Just as reinsurers were heading towards the end of a relatively benign hurricane season, Hurricane Sandy, which has already tragically claimed at least 13 lives in the US in addition to 66 lives in the Caribbean, has brought much of the US East Coast to a virtual standstill. Insurers and reinsurers with significant US exposures will be all too familiar with hurricane damage in the Gulf of Mexico and the Southern States on the Eastern Seaboard. However, Hurricane Sandy has hit areas less acquainted with the effects of wind damage and flooding.
Approximately 375,000 people were evacuated from the densely populated commercial and residential properties that lay in the path of the hurricane, and which are valued at over US$80 billion, before the storm reached the US mainland. Those properties / businesses are highly dependent on electricity supplies from wind-exposed high voltage power lines which have been interrupted. Telecommunications and transport networks have been severely damaged by flooding.
Potential legal issues for insurers and reinsurers
Even before Hurricane Sandy had made landfall, insurers were already exposed to substantial business interruption losses resulting from the evacuation and shutdown of large areas of New York and surrounding areas. Insurers will need to consider whether their policies cover business interruption as a consequence of government action or as a preventative measure, or whether business interruption is contingent on material damage. For example, the tourism industry may suffer from a reduction in visitor numbers, even if various parts of the city are untouched.
Business interruption losses will flow from the shutdown of transportation systems and supply chain interruption. If manufacturing districts such as New Jersey have been hit hard, contingent business interruption claims may follow. Cancellation of business conventions, sporting and entertainment events may result in claims being made on contingency policies, and travel policies will be subject to significant claims with the storm bringing a near halt to air travel and nearly 14,000 flights being cancelled to date. Many airports and airlines may not be able to recover business interruption losses in the absence of any physical damage, similar to their experience during the 2010 Eyjafjallajökull volcano eruptions.
The continued shutdown of the New York Stock Exchange and the financial sector due to adverse weather for the first time in 27 years may also have the potential to trigger financial losses further afield that may impact FI policies.
Given that property damage has occurred across a very wide geographical area, this may raise issues as to whether all such losses could be said to constitute a single occurrence; the hurricane itself was said to be over 1,000 miles wide. A particular concern is that the impact in certain areas may have resulted from the confluence of three separate weather systems. Damage has been caused as a consequence of wind, water damage, snow, fire, inland flooding and storm surge. Insurers will need to check policy coverages carefully to determine the scope of cover. As in the case of the New Zealand earthquakes, there may be practical difficulties for adjusters in determining the cause of loss due to inability to access areas that may be affected.
Whereas in the Gulf of Mexico region and Florida (in particular) there is often a conflict between State-backed insurance against windstorm and private insurance covering other perils, in the North-Eastern States virtually all insurance cover will be in the private sector. Policies may be more broadly drafted, but many wordings may not have been tested by storm-related losses on a large scale.
It will not automatically be the case that all losses arising from Hurricane Sandy will fall to be aggregated as a single occurrence for reinsurance purposes. That is likely to depend on the “Event” 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. If damage proves to be widespread and prolonged, insurers may seek to define the scope of the occurrence by electing when the “hours” clause is to be triggered. The inclusion of a clause limiting an occurrence to 72 hours, for example, might already mean that Hurricane Sandy losses in the Caribbean – occurring more than 72 hours before landfall in the US – could not be aggregated with US losses. Claims arising from the government action that pre-empted physical loss will not automatically constitute part of the same occurrence as subsequent material damage claims.
An area of potential uncertainty may be created by the fact that each underlying policy will be subject to its own governing law and jurisdiction. Given that damage has been inflicted in a number of different States, insurers could be exposed to differing rulings on coverage, including rulings in plaintiff-friendly State Courts (with juries drawn from hurricane-affected areas). 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.
The timing of Hurricane Sandy, less than a fortnight before the presidential election, may further increase pressure on insurers for immediate action to assist policyholders regardless of the extent of any property damage. National and regional politicians for both main parties will be anxious to avoid a repeat of the delay in responding to Hurricane Katrina in 2005. The cash flow impact on insurers (and reinsurers under simultaneous settlement clauses) may be significant. Reinsurers will also need to consider carefully the degree of claims control they are able to exercise in a fast-developing situation with reinsureds being subject to considerable political pressure to settle claims in a very short period of time.
Solvency and capital implications
With the hurricane occurring late in the season, a number of insurers and reinsurers will have been close to finalising their capital raising and solvency plans for 2013. A substantial loss at this stage of the year, in an unexpected geographical zone, may negatively impact on that planning process. There will be considerable pressure from the FSA and the Lloyd's Franchise Board to quantify exposures promptly and accurately.
The full impact of the hurricane on the North Eastern Seaboard is still revealing itself. Insurers and reinsurers will obviously need to be mindful of the unique legal issues that have arisen from previous hurricanes and other US catastrophes.