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Flood coverage examined following catastrophe claims

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Hurricane Harvey produced numerous commercial flood claims that are keeping attorneys and other claims professionals busy and catalyzing discussions about potential changes in flood underwriting.

The 2017 storm brought record amounts of rainfall to the Houston area.

“Since the passing of Hurricane Harvey, we have seen our property coverage caseload increase significantly, particularly in connection with commercial flood claims,” said Kent Adams, regional managing partner of the Wilson Elser Moskowitz Edelman & Dicker L.L.P. offices in Houston and Beaumont, Texas.

The spike in claims has been accompanied by increased discussion of the role private insurers can play in flood insurance market. While commercial policies can include flood coverage, there remains a demand for stand-alone commercial coverage provided either via or associated with the National Flood Insurance Program or independently of the government-backed U.S. flood insurer.

“We've also seen and followed some of the reaction of the insurance market to the flood claims and potential implications for future underwriting,” Mr. Adams said. “Obviously, underwriting changes are being considered in light of the scope of recent losses. Further, in some circles, we see discussions regarding further modifications to policy forms.”

Private market flood insurance has become part of the discussion.

“We know for example the chairman of Lloyd's has discussed ways to expand the presence of private insurers in the U.S. flood market, and there appears to be an appetite among insurers for that book of business,” Mr. Adams said.

Consideration of private market flood insurance then draws scrutiny to the differences in coverage, policy form and even the claims process between the private market and policies written by the NFIP.

Private market flood insurance generally takes one of two forms, according to Ross Jones, a partner with Wilson Elser in Beaumont.

The NFIP began a program in the 1980s that allowed private insurers to Write Your Own policies to sell and process flood insurance using NFIP rates, rules and regulations, Mr. Jones said.

WYO insurers write the coverage on their own paper, but the NFIP reinsures 100% of the losses. The policy forms are the same, and the NFIP and WYO carriers use the same adjusters to handle claims.

“More recently, some property insurers have created their own private flood insurance programs, separate and distinct from the WYO programs,” Mr. Jones said. These programs are new and somewhat untested and likely offer some advantages and disadvantages over the traditional NFIP and WYO programs.

“The advantages include possible lower premiums, higher policy limits, no 30-day waiting period as is required for an NFIP policy, and broader coverage for other structures on the property,” Mr. Jones said. Disadvantages may include more limited coverage from a private market insurer compared with NFIP coverage, no guarantee that coverage will be renewed by the private market insurer and potentially greater policy exclusions.

From a claims standpoint, private market insurers may not be able to take advantage of the protections afforded to NFIP and WYOP insurers, Mr. Jones said, particularly if the coverage provided in the private policy differs significantly from NFIP policy coverage.

There may be additional differences as well.

“The availability of NFIP coverage is limited to certain areas that participate in the program, but it is generally more widely available than private flood insurance,” said Robert Fisher, a partner with Clyde & Co in Atlanta.

Higher limits may be available from the private flood insurance market, Mr. Fisher added, and a private market flood insurance policy may provide certain coverages unavailable under NFIP policies, such as for time-element damages arising out of the property damages. Additionally, private policies may cover a broader range of structures than NFIP policies, Mr. Fisher said.

Claims may also be handled differently between the two markets, Mr. Fisher said.

“The method of valuation can differ under an NFIP policy versus a private policy, which could result in higher payments, for replacement cost value as opposed to actual cash value, which factors in depreciation,” Mr. Fisher said.

Government-backed claims may take more time as well.

“The claim procedure under the NFIP is similar to the claim procedure under private insurance but can be a bit more cumbersome due to rigid deadlines and requirements,” said Taylor Davis, senior associate with Clyde & Co in Atlanta. “Due to limitations on resources, a claim under an NFIP policy may take longer to investigate and/or process than a claim under a private flood insurance policy, particularly if there are many affected policyholders in the geographical region, as is often the case with a natural disaster.”