Superstorm Insurance

February 25, 2013

At a total cost of $65 billion in damages, Superstorm Sandy was the second-costliest hurricane in United States history, behind Hurricane Katrina’s $108 billion in damages. Of that, an estimated $25 billion is insured, meaning storm victims without coverage are on the hook for a collective $40 billion from wind, flood, and fire damage.

The insureds, on the other hand, have not had an easy road either, by any means. Many insurers have found pricey loopholes that policyholders have to jump through before seeing a dime of payout. Even those that are insured often find out their coverage is not enough to completely restore their quality of life. What if both groups had the option — or were required — to purchase an all-encompassing suite of coverage for just this type of storm, a.k.a superstorm insurance?

If Sandy was a one-off phenomenon and freak of Mother Nature, there’d be no reason for even discussing such an idea. Trouble is, many commentators, from NASA climatologists to Harvard geologists, are declaring storms like Sandy “the new normal” thanks to global warming. Of course, this is a highly controversial stance, but even the most measured assessments allow that global warming probably strengthened Sandy’s destructive power, and that we can expect stronger storms (though fewer of them) in the future.

Insurance’s Recent (Unfavorable) History of Super Storms

So what would superstorm insurance look like? The closest thing on the market today would be a homeowner who buys windstorm insurance and flood insurance. The way it stands now, superstorms and hurricanes can make dealing with damage from wind and flooding a nightmare.

The trials of Hurricane Katrina victims trying to make insurance claims were well-publicized. Thousands of homeowners were outraged to find their houses weren’t covered by flooding caused by wind-driven storm surge. Others discovered sliding deductible clauses in their policies and some moved away when their homeowners and flood insurance rates stood to quadruple.

Another hurdle coastal property homeowners have had to deal with in recent years is the “hurricane deductible.” Under this rule, homeowners whose houses were damaged by hurricane-force winds are required to pay up to 5% of their home’s value before insurance would kick in. In other words, a $200,000 house could have a $10,000 deductible after a hurricane. Sandy victims seemed to have dodged this bullet when the governors of New York, New Jersey, and Connecticut informed insurance providers that as Hurricane Sandy did not technically hit land as a hurricane, they would not be allowed to charge policyholders special “hurricane deductibles.” But already there have been reports of cases of homeowners being denied claims (with the state’s blessing) because of “windstorm” damage.

New Orleans policyholders also got an introduction to a phrase from the inscrutable world of fine print called the “anti-concurrent causation clause.” Basically it was a loophole for insurers to withhold payouts in situations where a home was damaged by two causes, only one of which was insured against. Needless to say, lawsuits followed, but the courts came down on the side of insurers. So when 111 homes in the Queens area of Breezy Point burned down during Sandy’s onslaught, the owners — many of whom were firefighters — stood to have their insurance claims denied, according to the Consumer Federation of America. The group publicly called for action to ensure the clause did not restrict the homeowners from collecting on claims.

Who Writes the Check?

Who would underwrite superstorm insurance policies — the government or the private sector? The situation is not pretty. The latter ditched the flood insurance market after insurers realized the potential for a massive number of concurrent claims after a storm; if one house floods, lots of houses are flooding. But the government’s insurance program has been derided as poorly conceived, terribly mismanaged, and in the words of Gov. Chris Christie, “a disgrace.”

It took a full three months before the federal government finally stepped in to help out Sandy victims. On Jan. 29, 2013, President Obama signed the bill giving Sandy victims relief in the amount of $50.5 billion. Earlier in the month he had had to sign a bill to replenish the coffers of the National Flood Insurance Program (NFIP) to the tune of $9.7 billion, after the program was deluged with more than 100,000 claims. The NFIP took a massive hit after Katrina, having to borrow $18 billion to pay out claims and leaving only $2.8 billion to work with under its cap.

Ronald Guidry has been an insurance agent in the New Orleans area for over 30 years. He said there has been some talk in years past about also putting windstorm coverage under the NFIP’s umbrella (no pun intended). He said he could get onboard with such a move because it would be a good way for coastal areas to make insurance more affordable. But as for the private sector taking over, he isn’t so optimistic.

“I don’t think the private insurance market has an appetite for (hurricane insurance),” he said. “I think it has to be a government program.”

He added that as far as flood insurance with the NFIP, the administration was “very responsive” and complaints were “very few.”

Billy Van Jura is the owner of property and casualty brokerage firm Birchyard in Poughkeepsie, N.Y., advising many clients living in the Sandy-smacked Hudson Valley. Unlike Guidry, Van Jura said he looks forward to the private sector taking over storm insurance, citing a much-needed market correction as reason enough to feel so.

“Flood insurance is not priced correctly and is costing taxpayers millions,” he said. “If this was in private hands, be assured the coverage would likely improve and the rates may actually get better, although they will be higher.”

