So how can an insurance professional, risk manager, general adjuster, and asset manager make an informed decision regarding investigating a flood claim? Assuming that there is insurance coverage and that a claim will be paid, which of the thousands of flood claims carriers receive each year should be investigated for subrogation? There are several approaches, from investigating all flood claims to investigating only those with obvious potential such as dam breaks, pipe breaks or collapses. The best solution is somewhere is the middle; a disciplined staged approach.
As recent experience shows, flood subro claims can be litigated and won or settled. In order to make money on these cases informed decisions must be made early. Most people think of floods as Acts of God so liability carriers are understandably reluctant to discuss settlement. Only when we can demonstrate that human intervention caused or contributed to the loss will meaningful settlement discussions occur. The key is understanding that the Act of God defense requires that the event be solely caused by unpredictable, uncontrollable, natural events without any human intervention. Only the most extreme events qualify as Acts of God. Most events result from the combination of naturally occurring events and human intervention; for example a large rainstorm combined with the failure of a property owner or municipality to maintain a bridge or culvert.
For asset allocation, the extremes are simple; very small flood claims rarely qualify for scarce investigation funds and investigating very large flood is easier to justify. The great majority are the cases in between – the $150,000 to $500,000 range of cases. What are some things that the adjuster can consider when deciding to invest in these cases and is there an acceptable protocol to follow to maximize the investigation budget and to justify further investigation expense? A disciplined, phased or staged investigation approach is best. This allows for the increased allocation of resources as more is learned about a case and the prospect for a recovery increases.
First and most obvious is utilization of “free” resources. If you pay an engineer hourly but pay your subrogation counsel a contingent fee then the first step is getting all you can from counsel. Most counsel who handle substantial flood cases are well acquainted with flood science. Counsel can gather preliminary details regarding the storm and flood such as how much rain fell and in what period of time, how deep the flood water was, if a flood study was completed by FEMA for the community where the flood occurred. If this initial evaluation reveals some questions or areas of interest then an engineer can be retained for the limited purpose of surveying background information about the flood and the history of the community and source of the flooding. The goal here is to try and exclude the case based upon this background information. To make an early determination that the flood was caused by too much rain falling too quickly suggesting an Act of God rather than a viable subrogation case. Most of this information can be gathered by the engineer for little cost from the internet. There are informational web sites which historically track rainfall data, stream flow data, and stream gage data (the USGS has deployed a system of rain and stream gages nationwide that provide substantial information about rainfall and water flow). Setting a “not to exceed” budget for the expert to work toward on this initial phase is beneficial. Flood studies and flood insurance rate maps are prepared by the government for thousands of communities and even the smallest of creeks and streams. This information can be gathered with a modest budget. The analysis by the engineer is more costly but can easily be budgeted beforehand (again, a “not to exceed” approach is useful). Now an informed decision based upon the background information can be made regarding a more expensive engineering site inspection. Usually this pre-site visit stage can be reached for $2,000 to $3,000 which is a modest investment for a substantial flood case.
Only then will the engineer go to the site, photo and measure (at the direction and with the participation of subro counsel) all of the relevant areas and objects. Decisions can then be made regarding actual surveying of the site in order to understand the water surface elevation as well as the elevation of landmarks so that comparisons can be made and data points identified. The last and most expensive step is to instruct the engineer to complete a profile of the creek or stream so that a sophisticated mathematical model (known as a HEC-RAS model) can be prepared and changes in dimensions of the waterway (width, depth, roughness of the channel) can be calculated and evaluated. It is significant to understand that changes in these dimensions can affect the water surface elevations at the property in question. Put differently this allows the engineer to say that if the waterway was wider or deeper or smoother, then the water surface elevation at the insured property would have been lower. This is the essence of a subrogation recovery case. We have even had cases in which the engineer can say that a small change in the water way of two inches for example, would have caused the water elevation at the insured property to be, for example, three inches lower. In the case of the hospital, data center or financial institution, three additional inches of water can mean the difference between valuable equipment being damaged or not; the difference between a small claim and a multi-million dollar claim.