ADDRESSING POST HURRICANE ADJUSTMENT ISSUES

FROM THE CORNER OFFICE

This special hurricane edition of Briefly Speaking is intended to assist you in addressing some of the many issues you will encounter adjusting Hurricane Charley claims.

Your own personal experience while handling Andrew, Opal and Irene claims will be invaluable. But Florida law continues to change and evolve. If you have any questions, please call us.

EXTENDED HOURS OF SERVICE AVAILABLE

We have enclosed a firm business card with our office numbers and available cell phone numbers for immediate contact after normal business hours.

Brian C. Powers

AFTER HOURS
CONTACT ATTORNEYS

Brian C. Powers
Cell (561) 371-1087

Daniel M. McNalis
Cell (561) 479-8219

Anna D. Torres
Cell (561) 635-1570

Mark A. Kirsch
Cell (954) 661-5997

Stephanie H. Luongo
Cell (561) 801-3562

CO-INSURANCE AND DEDUCTIBLE CLAUSES

Florida Statute §627.701 allows the application of a co-insurance clause only if the following words are printed or stamped on the face of the policy, or a form containing the following words is attached to the policy:

Co-Insurance Contract: The rate charged in this policy is based upon the use of the co-insurance clause attached to this policy, with the consent of the insured.

The co-insurance clause in the policy must be clearly identifiable.

Florida Statute §627.4025 defines Hurricane coverage:

(a) “Hurricane coverage” is coverage for loss or damage caused by the peril of windstorm during a hurricane. The term includes ensuing damage to the interior of a building, or to property inside a building, caused by rain, snow, sleet, hail, sand, or dust if the direct force of the windstorm first damages the building, causing an opening through which rain, snow, sleet, hail, sand, or dust enters and causes damage.

(b) “Windstorm” for purposes of paragraph (a) means wind gusts, hail, rain, tornados, or cyclones caused by or resulting from a hurricane which results in direct physical loss or damage to the property.

Residential coverage includes both personal lines residential coverage, which consists of the type of coverage provided by homeowner’s, mobile homeowner’s, tenant’s, condominium unit owner’s, and similar policies and commercial lines residential coverage, which consists of the type of coverage provided by condominium association, cooperative association, apartment building, and similar policies, including policies covering the common elements of a homeowner’s association.

Through Florida Statute §627.701, the Florida Legislature created and recognized a class of deductibles for residential property policies labeled “hurricane deductibles.” This statute allows insurers to state the hurricane deductible amount as either a defined sum of money or as a percentage of the dwelling policy limits.

This statute also produced the idea of a “secured hurricane deductible.” A secured hurricane deductible, in connection to a hurricane loss, is a deductible that is insured by a policy of supplemental insurance or secured by a line of credit from a financial institution.

The statute for personal lines residential insurance policies should be consulted to make sure the policy complies.

REQUIRED NOTICE. On the declarations page of any insurance policy that contains a separate hurricane deductible, the insurer must place on its face a boldfaced disclaimer in eighteen point type, stating:

“THIS POLICY CONTAINS A SEPARATE DEDUCTIBLE FOR HURRICANE LOSSES, WHICH MAY RESULT IN HIGH OUT-OF-POCKET EXPENSES TO YOU.” Florida Statute §627.701(4) (2001).

MOBILE HOMES. The maximum hurricane deductible permitted on mobile homes is 10% of the property value if the property is owned free of any liens, and 5% where a lien exists on the property. Florida Statute §627.701(7)(b) (2001).

COMMERCIAL RESIDENTIAL. An insurer may offer a maximum permitted hurricane deductible on commercial residential property in an amount not exceeding 10% of the insured value of the property, but a 3% option must be made available. Florida Statute §627.701(8) (2001).

CONDOMINIUM ASSOCIATIONS. An insurer may offer a maximum deductible on condominium association property in an amount not exceeding 5% of the insured value of the property, if, at the time of such offer and at each renewal, the insurer also offers to the policyholder a hurricane deductible of 3%. §627.701(8), Florida Statute (2001).

