Insurers and reinsurers are struggling to assess the damage of Hurricane Harvey, which shows no sign of abating since it made landfall on the Texas Gulf Coast on Friday 25 August as a Category 4 storm, and is now causing equal devastation in Louisiana. Officials claim that 30,000 people have already been forced from their homes and that there have been 31 confirmed deaths, although further fatalities have been predicted as waters recede.
Wide-ranging loss estimates have created serious difficulty for insurers and reinsurers attempting to estimate reserves with any accuracy. RMS has forecast $90bn of economic losses (of which an uncertain percentage may be insured) whereas AIR Worldwide has put losses exclusively arising from wind damage and storm surge at between $1.2 billion and $2.3 billion.
As well as quantification of loss, there may also be significant issues for claims adjusters in determining the scope of coverage. We address some of those complications below.
Flood losses are not typically covered under standard homeowners’ insurance and more than half the properties at risk of inundation in the Houston area lie outside the zones where homes financed by federally backed mortgages must carry flood insurance, typically provided by the National Flood Insurance Program ("NFIP"). It was initially expected that the NFIP would cover the majority of these losses, however it is has been noted that less than one-sixth of homes in Harris County, Texas, where Houston sits, currently have active NFIP coverage in place, with the take-up rate dropping off further inland from the immediate coastline.
The NFIP also applies to business owners, and it therefore appears likely that similar issues will apply to SMEs as to homeowners. The availability of flood protection for larger businesses will depend on policy coverage and may be much more variable.
Business Interruption (BI)
BI losses are often the most complex and contentious claims for the market to assess. Insurers will face multiple property damage and BI claims from insureds with retail, office and commercial exposures, due to the dense population of properties that lay in the path of Harvey.
Policies will ordinarily require BI loss to result directly from physical damage to an Insured’s property. Assessment of that loss could be problematic, but there may be policy extensions that complicate BI loss assessment further. For example, cover may be provided for BI loss that is not due to damage to the Insured’s property, but instead due to “wide area” damage. Common extensions are:
- Civil Authority cover – caused by evacuation/curfew orders that prevent access to an Insured’s property;
- Service Interruption cover - where loss of power and utilities will have caused businesses to cancel contracts; and
- Loss of Attraction cover - where damage to the surrounding area caused a fall in the volume of the Insured's customers.
In Orient-Express Hotels Ltd v Assicurazioni Generali SpA, the courts considered the operation of a Trends clause and recoverability of BI losses where BI results concurrently from damage to insured property and damage to the wider area. The hotel suffered significant BI losses due to both the damage caused to the hotel and the evacuation of the surrounding area, but sought for the measure of loss to be adjusted as a “damaged hotel in an undamaged city”. The English courts found in favour of the insurers and held that the hotel could only recover loss which would not have arisen “but for” the damage to the hotel. This approach was, however, contrary to previous US authority Prudential v Colleton, which may apply to a significant percentage of Hurricane Harvey claims.
Further complications arise when calculating BI loss, which include:
- The insured’s attempts to mitigate losses by relocating operations and continuing to trade;
- The length of applicable waiting period and restoration period;
- What figures are used to calculate the loss, namely pre or post hurricane profits;
- BI claims often require significant amounts of documentation, which may have been destroyed by the damage; and
- Policies often provide for sub-limits to apply to loss from particular perils or loss of a particular nature. Harvey has affected multiple US states, with damage being caused, arguably, by a variety of perils. There may be cause for dispute over whether the sub-limits should be applied cumulatively or treated exclusively.
Insurers and reinsurers will be particularly concerned at the extent of cover available to the oil and gas industry. Even if physical damage to oil installations is limited, there is likely to be massive disruption to the oil industry centred on Houston (which is already impacting global oil prices). The ability of oil companies to claim for this disruption will be of particular concern to the energy market. Reinsurers will also be concerned about the aggregation of energy losses on top of property claims. Contingent Business Interruption (CBI) provides an insured with cover losses caused when its supply chain is disrupted. Insurers will want evidence of the chain of suppliers, whether the insured has taken steps to mitigate its loss by sourcing supplies elsewhere. Reinsurers will be mindful that CBI losses are excluded from cover under some reinsurances.
As with any major catastrophe, there may be increased pressure on insurers for immediate action to assist policyholders regardless of the extent of any property damage. The increased political pressure to settle claims in a very short period of time may cause significant cash flow issues to insurers (and reinsurers under simultaneous settlement clauses). Reinsurers will also need to consider carefully the degree of claims control. It may be unrealistic to expect the level of scrutiny of claims that would normally be part of the adjustment process. Adjusters are already utilising drone technology to survey the extent of flooding, where traditional “feet on the ground” adjusting is impossible. Furthermore, the additional exposure of bad faith claims in Texas may add to settlement pressures.
Governing law and Jurisdiction
With Hurricane Harvey set to cause significant losses in Louisiana as well as Texas, further uncertainty may arise due to each underlying policy being subject to its own governing law and jurisdiction. Not only are Louisiana and Texas both considered to have plaintiff-friendly State Courts (with juries drawn from hurricane-affected areas), but insurers could still be exposed to differing rulings on coverage. Reinsurers whose policies include “follow the settlements” clauses will need to consider carefully whether they are obliged to indemnify insurers for early settlements intended to remove that risk.
Single Occurrence for Reinsurance Purposes
Whether or not energy losses are included, it will not automatically be the case that all losses arising from Hurricane Harvey will fall to be aggregated as a single catastrophe occurrence for reinsurance purposes. That is likely to depend on the aggregation language in excess of loss treaties, the interpretation of which may in turn depend on the governing law and jurisdiction of those treaties. Many treaties contain “hours" clauses which may impact on the scope of cover. As the damage will most likely be widespread and prolonged, insurers may seek to define the scope of the occurrence by electing when the "hours" clause is to be triggered.
With rainfall set to continue, it is predicted that the hurricane’s duration could exceed 168 hours, the typical time period at which the “hours” clause is fixed. One possibility is that wind and storm surge losses (as mentioned above) may be presented as a separate event from the subsequent flood losses. In addition, if the flooding extends beyond 168 hours, carriers may seek to present two separate flooding events, particularly given that the property damage has occurred across a very wide geographical area and indeed two States. However, it is also possible that a policy issued in the current “soft market” could include a longer hours clause ie 504 hours or an express right to reinstate for the same event of the limit of cover is exhausted.