Recently I received a worried e-mail from one of my clients with operations in Florida. Irma was at that time a category 5 hurricane, and my client was furiously searching their insurance policy to find out how their hurricane coverage worked. I was encouraged that my customer actually had their policy and was reading it, since most customers do not. Unfortunately there is no such thing as hurricane insurance.
Insurance professionals like to talk about perils. A peril is something that can cause a loss (i.e. fire, wind, flood, earthquake, theft or vandalism). Insurance policies used to be written on a “named peril” basis, so if you had a fire and fire was listed as a covered peril in your insurance policy, you had coverage. If the peril was not listed, then there was no coverage.
As the insurance industry evolved, the definition of what perils are covered by a policy evolved too. There are presently three broad categories of perils, also referred to as cause of loss, covered in a property insurance policy.
Hurricane Irma, which at the time of the worried e-mail had top sustained winds of 180 miles per hour, is what caused my client’s concern. While hurricane wind speeds slow once they are over land, Irma was a frightening storm. The good news is that wind is covered by all three types of insurance policies, so the damage to insured buildings caused by wind will usually be covered.
The trickier issue is water damage caused by a hurricane. A standard property insurance policy does not exclude “wind driven water.” So if your condo is on the 23rd floor of a high rise and a hurricane drives water into the unit through a broken window, it will likely be covered. Hurricane Katrina led to several lawsuits that tried to define storm surge as wind driven water. These suits were largely unsuccessful; storm surge is usually considered flood. Negotiating your claim to include wind driven water is legitimate, but where wind driven water ends and flood begins can be somewhat subjective.
The other issue to be concerned with is “named storm” deductibles. We are all used to property deductibles stated as a dollar amount. Deductibles for named storms are usually stated as a percentage of the insured value. They usually apply to property located in first or second tier counties from the coast. The Florida legislature has developed specific rules for the application named storm deductibles. Any variance between how the policy is written and the statutes will be decided based on the statutes.
Unlike Irma, the primary issue with Harvey was rain, up to 50 inches of rain in some locations, and much of residential Houston is built on a flood plain. Harvey caused tens of billions of dollars of flood loss. Flood is specifically excluded under most insurance policies, although it may be available. Most homeowners do not buy flood insurance, due to its high cost. While grants and loans from FEMA will help somewhat, much of the loss in Texas will be borne by the property owners.
Flood coverage is available through the National Flood Insurance Program (NFIP), which is currently up for renewal in Congress. There are specific guidelines that communities have to follow for its citizens to have access to the program. Limits available through the program are capped, but by purchasing coverage through the NFIP, a customer has a much greater probability of recovery.
Many people missed the news coverage of a major earthquake in Mexico, because of the news coverage on Irma and Harvey. The 8.1 magnitude quake, the largest quake to hit Mexico in over a century, caused serious property damage and killed over sixty people.
Earth movement is another specific exclusion found in most property insurance policies. While insurance professionals usually talk about “quake coverage,” the earth movement exclusion also eliminates coverage for landslides, mudflows, and earth sinking, rising or shifting. Buildings and foundations may be damaged as heavy clay soil contracts as it dries after a flood. This type of damage may be considered earth movement and may not be covered, unless the policy is endorsed to cover this peril.
What happens when your property is damaged by both wind and flood waters, an issue referred to as concurrent causation. Generally speaking, when a loss is caused by both wind and flood, but only one of the perils is insured, only the damage caused by the insured peril will be covered. In the case of Harvey, if a client purchased a “special perils” property policy, but not a flood extension, then the damage to their property caused by wind would be covered, but the damage caused by flood would not.
Clients complain that insurance for floods and earthquakes is expensive, and they are right. Insurance professionals like to talk about adverse selection. Virtually all property is exposed to the wind peril, so all customers want coverage for wind. However, most of the property in the United States is not exposed to either floods or earthquakes. The National Flood Insurance Program only has issued about five million policies in a country of 324 million people. Traditional insurance companies limit the supply of flood insurance capacity because of the catastrophic nature of the coverage. Harvey, for example, will damage the financial strength of insurance companies. People and companies that are willing to pay high premiums for flood insurance or earthquake coverage do so because they have an exposure. As a result, the cost is high, but when an event affects you, having the coverage can save you from ruin.
For more information about protecting your business, please contact us.
Russ Birch is a successful commercial insurance leader with expertise in sales, client service and brokering. Russ works with businesses to develop and implement comprehensive strategies to mitigate risk and provide cost-effective property and casualty insurance solutions. Over the course of his
Russ Birch is a successful commercial insurance leader with expertise in sales, client service and brokering. Russ works with businesses to develop and implement comprehensive strategies to mitigate risk and provide cost-effective property and casualty insurance solutions. Over the course of his career, he has led teams providing insurance products and risk management services to middle market clients across the country. His experience includes leadership roles at two global brokers and a national insurance agency. Russ’s primary responsibilities include increasing our capabilities to meet the needs of growing, mid-sized businesses. Russ received a bachelor’s degree and MBA from University of Minnesota.
Risk management and human resources are traditionally two different job functions, and the people in these areas have rarely crossed paths — but that is changing.
Why are these people starting to work together more frequently?
Many technology exposures originate in an organization’s information technology (IT) department. In addition, client data and intellectual property may be at risk through computer viruses or malware that can penetrate the system — even without fraudulent intent on the part of employees — through poor or nonexistent IT security policies.
Businesses are also exposed to a growing number of online security threats and vulnerabilities from the outside. Establishing policies and safeguards to protect your company from internal misuse, external fraud and malware is absolutely essential.
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