Hurricane Sandy is said to be the most damaging hurricane recorded in U. S. history. There appears, however, to be some dispute as to whether Hurricane Katrina holds that dubious honor.
The cost of the storm, estimated by private firms including PricewaterhouseCoopers and the PFM group, indicate that Hurricane Sandy destroyed or damaged more units of housing, affected more businesses and caused more customers to lose power.
The statistics are staggering as are the losses (both covered and not covered) that are emerging from the storm.
DEFINITION OF “STORM” AND ITS IMPACT ON INSURANCE
A storm reaches tropical storm status by reaching sustained winds of 39 MPH. The National Hurricane Center creates annual lists of names from the database of names maintained and updated by the World Meteorological Organization. If a storm causes significant damage and/or loss of life, the name is retired from the list permanently. Thus, there will be no Katrina II or Sandy II.
1. What Does The Definition Of “Storm” Have To Do With Insurance? There May NOT Be Coverage On The DIC.
Thousands of businesses were affected by Sandy. Many times those larger clients have flood and wind coverage, but written on a large property or DIC (Difference in Conditions) policy.
In those policies there may be restrictions, sub-limits or different deductibles that apply to “Named Storms.” Those policies will define what that is, and should include flood, wind, wind gusts, storm surges, tornadoes, cyclones, hail or rain into this category once the storm has been declared by the National Weather Service to be a hurricane, typhoon, tropical cycle, tropical storm or tropical depression, thus bringing into focus the entire life cycle that a storm may go through.
We have found a number of articles written by law firms that are already taking on the issue of “named storm,” claiming that even though the NWS had named the storm, it was not at hurricane strength when it reached landfall. A comprehensive definition of “named storms” would be helpful to clarify coverage. The fact that the meteorologists are discussing the attributes of this storm to be more like a winter storm rather than a tropical storm may end up on the chopping block of justice in a civil court or two and test the insurance policy coverages.
2. What Is Unique About Hurricane Sandy?
- Sandy defied normal storm behavior by moving east to west; it acted both like a hurricane and a cyclone simultaneously.
- The result of this last odd wind pattern was the root cause of the flood tides and the inundation of the New York subway system.
- The storm qualified as a hurricane at the time of landfall and its wave “destruction potential” reached a 5.8 on the National Oceanic and Atmospheric Administration’s 0 to 6 scale.
3. One Storm or Two Storms:
There was significant concern that a second storm, following the initial impact of Sandy, was going to hit which would have further devastated the area.
Richard Mackowsky, a member of the firm’s global insurance group, said new damage from a second storm could result in a separate occurrence, potentially requiring a separate set of deductibles.
“If there is damage caused by a second storm but related to the first storm, issues arise as to whether there were one or two occurrences. A second storm could impact causation as to what is really driving the loss. If the only reason the second storm caused damage was because of damage from Sandy, the question then becomes whether that is a covered cause of loss,’”Mackowsky said. “A second storm could trigger a separate limit of liability if it’s a big enough situation,” he said.
But even one storm can create causation questions. Was the damage from wind or flooding? Not a simple question to answer, litigation stemming from previous storms has shown. Saved by the bell on this one—the second storm never hit.
Flood…Not Flood?—That is the Question
This appears, at first glance, to be Insurance 101—most of this damage was either directly or indirectly caused by the condition of flooding.
Dilemma Of The Federal Flood Insurance Program—It’s A Problem:
Even if it is covered on the flood insurance policy there is real concern about the overall program.
Flood or NOT Flood
Whether talking about homeowners’ insurance (including renters and condominium owners) or commercial property insurance, the forms most often include an exclusion for flood. Here is where it gets a little tricky:
- Did the property owner sustain damage from storm surge?
- Was the loss due to rising flood waters?
- Was the loss due to too much rain that entered into the building because the wind removed the roof, blew out the windows or knocked a part of the building down?
“It is an ongoing saga,” says insurance lawyer Frank Darras, who has worked extensively on litigation scenarios following Katrina. “If you are a homeowner, you are going to argue that you have damage caused by wind and wind-driven rain. If you are the carrier, you are going to say the damage was caused by flood, tidal surge or a hurricane, which requires hurricane coverage.”
Problems With The Flood Insurance Solution
FEMA says that less than 15 percent of homeowners nationally carry flood coverage. Federally backed lenders have been lax in enforcing the obligation to purchase flood insurance.
The National Flood Insurance Program anticipates claims between $6 and $12 billion but has borrowing power at $2.9 billion. Reauthorization from Congress would be required and Homeland Security is expected to request appropriation soon. Those current and new policyholders of NFIP coverage will be getting a scheduled rate increase that predates Sandy.
Even if flood coverage exists, there are still problems and concerns.
- The limits of insurance available through the NFIP are small.
- Replacement cost coverage applies only to a dwelling and not to commercial structures.
- There may be wind damage to the building that the flood insurer will not pay but is covered in the homeowners’ policy.
- The insured may have to pay two deductibles for the two separate policies.
- What kind of coverage is there if the first layer of property coverage is the NFIP coverage and the insured purchases excess layers of flood coverage above that policy? i. Will it drop down to pick up the replacement cost difference? No. ii. Will it drop down to pick up business income, extra expense coverage? It should. Check the policy language.
The Future Of Flood Insurance
The future of the entire program is bleak enough, add to that the impact of Hurricane Sandy on the future purchase of flood insurance. Homeowners in storm damaged coastal areas who had flood insurance, and many more who did not, still now may be required to carry flood insurance and will face premium increases between 20 and 25 percent per year starting this year. This is due, in part, to legislation enacted in July to shore up the debt ridden National Flood Insurance Program and is exacerbated by Hurricane Sandy.
