Personal Flood Insurance Coverage Guide

2015

Chapter 1

Overview

Flooding is one of the largest issues a homeowner may face. Flooding affects more properties than fire, and is the most common natural disaster in the country. Most countries, 98 percent, are affected by some sort of flooding. The National Insurance Flood Program (NFIP) on average pays $43,000 per claim. Unfortunately, many, many people are uninsured for flood from the mistaken assumption either that flood is covered under a homeowners policy, that flood insurance is too expensive, or that it won’t happen to me. While coverage is very expensive in some areas, many people underestimate the chances of flooding and do not realize the chances they are taking.

In 1989, Hurricane Hugo made an enormous impact. It was one of the strongest hurricanes to hit South Carolina, and at the time was the most costly hurricane ever in the Atlantic Ocean. Hugo made landfall near Sullivan’s Island, South Carolina. It was responsible for 86 fatalities and $8-10 billion in unadjusted 1989 dollars. Up to 80 percent of the roofs in the city of Charleston, South Carolina were damaged. Much of this was attributed to poor roof installation practices, maintenance, and aged roofs. Insurance losses totaled more than $4 billion. Because of the hurricanes, building codes were upgraded, including requirements for protection of windows, doors, and garage doors. Additional requirements for the protection of glazed surfaces were added to the requirements as well. As of 1999, code enforcement officers were required to be certified and registered with the state in order to be able to inspect buildings.

A few years later, in 1992, Hurricane Andrew struck Florida as a category 5 hurricane, and was the most costly hurricane at the time. It caused $25.3 billion in 1992 dollars although some estimate that damage was more than $32 billion in Florida alone. Much of the damage in this storm was wind damage. Like South Carolina and Hurricane Hugo, Florida updated and changed building codes so that homes would be more resistant in later storms. Again, it was found that roof installation was lacking, and that the construction made it easier for the wind to tear off tiles and shingles, exposing the plywood and trusses that later failed and lead to roof collapses.

As much of the damage from Andrew was because of the wind, the insurance industry paid out significantly for the losses. Eleven insurance companies went bankrupt due to more than 600,000 insurance claims. By 1996, homeowners in Florida experienced an increase of premiums on average of 72 percent. As a result, Florida developed the Joint Underwriting Association, the Florida Windstorm Underwriting Authority, and the Florida Hurricane Catastrophe Fund. The Florida Legislature created Citizens Property Insurance Corporation in 2002 for those insureds who were unable to obtain property insurance through the private market in Florida. The state indicated that the Joint Underwriting Association was designed as a temporary measure until private insurers returned to covering all homeowners.

In 1996, meteorologists were predicting increased hurricane activity for the next twenty-five years. Central and South Florida have experienced significant growth since 1990, and have added more than 6 million people to the area. The additional people mean more buildings and property at risk.

Hurricane Ivan in 2004 caused $27.1 billion, again with significant wind and storm surge, and inland flooding. It also spawned 120 tornadoes, the most produced by any tropical storm or hurricane in U.S. history.

While Hurricane Hugo once topped the list of top ten costliest hurricanes, it has since been knocked off the list due to significantly dangerous hurricanes in recent years. In 2005, Hurricane Katrina became the costliest hurricane to ever hit the country, and was one of the five deadliest. It was responsible for 1,833 fatalities and roughly $108 billion in damages in unadjusted 2005 dollars. Levees that separated New Orleans from Lake Pontchartrain were broken, and at least 80 percent of New Orleans was underwater on August 31st. Storm surge was another issue, and in some areas, homes were washed away. The surge was an issue from Mississippi to Alabama.

One of the large issues that arose from Hurricane Katrina was wind vs. rain vs. flood. Wind and rain are both covered on a homeowners policy, while flood is not. Flood is covered through a separate policy provided through the NFIP. The problem starts when trying to determine the cause of loss; did wind blow off the roof, allowing rain to enter and damage the property before flood waters inundated the house, or did flood waters inundate the house first, so that unless the insured had a flood policy, there was no coverage for the damage? Many court cases were filed against insurers who denied claims based on floodwaters instead of paying claims due to rain and wind.

That same year Hurricanes Rita and Wilma followed Katrina. Rita caused $23.7 billion in damages with significant wind, storm surge and inland flooding. Wilma caused $24.3 billion in damages with winds and flooding, and caused the largest disruption of electrical service ever experienced in Florida at the time.

Because of issues and suits related to this, policy language was changed. The 1991 ISO HO 00 03 had typical anticoncurrent introductory language to the exclusions section. The 2000 form added the sentence These exclusions apply whether or not the loss event results in widespread damage or affects a substantial area. The water exclusion itself was changed to now exclude not just water that backs up through sewers or drains, but waterborne material as well. As the flooding washed away property, various items were in the floodwaters causing damage on their own. Likewise, backup was excluded not just through sumps, but sump pumps or related equipment. Water-borne material was also added to the exclusion for water below the surface of the ground, and added to the overall exclusion was the statement indicating that water is excluded when caused by or resulting from human or animal forces or any act of nature.

