Superstorm Sandy’s reach across several states had implications for insurers and reinsurers. Coverage decisions depend on a number of factors that are frequently inconsistent from one state to the next; political discussions, insurance contract wordings as dictated by state regulations, and NHC classifications of the storm that vary with time and location are all factors.
Hurricane Deductibles
After extraordinary losses due to wind from Hurricane Andrew in 1992 and Hurricane Katrina in 2005, insurers instituted hurricane deductibles to limit their exposure to levels that were acceptable to policyholders and regulators. In late 2017, the Insurance Information Institute reported that nineteen states and the District of Columbia allowed hurricane deductibles. Hurricane deductibles are separate from deductibles for other hazards such as fire and are usually expressed as a percentage of the insured property value. For example, homeowners who insure their $100,000 home with a 5% hurricane deductible would have to meet a deductible amount up to $5,000 before the insurer would cover any additional losses.
In the wake of Hurricane Sandy, questions arose about hurricane deductible triggers. Differing state laws and regulations have an impact on policy wordings filed by individual insurance companies, and ultimately on the different coverage language and factors that determine the hurricane deductible triggers. Wind speeds, watches and warnings issued by the NHC, a determination of the storm’s intensity as provided by the National Weather Service, and the Saffir-Simpson Scale category are among the metrics used to determine triggers, which also generally include a timing factor setting a window for the time period that damages are covered. When different factors are used to set the trigger, hurricane deductibles may be applied in one state but not another even if the same storm hits both, meaning that citizens of one state might have to pay hurricane deductibles while citizens of another do not, even if they experience similar damage. In such a case, the differing treatment creates political issues that may impact insurer claims handling. If the hurricane deductibles are not triggered, insurers may face larger than expected losses.
National Flood Insurance Program Issues
FEMA administers the NFIP, created in 1968 to establish community floodplain ordinances and insure property owners against flood losses in return for premium payments. There are concerns about NFIP coverage, including that: (1) available limits are relatively low, (2) restrictions apply to replacement cost coverage, (3) if there is wind damage to the building that the flood insurer will not pay but that is covered under a homeowner’s policy, the homeowner will have to pay two deductibles for the two separate policies, and (4) coverage questions arise if the primary layer of property coverage is the NFIP policy but the insured purchased excess layers of flood coverage above the NFIP policy, such as whether the excess insurance will drop down to provide replacement cost difference, business income or extra expense coverage.
Superstorm Sandy claims handling with respect to flood insurance provided by private carriers under the NFIP and administered by FEMA led to considerable policyholder dissatisfaction. More than 19,400 policyholders unhappy with NFIP payment recommendations filed administrative appeals with FEMA, and nearly 2,000 flood insurance litigation cases were filed against NFIP insurers in New York and New Jersey federal courts. As of 2017, FEMA had reviewed, made payments for, and closed most of the administrative appeal files and worked through the courts in mediations to settle most of the litigations.
The NFIP’s statutory authority to operate must be periodically renewed by Congress. President Trump signed legislation on July 31, 2018 that extended the NFIP authorization until November 30, 2018, meaning that the law must be reauthorized by no later than midnight on that date.
Commercial Property Insurance Coverage Issues
Civil Authority: A business that did not suffer property damage from Superstorm Sandy at the insured location might still have lost business income due to the storm if customers could not physically reach the business. Standard business interruption insurance would not apply, but “civil authority” coverage is generally triggered where the action of a civil authority impairs access to the insured premises. One problem with these provisions is that non-specific orders from authorities can lead to coverage disputes, such as orders that do not make it clear whether an order to vacate was related solely to flooding as opposed to concerns about wind damage.
Service Interruption: Service interruption coverage addresses business losses resulting from damage to the utilities that supply the insured premises with necessities such as power, water, communication, natural gas, sewage and internet access. Power failures present difficult insurance issues, and approximately 7.5 million power outages were reported over the two days that Superstorm Sandy battered the East Coast. First, to be covered for either direct or indirect losses related to a power outage, the insured’s policy must have “off premises” or “utility” coverage. Then, coverage under the off premises endorsement depends upon whether there is coverage for the damaging situation in the commercial or personal property policy itself. For example, if the off-premises losses were attributed to flooding, but flooding is excluded on the commercial or personal property, the off premises endorsement would not apply.
Off premises endorsements may include a waiting period, generally 72 hours, which prohibits insurance payment for properties that regain power within three days. Specific loss situations involving indirect damage, equipment breakdown from power surges or business income losses may become the subject of coverage disputes under off premises coverage. An “off premises” provision might include a distance limitation requiring that the source of the off premises loss must be within a certain radius of the insured premises, for example, 500 feet. Also, the insured may suffer spoilage during the power outage, which might or might not be covered under the equipment breakdown clause or a special “refrigeration loss” provision in homeowner policies.
In some areas affected by Superstorm Sandy, utilities preemptively shut down power so as to preserve the electrical system during the actual storm. The courts of affected states have taken different positions on the issue of whether such a shutdown was an insured event. Also, the question has come up as to whether huge transformer explosions such as occurred in New York at the 14th Street Con Edison plant were due to electrical arcing caused by flooding -- and thus excluded from coverage under many policies -- or should be considered to be an “ensuing loss” in the form of an explosion that triggered service interruption coverage.