Muddying the waters with flood insurance

Rough Notes, May 2000 by Malecki, Donald S

Coverage definitions aren't as precise as they could be

Some people who are otherwise eligible and purchase flood insurance from the National Flood Insurance Program (NFIP) are under the mistaken impression that this coverage pays, without challenge, whenever the property owner sustains a water-related loss. Perhaps this idea has its genesis from the fact that this coverage is available under governmental auspices and it is the U.S. Treasury that ends up paying losses. However, some of those who have suffered losses will tell you that the providers of this protection are not patsies; far from it.

The Federal Emergency Management Agency (FEMA) currently administers the NFIP through the Federal Insurance Administration (FIA). However, insurance policies can be written either by FEMA or by private insurance companies (known as the Write Your Own (WYO) program.)

Under this WYO program, insurers are precluded from having to underwrite the applicants, but they do issue the policies, collect premiums and remit a portion of them (i.e., deductions are made for expenditures) to the FIA. The insurers also service these accounts, which would include the adjustment of losses. This program, which was authorized by Congress in 1983, provides producers with the opportunity to capitalize on a niche, given that there is a broad base of eligible participants around the United States.

Of course, there are limitations on eligibility. Part of the qualification is that this insurance may be written in only those communities that have been designated as participating in the NFIP. This entails a designation by a detailed flood risk study, in most cases, and the eligible community adopts flood plain management ordinances.

If a community does not qualify and there is a risk of flood, property owners may be able to obtain federal flood assistance of a limited monetary amount; but that is about it, because flood damage generally is excluded by property insurance policies. Homeowners in the case of Wallis v. Country Mutual Insurance Company, 723 N.E.2d 376 (App. Ct. of IL 2000) found this out after they brought suit against their insurer for damage when waters in a manmade watercourse overflowed its bank during heavy rain.

The decision of the court in this matter was against the homeowners, given that the all-risks homeowners policy excluded "water damage," meaning in part "flood."

What is not covered-A tough call

While many people would probably have no problem describing the characteristics of a flood, the NFIP flood policies handle that task for policyholders by defining that term as meaning:

A. A general and temporary condition of partial or complete inundation of normally dry land area from:

1. The overflow of inland or tidal waters.

2. The unusual and rapid accumulation of runoff of surface waters from any source.

3. Mudslides (i.e., mudflows) which are proximately caused by flooding as defined ... and are akin to a river of liquid and flowing mud on the surfaces of normally dry land areas. ...

B. The collapse or subsidence of land along the shore of a lake or other body of water as a result of erosion or undermining caused by waves or currents of water. ...

These flood policies are subject to limitations on coverage imposed by applicable federal regulations with one of the perils specifically excluded being landslide, a term that is not defined in the policy.

Do people really know the difference between mudslides and landslides? The insurer thought it knew, in the case of McHugh a United Service Automobile Association 164 F.3d 451 (US.Ct.App. 9tlz Car. 1999), and put the homeowners through what looked like a long, expensive dispute only to find out it did not know the difference.

The insureds in this case reported to their insurer that their beach house had been damaged by a floodrelated mudslide that occurred after heavy rains and an overflow of a drainage ditch situated at the top of the slope on which the house was located. The house, located at the base of a steep sloping hill, was knocked off its foundation and partially destroyed after being hit by a saturated mixture of soil, gravel, vegetation, and rock.

After receiving the claim, the insurer hired an independent adjuster who took photographs and then hired a geo-technical engineering firm to determine the exact cause of the damage. The engineer concluded that the slide was caused by a combination of factors including saturation of the surface soils by heavy rainfall and a buildup of groundwater in the underlying sand and gravel. The report concluded that the soil instability was classified as a landslide, not a mudslide.

The insureds hired their own geotechnical engineer, who concluded that the damage was caused by a mudslide, not a landslide, precipitated by soil saturation and surface-water runoff from a natural drainage channel above the slide area.

Still seeking recovery of damages, and in light of the differing opinions, the insureds brought suit against their insurer. With the lower court agreeing with the insurer, the decision was appealed. The fundamental question involved, from the court's perspective, was not so much the interpretation of the policy's exclusionary language, but whether a mudflow had occurred and was the proximate cause of the damage to the house.