It takes a major event to bring light to basic coverage issues - by Spencer Macalaster

Spencer Macalaster, Risk Strategies Co.

With Matthew hitting the East Coast of Florida and the Carolina’s as a category 4 hurricane, it very well could live up to the hype of being the most destructive Florida storm since Hurricane Andrew almost a quarter century ago. The potential severity of damages from Hurricane Matthew has been all over the map. The latest projected economic loss for the U.S. is now $8 to $10 billion, based on Kinetic Analysis data cited by Bloomberg Intelligence. Insured losses could be $6 to $8 billion and reinsurers may be on the hook for large payments for the first time in years.

While the smaller, local insurers may be among the most vulnerable to losses, the bigger, national companies will also be exposed. AIG and Progressive are among the biggest publicly traded insurers with major homeowners’ market share in Florida.

The final impact of Hurricane Mathew on the insurance market is yet to be realized; however we thought it worth reflecting on the other major hurricanes to hit the U.S. mainland. Hurricane Andrew hit Florida on August 24, 1992, and the tumult for the property insurance market there has not ceased in the 20 years since.

Andrew was the costliest natural disaster in U.S. history in terms of insurance payouts to people whose homes, vehicles and businesses were damaged by the storm when it struck Florida and Louisiana in 1992. The insurance claims payout totaled $15.5 billion at the time ($25 billion in 2011 dollars). Even today, the storm is the second costliest natural disaster; Hurricane Katrina, which hit in 2005, is the most costly natural disaster.

Many of the insurance market changes that have occurred nationally over the last two decades can be traced to the wakeup call delivered by Hurricane Andrew. These include: • More carefully managed coastal exposure; • Larger role of government in insuring coastal risks; • Introduction of hurricane deductibles; • Greater use of reinsurance capital from around the world; • The birth and rapid evolution of sophisticated catastrophe modeling; • Strong support for strengthened building codes and the importance of enforcement of these codes, as well as enhanced understanding of the necessity of mitigation; and • Significant changes in flood mapping and pricing models, with large premium increases in the Federal Flood Program.

As is always the case with difficult situations, there are lessons to be learned. Too often, we are focused on saving premium at renewal and miss meaningful coverage provisions and sub-limits that are vital in the event of a major loss. Hence, the following lessons must be reviewed as result of potential market changes: • Flood coverage: Most commercial and personal policies exclude flood, particularly if the property is in or near a flood zone. Loss of income coverage, BI and CBI, generally only kick in if preceded by a covered peril. If flood is excluded on a policy, it becomes a challenge to trigger other coverage. Seek Federal Flood coverage at a minimum or evaluate purchasing standalone flood limits. • Wind coverage: Wind is covered on most policies but with potentially higher deductibles, particularly for named storms. Pay close attention to the policy language as it relates to storm surge and wind-driven rain. • Loss of Rents/Extra Expense: Generally, there must be some level of physical damage that results in a loss of rents. This physical damage must be caused by a covered peril, e.g. fire, flood, wind, etc. Ensure limits are adequate and check sub-limits on package policies. • Business Income – Civil Authority: Order of Civil Authority prohibits access to insured premises due to direct physical damage to property other than the insured’s caused by a covered loss. • Ingress/Egress: Business interruption loss due to lack of ingress/egress to your insured’s premises caused by a covered peril. • Definition of Occurrence: Make sure the policy contains appropriate definition of occurrence specific to the risk insured. • Claims Data Expense: Reasonable expenses incurred in preparing claim data required by a carrier. Includes forensic accounting, claim documentation and other expenses relevant to preparing a claim. • Dedicated Adjuster: If the program warrants insist on the carrier providing a dedicated adjuster to the policy. • Utility Services – Time Element: Loss of income due to service interruption. Ensure that the service interruption definition includes, power, utilities, communications, etc. Check sub-limits and waiting period. Pay special attention to how coverage applies especially as it relates to transmission and distribution lines. • Debris Removal: Debris removal coverage is usually included on property and package policies but the sub-limits are often low. The costs to clean up are generally more than anticipated after a major storm event. • Develop a Business Continuity Plan: Take the time to plan and have alternative locations available and contingencies in the event of a catastrophic loss.

Unfortunately, it takes a major event to bring illumination to basic coverage issues. Going forward our advice is to prepare through proactive risk modeling, including CAT modeling, this can help you understand the catastrophe exposures by location, and in the aggregate over multiple locations, from a single catastrophic event. So take the time to review your insurance coverage with your broker in the context of a catastrophic event.

Spencer Macalaster is executive vice president and real estate practice leader with Risk Strategies Co., Boston.