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Tropical Storm Harvey continued to batter Texas on Tuesday as loss estimates began to rise and some eyes turned toward potential coverage issues and questions.
Primary insurers look to bear the brunt of the cost as estimates for insured damages rose to around $6 billion, roughly double some estimates released Monday.
Based on early estimates from catastrophe modeling firms, insured losses could total up to $6 billion, excluding flood losses, according to a report late Monday from S&P Global Ratings Inc.
The S&P report, “Harvey, the First Major Hurricane to Hit the U.S. in More Than a Decade, Is Testing Re/Insurers,” said that primary insurers will see the most losses with these estimates while cautioning that it is still early in the process for estimating damages
“At this loss level, primary insurance carriers — as opposed to reinsurers — would retain the majority of losses,” S&P said, adding, “It's too early to accurately quantify the insured losses related to Hurricane Harvey.”
S&P also said any effects on the reinsurance market could be limited.
“Any impact on re/insurance pricing will likely be limited to affected regions and business lines,” the ratings agency said.
Ultimately, S&P sees Harvey potentially hitting insurer earnings but not affecting capital levels.
“Based on these early estimates, we believe that Hurricane Harvey will likely be an earnings event rather than a capital event for the property/casualty insurers and reinsurers,” S&P said, adding, “as a result, we don't expect to take many negative ratings actions in these sectors, but there could be ones on a few outliers.”
According to figures from A.M. Best Co. Inc. from 2016 for Texas, the leading commercial multiple peril insurers are Travelers Cos. Inc. with direct premiums written of $213.6 million; Hartford Financial Services Group Inc. with premiums of $211.8 million: Nationwide Mutual Insurance Co. with $195.1 million; Liberty Mutual Insurance Co. with $155.9 million; Farmers Insurance Group of Companies with $142.8 million; Chubb INA Group with $142.3 million; Tokio Marine US PC Group with $110.6 million; CNA Financial Corp. with $104.0 million; State Farm Group with $93,458 million; and Argo Group International Holds Ltd. with $89.3 million.
The open question of flood damages may raise issues relating to coverage, according to the legal community.
“Coverage issues will likely occur in connection with insurance claims arising out of Hurricane Harvey,” according to Bob Fisher, a partner at Clyde & Co in Atlanta, and head of the firm’s U.S. first-party coverage practice.
“The specific terms and conditions of the policies that are implicated by the claims will drive the scope and extent of those issues,” he told Business Insurance in an email Tuesday.
“Katrina and Sandy resulted in significant litigation about what covered damages were the result of windstorm versus floods,” Locke Lord L.L.P. partner Donald Frechette, Hartford, Connecticut, said in an email, also Tuesday. “Although early indications are that Hurricane Harvey was more a flood loss than a wind loss, and more of a primary rather than reinsurance event, we expect similar windstorm versus flood litigation emanating from Harvey.”
Based on past experience handling such claims, Mr. Fisher said, “I would expect coverage issues to arise relating to the application of sublimits, deductibles, ingress/egress and civil authority claims, as well as off-premises power interruption losses.”
“Based upon our initial observations, claims may fall under either Named Windstorm or Flood coverages, or possibly both,” Gary Marchitello, head of property broking for Willis Towers Watson P.L.C., said in a statement. “In addition to complex property claims, we also expect this event to result in significant business interruption losses, which could take some weeks to calculate. Even if a specific property is not damaged, the insured’s property may face other obstacles to its operations, for example it could be impaired by civil authority and/or it may not have a means of ingress/egress due to nearby road closures.”
The storm’s slow progress and sheer length of time in the area may give rise to specific questions.
“Furthermore, given the duration of the storm, I would most certainly anticipate issues with respect to how the definition of occurrence in a particular policy should be interpreted, which would implicate application of policy limits and deductibles,” Mr. Fisher said.
Indeed, at times Harvey was barely moving.
“The storm has slowed to a virtual standstill across east-central Texas as heavy rains were likely to continue until Aug. 31, with some spots estimated to receive as much as 50 inches,” Impact Forecasting, part of Aon Benfield, said in an alert late Monday. “Catastrophic flooding across a broad section of eastern Texas has already been recorded, with southern Louisiana also seeing floods.”
Past events have wrought changes to policy language trying to address such coverage and claims issues.
“As a result of that significant litigation following Katrina and Sandy, many commercial property insurers changed policy coverage to enforce sublimits, regardless of the peril that led to the flooding,” Mr. Frechette said. “Additionally, in the wake of those storms, the use of storm-surge clauses has become more common. Further, underwriters have adjusted their policy wording on business interruption policies to better clarify what is or is not covered. For example, many policies limit coverage to a single covered tier.”
“There certainly has been an evolution of language to address these kinds of catastrophic climactic events and the resultant losses,” Mr. Fisher said.
Hurricane Harvey is expected to make landfall early this weekend as a Category 3 hurricane with the potential to cause billions of dollars in damages, according to projections from leading catastrophe modeling firms.