Wind or water? Big difference for insurers

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Pioneer Press (St. Paul, MN)

Hurricane Katrina has put the insurance industry under a microscope, and the view has not been entirely flattering.

In the weeks since the storm wreaked devastation on the Gulf Coast states, costing more than 1,000 lives and displacing about a million people, the initial horror turned to outrage over fumbled relief efforts and clashes over insurance coverage. The implications for insurers — and their customers — will be with us for a while.

At heart, the issue is about whether wind or water damaged homes and businesses, and whether such damage is covered by consumers’ insurance policies. The same issue could arise again with Hurricane Rita, which hit the Texas and Louisiana coastline Sept. 24, causing widespread flooding.

The attorney general of one of the worst-hit states already has sued five big insurance companies, and industry experts expect more disputes to follow. To make matters worse, consumers in the Gulf states will soon face higher insurance premiums. Some members of Congress are calling for some sort of federal natural disaster insurance to deal with the huge losses wrought by hurricanes, tornadoes and earthquakes.

Katrina is the nation’s costliest natural disaster to date. One estimate puts total insurance claims from Katrina, which slammed into the Gulf Coast in late August, at up to $ 60 billion. Hurricane Rita could add $9 billion to $18 billion to that tally, according to another estimate.

The cost will hurt insurers such as St. Paul Travelers Cos., the largest commercial insurer in the Katrina-affected Gulf states and one of the largest home insurers in the region. Claims from Katrina could top those from the Sept. 11, 2001, terrorist attacks, which cost the St. Paul-based company $ 941 million in pre-tax operating losses.

Wind damage is usually covered by standard home and commercial insurance policies. Flood damage typically is not.

In the case of these hurricanes, the question is what caused the flooding. Was it the winds of the hurricane or something else? Typically, damage caused by water from above, such as water falling through a hole in a roof caused by a windstorm, is covered by private insurance. But damage from rising water typically is not.

Homeowners and businesses can obtain up to $ 250,000 in flood insurance through the National Flood Insurance Program, run by the Federal Emergency Management Agency (FEMA). Homeowners can buy private flood insurance above the federal limit, but this is mainly done for high-priced homes. In addition, business owners can buy separate policies for flood damage, which may include coverage if business is interrupted.

But well over half of owner-occupied homes in the Katrina-affected areas of the Gulf states had no federal flood insurance. The percentage for businesses was even worse — more than 70 percent.

Even some consumers who did have flood insurance claim their insurance companies are balking at covering claims. Others who were flooded didn’t have flood insurance, because they didn’t live in designated flood zones. Businesses have found that business interruption insurance they bought may not apply to flood damage unless they also had flood insurance.

Such complaints spurred Mississippi Attorney General Jim Hood to sue five major insurers — Allstate, Mississippi Farm Bureau Insurance, Nationwide Mutual Insurance Co., State Farm and USAA — to force them to cover flood damage not included in homeowner policies.

Bob Hartwig, chief economist for the Insurance Information Institute, called Hood’s claim “rubbish.”

“What perils are covered by windstorm damage (are) absolutely crystal clear,” Hartwig said. “Insurers see these type of claims every year — thousands of them every year. (Claims) adjusters are well-trained to examine these properties.”

Ray Stone, vice president of catastrophe operations for St. Paul Travelers, agreed. “The whole issue of water versus wind is something we deal with every single hurricane,” he said. “There’s nothing different with this storm.”

Stone acknowledged that St. Paul Travelers, which offers federal flood coverage, has received complaints about coverage but said it has not been “swamped.” The St. Paul-based insurer estimates Katrina will cost it at least $800 million in claims. That number would be $2.5 billion if the company had not hedged its risk with reinsurance. It has not estimated claims for Rita.

Last year, the U.S. insurance industry earned $38.7 billion despite paying higher-than-expected claims on damage from four hurricanes. Since Hurricane Andrew in 1992, the industry has changed the way it operates, using more sophisticated catastrophe models to estimate risk. It also has raised rates on some types of insurance and in certain locations.

The Foundation for Taxpayer and Consumer Rights, based in Santa Monica, Calif., argues it shouldn’t matter whether wind or water did the damage, since Hurricane Katrina was the initial cause of all of the damage.

Foundation spokesman Doug Heller says the problem is complicated by the fact that many Gulf state residents are reporting difficulty obtaining copies of their insurance policies, which could delay the claims process.

The Insurance Information Institute’s Hartwig expects at least 1 million insurance claims arising from Katrina, about half the number of claims from last year’s four hurricanes. But he said the average Katrina-related claim will be more expensive, because the hurricane disrupted and damaged more businesses. Typically, home insurers pay for up to 70 percent of hurricane claims.

As of late last week, the National Flood Insurance Program already had received about 170,000 claims on insured homes and businesses in the Katrina-affected areas of Alabama, Louisiana and Mississippi. It hadn’t received claims yet from Rita.

The legacy of hurricanes Katrina and Rita may be felt for a long time.

Industry experts expect homeowner’s and business insurance premiums to rise as much as 30 percent in the Gulf Coast states — and other places at risk for hurricanes.

Consumer Watchdog
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