Excess flood market steps up when national flood program falls short

The historical lessons learned from Katrina and Rita, and looming predictions of a future with bigger and stronger storms, have made flood insurance popular these days — even in locations where it was previously thought unnecessary.

The National Flood Insurance Program provides limited residential structure coverage not exceeding $250,000 ($100,000 for contents, $500,000 for commercial structures). A bill recently passed by the U.S. House of Representatives, H.R. 4973, would increase the NFIP’s borrowing authority and raise residential limits to $335,000 for structure, $670,000 for commercial and $135,000 for contents. The bill now goes before the Senate for consideration.

But the bill could be largely moot if property values are higher than the limits. Nationally, the average price of new houses sold in May 2006 was $294,300, more than $44,000 above the current NFIP $250,000 limit, according to the U.S. Department of Housing and Urban Development. Clearly, many homes and businesses will exceed the NFIP limits and will be forced to turn to the excess flood insurance market to secure sufficient protection from flooding.

The costs of excess flood coverage varies, depending on the risk of flood and the replacement value of the property. Coverage is not included in most homeowners policies. Estimated average premiums for a residential policy with a $1 million replacement cost would be about $1,000 annually, according to industry experts.

The Chubb Group of Insurance Companies recently introduced personal flood insurance with limits of up to $15 million for a home and its contents. It is available in Arizona, Colorado and Illinois, with coverage in additional states planned throughout 2006.

Also, Fireman’s Fund Insurance Co. launched a surface water and flood endorsement to its Prestige Home Premier policy.

Needed but not always available
Although federal flood insurance is available to virtually everyone in the United States, excess flood coverage is not. Insurance carriers that provide excess flood coverage do so on a voluntary basis — writing it when and where they want. Many carriers don’t write it in certain areas — mainly those hardest hit by Hurricane Katrina in coastal Louisiana and some parts of New Orleans, where it is needed most. It can be impossible to find coverage in many of those areas, according to Louisiana Surplus Line Association President Ricky Jenkins.

“Before Hurricane Katrina, rates were somewhat competitive, they were actually sliding downward. But since then, rates have gone up substantially, and you can’t buy coverage in many areas,” Jenkins said. “Levees that have failed, have not yet been rebuilt. Why would a company want to subject themselves to that?”

Jenkins explained how more companies are going to be careful writing business inside any protective levee system. “The feeling is the only people that know of potential breeches or failures are in the federal government. And they are not making that information public to citizens and the insurance industry,” he said. “They knew exactly where the breeches were going to happen in New Orleans. But, did they tell us and the citizens that built next to it? Probably not.”

Beyond the Mississippi Delta
In Hawaii earlier this year, the Kaloko Reservoir on Kauai’i’s North Shore was breached, spilling 300 million gallons of water across 100-yards of the Kuhio Highway. Seven people lost their lives after being swept by raging water.

The State Department of Land and Natural Resources faced questions about blame along with the private owner of the dam that failed. State law requires private dam owners to provide maintenance, although the state land department is responsible for inspections. State Department of Land and Natural Resources Chairperson and Land Director Peter Young admitted there is no record the state ever inspected the Kaloko Reservoir.

Following the breach, Hawaii Governor Linda Lingle ordered an inspection of all reservoirs and dams statewide. The report said the inspection found faults with all 54 of Kaua’i’s dams and reservoirs, though officials remained confident there was no imminent danger of another failure. Of the 54 dams inspected, 24 were classified by the DLNR and Kauai Civil Defense as “high hazard.”

California’s levees are suspect and remain vulnerable as well. The city of Sacramento, the surrounding areas like Marysville and Rancho Cordova and the Sacramento-San Joaquin Delta face some of the greatest flood danger in the nation, according to U.S. Sen. Dianne Feinstein, D-Calif.. She recently announced the fiscal year 2006 Supplemental Appropriations bill was approved by a U.S. Senate-House Conference Committee to provide $30.4 million to accelerate critical levee repairs and flood control projects in the Sacramento region.

The bill includes $23.3 million for Sacramento River bank protection projects and $7.1 million for levee improvements for South Sacramento streams. Votes on the bill by the House and Senate were pending at press time.

“An earthquake or a major storm in Sacramento would be disastrous — one-third of the city would be quickly inundated with as much as 40 feet of feet of water because of a levee break.” Feinstein says on her Web site, http://feinstein.senate.gov/. “A major earthquake in Sacramento or the Bay Delta is a nightmare scenario for California. The earthquake damage would be bad enough. But if it were to weaken the levees, it would cause terrible flooding, kill thousands of people, jeopardize the drinking water for 23 million people, and cost billions.”

