Superstorm Sandy a Wakeup Call for Policyholders and Claims Managers

This column is called “Reality Check” because I like to think of my role as someone who raises alarms about potential threats, challenges, and opportunities the insurance industry might not have considered. Unfortunately, I received a dose of my own medicine when “Superstorm” Sandy hit on the night of Oct. 29, 2012.

Living in Sheepshead Bay in Brooklyn, N.Y., these past 50-plus years, I had not seen an inch of water anywhere near my apartment building (outside of a backed-up sewer one time after a heavy rainstorm). But that changed dramatically when Sandy created such a powerful storm surge that it left our lobby hip-high in seawater, flooding the units on the ground floor as well as the cars in the indoor garage and outdoor parking lot.

I technically live in one of New York City’s “Zone A” districts, a low-lying area whose residents were advised to evacuate as the ominous Sandy approached our coast. Yet no one that I know of in our 140-unit building or the surrounding neighborhood packed up and left. After all, I reasoned, we’re well over a mile from the bay on one side and the ocean on the other. Despite the occasional hurricane threat over the years, we had not even lost power due to a storm, let alone seen any sign of Noah loading his ark for the next flood. Even areas far closer to the Atlantic Ocean, such as Coney Island, had failed to experience catastrophic flooding in prior storms.

Living on a high floor, I was far more concerned with wind than water risks, fearful that one of our windows might be breached, blowing out the contents of my small apartment. But my neighbors and I stayed put and hoped for the best.

What we got instead was the realization of a worst-case scenario. I still cannot quite comprehend that Sandy’s storm surge was so powerful that it drove a cascade of water up Sheepshead Bay Road’s prime commercial district and well beyond, tossing cars around like toys and flooding everything in its path, including my building. Luckily, while damage was extensive, no one where I live was killed.

Walking around the next day, the devastation was horrible to behold. The apartment buildings and private homes around the neighborhood were in a similarly grim state of affairs, with shell-shocked residents tossing water-logged furniture and clothing onto trash heaps up and down the avenue. The vast majority of our local businesses were closed—either heavily damaged or wiped out entirely. The owners of our favorite restaurants, dry cleaner, bank, grocery stores, and various other retailers were walking around in a daze, waiting for help to pump water out of their flooded basements and cart away ruined fixtures and inventory. There was no telling when, or even if, our neighborhood might ever return to normal.

One welcome sight was the many insurance company logos on cars roaming the neighborhood, with adjusters stopping to inspect totaled cars and survey what was left of the businesses and homes along the flood’s path. Many were parked next to trucks advertising various disaster recovery and mitigation services probably paid for by insurers—at least for those who had the proper coverage.

I realize this is a familiar tale for those in the claims management business, especially for anyone specializing in catastrophe damage. This is what insurance adjusters do for a living. They walk into disaster zones, assess the losses amid widespread destruction, and do what they can to get policyholders back on their feet as soon as possible. I know that because I’ve covered insurance for 31 years—mostly as a journalist, more recently as a researcher. I’ve seen the pictures and commiserated with the adjusters on the ground and heard horror stories from the claims managers who have been their lifelines back at the home office.

Still, nothing compares with direct experience, especially when it comes to an event like this. I realize my situation is nowhere near as difficult as when Hurricane Katrina hit New Orleans. Indeed, Sheepshead Bay was not even damaged as badly as a number of other devastated neighborhoods nearby, such as Gerritsen Beach in Brooklyn or the Rockaways and Breezy Point in Queens. But I’ve never personally gone through anything like this, and I certainly hope to never have to go through anything close to this again.

I am not alone. New York City simply has not had to endure a natural disaster like Sandy. It was mind-boggling. The tunnels for subways and cars connecting Brooklyn to Manhattan were filled with water, leaving me feeling cut off and isolated for the first time in this vast city. Power was out for days—perhaps the most haunting image I saw was a picture showing the upper half of Manhattan’s iconic skyline lit up, while the lower half was in total darkness.

We were fortunate enough to get our power back within a few days, and, luckily, our building’s managing agent was somehow able to secure a repair team to fix our flooded boiler, so we had to go without heat and hot water only for a week. Many other friends and colleagues as close as Coney Island and as far as New Jersey went without power or heat for two weeks or more.

The insurance implications of Sandy are vast, and insurer losses will likely be greater than they might have been because, technically, Sandy wasn’t a “hurricane”—at least according to rulings handed down by a number of state governments in the deadly storm’s path. Such a designation would have permitted insurers to trigger hurricane deductibles, and being denied that option could cost carriers a bundle in additional claims payments. 

However, Sandy-related losses for insurers could have been a lot worse had more of the damage been caused by wind and not water. Sandy not only exposed New York’s vulnerability to a storm like that, it also flashed a spotlight on the vast numbers of people living near the ocean and bays here who didn’t have flood insurance. One wonders whether we may be facing more claims litigation, as we did after Hurricane Katrina, over whether storm surge is a wind- and not flood-related loss.

Insurance agents serving these areas might have an easier sell on their hands at renewal time when it comes to flood insurance. Or will they? I suppose in a way it’s understandable for those who’ve just seen the first floodwater in their lives to wonder how they could’ve been expected to shell out thousands more in premiums over the years to cover such an unlikely event. That attitude might change now given the recent circumstances, although it is too late for those lacking the personal funds to rebuild from this particular debacle.

Longer term, one has to wonder if this is the “new normal” for New York City and surrounding areas. Should we expect to be regularly on the receiving end of a hurricane and perhaps catastrophic flooding and brace ourselves accordingly? How do we respond to such an enormous challenge as a community in terms of fortifying our infrastructure, and as individuals in terms of bolstering our personal insurance coverage?

Insurance companies have to be thinking about that worst-case scenario, as well, in positioning both their underwriters and claims management teams for a very different set of expectations when it comes to disaster preparedness in New York City and the surrounding region.

Let’s hope a storm like Sandy never hits this area again. But I wouldn’t count on that.  

Sam Friedman is insurance research leader with Deloitte’s Center for Financial Services in New York. He has been a CLM Fellow since 2011 and can be reached at samfriedman@deloitte.com.