While Florida hurricanes are not unusual, this storm created claims complexities because of new statutory reforms, homeowners without flood insurance, and supply chain and worker shortages.
Bruce Hickey, 70, walks along the waterfront, now littered with debris including shrimp boats, in the mobile home park where he and his wife, Kathy, have a winter home on San Carlos Island, Fort Myers Beach, Fla., on Oct. 5, 2022, one week after the passage of Hurricane Ian. (Photo: Rebecca Blackwell/AP)
On September 28, 2022, Hurricane Ian made landfall on the west coast of Florida near Fort Myers Beach as a Category 4 storm. Ian was estimated to be almost 500 miles wide, with an eye 40 miles across and sustained winds of 150 mph at landfall. In Florida alone, over 708,255 first-party property claims have been reported with reserves reaching almost $14 billion. In addition to delivering strong winds, this storm also slammed Florida with a catastrophic storm surge.
- While hurricane losses are often complex, this event was especially complex for three reasons:
- The event happened in Florida prior to the new statutory reform property insurance changes.
- Hurricane Ian was a wind and flood/surge event, and fewer than one in five homes in the affected areas had flood insurance.
- The general public lack knowledge of the National Flood Insurance Program (NFIP) and Building Code, FEMA 50% Rule application.
“Disputes regarding Hurricane Ian claims will almost certainly involve a determination of wind versus flood from a causation perspective,” says Jonathon Held, CEO and president of J.S. Held. “Carriers will need to ensure they are consistent in their investigations involving these complex claims. The segregation of wind versus flood damages can involve multiple experts, including engineers, flood plain managers, meteorologists, and use of reported data.”
“Another challenge for carriers will be to determine the period of restoration due to current market conditions, supply chain, and labor availability. This is an issue that will be challenging and needs to be studied on a case-by-case basis. Long lead times for certain materials and equipment have been well documented,” he adds.
This article will focus on :
- The legal issues on wind versus flood claims
- Substantial improvement and substantial damage issues
- Other Hurricane Ian challenges
Legal issues on wind vs. flood claims
According to Andy Rock, partner and founder of Rock Law, “Wind versus flood is the age-old coverage issue. ‘Which peril happened when’ and ‘which peril caused what damage’ will be questions asked on almost every loss.”
The proper interpretation and explanation of policy language will be paramount in these claims. “A denial letter on a wind versus flood loss, if improperly written, will be scrutinized by plaintiff attorneys,” Rock says.
Thomas Keller, partner at Butler Weihmuller Katz Craig LLP, explains: “In property insurance claims there are two doctrines that could apply when multiple perils combine to cause a loss — concurrent cause and proximate cause.”
Both doctrines exist in Florida and are important for understanding the application of coverage. Each of the doctrines apply in different factual scenarios. Florida courts apply the concurrent cause doctrine or the proximate cause doctrine depending on the facts related to causation [See Sebo v. American Home Assurance Company, Inc., 208 So. 3d 694, 697-699 (Fla. 2016)]. One of the best explanations of the differences between the two doctrines is discussed in Paulucci v. Liberty Mutual Fire Insurance Company, 190 F. Supp. 2d 1312, 1319 (M.D. Fla. 2002).
The concurrent cause doctrine applies when multiple causes are independent. The efficient proximate cause doctrine applies when the perils are dependent. Causes are independent when they are unrelated such as an earthquake and a lightning strike, or a windstorm and wood rot. Causes are dependent when one peril instigates or sets in motion the other, such as an earthquake which breaks a gas main that starts a fire. (Paulucci at 1319).
In Hurricane Ian claims there are typically two causes of loss, wind and storm surge (flood), which both cause damage to a structure. In those scenarios, the concurrent cause doctrine would be applicable for the damage that is attributable to both perils. Most property insurance policies exclude floods as a cause of loss. The most important aspect is what precedes the flood exclusion. Typically, anti-concurrent, anti-sequential language precedes the exclusion. If that is the case, then there is no coverage for the damage that is attributable to a combination of wind (covered) and flood (uncovered). Florida’s courts have held anti-concurrent, anti-sequential language to be unambiguous and applied it according to its plain meaning (Paulucci at 1320).
Therefore, in analyzing coverage when there are multiple causes, it is important to determine if there truly is a combination of perils causing the loss (which could trigger the concurrent or proximate cause doctrines) in addition to applicable policy language.
Substantial improvement and substantial damage (FEMA 50% Rule)
Another Hurricane Ian challenge is the NFIP Rule known commonly as the “50% Rule.” If a structure in a floodplain is damaged or improved by 50% or more of the structure’s market value, then it should comply with the current floodplain management rules, which could involve lifting the structure to meet the current elevation guidelines.
“The requirements of substantial improvement and substantial damage are often misinterpreted, but it is important to understand exactly what triggers these requirements,” says Mike Rimoldi, MPA, CBO, CFM, of J.S. Held LLC. For substantial improvement or substantial damage regulations to apply:
- The cost of the improvement or cost to repair to pre-damage condition exceeds 50% of the market value of the structure. This is the value of only the structure and does not include the value of the land or any other improvements to the land such as fences, swimming pools, etc.
- The structure is in a Special Flood Hazard Area (SFHA).
- The authority having jurisdiction has adopted flood plain management rules and regulations that meet or exceed the minimum requirements of the NFIP.
