Volcano sparks eruption of lawsuits on the Big Island

In May of 2018, the Kilauea volcano erupted sending molten lava soaring over 60 meters into the air. Over time, the lava spread to cover over 12 square miles on Hawaii’s Big Island. Over 1,000 homes and other buildings were destroyed by the flowing lava. Hundreds of earthquakes and tremors rocked the island during the volcano’s eruption.

Soon after the initial eruption, Hawaii’s insurance commissioner made it clear that in Hawaii, if a home catches fire and is destroyed due to exposure to molten rock it is considered fire damage, which is covered under a typical homeowners insurance policy.

Homeowners policies don’t cover everything

That being said, due to the increased risk of volcano or lava flow damage on the island, insurance policies are written so there is generally no coverage provided for damage caused by a volcano or by lava flow.

Losses caused by an earthquake, land shock waves or tremors are also not covered under a homeowners policy, so if the home damage is caused by an earthquake or tremor, there will not typically be coverage. If debris can be traced to a covered peril, debris removal coverage will provide funds to dispose of damaged property and toxic volcanic ash. If an insurer is willing to take on this risk, the insured may have the opportunity to purchase a policy that covers lava flow.

Because of the great risk involved in living in some areas in Hawaii, those areas have been designated as lava flow hazard zones. Zones are based on the location of eruptive events, historic lava coverage and topography. Zone 1 and zone 2 represent a particularly high risk. As a result, very few insurers will take on that risk by insuring homeowners in those areas. Lloyd’s of London, the world’s largest insurer, was one of the few options available to homeowners in lava zones 1 and 2. Although Lloyd’s is not licensed by Hawaii to sell insurance in the state, Lloyd’s is a “non-admitted” carrier in Hawaii, meaning that Lloyd’s can write coverage through an excess and surplus lines broker who is licensed in Hawaii.

Being a non-admitted carrier also means that the Hawaii Department of Insurance has less power to regulate the insurer than it has over Hawaii admitted insurers. Non-admitted insurers also do not have guaranty fund protection that helps to pay claims if an insurer becomes insolvent. Some of the home insurance policies that were issued within lava zones 1 and 2 included “lava exclusion” language, sparking huge concern among insureds after the volcano began erupting.

Avoiding bad faith claims

In a recent development, some insureds on the Big Island are suing the companies that provide their homeowners insurance for payment they have not yet received for their losses on their insurance policies, and for bad faith. In some instances, insureds have had to wait up to 60 days just to get a response from their insurer, in some cases denying coverage.

In one instance, Lloyds of London is the insurer being sued. Several residents claim they have lava coverage from Lloyds, but the company has refused to pay for loss of use or for contents, even if both were listed as covered under the applicable policy. This is an area of contention, as insurance coverage is very specific. Coverage can be taken away in one provision and restored in the next. Although loss of use and contents may be covered property, they may become not covered if the peril that causes the loss is excluded from coverage.

The attorneys who are representing the insureds want to put some pressure on insurance companies to do the right thing for their insureds who have paid millions of dollars in premium payments, and are not receiving the statutorily appropriate response from their insurers. Hawaii Revised Statute §431:13-103 provides definitions of unfair or deceptive acts or practices, and dictates that an insurer licensed in Hawaii must provide the insurance department with adequate response to inquiry, and reply to all pertinent written communications from the claimant within 15 working days.

The insurer has a duty to advise the claimant of the acceptance or denial of their claim within 30 days of the affirmation of liability, and if the claim is being denied, the insurer must promptly provide a reasonable explanation of the basis in the policy on which the claim is being denied, or of the compromise of a settlement. As mentioned earlier though, Lloyd’s is not an admitted insurer in the state of Hawaii, so they may not be held to the same statutory standard as admitted insurers.

Insureds are encouraged to speak with their insurers as soon as possible to see what coverage is available to them, and to ensure that any high risk peril is covered under their policy. Many of the individuals living in lava zones 1 and 2 know of the risk of lava damage, and assume the risk of living in such an area with inadequate insurance coverage.

Hannah E. Smith, JD, (hsmith@alm.com) is an insurance law editor with FC&S Online, the authority on insurance coverage interpretation and analysis for the P&C industry. It is the resource agents, brokers, risk managers, underwriters and adjusters rely on to research commercial and personal lines coverage issues.