The Wall Street Journal wrote a story, In Hurricane Ian’s wake, insurance companies and homeowners are gearing up for coverage battles, on the wind versus flood dilemma. This is a big question that will cause headaches for Hurricane Ian policyholders with the most significant damage, property insurance adjusters trying to determine which peril caused which damage, and restoration contractors dealing with multiple carriers for a construction project. The journalist interviewed me while doing his research and published this in the story:
Chip Merlin, president of the Merlin Law Group in Tampa, Fla., which represents policyholders in disputes with insurance companies, said his office is already fielding calls from people who feel their home insurance company isn̵7;t treating them fairly. Some say they tried to file a claim but were told to file an application with their flood insurance. Mr. Merlin’s position is that a claim should be submitted to both home and flood insurance companies, to better ensure that damage from both wind and flood is identified and that the homeowner can utilize the proceeds of both policies.
“These things often end up in court unfortunately,” Merlin said. ‘We are doomed to go through it again.
I have received many calls and messages about the article with a common question:
“Why do we have to have two policies covering wind and flood when one policy can cover both and eliminate the problem?”
There are historical and actuarial reasons why we have the current system. A study from 2017, Flood risk and insuranceof the National Association of Insurance Commissioners commented on the history of the National Flood Insurance Program (NFIP) which issues most flood policies:
The NFIP was created in 1968 largely in response to the failure of the private sector flood insurance market. After the severe Mississippi floods of 1927, private insurers concluded that flood risk was uninsurable due to adverse selection, risk-based premiums would be too high for families to afford, and flood losses could be so catastrophic as to cause insolvency or have a significant impact on surplus . This lack of private sector coverage triggered significant federal disaster relief for victims of Hurricane Betsy in 1965 and led to the creation of the NFIP in 1968.
When communities voluntarily join the NFIP and adopt minimum floodplain management practices, their residents become eligible to purchase flood insurance through the program. When created, the NFIP discounted premiums to maintain property values on structures already built in flood-prone areas, while new construction was charged premiums that reflect risk. Although premiums on existing property were heavily discounted, relatively few homeowners purchased coverage during the first five years of the program, leading Congress to pass the federal Flood Protection Act of 1973. This law requires all properties to be located in a mapped 100-year flood plain, designated as a Special Flood Hazard Area (SFHA), to purchase flood insurance if they have a mortgage or a loan from a federally supported or regulated lender. The 1973 law also requires communities to participate in the NFIP to be eligible for federal disaster assistance. The federal Housing and Community Development Act of 1974 added a notification requirement to the mandatory purchase requirement: Federally regulated lenders must inform a borrower if their property is located in an SFHA.
The bottom line is that mass marketing flood insurance could potentially bankrupt insurance companies. The price to sell the policies profitably is so high for those in high flood risk areas that the policyholders will not buy the product. The federal government came up with a solution, but with building code requirements to help reduce the impact of flooding on properties most susceptible to flooding.
The study noted that flood risk is not the only risk that has led to government-backed programs so that insurance can be sold:
The withdrawal of insurers from certain markets due to the high cost of covering catastrophe risks, including a lack of sufficient reinsurance capacity and other risk transfer instruments, such as catastrophe bonds (CATs), led to state-sponsored programs such as the establishment of the California Earthquake Authority (CEA), the NFIP, and the federal Terrorism Risk Insurance Act (TRIA).
While there are many proposals for possible changes where a policy covers wind and flood risk at the same time, only the UK has a plan in place with its federal government to make it a reality. Maybe we’ll have a new program that solves this problem before the next storm surge disaster.
For policyholders who have suffered damage, and if there is any question about which carrier to report the damage to, my strong suggestion is to report the damage to both the wind and flood carrier, as mentioned in Do I report wind damage or flood damage? Public adjusters are trained to adjust both claims at the same time. Second, keep track of anyone who does anything about tweaking and resetting, as I noted in Multiple Disaster Adjusters – What Policyholders, Contractors and Public Adjusters Should Do.
Life is not easy for any of us. But how about that? We must have perseverance and, above all, trust in ourselves. We must believe that we are gifted for something and that this must be achieved.