The 2011 policy included the same introductory language as the 2000 policy. The definition of water damage was changed to include tidal wave and tsunami, overflow of any body of water, not just overflow of a body of water, and storm surge. The language was modified to clarify that water that backs up through sewers or drains; or overflows or is otherwise discharged from a sump, sump pump or related equipment was excluded. This is a more detailed description than in the previous policies. The exclusion for waterborne material was split out separately and applies to waterborne material carried or otherwise moved by any of the water referenced in the exclusion. The policy also states that the exclusion applies regardless of whether any of the water damage is caused by an act of nature or otherwise. A final addition to the exclusion states that the exclusion applies to, but is not limited to, escape, overflow or discharge, for any reason, or water or waterborne material from a dam, levee, seawall or any other boundary or containment system. It is easy to see where the issues that arose from Hurricane Katrina and others, and the breach of levees and sea walls raised issues that ISO felt needed to be clearly addressed in the latest version of the homeowners policy.

However, this was only the beginning. Hurricane Ike in 2008 caused $34.8 billion in damages with large storm surges wiping some homes off their foundations and significant wind damage through the central part of the country; it was an extremely large storm. Superstorm Sandy in 2012 caused $70.2 billion in damages and like Ike, was a large storm. It did not hit the southeastern part of the country but the northeast areas of New Jersey and New York were inundated by storm surges and waves.

This brings us to 2017, with Hurricanes Harvey, Irma, and Maria. Harvey caused $125 billion in damage and devastated areas of Texas that were not considered flood zones. It was slow moving and dropped 60.58 inches of rain in some areas. The slow movement led to catastrophic flooding in many areas. Irma caused $50 billion in damages, and struck St. Thomas and St. John as a category 5 storm after devastating the island of Barbuda. It then hit Florida as the largest storm since Wilma, with storm surge 5 to 8 feet about normal ground level. Maria was the last hurricane of the year to strike the U.S. and it caused $90 billion in damages and devastated Puerto Rico. The storm struck on September 20 and was the strongest hurricane to hit the island since 1928. Power was out over 90 percent of the island, and by January just under 70 percent of customers had electricity. Flooding from the storm triggered hundreds or thousands of landslides that wiped out trees, roads, bridges, and houses. Access was cut off over much of the island, complicating recovery efforts. There are still serious issues in the area concerning recovery, and many still cannot return home. These storms, on top of the damages caused by Katrina and Sandy, have left the NFIP crippled and in serious debt.

Flood insurance is obviously a necessity. It is currently primarily written through the federal NFIP program, and has deficiencies. Due to the current structure of the program, the fact that premiums are not actuarially sound, and the existing $20 million or more in debt, the program is struggling and private markets are being encouraged more to move into the market.

Part of what makes growth in private markets even possible is the growth of modeling programs. There are more modeling programs available now than ever before to help companies determine viable rates and underwriting guidelines. However, it is not that easy. As modeling programs are new, accuracy is questionable, especially when different modeling programs vary widely is projecting losses. Three models were tested on one property, and the predicted annual losses were $1,000, $30, and $20,000. This does not inspire confidence in the modeling systems yet. The private market has been growing steadily, and grew by 51.2 percent in 2017. State-level markets are becoming more competitive and less profitable. The obvious deficiencies in the current system drive this, as well as the growth of modeling programs although they are in their infancy and seem unreliable for now. However, it will take some time for the models to become accurate enough to rely on, and underwriting to develop eligibility criteria that correctly rate the exposures.

Let’s take a step backwards, and look at where this started. Insuring properties against flooding goes back to 1895, at a time when private insurers provided coverage. Private insurers provided this coverage until 1927, when the Great Mississippi River Flood occurred. In the summer of 1926, there were exceptionally heavy rains in the Mississippi basin. The basin peaked in April of 1927 and did not subside until August. Levees broke and sent torrents of water downstream, affecting eleven states. A break in one levee sent so much water downstream that in ten days it covered almost one million acres in water ten feet deep. At the peak of the flood, 14 percent of Arkansas was under water. Flooding covered 16 million acres of land, killed 250 to 500 people, and displaced 640,000 in states from Illinois to Louisiana. The river swelled to eighty miles wide in Vicksburg, Mississippi. This is the most destructive river flood in United States history. Damages were between $250 to 500 million, with indirect losses bringing the total up to $1 billion.

The 1927 flood and more flood losses in 1928 led insurers to quit offering flood policies. Without flood policies, financial aid after a flood took shape as disaster relief. As time progressed, the government became more and more involved in providing aid to flood victims as humanitarian assistance. Floods in 1951 led President Truman to propose a national flood insurance program. His proposal was that flood insurance would not compete with private insurance when it was available in various areas, and that pooling risks nationwide would cause rates to drop. A cap would exist for both coverage and premiums, with a ten percent deductible, and agencies that guaranteed mortgage loans