Subrogating Against God: Recovering Claim Dollars When Natural Disasters Strike

The claims history of most domestic insurance carriers is littered with billion dollar claims as a result of catastrophic losses caused by natural disasters. When God sends a hurricane, tornado, flood or naturally-occurring fire, the resulting losses can be enough to put many insurance companies into receivership. With no third parties or obvious subrogation potential, these mammoth claim payments often disappear permanently. Acts of God such as these reveal a celestial tortfeasor who is both judgment proof and beyond reach by summons and subpoenas. However, rather than throwing in the towel, these losses present tremendous recovery potential for the proactive claims professional. It is said that opportunity is missed by most because it is dressed in overalls and looks like work. Nowhere is that adage truer than when it comes to subrogating natural disasters. If a carrier is willing to invest the time and effort necessary to investigate third-party potential in the face of disaster, it is possible to turn tragedy into triumph.

Great Flood of 1993

Such appeared to be the case with the Great Flood of 1993 in the Midwest and along the Mississippi River. This naturally-occurring flood costed an estimated $21 billion, covered parts of nine states and lasted three months. As the floodwaters rose, 1,369 brand-new Subaru automobiles, ready for distribution and valued at more than $17 million, were being stored by the Chicago & Northwestern Railroad (now Union Pacific) for Subaru of America, Inc. (“Subaru”) at an old American Motors outdoor storage facility in Kenosha, Wisconsin, which the railroad had leased for this purpose. Lloyds of London (“Lloyds”) and its lead underwriter, Commercial Union Insurance Company, ultimately paid more than $11 million on this claim. The claim also resulted in Lloyds canceling Subaru’s policy. Subrogation was looked into by Lloyds’ Claims Office and was quickly dismissed. It was, after all, the storm of the century. Who could one possibly blame for that?

As subrogation counsel for Lloyds’ Claims Office, I had routinely performed quarterly subrogation reviews at their office on Lime Street. During a routine file review, I came across the Subaru claim file in their closed file area with the words “No Subrogation” stamped across the top of the file. Noticing that there had been a similar flood in this area earlier, I convinced the lead underwriter to invest $50,000 to do a hydrological study and produce a HEC-2 computer simulation of the flood, which, together with a historical survey of the area, revealed that many of the vehicles may have been stored on a 100-year flood plain. That was enough to file suit. Subaru and Lloyds sued Chicago & Northwestern Railroad, Wackenhut Security, and several other purported owners of the property.

Discovery was excruciating with many of the depositions taking three days or more. Ultimately, an old lease agreement between Chicago & Northwestern Railroad and Subaru was produced, which required Chicago & Northwestern Railroad to maintain certain minimum standards, including drainage that would prevent more than two inches of water to accumulate. I put an ad in a local paper seeking anecdotal stories about previous floods in this area and received favorable responses. Still, the defendants strenuously claimed the flood was an Act of God.

Faced with the hydrological evidence and the existence of a flood plain, however, they ultimately had to admit that parking $17 million worth of automobiles on a flood plain was not prudent. After several Motions for Summary Judgment, two trial settings, and three-day mediation, the defendants ultimately paid more than $7 million. It was $7 million Lloyds never thought they would see. After the recovery, I set up a meeting between Subaru and Lloyds, which resulted in Lloyds reissuing coverage to Subaru. This was a happy ending for Lloyds and it proved the adage that when you have catastrophic losses, you have subrogation potential.

California Flooding of 1998

Similarly, another catastrophic loss occurred in the early morning hours of February 3, 1998, when much of the San Francisco Bay area and Alameda County (“County”) were struck by a strong storm system which had moved on shore the preceding afternoon. The storm had been preceded by several days of rainy weather which resulted in wetter-than-usual ground conditions in most areas of the state. Nearly four inches of rain fell in a 24-hour period. It was argued that this was the equivalent of a 100-year flood in this area, although we later argued that it was only a 10-year storm. Needless to say, there was significant damage throughout the area, including flood waters which backed up through drains located on different portions of the 52-acre lot owned by Bay Cities Auto Auction, a Cox Enterprise entity. Thousands of cars were stored on the property, and more than 2,210 vehicles suffered severe water damage, resulting in more than $4 million being paid by Transportation Insurance Company and its excess carrier.

A claims supervisor for Transportation Insurance Company had attended a recent flood loss seminar we had presented, during which we recounted a very similar flood loss involving thousands of new Subaru vehicles which had been damaged in Kenosha, Wisconsin during heavy flooding in 1993 in Wisconsin and throughout the Midwest. He recalled that our subrogation efforts had netted $7,275,000 in that case and asked whether there was any use in trying to subrogate this natural disaster. As we consistently tell our clients, where there are large catastrophic losses, there is almost always subrogation potential. He referred us the file to conduct some initial investigation.

