject to the same terms, conditions, alterations and modifications as the reinsured policies. The terms of the reinsurance agreement required the cedant to give notice to the reinsurer as soon as practicable of any loss likely to result in a claim under the treaty.
The hypothetical university policyholder sustained damage to its historic Art History Building as a result of a hurricane. The wind force caused one wall of the building to collapse and the roof to be torn off. The interior suffered water intrusion due to the roof damage. The university had purchased the insurer's standard policy with its $5 million sublimits for loss caused by enforcement of ordinances or laws. The university submitted a claim to the insurer for $100 million. Of the total claim, $20 million was for the cost to restore damaged elements of the building using means, methods and materials from 1820, when the building was originally constructed, and the remaining $80 million was driven by building codes that the university claimed required improvements, reconfiguration and significant upgrades over the original structure, including portions that were not damaged. In contrast, the insurer's adjuster and building consultant determined that the university's damage could be repaired for $9 million using modern means and materials, and of that amount, approximately $1 million would be the cost to comply with the minimum code requirements.
After digesting these facts, the audience was divided into groups, and each group was assigned to act either as the cedant or the reinsurer. The cedant groups explained what steps they would take in response to the university's claim and articulated their strategies for dealing with both the policyholder and the reinsurer. Meanwhile, the reinsurer groups were tasked with responding to information and demands for coverage presented by the cedant. The audience discussed the various aspects of the claim and the differences of opinion that the policyholder, cedant and reinsurer would have with respect to the availability of coverage for the loss. The cedant and reinsurer groups engaged in lively exchanges and articulated their positions as they might if presented with a real claim. Groups' approaches included analyzing and reviewing the initial claim as presented by the policyholder, negotiating the twists and turns of the adjustment process, dealing with contrary coverage opinions that relied upon cases from other jurisdictions, weighing dueling interpretations of the same policy language, and analyzing differences between the coverage afforded under the insurance policy and the reinsurance treaty.
One of the areas of dispute was the manner in which the Art History Building should be repaired: by using modern means, methods and materials to achieve a historic look or with nineteenth century materials and craftsmanship. The consideration that divided the policyholder and the cedant was the replacement cost and how much of that cost was driven by enforcement of current building codes. In the fact pattern, the costs associated with code enforcement dwarfed the actual building damages, a situation that is not uncommon, particularly when historic buildings are damaged.
The audience discussion continued with the presentation of hypothetical bad faith and extra-contractual claims by the policyholder against the cedant, along with additional "damages" claimed by the policyholder arising from the delays in paying the claim. The reinsurer groups scrutinized the new information from the cedant and noted the lack of coverage under the treaty for extra-contractual obligations. Again, the differences between the language of the policy issued to the university and the reinsurance treaty proved to be critical.
Finally, when the university and the cedant reached a settlement, the audience was faced with two new problems. First, the settlement was for multiple claims, not all of which were within the scope of coverage of the reinsurance treaty, including the bad faith claims. Second, a portion of the settlement payment was to be used by the policyholder to settle a third-party claim by an organization that was recently added to the list published by the Office of Foreign Assets Control of individuals, groups and entities whose assets are blocked and with which U.S. companies are prohibited from transacting business. These twists helped the audience consider what claims may be paid under a reinsurance treaty and the effect of sanctions of the type that had been discussed by the morning's first panel.
Ms. Davison is a partner in the Boston office of Morrison Mahoney LLP. She may be reached at rdavison@morrisonmahoney.com.
The 2014 MReBA symposium presentations were for educational purposes only. Views expressed by panelists at the symposium were their own and did not represent the views of their respective companies, law firms, or clients, nor do they represent the views of Morrison Mahoney LLP.
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