Cars and homes flooded by super storm Sandy
No flood insurance? Low payouts from home insurance after super storm Sandy

Six months after Superstorm Sandy made landfall on the Jersey Shore, causing more than $18 billion in insured losses, most homeowners’ claims have been paid. But the difference between the average homeowners’ payout and the average home value is large, and the situation is drawing renewed attention to problem of those in harm’s way who fail to buy flood insurance, which is provided by the federal government under the National Flood Insurance Program.

In mid-April, as the milestone approached, the Insurance Information Institute announced that 93 percent of all homeowners’ claims had been resolved. That included the hard-hit states of New Jersey, New York, and Connecticut, which accounted for slightly more than two-thirds of all such claims from the storm, according to I.I.I.’s 2012 year-end report and data from regulators in those states.

It’s not that the insurance industry did not make payments – in New Jersey alone, insurers closed 233,913 claims for $1.44 billion, according to data from Christine O’Brien, president of the Insurance Council of New Jersey. “Report cards” from the New York Department of Financial Services– which were first posted February 21, 2013, in response to consumer complaints – recorded more than 303,000 paid homeowners’ claims as of April 12. In Connecticut, regulators reported nearly 93 percent of claims closed by the end of March, with payments totaling $235 million.

Average Homeowners’ Payments Are Low

But it’s the average payment, reported at between $5,400 and $6,700 in the three hardest-hit states, that the typical homeowner will notice. New York regulators do not include an average homeowners’ claim payment in their report card; New Jersey’s Department of Banking and Insurance reported the average homeowners’ claim at $5,921 as of March 29. Connecticut reported an average of $5,459. In its year-end report in 2012, the Insurance Information Institute pegged the average homeowners’ claim at just above $6,700 for the region.

It sounds like a lot of activity – and it is. But it’s less than half the average Katrina homeowners’ payment of $15,000, reported by a well-regarded Consumer Reports study. Moreover, Sandy claims covered some of the most expensive real estate in the country, while property values along the Mississippi and Louisiana Gulf Coast were comparatively modest.

According to Census Bureau data, the median home price for 2007-2011 in Monmouth County, N.J., was $413,500; for Suffolk County, N.Y., it was $411,000. By comparison, Harrison County, Miss., home to the cities of Biloxi and Gulfport, reported a median price of $146,600 for the same period.

Those little Sandy payments will not go a long way if the homeowner lacked federal flood insurance, private flood insurance or surplus lines coverage, and local news reports abound of Jersey Shore homeowners selling property that had been in family hands for generations. (Surplus lines coverage, which is not regulated, has become increasingly important in high-cost costal areas.)

That’s because, as maps published on the I.I.I. Web site show, only on select areas of the Jersey coast did take-up rates for the NFIP exceed 50 percent; participation rates were below 50 percent for most of the coastline from Cape May N.J. to the eastern tip of Long Island, N.Y., as well as coastal Connecticut, as well as inland areas in all three states that were badly flooded.

Not Enough Purchased Flood Coverage

Privately, regulators feared this outcome for years. As outlined in the Insurance Information Institute hurricane briefing for the six-month anniversary of Sandy, decades of explosive growth along the coastal areas of New York and New Jersey had put billions of dollars of real estate in harm’s way, with relatively few homeowners participating in NFIP.

For an idea of how underinsured New Jersey was leading up to the October 2012 storm, consider this:  With most of the state within 80 miles of the ocean, for years the state’s construction codes required all new homes to be built to withstand a hurricane. Yet the I.I.I. reports only 14 percent of eligible homeowners were enrolled in NFIP.

News accounts in New Jersey and New York especially have the same sad news heard after Katrina in 2005 – upset families who paid premiums for years, thinking they were protected if a hurricane hit, only to hear the same news delivered in Mississippi and Louisiana years before – if it’s wind, you’re covered, if it’s flood, you’re not.

With Sandy, there were fewer cases of houses taken down to the slab, and thus fewer disputes over what caused the damage. Both New York and New Jersey have set up mediation programs for cases in which consumers claim they were misinformed. In some cases, flood coverage was dropped after a mortgage was paid off, or a consumer claimed a broker failed to explain that the homeowners’ policy didn’t cover flooding.

All this happens despite annual advertising campaigns by the National Flood Insurance Program, among relatively wealthy, well-educated property owners.

Not only is coverage lacking, but both regulatory and industry sources agree that a limited supply of NFIP-certified adjusters has put the claims-settlement process behind the homeowners’ schedule. As the six-month anniversary approached, one published report claimed FEMA had settled 95 percent of Sandy-related flood claims, but industry sources tracking the figure put it closer to 75 percent.

Making Flood Coverage Automatic

After Katrina, the National Association of Insurance Commissioners explored a push for so-called “all-perils” coverage – a blanket policy that would eliminate the distinction between wind and water, so that property owners would not discover these gaps after a hurricane or tropical storm. The discussion made its way to the U.S. House of Representatives in July 2007, when Kansas Insurance Commissioner Sandy Praeger testified on behalf of the NAIC.

Cars devastated by floods caused by storm Sandy
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Praeger presented results of a survey, which found that despite extensive coverage of how Katrina victims suffered from lack of flood insurance, many consumers still misunderstood how the NFIP system worked.

“Thirty-three percent of households still incorrectly believe flood damages would be covered by a standard homeowners or property and liability policy,” she said. “The results of this survey are alarming and revealing. Clearly consumers have an expectation of broader coverage than their policies currently allow. Their rationale is simple to appreciate: They a paying a premium and want their property covered.”

Six years later, not much has changed. Yet after Sandy, commentators are asking again why flood coverage is a not assumed in a homeowners’ policy. After all, some note, it is assumed in many automobile policies. O’Brien, of the ICNJ, noted in her data that some consumers sought payment for a flooded car under their homeowners’ policy, when this is a standard coverage under most auto plans.

Sam Friedman, a researcher with Deloitte’s Center for Financial Services, wrote about an exchange at an industry event, where he pitched the idea of requiring consumers in flood-prone areas to annually “opt out” of flood insurance:

“This could make more policyholders aware of their flood exposure and the availability of federal coverage to address it,” Friedman wrote. “It also might settle, once at for all, whether policyholders were made aware of flood gaps in their standard policy and, thus, alleviate the E&O exposure facing agents. Hopefully, more might see the need for flood insurance and decide to buy it.”