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Rising Water, Rising Concerns

Wind versus water, a private flood insurance marketplace, and solvency are just some of the issues on experts’ minds

October 16, 2020 Photo

Weather forecasters at the National Oceanic and Atmospheric Administration (NOAA) expected 2020 to be an “extremely active” hurricane season. They weren’t wrong. As the naming of tropical storms shifts to the Greek alphabet for only the second time ever, the United States has already seen multiple cyclones make landfall.

So far this season, Hurricane Laura’s landfall caused some of the most significant damage yet. Costing an estimated $12 billion in damages, and tied as the strongest hurricane to ever make landfall in Louisiana, Hurricane Laura’s impact will be felt for years to come. 

Hurricane Laura also brings attention to the various issues that regularly plague those in a hurricane’s path: Uninsured losses, coverage shortfalls, claims confusion, and strain on federal relief programs are all being discussed. However, there are ways that insurance companies can minimize or eliminate these issues, allowing everyone to move through major disasters such as Hurricane Laura with more confidence and better outcomes.  

The Problem With Flood

The headline remains the same after every major disaster: Those in the storm’s path didn’t purchase flood insurance. During Hurricane Harvey in 2017, the National Flood Insurance Program (NFIP) estimated about 80 percent of flood losses were in low-risk flood zones, where flood insurance is not required. Furthermore, CoreLogic estimates about 70 percent of flood losses were uninsured for this event. Sadly, these staggering numbers are only the beginning of the issue. Luckily, in the last eight-to-10 years, new options have emerged through private flood insurance products. These products provide new opportunities to close the coverage gap by offering flood insurance to more homes and businesses.

But with the growing private flood market comes a new gap to close: the lack of communication between the rules and regulations of the NFIP and the private flood market. The NFIP can offer beneficial ratings to consumers, but when an insured leaves the NFIP for an alternative product, there can be a loss of those benefits, sometimes referred to as “penalties.”

Additionally, there are many differing private flood policy forms that may or may not offer the same coverages as the NFIP. The best solution to this problem is for insurance agents to know the options they are selling and to understand the insurance program’s rules and underwriting requirements.

Insurance agents should thoroughly read any policy forms and endorsements that are available to the agency or to their clients. Ideally, agents and companies must develop guidelines for accurately and consistently communicating the differences between the NFIP and private flood policy rules and forms. The objective should be to fill the current gaps in communication and understanding between the two. Agencies and companies should consider an internal flood insurance placement procedure manual to take into consideration all the various questions that need to be contemplated when placing flood business.

Flood insurance policies are only perceived as good when they help the insured to recover fully from a loss. Without a claims payment, an insured cannot begin to become whole. The performance of an insurer during the claims process is critical and can make or break that insurer’s reputation. 

Wind Versus Water

Whether it be an NFIP or a private flood policy, at the time of a claim there can be issues determining if the initial cause of loss was wind or water. In large storms like Hurricane Laura and Hurricane Katrina, these issues create major headaches for property companies and their policyholders—so much so that over the past several years, some property companies have created underwriting guidelines to prevent this issue from becoming a place for litigation. In one example, the underwriting guidelines for a regional homeowner’s insurance company reads that a homeowner’s application will be rejected if “[a] home in flood zone A or V [is] without [an] active flood insurance policy.” These types of underwriting guidelines help protect the insured and the property company at the time of loss. 

Consistent claims procedures and best practices can also protect both flood and property companies. This is important when wind versus water becomes an issue. In fact, Section 52 of the NFIP’s claims manual discusses these best practices, stating, “When adjusting wind-versus-water losses, the adjuster should use established and proven investigative methods to document flood and wind damage to buildings and contents occurring during hurricane or storm events.”

When wind versus water becomes the issue, the adjuster should take photographs of surrounding properties as well as the insured property. This is to help gauge both the severity of damage and the types of items that were damaged.

For instance, roof damage can help illustrate the kinds of property damage that occurred. The adjuster should measure the distance of the building to the center of the storm to see how significant wind and water losses could have been. The claims professional should document the remains of connectors or tie-downs, and photograph any wind-caused openings in the building envelope. Water marks and lines should be observed as evidence of how high water levels reached. Experts, such as local meteorologists, will publish and report when wind and water hit during the storm. Still, there are cases when the determination becomes too difficult and an engineer may be needed to assist. 

When a claim is filed for both wind and water events, and there are two policies in place—one for wind, one for water—the insured should give each company the other’s adjuster contact information. The two claims professionals then can talk about what they found, agree to what is covered, and decide which portion of the loss each will take. In an ideal situation, the property and flood adjusters should both receive a copy of each estimate. With any and all claims scenarios, the claims professional on the ground needs to take charge rather than waiting for the insured or company to make the critical, immediate decisions. Companies need to have good, experienced, and responsive adjusting firms on their side for both property and flood. 

Above all else—and this goes for any claims scenario—documentation is everything. This is true for wind-versus-water situations, or when adjusting a flood claim when water is clearly the culprit. Before, during, and after the storm, a camera is the best friend of insureds, adjusters, and companies alike. Documentation is the best and sometimes only way to avoid claims litigation.

Clay Barclay, owner of BAC adjusting, says that he’s seen firsthand instances of claims that are unable to be paid due to lack of documentation. “In some storms, there have been hundreds of thousands of dollars of contents that we can’t pay for because there was no documentation,” he says. “People were throwing things out before we got a chance to get there. When the adjuster arrives onsite, open every draw, all the cabinets, and ask for all receipts. If there is no documentation of items, we can’t pay for it, even if it is covered. We need to prove the loss.”

Solvency Issues

Hurricane Laura generated roughly 1,000 flood insurance claims, and the storm was mainly a wind event. However, with one of the most active hurricane seasons on record, there are bound to be significant flood losses at some point in our near future. When large events strike, questions always arise about the NFIP’s ability to pay claims.

Currently, the NFIP sits at roughly $20 billion in debt. Fortunately, reforms to the NFIP in 2012 and 2014 gave the federal government the authority to purchase reinsurance to protect the NFIP. In the past, the NFIP could only use flood insurance premiums and borrowing capacity from the U.S. Treasury and congressional appropriations to pay flood claims. With reinsurance, the NFIP will receive payments for between 10-21 percent of any loss between $4 billion and $10 billion. (This reinsurance was used for Hurricane Harvey.) While the NFIP remains exposed for losses of up to $4 billon, this kind of forward thinking by the NFIP greatly increases its sustainability and sets the precedent for more reinsurance placement in the future. 

When flooding occurs, the flood insurance industry will continue to respond. Still, increasing flood insurance participation, correctly adjusting claims, and sustaining the NFIP into the future will be our collective responsibility. While there is no shortage of issues surrounding flood insurance and its impact on our future culture, insuring our communities is an investment in resiliency. Without flood insurance, we would have no strong financial recovery tool and no organized plan for how to rebuild after a flood. The result would be that many communities would essentially be left in ruin.

Fortunately for all, the industry will continue to evolve. This evolution will improve how we buy and sell flood insurance as well as how we adjust claims. It will eventually result in a greater ease of doing business for all of those involved. While that evolution occurs, our collective responsibility is to understand our roles, underwrite our risks, and help increase the number of insureds in our communities. 

(Photo by Joe Raedle Getty Images)

About The Authors
Joe Rossi

Joe “Flood” Rossi is a flood specialist at RogersGray Insurance and chair and executive director of the Massachusetts Coastal Coalition.  jrossi@knowflood.org

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CLM’s Property Committee provides education relevant topics, practical skills, and innovative strategies for handling property claims and litigation related to coverage and insurance claims for CLM’s members and fellows.

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