- The structure does not conform to the requirements based on the specific flood zone and base flood elevation (plus any required freeboard) as identified by the current Flood Insurance Rate Map (FIRM).
As seen in Figure 1, if any of these requirements do not apply, the substantial improvement or substantial damage requirements are not triggered, and the current building code governs the improvement or repair. If all the requirements do apply, then the structure must be raised to meet the current elevation guidelines of the code. It is important to remember that substantial improvement and substantial damage rules apply even when the property is not insured for flood coverage.
Figure 1 – Flowchart for determining whether the 50% Rule is applicable.
FEMA 50% Substantial Damage Example
A home near the beach has an appraised value (not including land) of $1 million. The home is in a flood zone that has adopted the NFIP rules. The home elevation is below base flood level. The home has $400,000 of flood damage and $150,000 of wind damage. Since the total amount of damage is in excess of 50% of the value of the property, the home would need to be raised to meet the current elevation guidelines of the code.
FEMA 50% Substantial Improvement Example
A home in Florida is appraised (not including the land value) at $500,000. The home is also in a flood zone that has adopted the NFIP rules. This home’s elevation is also below base flood level. While some jurisdictions have waived the cumulative cost provision, this county had not. The home was renovated in 2021 for a total of $100,000. The home suffered $75,000 in wind damages and $85,000 in flood damages from Hurricane Ian. With total damages and renovations of $260,000 and an appraised value of $500,000, the home would need to be raised to meet the current elevation guidelines of the code.
In both examples above, the home would need to be raised. If the homeowner has flood insurance, the maximum allowed under the flood policy is $30,000. If the homeowner’s insurer did cover this portion of the loss, it would be subject to the ordinance and law 15% limit of Coverage A in the policy. According to HomeGuide.com, the average cost to raise an average-sized house above the flood zone is $20,000 to $80,000 for piers or pilings. Even if the carrier denies the cost of lifting the home, they still have an insured who must undergo the arduous and costly process of lifting the home, which could take months due to demand.
Other Hurricane Ian Challenges
NFIP coverages are not understood by most insureds
“Many flood victims who turned in flood claims were surprised when they found out their contents damaged in the flood were not covered,” says Cynthia DiVincenti, CPCU, ANFI, vice president of client relations – Government Affairs at National Flood Services. Insureds on NFIP policies must opt in to purchase coverage for their contents; contents coverage is not automatically included on a flood policy as it would be on the typical homeowner policy.
Another challenge for insureds on NFIP claims is that coverage is tied to direct physical loss by or from flood. “For instance, if a home has two feet of water that damages only the lower cabinets in a kitchen, the flood policy does not provide coverage to also replace the upper cabinets that were not damaged,” DiVincenti adds.
NFIP flood policies have several coverage limitations and exclusions; for example, there is no coverage for additional living expenses incurred while the insured building is being repaired or is unable to be occupied. There is also no coverage for fences, walkways, patios, decks, trees, plants or pools.
According to the Insurance Information Institute, social inflation refers to the trend of rising costs due to increased litigation, plaintiff-friendly judgments and higher jury awards.
“We estimate the added litigation costs from Hurricane Ian will run between $10 billion and $20 billion,” says Mark Friedlander, the Insurance Information Institute’s corporate communications director, “and this is on top of the projected 80,000 to 100,000 non-catastrophe property claim lawsuits that we estimate were filed in 2022.”
While legislation reform to help stabilize the property insurance market was passed and signed in Florida in December 2022, the regulatory changes are not retroactive. This means that the provisions do not apply to Hurricane Ian losses.
“While Florida already has homeowner rates three times the national average, social inflation affects more than the premium costs. In 2022, six carriers became insolvent. In August 2022, 27 residential carriers faced a financial downgrade, and two dozen remain on the state insurance regulator’s list because of their financial health. Even though most Florida-domiciled insurers appear to have adequate reinsurance for 2022’s hurricane-related claims, the Hurricane Ian litigation expenses could be the tipping point for more at-risk carriers,” Friedlander adds.
At the peak of the storm’s force, over two million power outages were reported. Power outages caused by the storm also affected many automated weather stations in the hardest-hit areas, preventing them from recording peak wind speeds during Hurricane Ian, according to Megan Walker, CCM, principal atmospheric scientist at Blue Skies Meteorological Services. Obtaining the official wind speeds, the wave depth and timing of both are important factors in the wind versus flood segregation.
“In addition, while we have preliminary findings for Hurricane Ian from local National Weather Service forecast offices, we are still awaiting the final report from the National Hurricane Center,” says Walker.
Hurricane Ian will continue to be a challenging event for Floridians and the insurance industry. As permits are turned in to perform storm repairs, there will be many more homeowners learning they need to raise their homes to be compliant with the substantial damage or substantial improvement rule elevation requirements.
With over 683,000 claims reported in Florida, the demand for materials and labor to perform repairs will likely remain high, causing periods of restoration to be lengthy and costs to escalate. While the recent Florida insurance reform bill was passed and signed, the bill’s directives regarding assignment of benefits and one-way attorney fees on property claims are not retroactive.
Gregg Golson, CPCU, ACS, (firstname.lastname@example.org) is vice president and program director of J.S. Held University at J.S. Held LLC. He has helped create over 1,000 education sessions and served on or led 38 tours of catastrophe duty. Thomas A. Keller is a Partner at Butler Weihmuller Katz Craig and a recognized authority on property insurance coverage issues.