We’ve said it a thousand times and will probably say it one thousand more times in the next few years. When it comes to insurance; the devil, or angel in the case of this post, is in the details of your policy.
Property owners all over the eastern coast of the United States recently discovered they are catching a huge break when it comes to the damage caused by the storm.
Yep, the “details” have come out and it’s been officially determined that Sandy was not an actual “hurricane” when it struck the coast line. Why is this good news for property owners?
Well, property owners will be sharing much less of the repair and rebuilding costs as a result of Sandy’s last minute downgrade. Here’s what that looks like.
Storm Deductible Basics
Property insurance policies include a deductible clause, which dictates exactly how much money the property owner must contribute toward the repair of the damage they suffered, depending on the cause of the loss.
Typically, the deductible for hurricane and/or windstorm damage is significantly higher than the deductible for all other perils. This deductible is often expressed as a percentage of your home’s insured value rather than a flat dollar amount.
For example, if your home is insured for $300,000; you might have a 1% ($3,000) wind and hail storm deductible and a flat $1,000 deductible for all other perils that cause property damage (think fire or water damage claims).
Commercial property and coastal-area personal property insurance policies may contain a “named storm” deductible that may be even higher than a standard wind or hail deductible.
The logic behind this is that “named storms” generally cause significantly more damage than non-named storms and the insurers protect themselves financially by having property owners share in the repair costs at a higher percentage of their property’s insured value.
You might see a 5% named storm deductible in this situation. This would be $15,000 in the example above with the $300,000 insured home value.
Much of Sandy’s Damage May Not Be Covered
A common misconception held by property owners in the United States is that a basic homeowner’s or commercial property insurance policy covers against flood related damages. Nothing could be further from the truth.
Flood insurance is a completely separate policy from a property insurance policy. You must purchase flood insurance from the NFIP in order to be reimbursed for damages resulting from a flood.
If your property was damaged by flood waters due to Sandy’s landfall and you didn’t have a flood insurance policy, you will simply not have coverage. There is a gray area here and it is likely going to lead to some long, drawn out legal litigation between insurers and their insured. Let’s look at the gray area in detail.
Gray Area for Storm Damage
The concept of “proximate cause” weighs heavily on insurance claim payments. Proximate is defined as an event that sets into motion an uninterrupted chain of events leading to a loss.
We bet you’d like a pertinent example…so your home was damaged by water that meets the definition of a “flood.” You don’t have flood insurance, so you’re out of luck for reimbursement, right?
Not so fast. If you can prove the proximate cause of the flood damage was Sandy, which is a wind storm by definition, you may be able to recoup damages from your insurer.
This example is extremely over-simplified, but hopefully illustrates that insurance policies are not always black and white contracts. This is why so many claims wind up in arbitration or court.
Of course, regardless of who pays what on an individual basis, Sandy is bad news for all involved parties.
Sandy’s Insurance Aftermath
Here’s what you can expect to see as a result of Sandy or any other nasty weather event that causes widespread property damage.
Depending on the insurance industry’s overall financial preparedness (which is heavily regulated by State Departments of Insurance), insurers may have to increase everyone’s premiums to rebalance their finances after it’s all said and done.
Additionally, as residents of Florida will be able to attest to, insurance companies sometimes decide to simply non-renew policies in certain areas if they think there’s no way they can make money there.
Further, some companies simply pack up and leave certain states or raise their premiums significantly to protect against losing a ton of money if another storm hits.
All of the situations above certainly result in premium increases for all property owners in particularly “risky” areas in the U.S.
One thing is for sure. Insurer’s future loss models (estimates for future weather events) are starting to predict more of this type of weather. Without crystal balls and time machines they are subject to preparation for future profitability. This is leading to property rate increases all over the country.