WHEN TO APPLY THE DEDUCTIBLE. Damage from the peril of windstorm that occurs during a hurricane will trigger hurricane coverage and consequently, the hurricane deductible. A windstorm occurring during a hurricane includes wind, wind gusts, hail, rain, tornados, or cyclones caused by or resulting from a hurricane which results in direct physical loss or damage to the property. The time period for which the application of this coverage or deductible applies is the duration of the hurricane. This time period begins when the National Hurricane Center of the National Weather Service issues a hurricane watch or warning for any part of Florida. It continues through the time period when hurricane conditions exist anywhere in Florida, and expires 72 hours following the termination of the last hurricane watch or warning issued for any part of Florida.

HURRICANE DEDUCTIBLE CASE LAW. As of August 15, 2004, no reported cases from the Florida appellate courts address the application of either Florida Statutes §627.4025 or 627.701(2).

COMMERCIAL PROPERTY. The deductible scheme enacted by the Florida Legislature does not address commercial, non-residential property. Such commercial policies may, and regularly do, contain separate windstorm deductibles. Florida Statute §627.701(2) provides that the deductible provision in such a policy must be clear and unambiguous to be enforceable.

HURRICANE DAMAGE AND THE VALUED POLICY LAW

Florida’s valued policy law requires payment of the face amount of the policy in the event of total loss to an insured structure. It does not apply to personal property. It does not apply when other coverage exists on a building which is not disclosed to you, where two or more structures are insured under a blanket form for a single amount of insurance, or the completed value of the structure is insured under a builder’s risk policy. Otherwise, the insurer is obligated to pay the face amount of the policy in the event of a total loss because of any covered peril.

For purposes of the valued policy law, total loss can either be actual or constructive. Actual total loss is a relatively simple matter to determine, and will not be discussed here. Constructive total loss can come about in two ways.

First, operation of law or ordinance may make it impossible to repair the building. If, for instance, the governing authority enters an order that the building must be demolished, it becomes a total loss for purposes of the valued policy law. Even if you consider the building to be repairable, so long as there is a valid demolition order which has not been challenged, it is a total loss for purposes of the valued policy law.

The second way a structure can be considered a total loss is if it has lost its identity as a building.

Case law has defined loss of identity as follows:

"the building has lost its identity and specific character as a building, and becomes so far disintegrated, it cannot possibly be designated as a building, although some part of it may remain standing. It matters not that some debris remains which may be useful or valuable for some purposes."

Obviously, this is a somewhat subjective standard which will be open to argument. In light of the extent of destruction from Hurricane Charley, it is unlikely that governmental agencies will be issuing demolition orders in the near future. It, therefore, appears that this last standard will be most often used to determine whether a structure is a total loss.

The valued policy law and cases interpreting it prohibit application of depreciation to repairs in the event of partial loss caused by fire or lightning. If you are paying for fire damage, you must pay the cost of repairs without deduction for depreciation.

The valued policy statute does not have a similar requirement in the event of partial loss by perils other than fire or lightning. Therefore, if you write an actual cash value policy, you may be able to depreciate the damages caused by windstorm or any peril other than fire or lightning. There is some disagreement on this issue based on Florida case law, but the actual cash value-only policies presently written by Citizens Insurance Corporation and other carriers and the language of the valued policy law give rise to a persuasive argument that partial losses may be depreciated. Note, however, that a 1949 Florida Supreme Court decision has held that actual value of damage in a windstorm loss is the cost of repairs without deduction for depreciation.

Valued policy does not apply to coverage on an appurtenant or other structure or any coverage or claim in which the dollar amount of coverage available as to the structure is not directly stated in the policy.

The valued policy law does apply to mobile homes, but the amount payable depends upon the type of policy which has been written. The law allows insurers to write mobile home policies either for stated value, actual cash value, or replacement cost value. If coverage is written for a mobile home on any basis other than stated value, however, the insurer must have made a complete disclosure of the relative cost between that policy and the stated value policy on a form approved by the Insurance Department. If that has not been done, total loss of the mobile home will result in payment of the stated value of the policy.

CONCURRENT WIND AND FLOOD POLICIES. When total loss to a building is caused by concurrent causes, such as wind and flood, a recent Fourth District Court of Appeals case has held that the wind carrier is obliged to pay the face amount of the policy, regardless of the percentage of damage actually caused by wind versus flood. That is to say, if the wind carrier has any liability at all to the owner for building damage caused by wind and deemed a total loss, that liability is for the face amount of the policy. We expect this case to be further appealed.

