This article originally appeared in Law360 on October 1, 2021. All rights reserved.
Hurricane Ida once again highlighted the great vulnerability of our country to natural disasters. Century-old storms are now assaulting us on what appears to be an annual basis. The magnitude of Ida’s impact, however, was unique, leaving a strip of destruction from the Gulf Coast to the East Coast.
While flooding is the most common natural disaster in the country, less than one in 10 Americans is properly insured against flooding, according to a 2019 study by ValuePenguin.com. The same study found that although 91% of homeowners have home insurance, only 7% have flood insurance.
But, these are only general averages. People in states most prone to flooding are much better protected. For example, as you might expect, homeowners in Louisiana and Florida are insured against flooding at rates much higher than average – 44% and 36%, respectively.
Unfortunately, this means that homeowners in other states are insured at rates well below average. For example, homeowners in Pennsylvania and New York – two of the states hardest hit by Ida – are only insured at 1.7% and 4.6%, respectively.
The National Flood Insurance Program
Damage resulting from flooding is generally excluded under standard home insurance issued to home and business owners. Those looking for insurance should purchase a separate flood insurance policy. Flood insurance is available through the National Flood Insurance Program, or NFIP, administered by the Federal Emergency Management Agency, and from many private insurers.
Congress created the NFIP in 1968. It makes federally backed flood insurance available to communities that agree to pass and enforce floodplain management ordinances.
For the most part, NFIP flood insurance policies are issued by private insurers as part of the Write Your Own, or WYO, program, launched in 1983. As of September 2020, 60 insurance companies are participating in the program. WYO program. These private insurers issue flood insurance policies and adjust flood claims on behalf of the federal government. In 2019, 88% of NFIP policies were issued under the WYO program.
Flood insurance claims are undervalued
Sadly, even those with flood insurance can still ascend the proverbial cove without a paddle. FEMA publishes statistics that reveal systematic underpayments of flood insurance claims.
Using Storm Sandy as an example, nearly 144,400 policyholders have filed flood insurance claims. When numerous issues, including fraud, were discovered in the course of adjusting these claims, FEMA offered these policyholders the option of having their claims reconsidered.
Over 19,000 Sandy’s claimants took advantage of this opportunity. In January 2018, 17,854 of these re-examined claims were resolved, with the policyholder accepting the amount adjusted by the insurer. Of these resolved claims, nearly 85% of claimants received additional payments totaling $ 258,648,226, or nearly $ 14,500 for each underpaid Sandy claimant.
Take a moment to think about these statistics. FEMA’s internal review process revealed initial under-adjustments in 85% of the flood insurance claims that were submitted in the wake of Super Storm Sandy. Based on this large sample, if each of Sandy’s 144,000 claimants had requested a reconsideration, the underpayers could have approached $ 2 billion.
But the evidence of under-adjustments does not end there. If a Sandy claimant was not satisfied with the FEMA review, they were entitled to a neutral review by a third party, for example, a retired judge. Approximately 2,500 Sandy’s claimants requested a neutral third-party review. As of December 14, 2017, 2,082 neutral third party reviews have been completed.
In almost 11.5% of these cases, additional payments were found to be due and due. Additional payments totaling $ 44,603,756 were made under these neutral third-party reviews, or approximately $ 187,000 for each under-adjusted claim.
But, there is still more. Sandy’s claimants who remained dissatisfied with FEMA’s processes, including the third party review and neutral review, were able to pursue legal action. Nearly 2,000 Sandy-related flood insurance cases have been filed against NFIP insurers in federal district courts in New York and New Jersey. As of February 2018, 1,631 were settled, with checks issued totaling $ 164,320,515, or approximately $ 100,000 per claimant.
Those who have suffered, or may in the future suffer, losses from flooding can learn several valuable lessons from the experiences of Super Storm Sandy, Ida and other recent natural disasters. These lessons can be used before and after the next storm.
Before the storm
Every homeowner, tenant, business owner, nonprofit, and public entity should reassess their need for flood insurance. Flood risks that were not apparent just a few years ago are very real in today’s climate. You can determine if you are in a high risk flood area by finding your address on the FEMA Flood Map service center.
Even if your home or entity is not located in a high risk area, purchasing flood insurance should be considered. No property has zero flood risk. In fact, 25% of all flood insurance claims are made in areas at low to moderate flood risk.
After the storm
If the loss is suffered by those who have not purchased self-contained flood insurance, all is not lost. Often, floods are accompanied by other causes of loss which may be covered by more common property insurance policies which otherwise exclude losses due to flooding. All available insurance should be considered for potential coverage.
For example, much of the damage Ida caused in the northeast was due to wind rather than flooding. Wind damage is usually covered by standard form property insurance policies, including home insurance policies.
As a further example, after Hurricane Katrina, many companies argued that flooding was not the cause of their losses. On the contrary, these companies argued that their losses were caused by the failure of a negligently designed royalty system. While this argument was ultimately rejected in 2007 by the United States Court of Appeals for the Fifth Circuit in In re: Katrina Canal Breaches Litigation after lengthy litigation, it reveals how creative thinking can reveal coverage where none. was initially collected.
However, when multiple causes of loss are involved, anti-competitive causation clauses, or ACCs, are often involved. ACC clauses generally provide that when a loss is caused by a combination of covered and excluded causes, the resulting loss will not be covered.
A typical ACC clause states: “We will not pay for any loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event which contributes simultaneously or in any order to the loss.
Insurers often take a position to deny coverage as ACC clauses remove wind damage coverage if a flood occurs at around the same time, which is likely to be a serious problem in property damage claims resulting from Hurricane Ida.
Policyholders who experience a loss after purchasing flood insurance should anticipate and be prepared for FEMA, NFIP insurers and private flood insurers to initially undervalue their claims. While this shouldn’t be the case, the experience after Sandy proves once again that insurers have a strong financial incentive to undervalue claims.
The experience after Sandy further reveals that an initial adjustment from an insurer should never be accepted without a critical review. Policyholders should remain vigilant in the face of an initial undervaluation of their flood insurance claim. Any possibility of review and reconsideration should be considered.
The most common issues in adjustment flood insurance claims relate to the extent of repairs needed, the actual costs of those repairs and whether the alleged damage was pre-existing.
While this should not be the case, maximizing insurance recoveries can often only be achieved with the threat or onset of litigation. This is certainly the lesson learned from Sandy, where successful litigants received an average of $ 100,000 more.