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Florence drenches the Carolinas in test of flood insurance policies

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The extent of the insured damage caused by Hurricane Florence is still unclear, but some experts are drawing parallels to Hurricane Harvey because, like that storm, Florence is a multiday rainfall event, while others caution against such comparisons.

Florence made landfall on Friday morning and stalled across North and South Carolina, and its remnants continue to deliver record-breaking rainfall, dropping 36 inches on North Carolina and nearly 24 inches in South Carolina as of Monday evening.

Insured losses from what is now tropical depression Florence will total about $2.5 billion, according to an estimate Monday from Boston-based catastrophe modeler Karen Clark & Co.

“It’s not going to be as much the traditional wind,” said Michael Korn, leader of Integro Insurance Brokers’ property practice based in San Francisco. “It’s going to be about all the water that Florence is going to dump onto the land. As we saw in Harvey, that makes you start to think about how does each policy handle windstorm? How does each policy handle flood? Where does storm surge belong in a policy? There’s no one size fits all.”

“Some have compared it to Harvey, but although the extensive rainfall has been similar, the exposure in the region is not quite as high,” said James Cosgrove, London-based senior analyst for event response at Risk Management Solutions Inc. “Although you have reasonably large cities on the coast, you don’t have that population center (Houston) and total exposure in terms of properties at risk to that flooding.”

“I would be cautious about Harvey vs. Florence comparisons,” said Roy Wright, president and chief executive officer of the Insurance Institute for Business & Home Safety and the former chief executive of the National Flood Insurance Program. “So much of the damage in Harvey was concentrated in an urban/suburban area. Florence has a much broader swath.”

But business interruption losses could be sizeable, given the various industries headquartered in the affected states and supplying components to other unaffected areas, experts say.

“You may have a facility in California, for example, that relies on a supplier of products coming out of the Carolinas,” said Doug Backes, FM Global’s vice president of claims in Johnston, Rhode Island. “Your business may have never seen any water or wind, but it will experience a revenue interruption because of the event in the Carolinas. These contingent time element losses are becoming more prevalent because more and more businesses are relying on third parties for a portion of their production.”

“You go back to (Hurricane) Matthew, ingress/egress was prevented just because people couldn’t leave their homes to get to work, similar to what we experienced with Harvey,” Peter Jagger, managing director of Aon Rapid Response in Dallas. “Even people who would have gone to work didn’t get to their work location because the highways were either underwater or closed, which creates issues for many commercial clients that impact them from an operational standpoint.”

Local insurers will be impacted “more heavily” than the larger, regional insurers because the local insurers do not have the same spread of risk, but they have “strong balance sheets” and purchased reinsurance well in excess of a 1-in-100-year flood event to cover any losses, according to analysts at A.M. Best. Co. Inc.

“I really don’t think this is going to be a capital event,” said Angelo Lozano, a senior financial analyst for the Oldwick, New Jersey-based ratings agency. “This is really largely going to be an earnings event.”

NFIP impact

Harvey, which could be on the verge of supplanting Superstorm Sandy as the second-costliest event in NFIP history, caused $8.7 billion in NFIP payouts as of Sept. 6. But unlike with Harvey, penetration of NFIP coverage in the states most affected by Florence is relatively low, with South Carolina representing 4%, North Carolina representing 2.6% and Virginia consisting of 2.1% of the 5.1 million NFIP policies in force as of July 31, according to data from the Federal Emergency Management Agency. By comparison, Texas represents 14.5% of NFIP policies.

Florence is “going to end up in terms of actual economic loss among the largest floods in U.S. history and probably even larger in terms of economic loss than Sandy,” said R.J. Lehmann, senior fellow for the conservative R Street Institute think tank in Washington, which is a member of the SmarterSafer coalition advocating for reforms to the NFIP. “But in terms of NFIP, it’s really up in the air what the claims are going to look like.”

“My initial take was that it would probably be in (Sandy-Harvey) range, given the size of the storm and the kind of flooding that we’re seeing,” he continued. “On the coast, there is a lot of penetration of NFIP; in the interior, very little. A lot of those counties, including the largest ones, don’t have very much flood insurance, so a lot of this question is going to come down to federal disaster relief rather than insured losses.”

In 2017, private insurers had direct written premiums on flood risk of $12.7 million in South Carolina and $9.4 million in North Carolina, constituting 8.5% and 7% of the flood market, respectively, Mr. Lehmann said, citing National Association of Insurance Commissioners and ratings agency data.

Hurricane Matthew, which affected parts of the states now dealing with Florence in October 2016, triggered 16,542 NFIP claims valued at $648.7 million, while floods in South Carolina in October of the previous year resulted in 3,913 NFIP claims valued at $139.5 million

Matthew “didn’t cause anywhere near the amount of flooding or coastal surge that this system has caused,” Mr. Cosgrove said. The 2015 South Carolina floods “were quite severe, but that was more localized, whereas (Florence) has impacted both North and South Carolina and it’s an ongoing event several days after landfall. This event in Florence is significantly larger than those two previous events.”

The battle ahead

Harvey didn’t trigger much litigation over whether the flooding was triggered by wind or rain, in part because that storm, unlike previous storms, was generally recognized as a rain event since it stalled over the Houston area, policyholder attorneys noted.

“The insurance industry was pretty successful in cutting that off with policy changes,” said John Heintz, a Washington-based partner with Blank Rome LLP. “I didn’t see a lot of business-related insurance litigation out of Harvey.”

But that may not be the case for Florence, as there will be a fight over whether Florence was a wind-related event, a rain-related event or a storm surge event, said Alan Rubin, a New York-based principal and member of Blank Rome’s severe weather emergency recovery team. Insurers could try to invoke anti-concurrent causation clauses, meaning that if an excluded peril contributes either directly or indirectly to a loss, then coverage is excluded, even if a covered peril contributed to the loss, he said.

“Insurance companies are going to try to play that game,” he said. “The policyholders are going to be in a fight with the insurers right from the get-go.”

“The unfortunate answer is that most people will not have flood coverage,” Mr. Heintz said. “As a result, the argument will be that this is all water-driven, and certainly the reporting supports that. There are going to be a lot of folks without any insurance coverage.”