Penford flood insurance claims head to trial

A case set for trial Monday in Cedar Rapids is believed to be the largest insurance claim lawsuit stemming from the June 2008 flood in Cedar Rapids that will go before a jury.

Penford Corp. and Penford Products Co. sued National Union Fire Insurance Co. of Pittsburg and Ace American Insurance Co. Jan. 23, 2009, over claims filed under two insurance policies. The policies covered Penford's southwest Cedar Rapids factory, which flooded on June 11, 2008. The plant primarily makes starch products and ethanol.

Losses were estimated at $50.6 million at the time the lawsuit was filed, and were expected to exceed $56 million.

The insurance companies eventually paid $20 million to Penford for property damage at the Cedar Rapids plant, the lawsuit said, but had informed Penford that their obligations were capped by two $10 million “sublimits” applicable to flod in two zones at the Cedar Rapids plant.

As a result, the companies argued that they essentially owned nothing for losses under “time element” provisions of its policies, the lawsuit said.

Time element is a property insurance term referring to coverage for losses resulting from an inability to put damaged property to normal use.

The lawsuit alleges breach of contract and bad faith actions by the insurance companies. It claims they failed to adjust the loss in a timely manner, failed to pay undisputed claims, and failed to pay Penford the total mounts of its loss.

Chief Judge Linda Reade, in a pre-trial order, mentioned ambiguity in parts of the policy language regarding whether flood sub-limits cap not only property damage loss, but also business interruption losses. Penford believes Iowa's doctrine of ambiguities dictates that the policy be construed in the policyholder's favor, she wrote.

The insurance companies have responded in part that they have paid Penford the amounts it is legally entitled to receive under the policies. But they also replied that Penford has failed to provide adequate supporting documentation for its “alleged” business interruption losses.

Both sides have lists of more than 15 witnesses that they may call on during the jury trial set for Monday in United States District Court in Cedar Rapids.

The witnesses will include executives of Penford Products and its parent company, Penford Corp. of Centennial, Colo.; Marsh Inc. of Chicago, which participated in the sale of the policies to Penford and advised Penford on the adjustment of the claims, and officials of AIG Global Marine & Energy, which underwrote the policy to Penford and participated in the adjustment of Penford's claim on behalf of National Union.

The lawsuit states that the polices provided $300 million in “all risk' property insurance coverage, for which Penford paid $655,848 in premiums.

Penford claimed that in addition to physical damage to the plant, the claims resulted from lost earnings of $14.6 million through August 2008, interruption of electric service to the plant from June 11, 2008, thorugh July 29, 2008, inability to get into the plant due to floodwaters and evacuation orders, and also professional services for presenting its claims to the insurance companies.