LOSS OCCASIONED BY “CIVIL AUTHORITY”

Loss of Use Coverage and Business Interruption Absent Physical Damage to Insured Property: The policy may allow recovery under the Loss of Use or Business Interruption coverage where a “civil authority” restricts access or prohibits the insured from use of the insured premises even where there has been no direct physical loss to the insured premises. Note that there may be some restrictions on the coverage. For example, policy language may require that there be direct physical loss to neighboring premises by an insured peril and recovery will often be limited to no more than two weeks.

Coverage applies where access to the insured premises is restricted by government agencies due to damage to adjacent properties. An “act of civil authority” need not be expressly authorized, but by definition must fall within the administrative discretion of federal, state, county or municipal agencies or authorities. If, for example, the National Guard or local civilian authorities block off an area due to safety concerns or to prevent looting, such an act would fall within the coverage. Determination of specifics, such as what agency authorized the blocking of the area, the exact area involved and the actual time period might be challenging during a natural catastrophe. Closing of a building by a landlord, absent direction from a governmental or civil agency will typically fall outside of this coverage unless there is direct physical loss to the covered premises.

This coverage is to be contrasted with exclusions for losses occasioned by power failure which occurs off the insured premises and with the Ordinance or Law exclusion applicable to acts relating to regulation of construction, repair, demolition or building of structures.

CONDOMINIUM ADJUSTMENT HEADACHES

Damage to condominiums causes problems in the allocation of coverage which may be difficult to resolve. Typically, the question you will need to resolve is which policy insures the various damaged items — the master condominium policy or the condominium unit owner’s policy. Personal property in the condominium is obviously covered under the unit owner’s policy. The difficult issues arise with regard to other items that may or may not be considered “condominium property”. There is no easy answer to which policy covers these items.

In 2003, the Florida legislature revised the condominium statute section addressing insurance coverage for condominium associations and condominium unit owners (Fla. Statute §. 718.111(11) (2003)). The new statute is effective for losses occurring on or after January 1, 2004 and for policies issued or renewed prior to the date of loss but on or after January 1, 2004. Thus, for losses arising due to Hurricane Charley, it is still necessary to determine if the association policy was issued or renewed in 2004 prior to the hurricane in order to verify that the new statute will apply.

For losses in 2004 arising under association policies with an effective date in 2004 , it is no longer necessary to consult the declaration of condominium to determine which policy is primary because coverage for specific items is now excluded from the association policy.  However for items not delineated in the statute, the condominium documents will need to be reviewed.

For losses arising as a result of Hurricane Charley, but under a new or renewal policy dated in 2003, the amended statute is silent as to the handling and adjustment of such losses. It is therefore recommended those claims be adjusted in accordance with the statutory language immediately preceding the 2003 revisions.

Regardless of which version of the condominium statute is applicable to the loss being adjusted, the prudent adjuster will obtain a complete copy of the condominium association documents including the declaration of condominium, articles of incorporation, by-laws and any recorded amendments to those documents. It is also necessary to have both the association master policy and unit owner policy for review. The date that the declaration was recorded as well as the provisions of the declaration setting forth the association’s obligation to secure insurance, and for maintenance and repair, need to be examined and may be necessary in determining which policy provides coverage for damage.

For pre-2004 policies, the master policy would not insure electrical fixtures, appliances, air-conditioner or heating equipment, water heaters, or built-in cabinets if they are located within a unit and the unit owner is required to repair or replace such equipment and as to all declarations recorded after October 1, 1986, floor, wall, and ceiling coverings would not be covered.

Post-2004 policies provide primary coverage for 1) all portions of the condominium property located outside the units; 2) the condominium property located inside the units as such property was initially installed or replacement of like kind and quality in accordance with the original plans and specifications or if the original plans and specifications are not available, as they existed at the time the unit was conveyed; and 3) all portions of the condominium for which the declaration of condominium requires coverage by the association.

Even if the declaration of condominium provides otherwise, the master policy now excludes: all floor, wall and ceiling coverings; electrical fixtures; appliances; air conditioners or heating equipment; water heaters; water filters; built-in cabinets; countertops; certain identified window treatments and air compressors (with caveats).

There are other issues to be aware of as a result of the 2003 amendments involving deductibles, additional insureds, freestanding units, mortgagee approval, which policy is excess, and subrogation rights.

