Repercussions of Hurricane Ike on the Financial Services IndustryRead Time: 1 min
Categories of Claims
We can generally summarize the cases as falling into one of four categories:
- The homeowner sues the lender for allegedly failing to force-place hazard (homeowner’s) insurance;
- The homeowner sues the lender for allegedly failing to force-place flood insurance;
- The homeowner sues the lender for allegedly failing to make scheduled insurance premium payments from escrow which led to the homeowner incurring an uninsured loss;
- The homeowner sues the lender because the flood zone determination company retained to determine whether the borrower was in a 100-year flood zone incorrectly places the borrower outside the flood zone and flood insurance was not purchased.
Given the widespread damage that Ike appears to have caused, and the large number of residences which suffered losses, it is reasonable for the financial industry to anticipate claims which parallel those mentioned here. Without expressing an opinion as to the validity of any causes of action asserted in the Katrina/Rita cases, or how Texas law would apply, there is little doubt that the persons involved in those cases will need to have an intimate familiarity with the National Flood Insurance Act (NFIA) and the National Flood Insurance Program (NFIP) insurance policies.
Specific Cases and Causes of Action
Below are actual cases, some of which are still ongoing, with a brief discussion of the causes of action pled, to provide some context for the claims that have been brought to date:
Homeowner brings breach of fiduciary duty claim against lender for paying an insufficient insurance premium from escrow which reduced the amount of flood insurance coverage in place. The federal court dismissed this claim because there is no fiduciary duty applicable to the lender in this circumstance.
In a lawsuit arising from an alleged failure to pay interest on loss draft proceeds, the national bank has asserted a preemption defense. It is of interest that there is a class action pending on this issue for Katrina and Rita loss draft proceeds. We should expect to see very similar concerns raised in Texas given the displacement of so many people by the large breadth of the storm in Texas.
With regard to the failure to force-place and/or require flood insurance policies, there are a number of single plaintiff cases that were filed post-Katrina and Rita. In those lawsuits, the plaintiffs alleged direct violations of NFIA as well as seeking redress for claims arising from negligence, negligence per se, breach of contract, and breach of fiduciary duty. To date, these cases have been resolved by the lenders on favorable terms.
While there are and were a number of other different cases (for example, claims arising from the Murphy Oil Company leak), it is not unreasonable to conclude that there are a large number of homeowners who have suffered losses that, for one reason or another, will not be covered, or will only be partially compensated. In that event, and in this time of increasing credit uncertainty, it is perhaps inevitable to see litigation arising from Hurricane Ike.