The Edge of Disaster

The global pandemic and the associated issues that 2020 has brought, ranging from health risks and social distancing to economic strain and supply-chain difficulties, have framed a year unlike any other. Insureds and claims departments alike are dealing with a host of unprecedented concerns and challenges.

On top of all that, this hurricane season will present some unique considerations when it comes to handling property insurance claims. How will adjusters travel to loss locations? Where will they stay when they arrive? And once they do get there, will they be able to gain access to damaged properties safely while abiding by social-distancing protocols?

Amid all of these open questions, the most challenging months of a hurricane season are upon us. Early indications were that this season was going to be an active one, and that has largely proven true. For the first time on record, dating back to 1850, the Atlantic hurricane season produced more than seven tropical systems before August 1. This is more than the number of tropical storms produced by the same date in 2005, the season that brought us Hurricanes Katrina, Rita, and Wilma. The National Oceanic and Atmospheric Administration (NOAA) forecasted 13-19 named storms, six-to-10 of which they thought could become hurricanes, and three-to-six of which could become major hurricanes (Category 3, 4, or 5). We saw the first of these at the end of July with Hurricane Hanna—the earliest eighth-named storm of any season on record—and the second with Hurricane Isaias—the earliest ninth-named storm—which spawned 38 tornadoes. Most recently, Hurricane Laura made landfall in Louisiana as a Category 4 hurricane with 150 mph winds—one of the most powerful storms ever to hit the U.S.

Impact on Property Claims

Although many of the challenges the industry faces this year are unique and unprecedented, the experience of past hurricane events provides some guidance as to what we can expect from this season. A number of major named storms over the past several years have presented lessons that may be relevant to the current situation. Here are some examples of key issues that emerged in litigation over recent storm seasons.

The “HIM” Hurricanes. Beginning in August 2017, three major hurricanes hit the U.S. within a month’s time: first Hurricane Harvey, then Hurricane Irma, then Hurricane Maria in rapid succession. Combined, these three storms were partially responsible for making 2017 the most expensive year on record for U.S. disasters. NOAA reported that overall damages for Hurricane Harvey topped $125 billion, and Irma and Maria caused $50 billion and $90 billion in total damages, respectively.

Many of the insurance-specific challenges presented by these three hurricanes were centered on assessing damage quickly. The delay in being able to access damaged properties, and the short period of time between storms, in some cases, created issues for insureds in segregating damage, especially in the case of properties with multiple claims. Even without the risk of back-to-back storms, the longer it takes to get adjusters on site, the more a property’s condition can change, potentially making it harder to assess the extent of the damage.

In the 2020 hurricane season, we are likely to see many of the same issues that the “HIM” storms presented. This time, COVID-19 may present the challenge of getting field adjusters on site primarily due to factors such as quarantine requirements, fewer travel options, social distancing, and other health and safety factors. But the issues associated with gaining access to property to inspect damages are much the same. It’s important to note that the Atlantic hurricane season is long—June through November—and the impact of storms is not limited to the Gulf Coast. Recall that 2012’s Superstorm Sandy made landfall in the Northeast in late October, which also happens to be the beginning of traditional flu season. As COVID-19 hot spots shift throughout the country and states create their own laws in response, we may see increases in the number of states where adjusters will have to quarantine before they can enter a state to inspect damage.

Superstorm Sandy. Speaking of Superstorm Sandy, readers will recall that when it swept up the East Coast, it left over $70 billion in damages in its wake, according to NOAA. A late-in-the-season nor’easter/hurricane hybrid, Superstorm Sandy created not only extensive property damage, but also a legacy of issues related to flood, wind, and named storm provisions in first-party property insurance policies.

First, hurricanes and other windstorms frequently involve damage due to storm surge, which is essentially an abnormal rise in sea level caused by the offshore winds of a severe cyclone. As Superstorm Sandy-related litigation has highlighted, parties have disagreed over whether storm surge damage was caused by the perils of flood, wind, or both. This has led to a debate in courts across the U.S. over whether flood exclusions, deductibles, and sub-limits apply, or whether wind-related provisions apply to such losses. With Superstorm Sandy, as with Hurricanes Rita and Katrina before it, the question of whether damage was caused by flood or by wind had a significant impact on how certain policies responded to claimed losses.