Adjustment of condominium damage claims will require the claims adjuster to answer certain key questions in the claims handling process and analysis such as:

1) was the Association policy issued or renewed on or after January 1, 2004?;

2) was the date of loss on or after January 1, 2004?;

3) does the loss involve a freestanding building where there is no more than one building in or on such unit?; and

4) is the claimed damaged item addressed in the statute? The claims adjuster will then need to look to 2003 revised statute, applicable policies and condominium documents to determine and resolve insurability issues.

There are no easy answers to this troubling problem. In the wake of Hurricane Charley, this longstanding confusion over what is and is not covered under the master policy is only exacerbated. It is difficult to provide general answers to specific coverage issues arising in the condominium context. If you have any specific questions, please call and we will be glad to answer them for you.

APPRAISAL IN FLORIDA

The appraisal process has had a life of its own in Florida in recent years. Adjusters need to be aware that appraisal is being evoked routinely in Florida property cases. There have been a number of Florida court decisions addressing the appraisal clause in the policy of insurance. We will highlight some of the more significant ones in this article.

After Hurricane Andrew, when insurers sought to take advantage of the appraisal process to resolve disputed claims, the legitimacy of the appraisal provision in the policy of insurance was challenged. At a time when alternate dispute resolution would have benefited both the insureds and the insurers the appraisal provision was ruled to be invalid because the typical appraisal provision allowed the insurer to reserve the right to deny coverage even after appraisal.

In State Farm Fire & Casualty Ins. Co. v. Licea, 685 So. 2d 1285 (1996), the Supreme Court was called upon to decide whether the appraisal provision contained in a homeowner’s policy was void for lack of mutuality. Licea definitively addressed this issue holding that it was not, to the extent that the clause was interpreted as referring only to insurer’s rights to dispute issues of coverage as to the whole loss and issues of whether there had been violations of policy conditions.

1. WHAT MUST THE INSURED DO BEFORE DEMANDING APPRAISAL. Shortly before the five (5) year statute of limitations ran for Hurricane Andrew claims, a deluge of supplemental hurricane claims were submitted to insurers. In most of these cases the supplemental claim came packaged with an estimate for damages and a demand for immediate payment. Further, the insured typically failed or refused to execute a proof of loss, to provide supporting documents or to submit to an examination under oath.

In, USF&G Co. v. Romay, 774 So. 2d 467 (1999), the Third District Court of Appeal held that a trial court must require compliance with all of the policy's post-loss obligations before the appraisal clause is triggered. The court stated:

"No reasonable and thoughtful interpretation of the policy could support compelling appraisal without first complying with the post-loss obligations. If that were so, a policyholder, after incurring a loss, could immediately invoke the appraisal and secure a binding determination as to the amount of loss. That determination, in turn, could be enforced in the courts. Under that framework, expressed and agreed-upon terms of the contract, i.e., the post-loss obligations, would be struck from the contract by judicial fiat and the bargained-for contractual terms would be rendered surplusage. There exists but one reasonable interpretation of the terms of the policy at issue here: The insured must comply with all of the policy's post-loss obligations before the appraisal clause is triggered."

In Jacobs v. Nationwide Mutual Fire Ins. Co., 236 F.3d 1282, the Eleventh Circuit held that Romay requires the insureds to fulfill all of their post-loss obligations under the insurance policy before appraisal. Notably, the court identified five of these obligations, which include:

(1) Providing immediate notice to the insured;

(2) Protecting the property from further damage;

(3) Exhibiting the damaged property;

(4) Submitting to examination under oath;

(5) Providing records and documents requested by the insurance company.

2. WHO CAN ACT AS AN APPRAISER OR UMPIRE. In, Rios v. Tri-State Ins. Co., 714 So.2d 547, the Third District Court of Appeal held that even an individual who is receiving a contingency payment can act as an appraiser. However, the appraiser is required to disclose to the opposing party his pecuniary arrangements with the party who chose him in the appraisal. The Rios court looked to the Code of Ethics for Arbitrators in Commercial Disputes, which was promulgated jointly by the American Arbitration Association and the American Bar Association. Canon II A(1) states that persons who are requested to serve as arbitrators should, before accepting, disclose any direct or indirect financial or personal interest in the outcome.

The umpire must be neutral and must not have a pecuniary or other relationship with the parties which would render the umpire partial. If there is any conflict, the umpire should recuse himself or if he fails to do so, petition to the court should be filed to remove him.

