August 31, 2017

Harvey’s deluge raises coverage issues: Loss picture unclear, but insurers should brace for claims

Natural catastrophes break hearts and damage communities. As the world is witnessing from Hurricane Harvey, horrific events also can inspire people to heroic action, from risking their own safety to rescuing others to providing shelter.

The facts of an event like this, where there is massive flooding, often result in coverage issues involving the nature of the loss and what caused the damages to the insured property. Was it flood, wind or some combination thereof?

Houston and other areas of Texas have been inundated with record rainfall, causing severe floods. To put this into perspective, Harris County, Texas – home to Houston’s more than 4.5 million residents – has received more rain in less than a week than it usually sees in a whole year. Reminiscent of Hurricane Katrina’s impact on New Orleans in 2005, it will take many years to rebuild after the waters recede. The insurance industry will play a vital role in helping individuals and businesses to recover from Harvey.

Insurers will face significant claims from property damage in Texas and Louisiana, many of them from flooding. Early estimates of insured losses from Harvey—not involving business interruption—range from USD 1.2 billion to USD 2.3 billion. Those figures will certainly increase, but a variety of coverage issues makes it difficult to say exactly how large the losses associated with Harvey will become. For example, insurers must consider issues including:

Occurrence limits. Many property policies define an occurrence as a single event within 72 hours or 96 hours. Harvey, which made landfall in Rockport, Texas, on August 25, has weakened to a tropical storm but has now made a second and third landfall and dumped even more rain on already-flooded areas. Harvey's duration will likely lead to arguments by policyholders of multiple occurrences which in turn may, depending on the specific policy language, implicate multiple policy limits as well as deductibles.

Sublimits and deductibles. Even though Harvey is the strongest hurricane to hit the United States in a decade and the strongest to strike Texas since Carla in 1961, the extent of damages appears to be far more from water than wind. In that sense, Harvey is more akin to Tropical Storm Allison in 1991, which poured then-record amounts of rain on Houston. Much of the devastation so far appears to involve residential properties, where private insurers have long excluded flood. But there will undoubtedly be large commercial losses as well affecting a myriad of industries and businesses. The facts of an event like this, where there is massive flooding, often result in coverage issues involving the nature of the loss and what caused the damages to the insured property. Was it flood, wind or some combination thereof? The issue of whether storm surge and flood are separate and distinct perils has been a long and hotly contested issue in the courts since Katrina and Sandy. Add on top of this the inclusion of named storm definitions which policyholders have argued create a super peril that obviates other limits and exclusions for flood. These issues and policy terms will themselves potentially implicate the application of specific policy limits, sublimits, exclusions and deductibles. How these policy terms will apply to a given loss and any judicial review thereof will most certainly be driven by the specific policy language at issue and the developing case law since Katrina and Sandy.

Business interruption. The widespread flooding has forced authorities to close roads and restrict access to hotels, restaurants and other businesses, which may incur significant business interruption losses. Normally, a business interruption claim requires physical damage arising from a covered event. In the case of Harvey, orders of civil authority and ingress/egress issues within 1,000 feet of an insured's property may give rise to business interruption claims even if there is no physical damage to the insured property itself. Business interruption is potentially an enormous source of insured loss that may be associated with Harvey.

It will take time to assess the total insured losses. Harvey will have an impact well beyond Texas and Louisiana, however. Agribusinesses, the offshore energy sector, aviation and shipping are all likely to experience losses. This catastrophe is another grim reminder of the power of storms and the interconnectedness of risk. It also provides an opportunity for insurers, reinsurers and the communities they protect to mitigate catastrophe risks and improve resilience.