Superstorm Sandy left in her wake thousands of homes and businesses with severe property damage and, in many instances, considerable financial losses. Estimates indicate that Sandy caused over $62 billion in damage and other losses, which have already spawned a growing number of storm-related insurance claims.
The insurance departments and governors of a number of the states in which Sandy made landfall have addressed the property damage resulting from Sandy by, among other actions, declaring that hurricane deductibles should not apply to Sandy-related insurance claims. The directives seek to suspend the application of hurricane deductibles in homeowners policies but do not address commercial lines policies that may also have a hurricane deductible or other storm-related deductibles. While the deductibles in many policies may be consistent with the terms of these directives, not all necessarily are. Still to be determined is the extent and success of any challenges to the directives.
Many property owners along the East Coast have insurance policies that include “hurricane deductibles,” which, if triggered, require the insured to incur a larger deductible than the policy’s standard deductible. Hurricane deductibles are typically valued in the range of one to five percent of the property value. They can, therefore, result in a property owner being responsible for a considerably greater amount than a standard deductible that requires a policyholder to pay a set dollar amount, which for homeowners is often in the $500 to $1,000 range. For homeowner policies, hurricane deductibles are permitted by 18 states and the District of Columbia. States that allow insurers to include hurricane deductibles in homeowners policies typically do so for the principal purpose of keeping the cost of insurance down in coastal locations where there is a greater risk of hurricane damage. In exchange for a lower premium, the homeowner is responsible for a higher deductible for damage caused by a hurricane.
Many home and commercial property owners affected by Sandy had hurricane deductibles in their policies. While the criteria for what constitutes a hurricane can vary among state regulations and between policy wordings, generally it is linked to whether the National Weather Service provided a “hurricane warning” or measured sustained winds of at least 74 miles per hour when a storm hit landfall in a state. Sandy was initially referred to as a hurricane and obviously was a forceful storm that caused major damage. However, prior to hitting landfall in several states it was classified as a “post tropical storm,” which has served as the basis for announcements by various governors and state insurance departments along the East Coast that insurers are not to require homeowners to pay hurricane deductibles for claims of property damage caused by Sandy.
The directives, most of which expressly refer to homeowners policies and do not reference commercial lines, have been issued by the District of Columbia and at least seven states: Connecticut, Delaware, Maryland, New Jersey, New York, Pennsylvania and Rhode Island. The Delaware Department of Insurance, however, issued a broader declaration worded in terms of all “Delaware claims” and recently clarified its declaration to include hurricane “or other storm [percentage deductible].” Such directives, which remain controversial, have generally pointed to the National Weather Service’s lack of a hurricane warning for that state in the hours prior to Sandy making landfall within the state, and the purported lack of sustained winds of at least 74 miles per hour when the storm did hit landfall in that state. The states issuing these directives have generally derived their authority in two ways:
- By Statute or Regulation
In Connecticut, for example, the Insurance Department issued a notice citing Public Act 12-162 Section 1. (b) (the state statute allowing an insurer to impose a hurricane deductible if the National Weather Service issued a hurricane warning and the hurricane resulted in winds of 74 miles or more in any part of the state per hour). It stated that because a “Hurricane Warning” was not issued for the state, and the state did not “sustain hurricane force winds as a result of Storm Sandy,” insurers may not impose a hurricane deductible on Connecticut claims. Similarly, in New Jersey the governor issued an Executive Order that an insurer applying a hurricane deductible would be violation of New Jersey statute N.J.A.C. 11:2-42.7, which allows hurricane deductible to be applied to property damage in New Jersey only in the event the National Weather Service names the storm and measures sustained hurricane force winds of 74 miles per hour or greater.
- By Announcement
The New York State Department of Financial Services informed the insurance industry that hurricane deductibles “should not be triggered for [Sandy].” Because New York has not yet codified its hurricane deductible criteria, it could not issue an order declaring it to be a statutory violation to apply a hurricane deductible. In 2010, the then-New York Insurance Department circulated, but never adopted, a draft regulation that would have imposed limitations on the application of hurricane deductibles. After Sandy, however, the New York Department issued a statement on November 1, 2012 that “we have informed the insurance industry that hurricane deductibles are not triggered because Sandy did not have sustained hurricane-force winds when it made land in New York.” It made it clear that it considered that hurricane deductibles should not be triggered, and activated a hot line for consumer complaints.
Not all states, however, were able to make these declarations. In North Carolina, for example, Sandy was still declared to be a hurricane when it made landfall. Moreover, North Carolina allows the use of “named storm” deductibles in place of hurricane deductibles.
Windstorm and Named-Storm Deductibles
For those whose policies do not include “hurricane deductibles,” other storm related deductibles, such as “windstorm/hail deductibles” and/or “named-storm” deductibles, may be applicable to Sandy-related claims. Like hurricane deductibles, these types of deductibles, which are often found in commercial lines policies, also provide for higher deductible amounts in exchange for lower premiums. However, their application depends on their wording.
A “windstorm/hail deductible” may be defined to apply not only to hurricanes, but to damages caused by lesser storms. Therefore, assuming no other policy terms or exclusions preclude coverage, and no directives are issued that limit their application, they could apply to property damages from Sandy when it was not declared a hurricane.
A “named-storm” deductible usually applies when damage is caused by a storm that is named by an organization such as the National Weather Service or National Hurricane Center, and the storm reaches tropical storm strength with winds of 39 mph. Thus, this type of deductible could also apply to property damages resulting from Sandy, as the storm was “named” prior to its landfall in the storm-affected states.
Although the potential exists that some insurance departments may expand the scope of their existing “hurricane deductible” directives, at present time they appear not to have expressly limited the use of “windstorm/hail deductibles” and/or “named-storm” deductibles with regard to Sandy claims. For those policies that are not within the scope of the applicable state’s directive limiting the application of hurricane deductibles, the application or non-application of hurricane and other storm-related deductibles will depend on the policy’s definitions and terms. Thus, at this juncture, the effect of state directives concerning hurricane deductibles on commercial property owners remains unclear, as most state directives refer only to homeowners policies and do not mention commercial lines policies. The terms of the deductibles in the policies of many property owners may be consistent with the state directive anyway; for others, they may not be.
The change in classification of Sandy from hurricane status to post-tropical storm as it traveled up the East Coast may have effectively shifted a good portion of losses that would otherwise have been borne by homeowners under hurricane deductibles to insurers. This has already started to trigger scrutiny of the measurement of wind forces associated with Sandy, and of the National Weather Service’s determination of when to issue hurricane warnings, as well as of the states’ directives concerning the application of hurricane deductibles. The National Weather Service reportedly terminated its usual post-storm internal assessment of the Service’s response, although there may be other federal reviews in the future. New York Senator Chuck Schumer has warned that changing the classification of Sandy to a hurricane could substantially increase deductibles and the burden on homeowners, indicating he will be scrutinizing the situation closely. Some controversy will likely continue as to whether the state directives were consistent with the facts surrounding Sandy and with the policy wording for those policies affected.
Insurer compliance with state directives not to apply hurricane directives to the advantage of homeowners is likely to significantly benefit homeowners facing losses caused by Sandy, unless the directives are successfully challenged. However, there may be longer term negative consequences associated with “hurricanes” being re-categorized as “tropical storms” prior to landfall but still causing substantial damage. Faced with a substantial influx of Sandy-related insurance claims for which a hurricane deductible cannot be applied, insurers may have to reevaluate both the wording and pricing of policies in coastal states and other areas subject to significant weather-related damages.