3. CAN A COVERAGE QUESTION BE ADDRESSED THROUGH APPRAISAL

Whether or not a coverage question can be addressed in appraisal has been a major issue in the last few years.

The Florida Supreme Court has resolved the conflicting decisions regarding the role of appraisal as to the coverage and the amount of loss in Nationwide Mutual Ins. Co. v. Johnson, 774 So. 2d 779 (Fla. 2d DCA 2000), and Gonzalez v. State Farm Fire & Casualty Co., 805 So. 2d 814 (Fla. 3d DCA 2000).

The Supreme Court of Florida held that when an insurer denies a claim in part, appraisers are to segregate the covered and non-covered damages and determine the amount of loss for the covered claims. Where an insurer denies a claim in its entirety, coverage becomes a question for the court. The court further decided that where coverage exists, the dollar value agreed upon under the appraisal process will be binding upon both parties.

HOMEOWNER'S INSURANCE ISSUES

When addressing homeowner claims first determine what policy or coverages apply. Keep in mind that the insured may have a separate windstorm or flood policy.

1. REASONABLE REPAIRS. Most policies provide that the insurer will pay the reasonable costs incurred by the homeowner for necessary repairs made solely to protect the covered property from further damage. This coverage does not increase the limit of liability for the property. It is likely that many homeowners will pay costs for protecting their property which will be higher than normal, but will probably be necessary due to the shortage of materials and contractors. Request that the insured provide proof of all these payments.

2. SPOILAGE. Claims for spoilage of food resulting solely from interruption of power are common after hurricanes, since large areas can expect power to be out for a significant period of time. This is typically not covered under a homeowner's policy, if 1) the spoilage was caused by an off-premise interruption; and 2) the spoilage did not result from an on-premise covered peril.

Keep in mind that some companies’ policies extend coverage for spoilage of food due to power outages. Examine the policy carefully on this issue.

3. MITIGATION OF DAMAGES. The homeowner’s policy contains an exclusion for the insured neglecting to use all reasonable means to save and preserve property at and after the time of loss. The application of this exclusion will be limited by the severity of the damage and availability of contractors and materials. The measures which can actually be taken by the insured may be quite limited, and must be taken into account when considering this exclusion.

4. MOLD. In light of the explosion of mold claims in the last few years it can be expected that mold will be an issue after a hurricane. Check the policy to see whether mold is excluded or not. Some policies now have limited mold coverage which may be applicable. It may be necessary to sort out what is caused by water damage and what is related to mold depending upon what the policy language is.

5. SPECIAL LIMITS OF LIABILITY. The homeowner policy limits coverage on certain types of property. Examine the policy to see whether the limitation applies to all perils or just for loss by theft. For instance, the limita­tion on jewelry, silverware, and guns typically applies only to the peril of theft. In the event of loss or destruction of these items in the storm, your liability will be up to the full value of those items.

6. TREES AND SHRUBBERIES. Again, you must check the policy. A typical policy provides coverage for trees, shrubs, or lawns for only specified perils such as fire or lightning, explosion, riot or civil commotion, aircraft, vehicles not owned or operated by a resident, vandalism or malicious mischief, and theft. Windstorm damage to trees and shrubs is generally not covered.

7. SECTION I, CONDITIONS. Although a catastrophe like a hurricane creates adjusting problems, be aware that the policy conditions still apply and should be complied with. An insurer may chose to waive the insured's compli­ance with conditions such as presentation of proof of loss, formal inventories, receipts, or the like, but the insurer has certain obligations pertaining to the times within which an insurer must respond to claims or exercise options for repair or replacement. While the insured may be understanding at first, patience will wane if the claim process takes a significant amount of time. Remember also that plaintiff's lawyers and bad faith claims will not take a vacation during this process, so care must be taken to investi­gate the claims properly and to keep the insured advised of the status of his or her claim.

Other particular exclusion and conditions may apply, and we urge you to become familiar with the specifics of the policy.

ADDITIONAL LIVING EXPENSES

One of the most pressing issues confronting an adjuster involves the payment of additional living expenses (ALE) and interim living arrangements following a catastrophic loss. Typically, an adjuster will need to recommend or authorize payments of ALE with little or no documentation provided by the insured. Certain steps can be taken to manage ALE during the claim process and avoid misunderstandings. As a reminder, the insured must sustain a covered loss under the policy before he or she is entitled to payments for ALE.