We immediately hired the nationally-renowned hydrology and hydraulics experts, Daryl Simons and Charlie Baggs, out of Fort Collins, Colorado. They quickly went to the site of the loss and began taking site elevations in preparation for a HEC2 and HECRAS analysis of the flood. Bay Cities Auto Auction is surrounded by the County’s storm water drainage systems, which are comprised of three lines Line A, Line B and Line D. These Lines drained in an area of approximately 15-square miles, culminating in a sharp right-hand turn into Line A, which runs along the Nimitz Freeway all the way to the Tidegate and San Francisco Bay. We obtained FEMA studies of the area, including a FEMA study which was in the process of being completed at the time of the flood, together with the Alameda County Flood Control District’s Hydrology and Hydraulics Criteria Summary, dated August 1989, which dealt with design capacity of various categories of ditches and other channels in the system in order to accomplish their flood control objectives. The District’s own criteria required facilities to be designed to carry the 100-year flood. It appeared that the District had never upgraded to the 100-year criteria, nor had they maintained the original system to handle its original capacity the 15-year storm. Premised on this preliminary work, suit was filed against the Alameda County Flood Control and Water Conservation District, the State of California, and the City of Hayward, alleging causes of action in inverse condemnation, negligence, nuisance, waste, trespass, dangerous condition of public property, comparative equitable indemnity, comparative equitable contribution and failure to warn. The litigation lasted nearly four years.

Much of the ongoing litigation centered on whether the subject flood was a 10-year storm, as we maintained, or a 100-year storm, as the defendants maintained. The defendants noted that some rain gauges outside of the sub-basin measured a 100- to 200-year storm, while our use of the National Oceanic and Atmospheric Administration (NOAA) Atlases 24-hour system showed that this was less than a 10-year storm. The defendants claimed that Bay Cities Auto Auction was not historically subject to flooding, but that the defendants had unnecessarily concentrated extra water into Lines B and D around our insured’s property over the years, and the State had erected a freeway which acted as a dam, except for a small aperture through which the waters of Lines B and D were to pass into what became Line A. We surveyed surrounding properties and businesses, noting flood marks on the sides of buildings in order to “nail down” with some accuracy the high flood levels during the storm. As plaintiffs, we also demonstrated and documented the urbanization which had increased the blacktop and concrete surface area, which produced significantly more runoff than in 1960, when the system was designed. Ultimately, we were able to show that the flood drain system which could handle a 15-year flood in 1960 was not able to do so in 1998. Urbanization had reduced the systems capacity from the 15-year flood to less than that of a 10-year flood. Also, desilting was shown to be necessary because the channels had accumulated vegetation and silt which reduced the flow by approximately 50 percent.

While this case became hyper-technical in nature, and required the extensive use of experts in various disciplines, the issues were ultimately boiled down to the size of the storm and the capacity of the channels. The experts in this case disagreed about almost everything, including the actual formula to be used to determine hydraulic resistance coefficients or “n values”. Because we hired the foremost experts in the industry early in the case, their strength carried the day. This is true even though months before trial, Charlie Baggs suddenly and tragically died of an illness leaving us with a large “hole” in our expert arsenal.

Thanks to the creativity and vision of a claims supervisor at Transportation Insurance Company, the hard work of our local counsel in San Francisco, and the tenaciousness and reputation of our experts, we were able to turn a naturally-occurring flood into a recovery of more than $2.5 million. Both this case and its predecessor in Wisconsin are testaments to the fact that third-party liability doesn’t always jump out at you in the initial investigation of a catastrophic claim. Sometimes, it takes vision and hard work, which may ultimately pay dividends.

Hurricane Katrina

Subrogation in the aftermath of Hurricane Katrina was invisible at first, but was certainly present. There were numerous examples of decision-making in the New Orleans area which illustrated a lack of local government concern about specific hazards to private residents. Local officials often resisted proposals to protect their communities from storms because they did not want to pay their share of federal projects. Levy districts opposed hurricane protection floodgates at the mouths of the city’s drainage canals, leading to the construction of walls along the canals which failed in Hurricane Katrina. In the 1980s, the Federal Insurance Administration (“FIA”) launched a subrogation suit for more than $100 million against Jefferson, Orleans, and St. Bernard Parishes, contending that these Parishes caused the FIA to pay excessive flood insurance claims by failing to maintain levies and failing to enforce elevation requirements for new construction. This inaction on the part of the Parishes led to buildings being flooded and their owners seeking compensation from the National Flood Insurance Program (NFIP). The courts ruled in FIA’s favor and ordered the Parishes to improve their levy maintenance and enforcement practices. The City of New Orleans also did not update its 1970 comprehensive plan for almost 30 years. When it got around to this in 1999, its New Century New Orleans Land Use Plan made absolutely no mention of the extreme flood hazard facing the city, ways of mitigating the hazard through land use, and building regulations or how the city might recover from an event such as Hurricane Katrina. Still local governments are willing to reduce natural hazards by managing development. It is not that they are opposed to land use measures, but, like individuals, they tend to prioritize things and view natural hazards as a minor problem that takes a back seat to more pressing issues such as unemployment, crime, housing, transportation, and education.

If you are willing to make the investment into uncovering and pursuing subrogation potential in the face of Acts of God which result in claim disasters, it is very possible to turn tragedy into triumph. The smallest of investments could mean complete erasure of a significant loss for your insured and a good year for your subrogation department.