Hurricane Ike is likely the third most destructive hurricane to ever make landfall in the United States, and its influence on the insurance industry will be closely scrutinized as a result of various coverage disputes that have arisen.
Hurricane Ike started as a tropical disturbance off the coast of Africa near the end of August 2008, then tracked south of Cape Verde and slowly developed. On September 1, it became a tropical storm west of the Cape Verde islands.1 By the early morning hours of September 5, Ike was a Category 4 hurricane, with maximum sustained winds of 145 mph.2 That made it the most intense storm in the 2008 Atlantic hurricane season. Ike also had the highest Integrated Kinetic Energy of any Atlantic storm in history. Integrated Kinetic Energy is a measure of storm surge destructive potential, and on a scale of 1 to 6, Ike reached a 5.6.3 Ike made U.S. landfall at Galveston, Texas, on September 13 at 2:10 a.m. CDT as a very strong Category 2 hurricane with winds of 110 mph.4
Hurricane Ike hit the communities along the upper Texas Gulf Coast, including the large suburban areas of Galveston, where it made landfall, and Houston. Thirty-four counties were declared disaster areas.5 Specifically, in the five counties hardest hit (Orange, Harris, Galveston, Chambers, and Jefferson), the total real property losses are estimated to be over 100,000 properties, assessed as of December 3, 2008. There were over 100 total deaths (direct and indirect) from the hurricane as well. Hurricane Ike will likely go down as the most costly and destructive storm to ever hit Texas, and it is estimated to be the third costliest storm in United States history, behind only Hurricanes Andrew (1992) and Katrina (2005).6
The Property Claim Services of the Insurance Services Office, Inc. (ISO) estimates that the insured damage (not including inland flooding or storm surge) from Ike in Texas, Louisiana, and Arkansas is $9.7 billion dollars. Using preliminary figures, it is estimated that the total damage estimates are around $19.3 billion dollars.
The primary forms of damage were those typical of hurricanes: wind, flood, and surge. The highest storm surge measured by any National Ocean Service tide gauge was at Sabine Pass North, Texas, which was 12.79 ft. In areas where tide gauge records were unavailable due to destruction of measurement devices, it is thought that the surge was even higher than this. In Galveston Bay on the east side, it is thought that the surge reached somewhere between 15 and 20 feet, and on Galveston Island, somewhere between 10 and 15 feet.7 Coming in with the surge were huge amount of mud and debris, which caused further damage.
Effect on Rating and Underwriting
The Texas Department of Insurance (TDI) issued several bulletins to address the potential rate and underwriting effects from Hurricane Ike. These bulletins, available at www.tdi.texas.gov/, are listed as follows:
Bulletin No. B-0056-08—(September 14, 2008) encourages insurers to use all available means to provide prompt and immediate relief to those residents and policyholders, including but not limited to the suspension of premium payments to allow continuing insurance coverage.
Bulletin No. B-0060-08—(September 14, 2008) requires that in instances where insureds or potential insureds are temporary participants in the relief effort of Hurricane Ike, it is inappropriate for insurers to rerate, nonrenew, or refuse to provide coverage due solely to that participation.
Bulletin No. B-0062-08—(September 14, 2008) provides that it is inappropriate for insurers to re-rate, cancel, nonrenew, or refuse to provide coverage due solely to an individual's status as a victim or evacuee of Hurricane Ike. Further, it is not reasonable to change policyholders' rating classifications or increase their insurance rates solely because they are victims or evacuees of hurricane Ike.
Bulletin No. B-0063-08—(September 14, 2008) reminds insurers of their obligations pursuant to Section 559.103 of the Texas Insurance Code. This section requires insurers to provide reasonable exceptions to their rates, rating classifications, or underwriting rules for a consumer whose credit information has been directly influenced by certain factors such as temporary loss of employment, which likely affected many of those impacted by Hurricane Ike.
Bulletin No. B-0070-08—(October 14, 2008) encourages the suspension of any vacancy provision contained in the policy forms to allow continuing insurance coverage. The Commission intends that the insurer grant the policyholder an extended grace period for the home or business due to temporary displacement.
Effect on Claims Handling Procedures
The TDI issued several bulletins to address potential effects on claims handling processes from Hurricane Ike as well. These bulletins, also available at http://www.tdi.texas.gov/, are listed as follows:
Bulletin No. B-0058-08—(September 14, 2008) reminds insurers that the Insurance Code authorizes insurers to immediately use nonresident and emergency adjusters to handle claims. The TDI encourages insurers to use all available means to provide prompt and immediate relief to residents and policyholders.
