Insurers and reinsurers are bracing themselves for enormous losses in the wake of Hurricane Harvey. The category 4 hurricane, the most powerful to hit Texas in half a century, has so far caused 44 deaths, damaged 48,700 homes and forced 32,000 people into temporary shelter. The hurricane has also hit the Texas oil industry, forcing companies such as Exxon Mobil to shut down their facilities. It is expected to be the most expensive natural disaster in US history, with some estimates of the total damage reaching as high as US$200 billion.
The ultimate losses to the insurance and reinsurance industry are difficult to predict in view of a highly complicated and challenging claims situation, but initial estimates put industry losses in the range of US$10 billion to US$20 billion1. The catastrophe is being considered predominantly as a commercial flood event, with insurers preparing themselves to be faced with many property damage and business interruption claims.
Hurricane Harvey has also affected HFW's own offices in west Houston with staff unable to access the office for several days due to flooding. We ourselves are therefore facing potential property damage and business interruption issues. The hurricane is also causing significant damage to the Texas oil industry. Inventory is unable to be brought to refineries and plants, so those refineries and plants remain closed waiting on product to refine. The Houston Ship Channel has only recently re-opened and therefore crude oil and other products have only just begun to be unloaded.
Policyholders should act quickly and diligently to maximise their chances of insurance recovery. They should carefully review all their insurance policies to find those areas for which they are covered. Insurance cover will most commonly be provided under a policyholder's first party property and business interruption covers, but others might be relevant too (e.g. extra expenses, service interruption, civil authority coverage, contingent business interruption, ingress/egress coverage). They should carefully check the applicable sub-limits to each cover and time limits for claims to be made, in particular the sub-limit for flood damage. Policyholders should also keep complete and accurate records of all losses and prepare detailed records of all property and income losses, with as much supporting evidence as possible.
Coverage disputes are likely to arise as a result of Hurricane Harvey. In particular, we expect to see disputes around the following issues:
- Issues are likely to arise around the definition of "flood", particularly in policies which contain high full coverage issues but lower flood sublimits. What is genuine flooding caused by rivers and reservoirs overflowing (which might limit an insured's claim to a lower flood sub-limit) and what is simply large accumulation of rainfall in surface water (which might entitle an insured to claim a full policy limit)?
- Concurrent causation issues are likely to arise in both commercial and homeowner coverage. Many homes and businesses sustained damage caused by two concurrent factors: Firstly, rising surface water. Secondly, damage from water entering the building through holes caused by high winds (e.g. holes in roofs or lost windows). In that situation, if the insured cannot prove which water damage came from surface water and which came from wind damage, all of the water loss will be excluded under most policies, unless the insured also purchased flood coverage. If the insured did purchase flood cover, concurrent causation would still be an issue if there is a flood sublimit.
- Aggregation issues are likely to be contentious. In particular, not all losses arising out of the disaster will necessarily be aggregated as a single catastrophe for reinsurance purposes. This will depend on the wording of the relevant reinsurance contracts and the governing law and jurisdiction clause may affect how such wording is interpreted.
It is not yet clear what proportion of losses will ultimately be covered by insurance. In 2005, Hurricane Katrina caused US$176 billion of damage, of which US$82 billion was insured. Then in 2012, Hurricane Sandy caused US$75 billion of losses, of which US$31 billion was insured (source: Swiss Re). Insurance Day reported that in relation to Hurricane Harvey, economic losses are likely to reach beyond US$100 billion, of which around US$20 billion would be insured.
There are particular concerns about homeowners, because standard home insurance policies cover losses from fire, theft and wind damage, but not flood damage. This is because private flood cover is very expensive for the consumer, as adding flood coverage can increase the premium by five times over basic home cover. To address this problem, homeowners can purchase subsidised cover from the federally-run National Flood Insurance Program, but it appears only around 15% of homes in Houston have purchased this.