It is incumbent upon an adjuster at the beginning of the claim process to explain to the insured what ALE coverage will pay for and what is expected from the insured. Any agreements reached with the insured during the investigation or claims-handling process should be reduced to writing.

Terms such as “increase in living expenses,” “necessary” and “normal standard of living” should be explained with care. Normal living expenses must be determined at the outset in order to properly compensate the insured for any necessary increase.

As to interim living arrangements pending repairs to the insured premises, most ALE provisions allow for sums necessary for an insured to maintain a “normal standard of living.” An example of an ALE provision provides:

If a loss caused by a covered peril makes the residence wholly or partially untenantable, the policy covers:

Additional living expense, meaning a necessary and reasonable increase in living expenses you incur so that your household can maintain its normal standard of living.

Situations may arise where due to local shortages in comparable housing, an insured’s only alternative is to obtain housing in an expensive hotel or high grade temporary home that clearly exceeds the normal standards of living. In regions that sustain catastrophic losses, this situation may become unavoidable. However, if comparable housing becomes available during the repair process, you should immediately notify the insured of this development and request relocation since the policy only calls for the maintenance of the insured’s normal standard of living.

As an additional matter, it is important to remember that an insured must “incur” or be liable for expenses for entitlement under ALE provisions; prospective or possible liability for expenses is insufficient.

 The following checklist of topics may prove helpful in assessing and recommending ALE payments. If you can gather information based upon this checklist, and you are able to obtain written agreements with the insured early in the claims-handling process, the risk of any misunderstandings and litigation should be greatly reduced.

RESIDENTIAL LOSSES

A. RESIDENTS

1) NUMBER OF FULL TIME RESIDENTS — Length of time in residence

2) NUMBER OF PART TIME RESIDENTS — Length of time in residence

Frequency of part time residency

B. MORTGAGE OR RENT PAID BY ANY RESIDENT

C. MEALS

How often each resident eats out or at home

D. WEEKLY FOOD COSTS

E. UTILITY EXPENSES

F. LAUNDRY/DRY CLEANING EXPENSES

G. PETS and BOARDING EXPENSES

RENTAL LOSS

A. DETERMINE WHAT PART OF THE PREMISES, IF ANY, WAS RENTED AND TRY TO VERIFY THE RENTAL

B. IF THE RENTED PART OF THE RESIDENCE IS SEPARATE FROM THE MAIN RESIDENCE e.g. A GARAGE APARTMENT, THEN DETERMINE IF THAT SECTION CAN BE MADE HABITABLE WHILE THE MAIN RESIDENCE IS BEING REPAIRED.

C. ESTABLISH THE AMOUNT OF LOSS OF THE RENTAL PROPERTY AT THE OUTSET OF THE CLAIM BY DETERMINING THE PROPER RENT FOR THAT PROPERTY IN THAT LOCALITY.

REPAIRS

A. ESTABLISH WHEN REPAIRS WILL BEGIN.

B. DETERMINE A REASONABLE LENGTH OF TIME FOR REPAIRS. Maintain contact with the insured’s contractor and monitor progress of repairs

MARINE CLAIMS

Claims will be filed for damage to vessels from collisions, either with other vessels or with objects such as docks, and for damage that resulted from flying debris and for maritime salvage. The claims for damage to an insured vessel are usually easily resolved. With these claims, the damage is assessed, the policy is reviewed, and if it is determined that the damage is covered under the policy, the applicable deductible will be applied, and the claim is paid if it is greater than the deductible.

However, the claims for maritime salvage are much more difficult to adjust. Many of these claims, if not expeditiously addressed have the potential of being litigated and even resulting in the arrest (seizure) and possible sale of the insured’s vessel.

The claims for salvage usually result when salvage is occasioned by an insured’s vessel being rescued from a perilous situation by a salvor, whether commercial or otherwise. Once a salvage claim is made, a determination must very quickly be made regarding whether the services rendered to the insured’s vessel by the salvor was in fact salvage. The urgency of these claims is usually seen, as the salvor will demand that the insurer pay the salvage award claim within a few days or weeks, or if not, the salvor will initiate action against the vessel for the services rendered.