Bulletin No. B-0065-08—(September 19, 2008) directs insurers to provide data in accordance with the Hurricane Ike Reporting Requirements Memorandum. The 10-day time period otherwise required for responses to inquires made by TDI is extended in this bulletin for the limited purpose of facilitating full compliance with the reporting requirements.
Bulletin No. B-0066-08—(September 24, 2008) provides that in accordance with Insurance Code § 542.059 and 28 TAC 5.903, the Commissioner has determined that Hurricane Ike is a catastrophe for purposes of claims processing subject to conditions, which are that the insurer must:
Establish quick contact with the claimant;
Quickly survey and assess the claimant's damage;
Provide quick responses to claimants;
Promptly provide payment for additional living expenses (ALE) and for temporary repairs after the assessment of the insured's damage; and
Quickly set appointments with the claimant for examination and resolution of claims.
Bulletin No. B-0068-08—(September 29, 2008) reminds insurers of the TDI's position that the standard method for determining actual case value of a structure is replacement cost with proper deduction for depreciation. The insured continues to be entitled to reasonable and necessary expenses to repair or replace the damaged property, less proper deduction for depreciation. The TDI expects all insurers to act in good faith and use fair claim settlement practices as required by Insurance Code § 541.060 and § 542.003 and Texas Administrative Code (TAC) Title 28, § 21.203.
Bulletin No. B-0071-08—(October 21, 2008) reminds all persons that Insurance Code § 543.001 requires insurers or any other person may not misrepresent the terms and provisions of a policy. As further stated in 28 TAC § 5.9970(d) and (e), persons insured under a homeowners or dwelling policy are entitled to have their home repaired by the person of their choice. Further, under Insurance Code 542.003(a) an insurer may not engage in an unfair claim settlement practice. Not attempting in good faith to effect a prompt, fair, and equitable settlement of a claim submitted in which liability has become reasonably clear constitutes an unfair claim settlement practice.
Bulletin No. B-0012-09—(March 16, 2009) relates to the bulletin which provided that insurers have an additional 15 days for claims handling services, which was necessary because of the large number of claims resulting from Hurricane Ike. This bulletin notes that the Commissioner is not extending the bulletins beyond March 6, 2009. However, it is the Commissioner's continuing expectation that insurers, their representatives, and agents will efficiently, effectively, prudently, and timely provide services to their policyholders that their customers expect and deserve. Insurers should not take advantage of the bulletin extending of claims handling time unless the extension is absolutely necessary.
Numerous lawsuits have been filed in connection with coverage disputes arising in the aftermath of Hurricane Ike. Among the common issues which have arisen include allegations of violation of the Texas Insurance Code provision on unfair settlement practices.8 Other allegations by insureds include violations of the prompt payment of claims provision of the Insurance Code.9 Some insureds are also bringing the common law cause of action for breach of the duty of good faith and fair dealing and breach of contract.10
There is a volume of pending Ike- and hurricane-related legislation. When hurricane season arrives in June, the Texas Windstorm Insurance Association (TWIA) will be funded largely by insurance company assessments and state revenues. The storms of 2008 cost TWIA six times the premium collected in the previous year. In just one year, 2008 storms depleted a 36-year surplus of reserves, and recent scientific storm models estimate damage from another large storm in Texas as high as $8 billion.11
The danger is in insurers pulling out of the market after a series of damaging storms, which would leave the state's taxpayers and policyholders to foot the bill. If insurers are charged an unlimited amount of assessments and aren't allowed to recoup their losses, they'll have to charge policyholders higher premiums or stop writing policies in Texas. Either way, that's bad news for homeowners and businesses throughout Texas, not just on the coast. Recognizing that coastal policyholders cannot pay all of the losses themselves, legislators are working on a solution to maintain a healthy insurance market for the state.
Currently, public securities, such as bonds, have been proposed as an appropriate means of refunding TWIA and building up its reserves to protect the state from the financial consequences of another major storm. It has also been proposed that the state lend $1.5 billion from its Rainy Day Fund to help pay for claims. Bills filed to date suggesting a new means of funding for TWIA include HB 911 by Rep. John Smithee (R-Amarillo), HB 3853 by Rep. Craig Eiland (D-Galveston), and SB 14 by Sen. Troy Fraser (R-Horseshoe Bay).12
The insurance industry will be closely scrutinized as a result of various coverage disputes that have arisen in the aftermath of Hurricane Ike. Though it is unlikely that courts will rewrite the policies and construe them in favor of coverage, the courts may be more inclined to address the uninsured losses by other remedies, such as extra-contractual liability for alleged unfair underwriting and claims handling efforts on the part of the insurance industry. Undoubtedly, the effect of Hurricane Ike could be not only catastrophic in loss of lives and property, but also a driving force in changing the insurance industry.
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