The Cost of Disasters

The cost of disasters worldwide and on a national level are rising.  A new UN report released on May 15 puts the cost of natural disasters at $2.5 trillion so far for this century.  The study was conducted by the UN International Strategy for Disaster Risk Reduction.  The study focuses on businesses and their failure to take adequate catastrophe-proofing precautions.  Interestingly, one of the comments relates to insurance and states that insurers only cover a segment of the risk.  In emerging markets, insurance coverage may be less than 10% of the risk compared to insurance coverage of 90% in the US for businesses.  Global companies need to consider the possibility of natural disasters when considering facilities in emerging markets and to look at more than the political and market risks, currency fluctuations, or litigation.

These are very interesting comments.  Clearly, insurance does not cover everything (even all-risk policies have exclusions).  Financial reporting is now forcing companies to consider climate change issues and may soon require consideration of the risk of natural disasters to assets in areas prone to natural disasters.  Something for all businesses to consider when locating plants, offices, distribution centers, and other facilities.

In New York, the cost of Superstorm Sandy is being mitigated by a home buyout plan.  but recent reports indicate that the buyout plan is going to be much smaller than originally proposed.  This means that a repeat of Sandy for those who stay and rebuild is possible.  This raises the cost of disasters on insurers and the government and precludes the lofty goal of reshaping the shoreline to avoid clean-up costs.  Buyouts and returning shoreline to nature in concept is an interesting and less costly option than rebuilding and suffering another disaster.  But in developed shoreline communities, it is difficult to convince landowners to accept a buyout and move to higher ground.  One expert commented that this is a new program and it has to start slowly and hopefully build momentum for future buyouts.

We welcome your comments.

Free Webinar for ABA Members: The Insurance Response to Disasters - April 15, 2013

The Tort Trial & Insurance Practice Section of the American Bar Assocation is sponsoring a free webinar on The Insurance Response to Disasters:  Considerations for Insurers and Businesses on April 15, 2013.  The webinar will cover the following: 

Superstorms, hurricanes, drought, floods, wildfires, tornados - the past year has seen a surge in catastrophic events in the United States. This in turn has led to unprecedented levels of insured losses, which for Superstorm Sandy alone were recently estimated at over $28 billion. These losses create tremendous operational and financial risk for impacted business, while subsequent response efforts can create a "double-dip" of risk in the form of large intangible losses in management time, effort, and loss of focus on core business activities.

Whether representing insured businesses with catastrophic losses or carriers responding to subsequent claims, understanding the complexities facing both sides - best practices for policyholders in responding to losses and how the insurance industry responds to these disasters - can be key to resolving these complex insurance claim issues.

This panel discussion features speakers from both the insurer and policyholder perspective who will discuss:

• Best practices for insureds in responding to a catastrophe and mitigating losses
• Preparation and submission of the insurance claim
• The insurer's expectations for and response to the claim
• Best practices for businesses in planning for the next disaster, including proactive review of coverages and optimizing financial recovery

Speaking are:

Moderator

Pamela A. Palmer
Partner
Morris Polich & Purdy
Los Angeles, CA

Speakers

Iain MacBean
Executive Director
PWP International LLC
Miami, FL

Jim Paskell
President and Founder
Litigation and Liability Management, LLC
Solon, OH

James Tortorella
Director
Aon Global Risk Consulting
Chicago, IL

Is a National Catastrophe Fund Possible?

Among the ideas to address disasters and their aftermath is the creation of a national catastrophe fund.  Catastrophe funds have been around on a state basis for a reasonable period of time.  Florida has one.  Texas has one.  There are some others.  A regional or national catastrophe fund is a much bigger idea with much greater benefits and issues than the existing local catastrophe funds.

That brings us to HR 1101, a bill to create a national catastrophe fund using private insurance on a pre-funded basis to protect against national catastrophes.  As with everything, the devil is in the details and the details are not fully clear.  Certain insurer groups back the concept of a pre-funded catastrophe fund, but other insurer groups oppose the bill claiming that it would put an unnecessary burden on the taxpayers.  Considering that elements of the insurance industry are on both sides of this controversy, it will be interesting to see if a compromise can be reached. 

Addressing disasters with a pre-funded catastrophe fund with some federal backup is an idea that has been floating around for some time.  With a true disaster that overwhelms local resources, a multi-level approach to recovery and response is necessary.  Disasters are coming with much more frequency so those debating the various ways of addressing disasters need to find a common ground and come up with a comprehensive plan to address catastrophes before the next one strikes leaving us all unprepared.

Unintended Consequences Hampering Recoveries From Disasters

When disasters strike, many people line up to volunteer to assist with the recovery.  When natural disasters like hurricanes strike and destroy or damage homes and businesses, members of the design community mobilize to assist local governments in inspecting homes and buildings to determine whether they are safe, need repair, or should be demolished.  Such was the case after Superstorm Sandy.  Hundreds of architects and engineers mobilized to assist local building department officials in their communities in assessing the structural viability of the tens of thousands of homes that were damaged in Staten Island, Brooklyn, Queens, and elsewhere.

