Property insurers are on high alert as the most powerful Atlantic storm in nearly a decade continues to bear down on the Southeastern United States.
Hurricane Matthew slammed into Cuba Tuesday night after leaving a trail of destruction in Haiti, flooding streets, flattening homes and claiming the lives of at least seven people. The powerful Category 4 storm, with sustained winds of 140 mph, showed no signs of weakening as it continued on toward the US, where it is expected to ride the coast from Florida to the Carolinas.
Florida Governor Rick Scott is now urging residents to prepare for a “direct hit,” and officials in South Carolina are beginning massive preparations to evacuate nearly 1.1 million people – about a quarter of the state’s population – beginning Wednesday afternoon.
If Matthew makes landfall, “there will be massive destruction that we haven’t seen in years,” Scott said.
The evacuation question
While meteorologists say it’s too early to make firm predictions on Matthew’s trajectory, any evacuations ordered by state officials will mean certain loss for insurance companies.
“Even if the storm track changes and physical damage is not terribly bad…you’re looking at business interruption claims that could cause major losses,” Howard Mills, global insurance regulatory leader at Deloitte, told
Insurance Business America.
“Obviously, all businesses will be closed and there will be no one patronizing coastal restaurants or shops for a period of time before and after the storm.”
Along with physical damage to homes and automobiles, business interruption claims contributed to the $1.4 billion in insured losses caused by 1999’s Hurricane Floyd, a Category 4 storm whose strength and trajectory has been compared with Matthew.
Floyd also generated a great deal of case law that further solidifies the duty insurers have to provide business interruption coverage, even when a commercial enterprise does not suffer physical damage.
Courts ruled in favor of several Wendy’s fast-food locations, whose insurer argued that because the restaurants did not suffer physical damage, their business interruption coverage was not triggered. A 2003 ruling in
Assurance Co. v. BBB Service Co. ordered the insurer to pay out, however, with the court arguing that county officials’ declarations of emergency and evacuation orders satisfied the policy’s “direct physical loss or damage to property other than at the covered premises” clause.
The definition of “access” to an insured property also became important, as courts considered “loss of ingress or egress” as damage to roads and other public utilities prevented access to covered properties.
While much depends on policy language, coverage is likely to apply for many businesses affected by Matthew, even if the storm changes track later in the week.
In fact, Mills speculated that even if Matthew does not cause significant physical damage, business interruption claims caused by the storm could generate losses to rival those of Hurricane Hermine in September, which are estimated to reach just under $400 million.
Assignment of benefits concerns
Another concern for insurers anticipating Hurricane Matthew claims is ongoing alleged abuse of Florida’s Assignment of Benefits (AOB) provisions.
The AOB legal tool was introduced in the state as a way to allow contractors to bill and be paid by insurers directly for work performed, without involving the insured homeowner. It was meant to prevent homeowners from having to pay money upfront or deal with a sometimes complicated claims process, but insurers have long argued that repair vendors have taken advantage of AOB by artificially increasing the cost of claims, and even suing the insurer if it refuses to pay the bills.
In the wake of serious damage from Matthew, inflated AOB claims could make the storm an expensive one for property insurers.
“AOB could become a significant issue if we get a large event in Florida,” Mills said. “Hopefully Matthew won’t be it, but if it is, fraud is just easier to commit and the market could see some inflated claims.”
AOB abuse has already led to significant rate hikes in South Florida, both from private insurers and the state-run insurer Citizens Property Insurance Corp. Though state lawmakers have considered several reform proposals, no material changes have yet been enacted.
Looking ahead
If Hurricane Matthew does make landfall, the industry is well-capitalized enough to absorb losses without significant disruption.
Anxiety levels among property insurers are likely to be heightened following the storm, however – and with good reason.
“Not to sound dire, we did have Katrina and Wilma back-to-back-to-back in 2005,” Mills said. “Water temperatures are very, very warm, and hurricane season could go on right to the end of the traditional time frame.”
Mills urged agents to check client coverage and consult with them on matters like property inventory, business contingency plans and potential coverage gaps.
Matthew is expected to make landfall in the US at any point Thursday through Saturday.
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