A View From The Press Box

Peter Kensicki is a professor of insurance at Eastern Kentucky University in Richmond, Ky., as well as a member of the Ethics Committee of the CPCU Society in Malvern, Pa. He poses ethical queries to NU's readers every quarter, and this is the report he wrote for our Jan. 14 edition. Feel free to weigh in with your own views on the matter.

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Is the concurrent causation clause itself a fundamental problem, ethically speaking, or simply how it was implemented following Hurricane Katrina? And is there a way to more fairly exclude flood damage without leaving policyholders high and dry?

Among National Underwriter readers who responded to our invitation to speak out, opinions were roughly evenly split as to the ethics of the clause itself.

Those who believe the clause is unethical on its face cited emotional reasons to justify their position. Those who say it is ethical cited the history of the exclusion and contract language.

A Florida adjuster wrote that the clause “was never intended to link covered and uncovered losses, thereby creating an impenetrable barrier to recovery at a time of greatest need. It was a response to a creative backdoor approach to coverage.”

He did not object to the exclusion. Rather, he objected to alleged insurer actions based on the exclusion: “Today insurers seek to link any excluded event with any non-excluded event to create a barrier to recovery. It is simply wrong to do so.”

An Illinois producer commented that “the reasons for the language are ethical and just. It is the application of the exclusion that can be unethical at the time of loss. However, it is hard to tell the cause when nothing is left.”

A risk manager believes that “the exclusion is ethical if the insured knows about it from the beginning. The relevant loss creates a ‘chicken-and-egg’ situation, with each party wanting what affords them the best outcome.”

An insurance company employee--one of the principal drafters of the exclusion in ISO contracts in 1983--explained the background of the language: “I can confidently relate the intent was to restore the effect of critical exclusions (flood) which creative judges threatened by finding coverage where clearly there was none because of a contrived causation trail to some element not excluded.”

The drafter called the original California Supreme Court 1963 decision in Sabella v. Wisler--allowing coverage for a presumably uncovered cause of loss, if a covered cause was also sequentially involved—as well as subsequent rulings to that effect, “archetypes of judicial malfeasance rather than reasoned approaches based on contract language and intent. Without such malfeasance, insurers would not have to apply so much armor plate around its contracts.”

Another adjuster “shouted” his response: “I keep a laminated copy of the wording of the concurrent cause exclusion in my wallet, much like other missionaries carry holy pictures. This clause IS ETHICAL and IS NECESSARY.”

He added that the clause “does NOT say what some say it does, that is ‘the coverage grant is voided if a non-covered event occurs at approximately the same time.’ Exclusions for losses arising from specified perils otherwise covered by ‘all-risk’ insuring agreements are routine. How could this ‘diabolical’ clause be accepted by 48 regulatory bodies if it was unethical?”

Another adjuster observed: “Creating an ethical issue regarding concurrent causation ignores the fact that it all began when lawyering exposed loopholes in exclusionary wording. How can we continue to this day to create ‘victims’ who thought they were getting flood coverage in their HO policy?”

On the other side, a New York broker commented: “On its face, it’s unethical. How can a loss be excluded not before but after it has happened? No one would expect such a clause to be in their policy.”

A consumer advocate with a strong insurance background wrote: “Of course the exclusion is unethical. The insurers introduced it en mass to an unsuspecting public who, year after year, pay their premiums and expect their insurers will care for them, not fake them out. Few read the policy, and few of those would understand the exclusion, which is intellectually ambiguous. The exclusion was intended to deceive and it achieved its goal.”

A consultant noted: “Many things have unintended consequences when circumstances impact their original intent. This is the case with the concurrent causation exclusion. It was created as a defensive measure by insurance companies in an era lacking enlightenment for consumer interests. The exclusion is an arcane artifact and a structural impediment to progress. It should be abolished.”

The easiest question for all readers was whether the clause itself was unethical or was just unethically implemented following Hurricane Katrina?

There was clear agreement among all that if an adjuster or insurer deliberately applied the exclusion incorrectly, that act was unethical and a violation of the insurance contract.

For example, one insurance company executive wrote: “If insurers are interpreting and citing the exclusion incorrectly to deny coverage where it should exist, it is an ethical issue. The problem would not be with the exclusion, but with the interpretation of the exclusion by the company. Bad-faith actions should act as an incentive for insurers to apply the exclusion correctly.”

An adjuster explained that what they do is prefaced by the contractual language. “We survey the damage, provide observations on causation, quantify the damage and forward all to the insurer, which decides whether to act ‘ethically’ or ‘contractually.’”

While suggesting that “from a good-will point of view, more could have been done for policyholders,” this adjuster went on to warn that if carriers are too liberal on contract interpretation, “then [policyholders] will expect a favorable variance on contracts every time they feel slighted. The courts are tied up with enough frivolous litigation as it is.”

Suggestions for modifying the contract language varied. Most responding offered no suggestions. Those believing the exclusion is ethical generally were for leaving the exclusion as is.

As to suggested changes, the Illinois producer quoted earlier suggested adding the wind peril to the federal flood policy, even though “Illinois and Iowa people would then be paying costs for coastal areas.”

The risk manager was in favor of “inserting plain English language in every policy that clearly states what concurrent causation is. What WE think is clear is NOT clear and defined to the public. Katrina and other disasters should have taught us that by now.”

The New York broker suggested adding flood as an optional property insurance peril, with reinsurance for flood only going to the federal government.

“That way, as long as flood policy limits are adequate, the insured would be made whole, which is what we are all supposed to be about,” the broker said. “The insurer and the National Flood Insurance Program can hassle out the division later. Right now, I try to place a flood policy with the homeowner insurers so my clients are dealing with one company.”

CONCLUSIONS
It appears that our emotionally-charged questions allowed all sides to vent frustrations over this controversial issue.

However, those who believe the concurrent causation clause is unethical offered no support for their beliefs—it is just bad because people do not get paid, or do not get paid enough when it is difficult to separate covered wind damage losses from uncovered flood damage losses.

No one who wanted the exclusion abolished, or in the alternative wanted private property insurance to cover flood, mentioned the impact on future premiums.

Few respondents commented on the difficult task the adjuster has in separating covered wind losses from uncovered flood losses. It is, as the Illinois producer noted, an almost impossible job when nothing is left after the disaster.

All agreed that the exclusion should be applied ethically. For some that meant “as intended by the language.” For others it meant “pay the loss no matter what.”

All responding would be happier if whatever language was used was understood to have a single meaning. Most would also want courts to respect that meaning.

What do you all think?