Second, some commercial property policies contain a named-storm definition and provisions that apply specifically to named storms. These definitions vary widely in terms of their language. Some include tropical storms and cyclones, whereas others are limited to hurricanes. It is important to pay close attention to the exact wording of the definition, as the mere fact that a storm has a name does not necessarily make it a “named storm,” as defined in a given insurance policy.

New Lessons to Learn

Claims resulting from Hurricane Laura and future storms this season will no doubt present a number of new lessons for the insurance industry. While no one has a crystal ball, here are some key issues to watch in 2020 and beyond.

Potential change in risk due to property improvements. In some industries, most notably the food-service industry, business owners have made significant changes to their properties in recent months, such as adding outdoor space or additional windows to ensure proper air flow and adequate social distancing. This may mean that the risk has materially changed since it was underwritten. If a property is underinsured because of improvements made since the policy’s inception, and there is no coinsurance penalty or limits are not capped at scheduled values, then the insured may seek damages far in excess of what may have been anticipated at the time of binding.

Failure to protect property and mitigate damages. It stands to reason that storm-related damages may be worse this year than in years past because of the unique circumstances presented by the pandemic. In the last few months, many businesses have switched to a work-from-home model, leaving commercial properties vacant. With a lack of personnel on site, some of the usual hurricane preparation activities—boarding up windows, applying storm shutters, sandbagging—may not be top of mind or may not be feasible due to illness or incapacitation this year.

Many smaller businesses have closed down completely, which raises questions about whether the insureds are both willing and able to protect their now-empty properties. If a property experiences water-related loss, will the insured take immediate steps to prevent mold growth? If not, and mold growth ensues, will that damage be covered? A policyholder’s failure to mitigate damages may impact coverage, damages, or both. Perhaps the policy excludes losses to vacant properties. As with most losses, the policy language remains of critical importance in these situations.

Claims technology advances. The insurtech industry has brought countless new technology capabilities to the insurance industry as a whole in recent years, and the claims process is no exception. Some of these options may prove quite useful this hurricane season.

For instance, advancements in satellite imagery and drone technology have made it easier to assess damage from a safe distance, which could both reduce in-person interaction and aid in managing claims efficiently. Though the need will still exist for in-person site visits for some losses (in which case proper personal protection equipment, social distancing, and minimized interactions are all important considerations), technology may be one way to lighten the load. Hopefully, these innovations can reduce some of the accessibility challenges experienced in the wake of the “HIM” hurricanes.  

Valuation and other damages considerations. As we enter the final three months of the 2020 hurricane season, business owners and homeowners alike are already stretched financially, and this raises the question whether some insureds will attempt to be creative with their claims in order to improve their cash flows. Claims handlers now more than ever will need to be vigilant about making sure that claims are investigated, measured, and adjusted appropriately.

With past hurricanes, there have been massive aid packages from the government and recovery from the Federal Emergency Management Agency (FEMA). Although such recoveries are often conditioned upon exhausting private insurance first or reimbursing the government if a private insurer pays the claim, carriers will want to satisfy themselves that insureds are not seeking a windfall—that is, seeking to recover for the same damages from multiple sources, often called double recovery.

Finally, given the current economic environment, there is the question of whether certain insureds will even want to rebuild. Generally, policies provide for both actual cash value (ACV) and replacement cost value (RCV) under different circumstances. Under typical valuation provisions, to recover the RCV, an insured must repair or replace damaged property within two years of the date of loss. If they fail to do so, then recovery is generally limited to the ACV, which is usually lower because it takes into account depreciation. Normally, insureds seek to repair the damage and recover the RCV, but in a time when businesses are struggling to stay afloat, some insureds may prefer to “take the money and run.” Whether this will make a noticeable difference in overall payouts remains to be seen, but it certainly seems plausible that more covered claims will be limited to ACV than in previous years.

2020’s Legacy?

Forecasters at NOAA’s Climate Prediction Center predicted in May that 2020 would likely be an above-average hurricane season, and so far, that prediction has proven accurate. For communities already struggling with the impact of COVID-19, the effects of a severe storm are likely to be even more challenging. But previous storms offer insights to help us weather the coming season and pinpoint key issues that may arise. What will the lasting legacy of this hurricane season be? We’ll have to wait and see.

Photo by Joe Raedle/Getty Images