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Hurricane Katrina made landfall on August 29, 2005, with the eye of the Category 3 hurricane centered on Bay St. Louis, Mississippi, though the storm is remembered largely because of the devastation to New Orleans, Louisiana. Over 1,800 people died in seven states, with over 1,500 of those in Louisiana.

The storm surge, a major loss cause, extended from the Florida Panhandle to western parts of Louisiana, and was 27 feet in Mississippi, flowing inland up to 6 miles and 12 miles up inlets and streams. One-third of Hancock County, Mississippi was flooded. St. Bernard Parish in Louisiana only had five buildings that were not flooded.

Following 53 separate levee breaches in and around New Orleans, 80% of Orleans Parish flooded under 2 to 20 feet of water. Well over a quarter-million homes were destroyed with many more damaged and tens of thousands of businesses were damaged or destroyed.

Over 1.7 million insurance company claims were reportedly filed with over $41 billion paid to policyholders. Over 163,000 NFIP flood insurance claims were filed and over $15 billion paid to policyholders, with the average payment being “just” $94,000. Total property damage was estimated to be $85 billion, resulting in an uninsured total of almost $29 billion.

These numbers were provided several years after Katrina by Jim Mahurin, CPCU, ARM, a risk management consultant who did years of expert witness and consulting work along the Gulf coast following Katrina. Contrary to the numerous media reports of poor service by insurers, along with extensive litigation, according to Mahurin, only 2% of claims were disputed, tracking with the national average for non-disaster claims.

He also asserts that New Orleans area independent agents did an exemplary job over many years in informing prospects and policyholders of the importance of purchasing flood insurance, including newly available excess flood coverage. As a result, almost 60% of property owners in the Greater New Orleans area had NFIP coverage but very few, including many high net worth individuals, had excess coverage…independent agents offered excess coverage but few property owners accepted it. These agents documented their offers, something that proved invaluable when E&O claims were filed.

The purpose, though, of this ¾ÅÉ« special feature is to focus on the ISO homeowners and commercial property coverage form language changes made largely in response to litigation involving whether water damage exclusions applied to damage resulting from storm surge and levee breaks. In addition, this article will address other changes and “lessons learned” that have impacted underwriting, rating, and loss control.

Commercial Property Policy Form Changes

In 2007, one of the first filings (CF-2007-OFR07) made by Insurance Services Office (ISO) included changes to endorsement CP 03 21 – Windstorm Or Hail Percentage Deductible. Without elaborating, several Katrina lawsuits alleged that the language in this form implied that wind-related storm surge was subject to windstorm perils and not the Water damage exclusion. According to the filing:

“Language is added to make it explicit that this endorsement does not affect the impact of the policy’s Water Exclusion or any other exclusion in the policy; and does not affect the application of a Flood Deductible if the policy (or another policy) provides coverage for Flood.”

The filing goes on to state that “There is no change in coverage.” This is an important point, as we’ll see later in the Katrina-related changes made to the Water damage exclusion. When ISO made those changes, a number of policyholder attorneys alleged that the more restrictive language related to storm surge, levee breaks, etc. were proof that, without such language, there was coverage under forms in effect at the time of Katrina.

In 2008, ISO made a countrywide filing (CF-2008-OWEFO) that introduced new Water Exclusion Endorsements for both its countrywide Commercial Property (CP 10 32 08 08) and BusinessOwners Program (BP 01 59 08 08) lines, as well as two other lines of business. (Note: Some reference materials indicate that the new CP 10 32 form replaced a CP 10 31 form introduced in 2007, though I can find no reliable documentation of that.)

In the filing, ISO cites two Louisiana cases, one in federal district court and the other a ruling from the Louisiana Supreme Court, as the basis for introducing these endorsements. Both courts found that the “flood” exclusions in the policy forms in question were not ambiguous. Plaintiffs had alleged that water damage was due to man-made causes (e.g., levee failures) but the existing exclusions implied that they applied only to natural causes of flooding and were, at the least, ambiguous.