To determine that the insured’s vessel was salvaged, three (3) elements must be present:

1) The vessel must have been in marine peril;

2) The service to the vessel must have been rendered voluntarily, and not required by duty or contract;

3) There must have been success in whole or in part by the service rendered, with such service rendered having contributed to such success. The Sabine, 101 U.S. 384 (1880

Many of the salvage claims that end up being litigated, do so, because there is no clear answer regarding the definition of a “marine peril.” Applicable maritime case law defines a “marine peril”, as a situation that is present and impending. This may be a situation where there is no imminent threat to the vessel, but where more probable than not, the vessel would be either damaged or destroyed without the salvor’s intervention and or rescue.

To be entitled to a salvage award, the salvor’s services in rescuing the vessel must have been voluntary. If the salvor was under a contractual obligation to rescue the vessel or to perform the services that he rendered to the vessel, he cannot recover for salvage.

Furthermore, if the salvor is not successful in rescuing the vessel, he is not entitled to obtain a salvage award for his efforts. This is based on the underlying rationale that the purpose of engaging in salvage is to render beneficial service to the vessel or its owner.

In determining a salvage award the following factors must be considered:

1) The degree of damage from which the vessel was rescued;

2) The value of the vessel saved;

3) The risk incurred in saving the vessel from the impending peril;

4) The salvor’s promptitude and skill;

5) The value of the property employed by the salvor, and the damage to which it was exposed; and

6) The labor expended in rendering the salvage service.

In making the claim for salvage, the Salvor may use a Standard Lloyd’s No Cure-No Pay salvage form, Boat US Salvage form or other preprinted standard salvage contract that entitles them to receive as a Salvage Award, a percentage of the after-salvaged value of the vessel. Should the insured sign any of these forms, it maybe difficult to negotiate with the Salvor for a smaller Salvage Award.

Many times the insured's vessel will be docked at a marina, where it had been taken by the Salvor. In most of these cases, the Salvor will have a working relationship with the marina's owner, who will refuse to release the vessel to the insured, until the insurer agrees to pay the Salvage Award being demanded, or posts security for the amount being claimed as Salvage Award. This tends to be very costly for the insured, who is not only faced with paying to repair the vessel, and paying the Salvage Award, but is also faced with paying the dockage fee on a daily basis.

Furthermore, if the Salvage Award remains unpaid for longer than the Salvor demands, the marina may also file its own lien against the vessel for the dockage fees if they remain unpaid. The Salvor may also seek to enforce his maritime lien on the vessel. A maritime lien is a property interest in a vessel, which arises out of goods or services that are rendered to or injuries caused by a vessel. The salvage of the vessel is deemed to be services rendered to the vessel. Consequently the Salvor has a maritime lien against the vessel for his Salvage Award.

If the Salvage Award remains unpaid, the Salvor will enforce his maritime lien by bringing an action (lawsuit) in Federal Court in rem to take the insured's vessel into the custody of the court. This is actually done by the court issuing an arrest warrant for the vessel, and U.S. Marshals actually seizing (arresting) the insured's vessel.

Once the vessel is arrested, the only options are to either post security for the amount of the claim, to facilitate the vessel's release while litigation ensues, or to pay the Salvage Award, so as to extinguish the maritime lien.

Absent the posting of security, or the negotiation of a settlement with the Salvor with respect to the Salvage Award, the Salvor will attempt to foreclose his maritime lien against the vessel, and force the judicial sale of the vessel for the Salvage Award.

Additionally, the Salvor may also bring a direct action against the insurer or the vessel's owner for his Salvage Award.

However, it should be noted, that if the insured's vessel is destroyed and/or declared a total loss, then no portion of the vessel is salvaged. As such, the Salvor is not entitled to a Salvage Award, as he was not successful in saving the vessel. Consequently, all maritime liens, including the Salvor's lien for a Salvage Award are extinguished.

Furthermore, if the Salvor is successful in litigating his maritime lien for his Salvage Award, he is entitled to an award of attorneys' fees and costs. The Salvor may also be entitled to prejudgment interest.

COMMERCIAL

Many businesses will be filing claims for structural property damage, as well as for claims for spoilage of perishable inventory and thefts caused by looters.

SPOILAGE. Businesses not in the path of the hurricane will also suffer losses to inventory as a result of power outages and disruption in business activities. Stores and restaurants stocking perishable meats and produce will experience significant spoilage of inventory. Each individual policy must be reviewed to determine if coverage exists for this type of loss resulting from utility failure and not windstorm. Business policies generally exclude coverage for loss resulting from failure of power or other utility service if the point of failure is away from the insured premises and the spoilage did not result from an on-premise covered peril.