In addition, lenders will be affected by Sandy if they fail to enforce the requirement for their lenders to carry flood insurance. They will face even higher penalties then they have in the past.
Ordinance or Law
Many of those properties damaged by Hurricane Sandy had been built a number of years ago. So here are the questions:
i. Does the Homeowner’s Policy, Commercial Property Policy or DIC include contingent ordinance or law coverage, demolition coverage and increased cost of construction coverage?
ii. What about the loss of use for the homeowner as well as the business interruption coverage?
The NFIP policy is out as there is no coverage for the indirect loss.
Many DIC policies do not include ordinance or law automatically and many more do not include ordinance or law – increased period of restoration to cover the additional down time due to code or law enforcement.
Earlier we quoted the statistic of there being approximately 7.5 million power outages throughout Hurricane Sandy’s two day assault on land. Many of these outages lasted days and weeks. There are several issues relating to insurance in terms of the power outages:
Requirement Of An Off Premises Endorsement:
In order for businesses to have coverage for either direct or indirect losses relating to power outage, the insurance would first have “off premises” or “utility coverage” on the policy. Typically, losses stemming from off premises situations are excluded on property insurance policies.
Causation Of The Power Outage:
If there was coverage on the property policies for the off premise loss, the situation that occurred off premises would have to be covered. For example, if the off premises loss were caused by a windstorm, that cause of loss is typically covered on a Commercial Property Policy or personal form. If the loss were caused by Flooding then that cause of loss is excluded and the off premises endorsement would not apply.
Off Premises Deductible:
Off premises coverage oftentimes has a “time” deductible or waiting period of 72 hours unless endorsed. This waiting period would have eliminated coverage for many of the properties that had their power back in three days or less.
Direct vs. Indirect Loss:
An Off Premises Endorsement would have to cover both direct damage and indirect to pick up a loss for Business Income.
Other Perils Such as Equipment Breakdown (EB):
The cause of off premises loss may be due to a power surge that results from the storming. If the EB policy has off premises coverage and Business Income coverage then recovery can be sought under that policy.
Some Off Premises Policies Have Distance Limitations:
It must be ascertained if there is any distance indication on the policy to which the off premises is being attached. For example some policies have a 500-foot distance radius which means the source of the off premises loss must be within 500 feet of the insured’s premise.
It may be that the loss the insured sustained while the power was out was spoilage, such as loss to refrigerated items AND the business income that stems from that loss. This could be covered on either an Equipment Breakdown Form depending on whether there was a “breakdown” or on a Commercial Property Spoilage Form. Some Homeowners have limited coverage built in for refrigeration loss but not for the peril of flood.
Now we are talking about one of the bigger claims that will result from Hurricane Sandy and much of it will NOT be covered. Here are some of the pressure points of this coverage.
- Cause of Loss—back to that one. Flood is excluded on the commercial property form so there will be no response for Business Income.
- The flood insurance policy does not cover business income.
- If the cause of loss is determined to be “windstorm” and the insured has Business Income insurance then the policy should respond from the causation point of view assuming they had direct damage.
- The insured will have to prove that their income loss is directly attributable to Hurricane Sandy.
- The policy has a waiting period for coverage typically 72 hours unless endorsed.
- The policy would have to be endorsed with Off Premise coverage for the Business Income stemming from loss of power to apply.
- There is NO building ordinance for the business income—it would have to be endorsed.
- Civil Authority: Many of the businesses did not sustain direct damage but where closed by civil authority. 1) There is limited coverage on the BI form 2) There may be distance limitations.
- Ingress/Egress: A bigger problem is the ingress/egress issue which basically means “because of the condition, itself, access to an area is affected or unavailable.” For example, if a road is flooded out so that there is no access to a grocery store, the grocery store will be able to demonstrate they are losing customers. However, if the store was not directly affected by the physical loss, there will be no trigger on their business income form. Civil Authority did not close down the area—it was closed to natural events in this case.
Traditional Business Income Policies require that there be direct damage to the premises by a peril insured against for there to be any business income insurance response. However, there is talk, in the aftermath of Hurricane Sandy of what is referred to as Non-Damage Business Interruption or Non Physical Business Interruption Insurance. It is referred to as NDBI.
While articles are referring to these coverages, as if they are readily available, I believe they are truly exceptional in availability and accessibility. Sometimes these forms are part of a “supply line coverage” for very large businesses that often have an international component.
There is also the TDI or CDI coverage—Trade Disruption which could come into play; however, that coverage has a very limited market. Bottom line, the average business that sustained damage as a result of Hurricane Sandy had neither one of these types of coverage.
Automobile Losses from Hurricane Sandy
Autos are the easiest part of this equation: whether wind, flood or a combination, all are covered under the “Other Than Collision” coverage. The salvaging of these autos is where it gets interesting. Canadian officials are now bewailing the fact that thousands of autos, some estimates are as high as 250,000, are likely making their way to Canada. Those storm damaged vehicle are classified in Canada as “non-repairable” and are illegal to sell. But, in the aftermath of Katrina, Canadian citizens were buying these vehicles in the thousands and they expect the same thing to happen again.
The storm was one of the biggest ever and the insurance story will not end soon. There is so much more we could say but best end this with a heads up to watch and see how these claims unravel.
Laurie Infantino AFIS, CISC, CIC, CRIS, ACSR, CISR is the president of Insurance Community Center, Insight Insurance Consulting
Marjorie L. Segale AFIS, CISC, RPLU, CIC, CRIS, ACSR, CISR is the director of Education, Insurance Community Center & President, Segale Consulting Services, LLC