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Isabel's
wake-up call
A new hurricane warning: Read your policies and make
a plan.
by
Robert Burke
Virginia
Business
December 2003
Hurricane
Isabel was roaring but Jim Wilkerson needed one more
look at his family’s restaurant on the Potomac
River in tiny Colonial Beach. At just past 9 p.m. he
went out in the driving rain and wind to see what was
still standing. “All the doors were there, the
sign was on the building, the radio antenna was still
there,” he says. “No visible damage, other
than the water was probably two feet over the highway.
I said, ‘We’re going to make out.’”
Daylight,
though, told a different story. High waters pushed by
the winds “knocked the whole back wall out and
just came on in,” he says. Wilkerson, 56, says
he’ll rebuild — an insurance adjuster and
structural engineer looked at the property soon after
the storm — and reopen in the spring. “I’ve
worked on the water and in the restaurant and seafood
business all my life,” he says. “This is the
worst I’ve ever seen.”
That’s
what commercial insurance is for, to handle catastrophic
events that would otherwise kill a business. In all,
Colonial Beach lost all four of its riverside restaurants,
a tough blow for the local economy. But what happened
to this Northern Neck town stands in contrast to the
impact that Isabel had across the rest of Virginia.
The
storm produced widespread damage, downing trees, flooding
homes and businesses and knocking out power, which particularly
hurt merchants who lost inventory or couldn’t reopen
for days. Total insured losses in Virginia totaled $450
million, with commercial losses accounting for 20 percent
of that, according to the New York-based Insurance Information
Institute, a trade group. The total damage in all states
affected was estimated at more than $1 billion. But
Isabel weakened as it came ashore and didn’t turn
out to be the catastrophic event many feared. “You
usually think of hurricanes knocking your buildings
down,” says Jim Kitchin, president of Virginia
operations for Richmond-based Hilb Rogal & Hobbs
Co. Commercial claims were typically for wind damage
to roofs and signs, business interruption losses or
spoilage claims from restaurants and grocery stores,
he says. “So from an actual insurance loss, it
won’t be as devastating as it could have been.”
In
addition, says Kitchin and others, Isabel isn’t
likely to push commercial rates higher. They’ve
climbed steeply in recent years as the industry emerged
from a long pricing war, the fallout of slumping investments
and huge losses from the Sept. 11 terrorist attacks.
Concerns about potential claims from asbestos, mold
and future terrorist attacks also helped drive rates
up and competitors out of the market.
But
the higher rates have had their effect and insurers
are making money. The property/casualty insurance industry’s
rate of return for the first half of this year was 9.7
percent, compared to 1 percent last year. The industry’s
combined ratio — the cost of writing policies and
paying claims versus the premiums charged — has
dramatically improved. In 2001 it hit 116 percent, meaning
carriers were losing 16 cents for every dollar of coverage.
Losses that year hit a record $52 billion. That ratio
dropped to just below 100 for the first half of this
year, according to the insurance institute, and underwriting
losses for the year should be between $4 billion and
$6 billion.
As
a result, the pace of rate increases is slowing, says
William Coyner, senior research analyst who follows
the insurance sector for Charlottesville-based SNL Financial.
“We’re not getting the 15 to 20 percent rate
increases we saw a year ago,” he says. “Anywhere
between 7 to 10 percent is what I’ve been hearing,
at least on the commercial side.” In another year
or so rates may begin to drop as competition increases,
he says.
Other
issues that pushed rates up are showing signs of cooling
off. Congress is working on asbestos legislation that,
if approved, would create a trust fund to compensate
asbestos victims. A plan proposed by Senate Majority
Leader Bill Frist (R-Tenn.) would have insurers contributing
$46 billion and asbestos manufacturers paying up to
$67.5 billion. Democrats are pushing for a bigger fund.
Coyner says most insurers will be glad if a decision
is made no matter what it is. “They just want a
final number that they’ll have to pay. They don’t
really care how high it is, they just want it to be
over with,” he says.
