When the National Hurricane Center declared Sandy a “post-tropical storm” just before it made landfall, a lot of homeowners across New Jersey, New York, Connecticut and Maryland may have saved a lot of money. The governors of these states have told insurance companies that because the storm was not classified as a hurricane, the insurers can’t enforce costly hurricane deductibles on storm-related claims.
In recent years, many insurers have added hurricane and wind deductibles that can run as high as 5 percent of the covered value of the homes. So a person who owns a home worth $500,000 suffering hurricane damage would be responsible for as much as $25,000 before the insurance company would pay anything.
Catastrophe modeling estimates of damages from Sandy range from $5 billion to $15 billion. The midpoint of that range would make Sandy the sixth-most expensive “hurricane” in U.S. history, said Robert Hartwig, president of the Insurance Information Institute.
But while New York Governor Andrew Cuomo announced boldly that “homeowners will not have to pay hurricane deductibles,” this does not mean homeowners won’t face any costs. Some policies carve out wind damage from coverage altogether or levy sizable deductibles for wind damage even if it is not caused by a hurricane. New Jersey regulations prohibit that when it pertains to a hurricane, the state’s Department of Banking and Insurance said.
On the other hand, some states affected by Sandy will allow hurricane deductibles to come into play. In North Carolina, for instance, Sandy was still a hurricane when it passed by the state, said Kerry Hall, spokesperson for the North Carolina Department of Insurance. “Secondly, North Carolina policies use named-storm deductibles instead of hurricane deductibles.”
Furthermore, “insurers may fight this ‘post-tropical’ idea, and say we don’t care what you call it,” said Bob Hunter, director of insurance for the Consumer Federation of America, a watchdog group. “We won’t know for a while because they won’t know for a couple of weeks when they settle a claim.”
That may mean a protracted trip through the courts because insurance contracts typically contain specific meteorological language that state governors can’t necessarily change by fiat.
“Ultimately, this is something a court will decide,” said an insurance attorney, who spoke to Reuters but did not want to be identified. “Not Governor Cuomo.”
Hunter suggested that any homeowners who are pressed to pay a hurricane deductible in these states should immediately contact their governor and state insurance commission in writing. He also said that it would be helpful for people to report this development on social media like Twitter and Facebook so that others can be aware.
OTHER COSTS AND GRAY AREAS
If insurers do not apply the deductibles, they may try to recoup costs in other ways.
Hartwig of the Insurance Information Institute said insurance industry officials had meetings with New York’s Department of Financial Services and the governor’s office to convey their point that ultimately the cost of flood insurance will have to rise as a result of the decision.
“Insurers will comply, but the broader point is that the deductibles help keep the cost of insurance lower in coastal areas,” he said. “The cost to insurers has to be reflected in the price that is charged, and now that has to include the possibility of storms that are hurricanes being re-categorized as ‘post-tropical events.’”
Hartwig noted that people in the future will undoubtedly continue to refer to the devastating storm as “Hurricane Sandy,” and said New York State regulators years earlier approved the language in insurance contracts that triggers when hurricane deductibles go into effect.
“The unprecedented nature of the storm is going to be something that insurers take a hard look at it, in terms of cost damage, and also in terms of how the pricing works in coastal parts of New York and other areas subject to hurricane deductibles,” he said.
He would not estimate how long the process of re-determining pricing – which requires final approval from state regulators -will take – nor the value of deductibles that insurers will forgo.
Another battle could brew over “anti-concurrent causation clauses” now contained in many policies, according to Hunter. These pertain to damage that comes from two causes at once – say wind and flooding, where wind damage would likely be covered, but flooding not. So if a tree lands in the living room and at the same time, the basement floods, suddenly neither would be covered.
The language in policies is often ambiguous, which leaves homeowners the opportunity to sue, Hunter said.
According to the Insurance Information Institute, states allowing hurricane deductibles include: Alabama, Connecticut, Delaware, Florida, Georgia, Hawaii, Louisiana, Maine, Maryland, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Rhode Island, South Carolina, Texas and Virginia. But whether a hurricane deductible applies to a homeowner's claim depends on the specific “trigger” selected by the insurance company. These triggers vary by state and insurer and usually apply when the National Weather Service (NWS) officially names a tropical storm, declares a hurricane watch or warning, or defines a hurricane’s intensity.]