2020 was an extremely active year for Atlantic tropical storms and hurricanes and the four preceding years were above average. According to climate scientists, this suggests that 2021 will be active as well. And once those storms appear – especially those that are “in the box” – you and your customers will likely find yourself with few good options.
True, many states technically have an order taker standard of care such that, if your customer didn’t order coverage to deal with a devastating storm, they have to live with the consequences. However, frequent readers of this column know that courts often find that a “special relationship“ exists between broker and customer, which gives rise to a duty to advise. Even if there’s no such duty, there’s always the desire to help a customer in a time of need, which usually will involve higher commissions for additional coverage…
So, what should you be wary of when it comes to hurricane coverage? We’ve seen a number of recurring claim scenarios:
- Among the most common: failure to address the $500,000 (personal lines) limit under the National Flood Insurance Program (NFIP). If you think it is unlikely that a hurricane would cause in excess of a half million dollars in damage? Let me refer you to some of your colleagues in the New Orleans area to set you straight. It’s not that difficult, especially if power is out for a while.
- Speaking of which: if power is knocked out for an extended period of time, but the storm doesn’t directly damage your customer’s home/business? Coverage depends on the wording of individual policies, but you may need to explore Off Premises Power Outage coverage, or a different carrier, to obtain coverage for power outages.
- Similarly, if your customer’s business is not directly affected, but its customers are, including locations where your customer stores its business equipment? You may need to find Dependent Property coverage that will protect your client from losses.
- Bear in mind that, generally speaking, a single policy will not provide all necessary coverage. For homes in coastal or low-lying areas, you may need to place Homeowners, Wind, and Flood policies. And as noted above, you may need a fourth policy for Excess Flood.
- What are the limits on each of those policies? Do they match up with, or exceed, the Homeowners limit? If not, your customer is likely to claim that he wanted that HO limit on all policies. If you cannot make that happen, or if your customer doesn’t want to pay for the higher limits, be sure to have that conversation with your customer well-documented in the file.
- At this point, some of you will be dismissing these concerns either because your customer is not located “on the beach” or is not in a flood plain according to the maps in your office. First, bear in mind that tropical storms wreak havoc in many ways. Yes, high wind and storm surges along the coastline cause much damage, but significant losses have been caused by storms that wreak havoc for miles inland where the storm drops epic amounts of rain, pushes the storm surge into low-lying areas or drives rivers and creeks out of their usual shorelines. (I personally handled a claim for damage to a recycling facility in upstate New York that lent new meaning to the phrase “inland marine.”)
- As for that flood map: how old is it? Such maps are updated regularly, and if you’re not using the most recent one, you may find yourself flooded with claims. The same goes for the temptation to fudge – just a little – on elevation certificates. What’s a few inches among friends? Answer: an E&O claim waiting to happen.
- Other claims stem not from a failure to procure coverage, but rather, the failure to explain the policy that you did procure. Did you point out that flood policies typically provide little or no coverage for that portion of the property that is “below grade,” e.g., basements? Did you explain that flood coverage typically is ACV, not replacement cost – at least on Personal Lines policies?
- And let’s not forget your coverage. Are the aggregate limits on your E&O policy sufficient to deal with a catastrophe in your community? No one claim may broach your limits, but in the aggregate? In the wake of Hurricane Katrina, we saw several agencies hit with 50+ claims. If you do not have adequate limits, that catastrophe may be an “extinction event” for your agency.
- Some E&O policies provide Catastrophe Extra Expense coverage to help your agency recover from severe weather events and keep providing service to your customers when they need it most.
And for the “inlanders” who have read this far? Our focus has been on hurricanes, but all of you should consider CAT events that may strike your customers, too: wildfires, earthquakes, tornados, droughts, hail… The National Oceanic and Atmospheric Administration (NOAA) reported that 2020 saw a record 22 weather and climate disasters with a price tag of more than $1 billion, and most of those were inland events. Plus, we see claims every year where inland agencies place coverage for their clients’ boats and vacation homes along the coasts, often with several of the errors noted above.
We all know that it’s tough to find Homeowner’s coverage for a burning house. Likewise, you’re not going to find hurricane coverage for a customer once a tropical storm is “in the box” — the area northwest of 15 ° North Latitude and 65° West Longitude (roughly the Virgin Islands). Whether your agency is located on a sunny beach or miles inland, don’t wait for the sirens to herald the arrival of the next “Billion Dollar Storm.”
Now is the time to act.
Matthew Davis is a vice president and claims manager at Swiss Re Corporate Solutions, working out of the office in Kansas City, Missouri. Insurance products underwritten by Westport Insurance Corporation, Kansas City, Missouri, a member of Swiss Re Corporate Solutions.
This article is intended to be used for general informational purposes only and is not to be relied upon or used for any particular purpose. Swiss Re shall not be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained or referenced in this article. The information contained or referenced in this article is not intended to constitute and should not be considered legal, accounting or professional advice, nor shall it serve as a substitute for the recipient obtaining such advice. The views expressed in this article do not necessarily represent the views of the Swiss Re Group (“Swiss Re”) and/or its subsidiaries and/or management and/or shareholders.