The severe weather events of the last two years have called into question the use of hurricane deductibles in the Northeast states. In both Hurricane Irene (August, 2011) and Hurricane Sandy (October, 2012), insurers were unable to apply policy hurricane deductibles for the reasons discussed below; however, the claims resulting from these storms will be adjusted with the application of the general policy deductible.
Hurricane specific wind deductibles were generally developed in the last decade as a response by insurers to help spread the risk of catastrophic loss. Consumers living in hurricane prone areas benefited from these deductibles by having coverage available at a reduced cost. Insurers benefited by being able to better manage their catastrophe exposure, and in reducing the number of claims to adjust following a hurricane.
In most states with specific hurricane deductible requirements, insurers may impose a hurricane deductible for wind damage occurring from the posting of a hurricane watch or warning in the state, until some amount of time (72 hours in Florida; by policy provision in many other states) after the watch or warning has been discontinued. This has been modified in some states (Connecticut, New Jersey, New York, Rhode Island) to also require that hurricane force winds be measured in the state.
There are three apparent reasons why hurricane deductibles may not be applied in the Northeast following future hurricanes impacting the region. These are concerns over the declaration of a hurricane warning, the measurement of hurricane force winds, and political fallout from use of the deductible.
Hurricane Warning: In many states with hurricane deductibles, it is the declaration of a Hurricane Warning by the National Weather Service (NWS) that initially triggers the application of the hurricane deductible. It has been thought that the NWS would issue a hurricane warning in accordance with meteorological standards, and not be subject to other considerations. This proved not to be the case with Hurricane Sandy.
The NWS had declared Sandy a hurricane as early as October 24, 2012, shortly after its formation in the Caribbean, and the storm retained hurricane status as it progressed over Cuba and the Bahamas, and thereafter along the east coast of the United States. Tropical storm watches and warnings were duly posted along the east coast up through North Carolina, and then not posted from Virginia northward, even though Sandy was forecast to come ashore in New Jersey and to impact much of the greater Northeast with hurricane force winds¹. (NWS Sandy Advisory Number 29 Issued 11:00 a.m. Monday, October 29, 2012; Exhibit 1). The official NWS explanation for the failure to post hurricane warnings was that Sandy was expected to become a “post-tropical cyclone” before it made landfall, so no hurricane warnings were required². In fact, Sandy retained tropical characteristics and hurricane status until approximately one hour before the center of the storm crossed land. As late as 5:00 p.m. on October 29, 2012, Sandy remained a hurricane, was located 40 miles south of Atlantic City, New Jersey, had sustained winds of 90 mph and hurricane force winds that were reported to extend outward 175 miles³. At that time, one could infer that Sandy was a hurricane and that hurricane force winds were impacting the coast of New Jersey and other adjacent states. It was not until 7:00 p.m., with the center of Sandy expected to make landfall over New Jersey within one hour, that Sandy’s status was changed to that of a “Post-Tropical Cyclone.”4 The NWS appears to have handled the posting of warnings for Sandy differently than it had for other storms. Whether this result was due to political reasons or for the announced reasons remains to be seen. In any event, the failure of the NWS to post a hurricane warning for states in the path of Hurricane Sandy calls into question the use of hurricane deductibles that are triggered by the NWS posting a hurricane watch or warning.
Wind Speed Measurement: At least four Northeast states require that the NWS measure sustained hurricane force winds within the state in order for a hurricane deductible to be applied. This requirement may have been extended by endorsement on a per company basis in other states. The industry generally agreed with a measured hurricane force wind speed standard, in part to avoid a trigger based on landfall of the hurricane. However, in practice the use of wind speed measurements as a trigger may prove to be unworkable.
