Lessons Learned from Handling Superstorm Sandy Claims

With the horrific aftermath of Superstorm Sandy still very fresh in their minds, C-suite executives made the claims management implications of mounting catastrophe losses the chief topic of conversation during their annual reunion earlier this year, better known as the Property/Casualty Insurance Joint Industry Forum.

Panelists offered a number of keen insights from the podium, but some of the most interesting observations came during the breaks between and after the sessions, with attendees buzzing about what they had heard from industry leaders, as well as their own personal takes and experiences.

One forum speaker cited Sandy as a wake-up call for the industry. As bad as the insured losses were, they could have been a lot worse had the storm hit land at a higher wind speed. There also were concerns expressed about whether Sandy represented the start of a “new normal” for underwriters in the Northeast, where storm deductibles have been fairly low and property insurance prices fairly reasonable. 

Another area of concern was the number of business interruption (BI) claims prompted by Sandy, primarily because of long delays in restoring power to many areas. After disasters, BI insurers are effectively at the mercy of those responsible for maintaining an area’s infrastructure, although in many cases—I witnessed this firsthand in my own devastated Sheepshead Bay commercial district—portable generators were employed to get some businesses up and running much earlier than others that were waiting for utility companies to finish repairs.

A number of attendees complained to me about states waiving hurricane deductibles for policyholders filing Sandy claims. Some took issue with the decision itself, criticizing the deductible denial as politically expedient. By nullifying the deductible, some predicted, these states might ultimately prompt higher premiums for consumers while undermining market stability by perhaps discouraging some carriers from writing as much property coverage in the region as they do now.

But others at the forum conceded that the state governments likely acted within their authority given how the deductible trigger was drafted. To avoid a repeat of the Sandy experience, some suggested that the industry should consider tightening up policy language to determine precisely when a hurricane should be classified as such for insurance claims purposes—when it’s still at sea, when it reaches land, or when it hits a policyholder’s home.

Each word in a policy matters, noted one industry official, adding that if a coverage restriction has a hole in it, the policyholder’s representative—whether that be a trial lawyer, public adjuster, or government official—will gladly drive claims through it if that gap isn’t closed by the carrier first.

If insurers don’t clarify hurricane deductible language on their own initiative, chances are their reinsurers might take the lead since a good chunk of Sandy losses are likely to make their way up the coverage chain, some forum attendees predicted.

A few of those I met observed that some insurers appeared to be more proactive after Sandy when it came to claims management—for example, sending in engineers right away on large losses rather than waiting for adjusters to visit and report back first.

Others noted that while litigation might be inevitable given the number of claims filed, disputes were more likely to arise over the size of the settlement rather than core, precedent-setting coverage issues. That’s because the question of whether damages were caused by wind- versus water-related issues appears to be less of a controversy with Sandy than it was with Hurricane Katrina.

A number of forum attendees lamented the fact that many Sandy victims lacked federal flood coverage. Speakers said that the industry must do a better job educating the public about the need for flood insurance, with many laying the responsibility at the feet of agents.

But others insisted that agents are not to blame for the large numbers of uninsured policyholders, pointing out that flood insurance can be a hard sell unless the exposure is obvious, and even then the price often scares many buyers into going without and hoping for the best.

I saw evidence to validate this view in my own neighborhood. When I asked several merchants whose businesses had been destroyed by Sandy’s storm surge why they didn’t have flood insurance when they were less than a mile (some right across) from Sheepshead Bay, they responded that they’d been at their current location for years and had never seen a drop of water at their doors. They wondered how they could have justified spending thousands of dollars each year for a coverage they might not ever need—until they did need it, that is, this past year.

A number of attendees sounded frustrated when I brought up news reports about lawsuits filed by policyholders claiming they were not told their standard property insurance did not cover floods. One speaker pointed out how some savvy agents go out of their way to make sure policyholders acknowledge this gap by asking them to sign a disclaimer if they don’t want flood coverage added to their policies. At the very least, such a document might offer the agency protection against an errors and omissions claim if the worst-case disaster scenario comes to pass.

But many agents don’t go to such lengths, perhaps out of concern that they might confuse or upset the policyholder and risk losing the sale altogether. This is risky for agents, given talk at the forum about how buyer’s eyes often glaze over when agents discuss coverage details, how awkward it is to explain everything a standard policy does not insure, and how consumers often speed-read their insurance documents (if they look them over at all) before signing, with disclaimers not being an exception.

I wondered out loud to a number of attendees whether it might be time to automatically include federal flood insurance with property policies—at least in certain storm-prone areas—while forcing consumers to opt out if they don’t want the additional coverage.

This could make more policyholders aware of their flood exposure and the availability of federal coverage to address it. It also might settle, once and for all, whether policyholders were made aware of flood gaps in their standard policy and, thus, alleviate the E&O exposure facing agents. Hopefully, more might see the need for flood insurance and decide to buy it.

Many found my suggestion intriguing, although they warned that there might be regulatory and even legislative complications to overcome in implementing the idea. (What do you folks think? Feel free to email me at samfriedman@deloitte.com and let me know if opt-out flood insurance makes sense to you.)

One international attendee said he was baffled by the controversy over flood insurance here, since in the United Kingdom flood is automatically part of property policies. If the U.S. flood market were privatized and insurers allowed to price according to actual exposure, some at the forum suggested, it might drive more risk-conscious behavior in terms of location and construction of homes and businesses.

I asked fellow forum attendees whether the proliferation of mega-disasters like Sandy might reignite interest in the establishment of a federally backed National Catastrophe Fund. But the reaction was almost unanimously negative.

At present, we’re financing disaster relief retrospectively—usually through tens of billions in emergency grants grudgingly appropriated by Congress. That’s not likely to change anytime soon, according to those with whom I spoke at the forum who believe there is little appetite for a new federal insurance program in this increasingly budget-conscious environment, particularly given the huge deficit plaguing the NFIP.

Overall, however, those who spoke publicly at the forum, or who shared their views with me during the breaks, expressed pride in how the industry handled the claims management process after Sandy. The one complaint I heard repeatedly was that the industry doesn’t seem to receive credit for helping so many people get started on the road to recovery after a catastrophe like Sandy strikes.

I’m sympathetic, but perhaps it’s time for industry officials to resign themselves to having a thankless job when it comes to claims management. The consumer’s expectation is that a claim will be investigated, adjusted, and settled both fairly and quickly. I can’t imagine many of us would expect anything less for our own claims, especially anyone who had just lost their home, car, or business in a disaster. It just goes with the territory.