LOOTING. Disasters such as hurricanes unfortunately bring out the worst in some people, including those willing to loot closed or damaged businesses. It is necessary to review the particular exclusions of the applicable policy regarding coverage for this type of loss. Looting does not normally fall under the definition of insurrection or rebellion for purposes of that exclusion. However, business policies may specifically provide coverage for burglary or looting. Thefts and burglaries to closed businesses, if otherwise excluded under the policy, will not automatically be covered under a “civil disturbance” or “looting and pillaging” provision just because the loss occurred in the aftermath of a hurricane. The insured must show the loss resulted from a covered peril and is not otherwise excluded.

INVENTORY LOSS. In any commercial loss, documentation of the claim is essential to establishing the true extent of loss or damage, especially to business inventory. It is prudent to retain a forensic accountant for assistance in evaluating every large inventory loss claim. Also, see this issue’s article on business interruption which highlights records needed in commercial losses.

The standard form of business policy requires an insured to separate damaged goods from his stock and to submit complete inventories of damaged property. To facilitate calculation of the loss, the adjuster should instruct the insured to take an immediate “post-hurricane” inventory and to document all “hurricane-sale” activity. These measures are necessary to determine the actual inventory loss sustained. Most policies will require the insured to produce these and other records in support of its claim and to cooperate with the insurer in determining the amount of covered loss.

BETTERMENTS AND IMPROVEMENTS. For those insureds leasing their business premises and sustaining structural damage, it is likely that part of any claim will include damage to betterments and improvements. Tenants’ “betterments and improvements” are permanently installed fixtures, additions, or extensions to the leased premises that may not be removed when vacating the premises. Generally, the law in Florida is that the tenant is responsible for improvements and fixtures he installed, and the building owner is responsible for the structure and improvements preexisting the insured’s occupancy of the premises. However, the lease should be examined to ascertain the extent of the lessor’s obligation to repair damaged improvements or additions by the tenant.

The business policy may provide coverage for replacement cost or actual cash value for a covered loss if the betterments and improvements were installed at the expense of the insured. If repairs are not actually made, the insurer may be liable only for a proportionate value of the damaged improvement, calculated by using the lease expiration date. The pertinent policy provision should be reviewed, as many business policies are special forms with modified provisions.

BUSINESS INTERRUPTION COVERAGES

Business interruption provisions of most commercial insurance policies provide coverage for damages resulting from the necessary interruption of businesses arising directly from a covered peril.

Generally, business interruption claims resulting from hurricanes occur when a business sustains direct physical damage which prohibits the business from operating.

Coverage is generally afforded under the policy of insurance when assessing these claims and the following actions are suggested:

a. Request that the insured make the business books and records available for review to verify the amount of the business interruption loss.

b. Depending upon the size of the business interruption claim, it may be necessary to obtain the services of an accountant to review the insured’s books and records.

i. If the insured’s business and records have been destroyed, see if the insured’s accountant has any records.

ii. Unfortunately, because of the widespread nature of the damage, if the insured’s accountant’s office was in the same neighborhood, it may be destroyed with all the records in it. In that case, it will be necessary to reconstruct records from some of the following sources:

a) Monthly banking statements and checks from the insured’s bank.

b) Monthly statements and payment records from credit card companies.

c) Copies of Federal Tax Returns from the Internal Revenue Service.

d) Sales tax records from the State of Florida.

POWER OUTAGE. If the business has not sustained direct physical damage as a result of the hurricane and the business interruption is caused by the lack of power to the business, generally there is no coverage for business interruption. This is due to the fact that business interruption is only afforded for losses arising directly from a covered peril. Most policies exclude power failures if the failure occurs outside the insured premises.

Be aware that business interruption loss claims cannot be based upon speculative loss profits. Business interruption losses can be based upon such sources as monthly banking statements and checks from the insured’s bank, the monthly statements and a payment record for credit cards, copies of federal tax returns from the Internal Revenue Service. Profit and loss statements relating to business loans.

Pursuant to Florida law, the insured has the burden to prove entitlement to business interruption coverage and the amount of such entitlement. Interruption insurance coverage is not designed to put the insured in a better position than he would have occupied without the claimed interruption.