During Sandy, the maximum sustained wind recorded by the NWS on October 29, 2012 in New Jersey was 51 mph at Mount Holly, New Jersey.5 The highest wind gust recorded at that site was 64 mph. For Trenton on that date, the wind speed measurement was 38 mph, and the maximum gust recorded was 61 mph.6 Wilmington, Delaware reported 46 mph wind with the highest gust 58 mph. The highest located wind speed as reported by the NWS was at LaGuardia Airport, NY, with a wind speed of 64 mph and a gust of 74 mph7. Other stations reported wind speed as follows: Islip, NY, with a wind speed of 56 mph and a maximum gust of 90 mph; JFK Airport, NY, with 56 mph wind and a maximum gust of 85 mph.
One has to wonder why there is such a significant difference in wind speeds measured by the NWS prior to the storm impacting land, and the wind speeds measured on land. It is unclear whether the difference is due to changes in the wind speed upon interaction with land, or due to differences in the wind measuring equipment, or for some other reasons. The insurance industry has, to the authors' knowledge, never confirmed with the NWS that is has sufficient equipment to measure hurricane force winds at land based stations. Further, the industry may not have confidence as to whether, even during a hurricane, hurricane force winds reach the land based measuring equipment. Also, at higher wind speeds, the measuring equipment may be damaged or may not have electrical power to report its measurements.
Even if the NWS had recorded sustained hurricane force winds, insurers could be subject to litigation on an individual case or class action basis over whether the reported NWS wind speeds were accurately measured, particularly in cases where the reported wind speeds were at, or marginally in excess of, the threshold. Plaintiffs’ attorneys could challenge the accuracy of the wind speed measurements, and bring in their own experts to refute the reported wind speeds.
Political Factors: Hurricane Irene concentrated its damage on the Connecticut coast, and then further inland in Connecticut and into Massachusetts. At the time, the hurricane deductible in force in Connecticut required a hurricane warning and subsequent damage caused by wind.
Hurricane Irene clearly met these standards. However, the Connecticut Insurance Department called on insurers not to apply the hurricane deductible, based on the fact that Irene had been downgraded to a tropical storm shortly before the eye of the storm reached the coast. Most insurance companies agreed not to apply the hurricane deductible. The Connecticut Insurance Department’s position with respect to application of the hurricane deductible was at odds with the policy language that had been approved by the Department. The Department’s rationale for this request essentially added a new element to the approved deductible terms standard.
In New Jersey, following Hurricane Sandy, the Department of Banking and Insurance was quick to announce that the deductible could not be applied, based on its reasoning that the NWS characterized Sandy as a post-tropical storm.8 The Department was correct that the deductible did not apply, but for the wrong reason. The deductible did not apply because the NWS did not report hurricane force winds at any of their New Jersey stations. There was never a “hurricane status at landfall” requirement, as implied by the Department.
Following New Jersey’s lead, other states were quick to announce that the hurricane deductible did not apply (for various reasons in accordance with individual state law).9
Although insurance departments are willing to approve a hurricane deductible policy provision, in recognition of the benefits provided to the consumer in the form of reduced premium and greater product availability, they appear reluctant to actually allow the deductible to be used in practice.
Future Actions: The industry needs to continue to monitor this issue and consider the following responses:
- The property and casualty insurance trade organizations need to become involved in this issue on behalf of the industry. The trades need to follow up with the NWS on the measurement of wind speeds and the declaration of hurricane watches and warnings, and to determine whether changes to state laws are necessary.
- Incoming NAIC President James Donelan, Commissioner of Louisiana, recently advocated simple percentage wind and hail deductibles. The industry should address this issue at the NAIC level.
- Depending on the information received from the NWS, and any activity at the NAIC, the industry may need to directly lobby state legislatures and regulators to allow a reasonable application of deductibles.
Irene and Sandy will not be the last storms of their type to strike the Northeast. As the insurance industry aids Sandy's victims in the long process of recovery, it should also make preparations for the next major cyclonic storm. Insurance protects against unpredictable, yet known, risks. When those risks develop into actual losses, the industry needs predicability as to how its policies' coverage will apply.
Robert P. Suglia