There’s also less uncertainty in directors and
officers insurance. Premiums
for that coverage soared in the wake of corporate scandals,
and it has been a difficult coverage for insurers to
price, Coyner says. “Nobody expected we would see
as many bankruptcies and as many issues with directors
and officers as we’ve seen in the past few years.
But, at this point, most of the writers of that insurance
now have a few years under their belt figuring what
the cost could end up being, so now they can price it
a little better.”
Another
environmental hazard, though, still shows signs of disrupting
coverage. Mold-related insurance claims totaled $2.5
billion in 2002, more than double the previous year.
Mold, found usually in heating and air-conditioning
systems or in poorly ventilated areas of buildings,
can be an irritant and in rare instances dangerous.
Some insurers cover mold claims but have hiked premiums
while some won’t cover it at all.
The
next group to suffer will be contractors in fields such
as heating and air conditioning, plumbing, siding —
anything that might be linked to moisture in a building,
says Cindy Amick, executive vice president with S.L.
Nusbaum Insurance Agency in Norfolk. “The construction-defect
claims are just totally out of hand,” she says.
“We’ve had insurers say they absolutely will
not write (policies) on any companies in that business.
It’s really going to hit the small contractors
hard. It’s going to put a lot of them out of work.”
Insurers,
of course, limit what they’ll cover because they
have to or face going out of business. If the risk seems
too high, they’ll walk away. “I think people
forget that insurance is not a nonprofit organization,”
Amick says. One option that coastal states south of
Virginia have adopted is the creation of a “wind
pool” funded by insurers in the state to help residents
and business recover from wind damage. Amick says in
the mid-1990s she and a handful of other agents tried
to persuade state officials to consider creating a wind
pool but were met by heavy resistance from major insurers.
One problem with the wind pool approach, Amick acknowledges,
is that some insurers would stay out of Virginia entirely
to avoid having to pay into the pool.
Isabel
was for many in Virginia a lesson on why you should
pay close attention to the terms of your policy to see
where insurers draw the line. In the days after the
storm ripped across the state many in affected areas
were stunned to find that they were obligated to pay
a higher deductible — often thousands of dollars
more — if the damage to the property was caused
by a windstorm.
These
mandatory “wind deductibles” take the place
of fixed deductibles if a hurricane strikes. Instead
of a $500 deductible, for example, a claimant might
have to pay 2 or 3 percent of a property’s total
insured value to cover windstorm damage. In recent years
insurers have been inserting wind deductibles into policies
to protect themselves after $15.5 billion in losses
from Hurricane Andrew in 1992.
San Antonio, Texas-based USAA has about 40,000 policyholders
in Hampton Roads and other parts of eastern Virginia.
It began inserting a 2 percent wind deductible in policies
renewed this year, much to the chagrin of claimants,
who complained loudly that they weren’t properly
notified about the change. Two weeks after the storm,
USAA announced it would waive the wind deductible for
Isabel-related claims on homes it insures in Virginia
and Maryland.
Exactly
whether the deductible is applied or not can vary. Some
insurers apply them only if the affected property was
actually struck by a hurricane. Amick says that for
most policies in Hampton Roads, the wind speed measured
at Norfolk International Airport defines whether it’s
a hurricane or not. Isabel weakened as it came across
North Carolina and technically didn’t reach the
minimum 74 miles per hour, Amick says.
In
Isabel’s wake, property owners at least know more
about how a hurricane or other natural disasters might
affect them. Hurricanes aren’t that rare; Virginia
has felt the affects of about 40 hurricanes in the past
100 years. So a little respect for the power of nature
is a good thing, says Kitchin of Hilb Rogal & Hobbs.
Businesses shut down for days from loss of power or
damaged property should update their “what if”
scenario, he says. “It’s as simple as making
arrangements for another building or getting your phones
back up. Just preparing for the worst. It can happen.”
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