In the filing, ISO explains that the purpose of the form language change was to reinforce the intent of the Water damage exclusion to apply to damage caused by an act of nature or otherwise caused. In anticipation of other water-related claims or lawsuits in the future, ISO also specifically referenced the applicability of the exclusion to tsunamis and storm surges.

These mandatory endorsements remained in effect until 2011 when ISO, in filing CF-2011-OFR11, incorporated the language in the 2008 endorsements into the Causes of Loss forms and two other Commercial Fire and Allied Lines forms.

Residential Property Policy Form Changes

Two months after the aforementioned 2008 commercial form filing, ISO filed (HO-2008-OFRWE) which introduced comparable language in new homeowners endorsements HO 16 09 01 09 and HO 16 10 01 09. ISO’s Water Backup And Sump Discharge or Overflow form HO 04 95 was also updated with the new language.

The HO 16 09 endorsement was filed for use with ISO’s HO 00 02, HO 00 04, HO 00 06, and HO 00 08 homeowners forms, while the HO 16 10 endorsement was filed for use with ISO’s HO 00 03 and HO 00 05 homeowners forms.

Both the HO 16 09 and HO 16 10 were withdrawn in a subsequent ISO filing (HO 2010-OFR10) when the language in each endorsement was incorporated into all HO forms that referenced the endorsements.

Other Coverage Changes and Lessons Learned

The aforementioned coverage changes weren’t the only industry reactions in response to Katrina. In addition to structural changes in New Orleans (e.g., levee reconstruction), other developments include:

• NFIP Changes. The Biggert-Waters Act of 2012 attempted to ultimately eliminate subsidies and gradually introduce actuarially-sound rates, though subsequent legislation has mitigated that.
• Private Flood Insurance Markets. As one might expect, excess flood coverage almost instantly vanished in coastal areas though this market rebounded significantly 10 years after Katrina and reportedly today comprises almost a third of flood premiums on a countrywide basis.
• Hurricane and Windstorm Deductibles. Flat dollar hurricane deductibles all but vanished and small percentage-based deductibles increased substantially. With increased focus on climate change or otherwise on perceived long-term weather changes, many property owners now experience percentage windstorm deductibles and/or coverage limitations to roofs or roof surfacing.
• Catastrophe Modeling. Formerly a product of reinsurers or broadly applied to entire books of business, CAT models were refined for application to individual risks or class or risks with greater emphasis on evolving weather pattern frequency and severity.
• Underinsurance. While solutions continue to evade the industry, hurricanes and other catastrophes (e.g., wildfires) continue to demonstrate that most properties in the country are underinsured, especially when subject to widespread damage.
• Zoning and Codes. Stronger building codes and zoning enforcement have been introduced in some areas. New, innovative products have been introduced such as roofing systems that can withstand major windstorms and hail. As such products proliferate, by choice or code or underwriting mandates, expect unit prices to fall.
• Loss Control. As weather- and water-related losses make these perils increasingly uninsurable, insurers are likely to encourage or even mandate that policyholders implement risk-reducing loss control measures. This is already happening for some risk profiles with regard to underwriting requirements for water shut-off devices and electrical system monitoring devices.

According to Mahurin, agents in the area learned the sales and E&O value of offering flood coverage and documenting refusals. They also learned to look beyond Zone A in their flood insurance marketing efforts. He cautions agents to think about a 5, 10, 15, or 20 foot tidal surge.

What’s next? Many advocates for change suggest that catastrophe exposures in general (hurricane, tornado, hail, earthquake, wildfire, etc.) may require extensive public and private cooperation. Catastrophe damage is no longer just a coastal issue. Weather-related catastrophes suggest to some that, from an insurance perspective, a wider spread of risk is required in the private sector perhaps on a mandatory basis, coupled with TRIA-like state and federal financial backstops, and built on a foundation of effective building codes and zoning ordinances that are rigorously enforced. What do you think?