Higher prices are almost certainly on the way. Private homeowner policies have risen significantly in cost in recent years in at-risk areas like Long Island (doubled in the last decade), Mississippi (raised as much as 48.5% in 2008 and another 19.5% in 2009), and South Florida (State Farm dropped nearly one-fifth of its customers after being denied a 47.1% rate hike). But the average flood policy with the NFIP that Van Jura spoke of costs just $637 per year, putting it well within the reach of most homeowners.

For homeowners who can’t get wind coverage for their homes or are dropped by their carriers, the private market also offers “wind pools” in certain areas; despite their name, wind pools are much less fun than they sound. These government-mandated groups insure at-risk properties, which would be ideal except they cover less than a homeowner policy and cost much more in premiums, sometimes as much as $3,200 a year, and they don’t cover flooding. The high cost is set by the re-insurers, the folks who insure the insurers against massive payouts.

The bottom line is that someone is going to end up paying after a superstorm; the only question is whether it’s taxpayers or the folks who choose to live in flood plains. If superstorm insurance policies were created with both flood and wind damage in mind, and priced accordingly for the increased risk of loss, private insurers might be enticed to provide such packages. State governments would have to get involved on the legislative side, as most have laws regulating how much insurers can charge. Uncle Sam could keep the NFIP going only to process existing claims (as shutting down before then would cost even more money), and then allow the program to be privatized.

Policy Changes in the Works

Some rumblings of change do appear to be emanating from the within the halls of capitol buildings across the country. Alabama’s Senate Bill 230 became effective Aug. 1, 2012, giving premium tax credits to insurers writing in the coastal area, while Senate Bill 210 requires insurers to provide the state Department of Insurance with info on how many policies they write, what they charge in premiums, and how much money they lose in claims.

Since Sandy, lawmakers in New Jersey have taken note of the hordes of angry policyholders and have drafted a bill to help ease customers’ confusion. The bill would require that a one-page summary of the policy be included in the brochure consumers are already given when purchasing the policy. The drafters of the bill promise that “notable coverage and exclusions” will be essential parts of these summaries.

Even states at as little risk of hurricanes as Colorado have seen bills floated that would require disclosure forms written in “plain language” and written notification at renewal time of any changes to a policy, in order to avoid large numbers of homeowners caught unaware.

In addition to drafting policy, politicians could chip in by obeying the old maxim “a stitch in time saves nine.” NASA climate scientist Cynthia Rosenzweig co-authored a paper that found for every $1 New York city planners spend in prevention of damage from storms saves $4 in reconstruction costs. Though it was fortunate enough to avoid a meeting with Sandy, Boston officials have seen the handwriting on the wall and has assembled what they call the Green Ribbon Commission to carry out a Climate Action Plan to prepare the city for coming Sandys.

What You Can Do in the Meantime

Until a perfect solution is found, there are some steps homeowners can take to make sure they aren’t featured in a horror story, even if their home is damaged by a large storm.

Michael Conley, an insurance recovery attorney with law firm Offit Kurman in Philadelphia, says homeowners insurance is so complicated, policyholders should be having a frank discussion with their insurance agents.

“The biggest mistake policyholders make is not understanding the actual scope of the coverage they purchased, but instead relying upon representations as to the coverage,” he said. “Policyholders need to make sure that they understand exactly what will be covered for certain causes of loss, such as storm damage or floods. They also need to understand the difference between replacement cost and actual cash value policies.”

He added that flood insurance should be high on homeowners’ priority lists, even for those not in areas prone to flooding. He cited FEMA’s finding that of the millions of flooded homes in New Jersey, only 231,000 had flood insurance. “Because an area has not flooded in the past does not mean that it won’t flood in the future,” Conley said. Staying on top of payments to make sure flood insurance has not lapsed is also highly advisable and was another area that stung unsuspecting homeowners in Superstorm Sandy.

Van Jura pointed out that insurance premiums will be rising but that they had been rising before Sandy because home insurance is just not profitable for insurers. Massive losses would just speed up the process. However, he added that if a homeowner has been with the same company for years, switching to another provider (if you can find one) could be a way to offset the price hike.

Finally, Guidry’s advice for homeowners is simple: read the policy closely.

“Most people don’t read the fine print,” he said. “But even if (insurer loopholes are) highlighted in red, white, and blue, people still don’t seem to comprehend it until it happens. Even if you comprehend it, you think it’s never going to happen to you.”

As vividly as most Americans still recall the moving images from the destruction wrought by the superstorms of 2012 and even 2005, somewhere out over the Atlantic another storm just as destructive and record-breaking as anything we’ve seen to date may be brewing. When it hits, thousands more people who “never thought it could happen to them” could find themselves unprepared. The homeowners who acknowledge that Mother Nature can and does strike at any time will be the ones ready for what storms may come.