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Insurers suing town halls to recover claims paid

May 16, 2014

It’s not the first time municipalities have been sued for negligence but this is one to watch: Farmers Insurance Group claims that the town of Gurnee and two hundred other towns should have done more to protect their homes from water damage.  The defense will argue that the insurers should calculate the premiums based upon the actual risk characterstics of the town and give credit as protection is augmented. 

www.chicagotribune.com/news/local/ct-insurance-claims-flooding-met-20140514,0,3734520.story

chicagotribune.com

Insurers sue Chicago-area towns in bid to get flood money

They say municipalities should’ve done more against flooding

Robert McCoppin, Lisa Black and Dan Hinkel

Tribune reporters

May 14, 2014

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For years, Gurnee has projected the rise of the Des Plaines River before heavy rains, bought up property in flood zones and put out sandbags to prevent rainwater breaches.

Still, the village is among nearly 200 communities in the Chicago area being sued by a major insurance company that is arguing the municipalities didn’t do enough to prevent last year’s record flooding. The suits, filed by Farmers Insurance Group, seek to force these communities — and by extension their taxpayers and, ironically, their insurers — to pay back Farmers for claims it paid out for flooding in spring 2013.

“Their underwriters must have had a brain cramp that day,” Gurnee Mayor Kristina Kovarik quipped. She said the locations of flood ways are well-documented on FEMA maps. “You can’t stop the river.”

But Farmers asserts that flooding is no act of God. Filed as another spring rainy season commences, the lawsuits also make the novel argument that global warming will make such problems more common and government should be doing more to plan for that.

While some legal experts question the merits of the case, they acknowledge it raises a fundamental issue: When floods occur, who should pay for the damages?

The suits, filed in Cook and the collar counties last month, seek class-action status for all homeowners whose property was damaged by the April 2013 flooding. The litigation does not cite the amount of damages sought or paid by Farmers, but federal payments for losses statewide, excluding those covered by insurance, totaled more than $200 million, according to the Illinois Emergency Management Agency.

The suits argue that public agencies should have taken more emergency measures, such as emptying their reservoirs before the rains hit and employing more sandbags and inflatable flood barriers. That, the suits assert, could have prevented problems such as sanitary sewers backing up into homes so forcefully that “geysers of sewer water shot out from the floor drains.”

“The common, central and fundamental issue in this action is whether the defendants have failed to safely operate retention basins, detention basins, tributary enclosed sewers and tributary open sewers/drains for the purpose of safely conveying stormwater,” the lawsuit states.

The suit is an extreme example of “subrogation,” by which insurance companies pay out claims but then go after another party to pay for the damages. The practice is common on a smaller scale, such as when insurers pay for damages from a car accident, then go after the driver who caused the crash.

But attorneys and officials contacted for this story said they hadn’t heard of that kind of a claim on such a broad scale. The insurance industry defends the practice as justly seeking compensation from the parties that should be held responsible.

But Margo Ely, executive director of the Illinois Risk Management Association, which represents 55 municipalities named in the suit, noted that if local governments have to pay out anything in the lawsuit, it’s taxpayers who ultimately foot the bill.

“I view it as double-dipping,” she said. “The ultimate payer would be the same people who are paying the insurance companies to insure them: our residents and taxpayers.”

While each municipality could argue individually it should be removed from the suit, Ely said it would be much more efficient to make a blanket defense of tort immunity, which protects municipalities from a broad range of lawsuits.

The insurance company declined to comment beyond a prepared statement: “Farmers has taken what we believe is the necessary action to recover payments made on behalf of our customers, for damages caused by what we believe to be a completely preventable issue, as well as to prevent it from happening again.”

Though the Farmers suit casts an unusually broad net, there are similar cases in recent legal history.

In 2001, an apartment owner filed a class-action suit against the city of Chicago based on claims that a device known as a rainblocker, which restricted drainage into sewers, actually caused flooding by backing water up into homes. That suit lost in the trial and appellate courts, which noted that city officials had discretion in judging costs and benefits, but it took 11 years.

Last year, an appellate court ruled against a man who sued Elmhurst, saying negligent sewer maintenance cause sewage backups in his home. Both rulings said tort immunity protected the municipalities.

One resident whose home suffered damage in last year’s floods wishes local governments would do more to prevent flooding but is unsure of Farmers’ approach.

Ronald Madon, 75, endured nine floods in 26 years while living on a channel in Fox Lake. He was forced to move out after flooding in April of last year filled his home with a few feet of water. He’s been living with his daughter in Lake in the Hills since.

He was approved for a federal grant of $30,000 to elevate his house but expects the costs will be far more. He’s not sure what to make of the Farmers suit, saying, “I don’t know what the village could do to prevent the water,” Madon said.

Of course, local governments have taken many steps and spent millions to minimize flooding. Chief among the efforts has been the Deep Tunnel, a network of sewers and reservoirs that can hold 2 billion gallons of water. Continuing work is expected to expand capacity to 17 billion gallons, but its completion is still years away.

Daniel Jasica, a chief deputy state’s attorney for Lake County, said he believes the Farmers lawsuit will face “significant legal hurdles,” including a tort immunity challenge and “Act of God” defenses.

Like other suburban counties, Jasica said, Lake County has a comprehensive watershed development ordinance that applies to new construction to ensure it doesn’t create or exacerbate flooding.

And also like other public entities around the Chicago area, the county has received federal funds to purchase property that commonly floods so it can no longer be developed.

“On behalf of the county, we will certainly be vigorously defending the case,” Jasica said.

Just Tuesday, the Lake County Board approved spending $7 million on a regional water storage system that would help mitigate water overflow, he said.

Other municipal leaders also noted what they said were extensive, expensive efforts to address flooding.

In Glenview, the issue is “obviously a huge priority to our board,” said Village Manager Todd Hileman, noting the village plans to spend about $30 million over the next five years on flood-reducing infrastructure projects.

Hileman called the Farmers lawsuit “a publicity stunt” and said it’s unrealistic for any municipality to have perfect infrastructure.

“What’s next?” he said. “Is there not going to be any potholes allowed?”

In fact, insurance companies have gone after local governments over potholes too. Naperville was sued by an insurance company that paid out a claim to a driver whose car was damaged by a local pothole, city spokeswoman Linda LaCloche said.

Though suits seeking reimbursement for insurance companies are not unusual, this type of class-action litigation against dozens of governments is unusual, experts said.

Gary Wickert, a Wisconsin lawyer who specializes in insurance subrogation, said he believes insurance companies have taken the practice “more seriously” in the past 25 years. Wickert — who has represented Farmers Insurance in other matters but was not aware of the local litigation filed by Illinois Farmers Insurance Co. and Farmers Insurance Exchange — said subrogation holds down insurance premiums and makes sure those responsible for damages are held accountable.

Roger Baron, a University of South Dakota law professor who has criticized insurers’ actions in subrogation cases, said he doubted the practice truly holds down premiums. He questioned whether homeowners who suffered flood damage would benefit from the local litigation.

“Is the interest of the insured going to be protected?” he said.

In the case of the Farmers lawsuits, the financial implications could be even murkier because many municipalities buy insurance to help pay legal claims against them. That means if Farmers wins damages from any of the municipalities, the payouts might be made by another insurance company.

Tribune reporter Alex Chachkevitch contributed.

rmccoppin@tribune.com

lblack@tribune.com

dhinkel@tribune.com