Excess

Ever since childhood, I’ve had a fascination with architecture.  I never had sufficient artistry to justify studying it in college or choosing it as a profession, but I enjoy doodling floor plans and looking at how different buildings are designed.

One manifestation of that interest is a dream house project.  When my wife is having a good day, it’s sometimes enjoyable to sit with her and play with the layout and features of a mythical house.  And, for all the conservation minded features I throw in (rainwater capture, greywater usage, solar & wind power discreetly installed), I do have to admit that our dream house has such a large square footage that I ought to be ashamed of myself for even conceiving such a monstrosity.

However, it sounds like our 15,000 square foot cottage might not be quite as ostentatious as some residences in Connecticut.   Consider this post in the WSJ’s Wealth Report blog (free link):

Greenwich, Conn., is a small town of big houses. Like Steve Cohen’s 32,000-square-foot home with its own ice rink. Or Paul Tudor Jones’ 13,000 square-footer.

So when Greenwichers complain about a house being too big, that counts as news. According to an article in Greenwich Time by Hoa Nguyen, Russian billionaire Valery Kogan and his wife Olga are planning to build a 30,000 square-foot home on Simmons Lane.  [...]

The house would have the usual Russian-billionaire amenities: eight bedrooms, a gym, theater, lockers, wine cellar, staff quarters, game rooms, a Turkish bath, a Finnish bath and a special room in the basement for grooming dogs. The home also features a grand total of 26 toilets.

Twenty-six toilets?!   There probably is some method to that madness (one per bedroom, plus an extra one to provide jack-and-jill facilities in the master suite, a couple in dressing rooms for the gym, ….), but even so, uttering the phrase “my house has 26 toilets” just don’t seem right.

I wonder if I can score some floor plans.  I’m dying to know how one comes to need 26 toilets in a house.

So, while the attention of the Mississippi legal and insurance communities has been focused on the Scruggs circus, it looks like a bit of work has still been going on elsewhere in the state. For example, consider
this story at Insurance Journal:

California-based law firm Irell & Manella reports it has won a partial summary judgment on behalf of national gaming operator Pinnacle Entertainment Inc., in an insurance coverage case arising out of Hurricane Katrina.[...]

In August 2005, Pinnacle’s facility in Biloxi, Miss., sustained property damage and business interruption loss.

According to Irell & Manella, two of Pinnacle’s insurers, Allianz Global Risks U.S. Insurance Co. and RSUI Indemnity Co. (together providing more than $100 million of excess coverage), took the position that coverage for all storm surge damage falling within their policy layers was precluded by flood exclusions contained within their policies.[...]

After a two-hour oral argument on the motion, Judge Sandoval took the motion and cross-motions under submission. On March 26, he issued his ruling in Pinnacle’s favor.

The IJ article reads like this is a case of a Mississippi judge rewriting property insurance contracts after the fact. However, while that is an attractive thought to someone in the industry…I don’t think that is actually the case here. IJ skipped over a key paragraph in Irell and Manella’s press release:

According to Pinnacle’s CEO Dan Lee, “Pinnacle has always maintained that it has coverage for flood and other related damage caused by Hurricane Katrina. We specifically bought $400 million of coverage for Weather Catastrophe Occurrences like Katrina, including any resulting flood. We have been extremely disappointed that it has taken a lawsuit to convince our excess insurers of this fact.”

The phrase “Weather Catastrophe Occurrences” is the telling phrase here. A “Weather Catastrophe Occurrence” peril is a feature of some property insurance contracts written by London brokers. It’s my understanding that, at least at the time of Katrina, it was not uncommon for London to exclude Flood but provide coverage for the specific peril of “Weather Catastrophe Occurrence”, which in the case of a hurricane, arguably includes storm surge.

I’ll make an educated guess that the excess property carriers, Allianz and RSUI, issued “follow-form” excess contracts. They probably provided their own exclusions of the flood peril…but didn’t exclude WCO since WCO isn’t a peril you normally see on primary contracts written by American insurers.

The insurers likely tried to argue that the flood exclusion was unambiguous and superseded all other perils. However, I’d bet that either “flood” was not redefined in the excess contracts, or that the judge thought the flood exclusion was ambiguous when it comes to WCO. Ambiguity tends to be interpreted in a manner favorable to the party with the shallower pockets.

Moral of the story: If you’re an excess insurer, you need to be familiar with the language of the forms you’re following, and either price or exclude accordingly.