A Royal Pain in the Rain

A judge finds that the Chron's all wet about insurance coverage

Tropical Storm Frances delivered the first deluge in 1998. The second torrent soon followed from residents and businesses seeking compensation for extensive damages from high winds and water.

Families ousted from flood-ravaged homes headed to their insurers for relief. So did motorists who had cars washed away and owners whose shops were shut down by surging tides. The Houston Chronicle largely had been spared storm problems, along with the rest of downtown, but that didn't stop the newspaper from arguing that it had more unusual damages: It wanted insurance payments because some of its employees didn't make it to work that day.

The Chron tried to collect more than $110,000, saying that the reduced workforce brought in fewer profits from classified ads during the storm. And when Royal Insurance Company of America didn't pay up on the novel claim, the Chron sued. It alleged breach of contract and violations of the state's insurance code. This from a newspaper whose pages regularly have warned readers about frivolous insurance claims, unscrupulous operators who would try to exploit natural disasters, and even the perils of lawsuit abuse.

The newspaper's parent, the Hearst Corporation, paid Royal $600,000 in 1997 to include the Chronicle and several other entities in a three-year comprehensive "all risk" insurance policy to cover interruptions in business.

Frances rolled through less than a year later, dumping as much as 12 inches of rain in some parts of the region. Officials cautioned residents against nonemergency travel because of flooded streets and freeways. The suit says about half the Chronicle's regular classified advertising sales crew apparently took the advice and stayed home.

When the rains stopped, the Chronicle submitted a claim to Royal for about $6,700 in minor water damage from "wind-driven rain" that seeped into three upper floors. It also wanted $2,600 for overtime for production and administrative personnel who had to stay over to handle duties of the depleted workforce. But the biggest hit in the Chron claim was $113,500 in lost profits from the missing ad salespeople.

There was a problem: the terms of the insurance policy. Royal would have to shell out if the newspaper ceased operations even temporarily. Or if the building flooded or was damaged seriously enough to prevent workers from getting in or out.

But the Chronicle itself admitted it never came close to that kind of crisis. Executives simply reported that "large numbers of employees were unable to report for work because of flooding."

Attorneys for the newspaper argued that the policy was ambiguous. Hearst representative Gary Haag claimed that the flood was a "covered peril" and it didn't matter if company buildings stayed dry, as long as there was a flood somewhere that affected its workers. "The policy speaks for itself and makes no mention of any distance requirement in which the peril must occur," he wrote. Taken to extremes, such a position could require an insurer to cover the Chronicle for employees who can't make it back from a ski trip if there's a snowstorm in Colorado.

"I was astounded," Jay W. Brown said of the suit. As lead attorney for Royal, he used the paper's own articles that described downtown mostly as "high and dry" during the storm. The Chronwas merely unhappy that the weather had hurt ad sales, he argued.

"Business interruption policies in general do not cover business downturns," Brown explained. "You can see the reason for that, because every business has upturns and downturns."

The newspaper contended basically that since "employees can't get out of their homes in The Woodlands, or can't get across the Trinity River, then ingress and egress to the building is barred," Brown said. "That was just something specious." The policy states that access to the actual "premises" must be restricted, he said.

Laura Gibson, the attorney for the Chronicle, said the newspaper had adequate proof that employees were blocked from working by the "extreme flooding conditions."

"I don't think anybody who experienced that flooding would think that the lawsuit was frivolous," Gibson said. "The business was impaired a great deal by everyone's inability to get to work. The Chronicle lost large amounts of classified revenue. It did its best to try to mitigate the loss, but did suffer a loss under the policy."

Gibson argued that Royal raised no objections to a 1997 claim, when it paid for losses after a Chronicle printing press had a flameout that harmed operations but did not shut down the newspaper.

U.S. District Judge Ewing Werlein Jr. waded through two thick file folders of briefs and more than a year of acrimonious contentions by the opposing sides. Then he threw the suit out earlier this year with a summary judgment against the newspaper.

"The judge took their argument apart piece by piece," Brown said.

The ruling doesn't quite close the case, however. The newspaper's original quest for more than $100,000 now could cost it double that in attorney fees that the judge may order it to pay to insurance company lawyers. Werlein will soon decide the amount.

"We think that the court's decision was in error.We've offered to make some compromises with Royal, but they've been unwilling to work with us on it," Gibson said. "We may appeal the decision after all this is said and done."

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