Legislation allocated $39 million to improve flood control in Sacramento in November 2005, but steps toward remediation seem to be restrained by finger pointing and confusion about who’s responsible for footing the bill. With some of the levees funded with federal money and others by state or local and regional authorities, the financial responsibility appears to be divided.

The federal government has set standards for levees in California and across the nation, but in many cases, it provides no financial support to meet them.

Media reports indicate local and regional governments in California may want to attract more building into flood plain areas to promote economic growth, thereby exacerbating the problem.

A flood of E&O lawsuits
A number of excess flood-related lawsuits have been filed against insurance agents since last year’s hurricanes. A classic example is a couple from New Orleans, facing more than $1 million in uninsured home losses from Hurricane Katrina. They filed a lawsuit claiming their agent did not tell them they could have bought additional coverage.

Although their home was worth $1.4 million, they only had the NFIP standard $250,000 limit on the property and another $100,000 in contents coverage. The suit alleges the couple was told that the coverage they secured was all that was available, and that they did not discover they could have purchased excess coverage until after Katrina sent a 4-foot water surge through their home, destroying 80 percent of it and $500,000 in personal property.

“We are seeing an awful lot of these claims,” said Chuck Morgan, an agent errors and omissions attorney with Seale, Smith, Zuber & Barnette in Baton Rouge, La. “I just walked in the door this afternoon from picking up another one at an agency here in Baton Rouge — another Katrina claim.”

Morgan expects a steady increase of those types of claims to continue through August and the one-year anniversary of Katrina. He said the claims are, to some degree, driven by insurers denying coverage. “When the insurer denies coverage, then of course the client turns around and goes after the insurance agent,” Morgan said.

Assertions of “my agent didn’t tell me that I could get this” arising from the Katrina and Rita disasters continue to flood in, according to industry officials.

While there may be some truth to such accusations, agents generally do a good job of telling people what is available. Morgan said what it comes down to is a question of economics. “People don’t want to pay for the most expensive thing they can buy. Then, when something happens, they wish they had the most expensive thing they could have bought,” he said.

Managing the E&O risk
“I represent agents, and I don’t want to make any of them mad. But I am sure there are situations where agents fail to offer these somewhat unusual coverages, like excess flood,” Morgan said. “In those instances, you have a problem … Those are difficult to defend. The only way that I can see to protect yourself is to try and use as many ‘paper trails’ to back up what you offered to a client and what they said they wanted. Make that client confirm what he wants,” he recommended.

Morgan said as in the case with most coverages, “Ninety-nine percent of the time a client comes in and says, ‘I want coverage that will either, No. 1, satisfy the bank if it is a homeowners coverage and or business. Or, No. 2, the best I can get for the cheapest amount of money.'”

The challenge then becomes tacking on extras to basic coverage because of the cost. “About nine times out of 10 they want the cheapest thing they can get,” Morgan said.

From an E&O standpoint, an agent must protect him or herself from what can happen when coverage is put into effect and a claim comes along that wasn’t covered under basic coverage limits. Suddenly, agents are faced with the dilemma of their client saying, “Price was no object, I would have been willing to pay anything. I wanted the ‘Cadillac’ of the fleet. I wanted ‘full’ coverage,” whatever that means, Morgan said. He urged agents to protect themselves by documenting what their clients said they wanted, agreed to pay for and agreed to order.

One of the easiest things to do, Morgan said, is to make sure clients sign the application so that they know what they applied for. “If the application doesn’t include business interruption, or whatever, then you at least have a signed piece of paper by the client saying, ‘this is what I want,'” he said.

Second, and perhaps better, is to use what is known as a “coverage checklist” published by insurance organizations and agent organizations for most lines of business. The homeowners’ checklist, for example, would have a box to check if the client wanted flood insurance, one to check if they wanted excess flood coverage, etc. And if they did not want those coverages, they would have to check a box indicating that. “At the end, have them sign it. Now there are two pieces of paper,” Morgan said.

“When they say, ‘I wanted excess flood,’ you can say, ‘Oh no you didn’t. This is what you signed stating this is what you wanted,'” he explained.

Morgan said such a case will most often go to trial despite having the signed application and signed checklist, because the client is going to say, “I signed that, but I did not understand what I was signing.” However, at least the case will be tried with you holding two pieces of paper that the client signed and can be blown up and placed in front of a jury. “Juries are pretty hard on folks who have signed something,” Morgan noted. “If there is something that somebody signed, they’re pretty much going to hold them to what they signed.”

Such documents are things agents’ attorneys should have in their arsenal when they have to go to court and defend E&O claims. “It at least gives your E&O attorney the ability to make the argument that the client understood what coverages he was requesting and what coverages he was not requesting,” Morgan noted.

Topics California Trends Catastrophe USA Agencies Excess Surplus Flood Hurricane