But something happened shortly after they mobilized.  They assessed what occurred in the aftermath of the terrorist attacks on the World Trade Center on September 11, 2001, and took a step back.  After September 11th, contractors, architects, engineers, and others all mobilized to assist in the recovery efforts at the WTC site.  They did this with no thought to the potential consequences of their participation in making decisions about how the demolition and clean-up of the site would go.  And they found out that for their heroic participation in helping with the recovery and clean-up efforts, they were thanked by being named as defendants in the thousands of personal injury lawsuits that were brought by clean-up workers and others alleging injuries arising out of the clean-up at the WTC site and related lower Manhattan buildings.

With that memory fresh on their minds, the architects and engineers who could have assisted the local communities in assessing the damage to homes and businesses went back home because they did not want to become defendants again based on their efforts to help with a post-disaster recovery.  The pain and expense of being sued was not worth it to them to get involved.  Architects and engineers are not covered under New York's Good Samaritan laws and with no protection and no agreement by any municipal authority to hold them harmless and indemnify and defend them from tort suits, they stood on the sidelines. Crain's New York has a great story on this.

This unintended consequence of mobilizing professional volunteers to assist in disaster recovery affected the ability to inspect and classify homes and commercial buildings as quickly as would have happened had the fear of lawsuits been absent.  Efforts have been made to include design professionals under a Good Samaritan-type law, but in New York, so far those efforts have been blocked.  According to the Crain's article, 24 states, including states on the Gulf Coast, have laws that protect building and design professionals from lawsuits when they come to the aid of disaster victims.

Recovering from a disaster like Superstorm Sandy requires has many hands as possible in the stricken communities.  Even today, months later, homes are not rebuild, insurance funds have not been paid to everyone, and families are still unsure when or whether they will ever be able to rebuild.  When those who can help are afraid to help because they might find themselves on the receiving end of tort claims, there is something wrong.  There is a bill in the New York Assembly to address this issue.  A04380 is a Good Samaritan law for building and design professionals.  The purpose of the bill, if passed, is:

"To provide professional engineers, architects, landscape architects and land surveyors immunity from liability for providing volunteer services funding during times of crisis and catastrophe. Such immunity would not be applied in cases of wanton, willful, or intentional misconduct, nor to services provided after 90 days of the emergency. This legislation shall not affect the liability of any government which requests a volunteer to perform these services."

You decide if this makes sense.  Many other states believe it does.  If you are sitting in Rockaway with your house still a wreck because you couldn't get it inspected properly and can't afford an engineer or architect to help you figure out if you can rebuild, you probably think it makes sense also.

Let us know what you think.

Claims Changes in the Wind?

The aftermath of Superstorm Sandy is still being felt throughout the New York, New Jersey, Connecticut coasts.  Claims payments, especially for flood insurance, are not coming as quickly as some would like.  Banks, with mortgages on damaged properties, are holding up checks causing inquiries by government officials to be made.  And regulatory and legislative changes are being considered throughout the region that, if enacted, will affect how claims are handled in the future.

Shortly after Superstorm Sandy, New York enacted an emergency regulation requiring claims arising from the storm to be handled on an expedited basis.  Inspections by insurance companies on claims had to be made within six days of notice of claim instead of the normal fifteen days -- a time frame large insurers said was impossible given the number of claims and the number of insurance adjusters.  A report card was and continues to be posted on the website of the New York Department of Financial Services on claim responses.

New York also issued a circular letter that allowed claims to be made and documented without first having to wait for an adjuster's inspection.  Some of the text of the circular letter stated as follows:

Accordingly, insurers must accept homeowners' documentation of losses rather than requiring an inspection first where an immediate cleanup is reasonably necessary to protect health and safety, or protect further damage to property.

For claims under homeowners' insurance, if dwelling debris must be removed before the adjuster is able to examine it, insurers should accept as proof of loss documentation such as photographs, videos, material samples and inventories prepared by policyholders as alternatives to formal inspection.

Now New Jersey is considering amending its insurance law to allow for a private right of action for bad faith claims practices against insurance companies.  Coupled with governmental pronouncements about the applicability of hurricane deductibles and the consideration of changes to the anti-concurrent causation clause in many homeowners' policies, there may be big changes for insurers and consumers coming in the wake of Superstorm Sandy.

These developments are important to watch because they will have an impact on the availability and affordability of insurance for communities in areas now clearly exposed to disasters caused by hurricanes and other cyclonic events.

New York State 2100 Commission Report - Building Resilience in New York

On November 15, 2012, New York Governor Andrew Cuomo convened the NYS 2100 Commission in response to the recent severe weather events such as Superstorm Sandy, Hurricane Irene, and Tropical Storm Lee. Tthe commission was asked to recommend actions to be taken to prepare New York to more effectively respond to, and bounce back from, future storms and other shocks.

On January 11, the Commission issued its first report, entitled Building Resilience in New York.  If you have any interest in a detailed plan to address disasters, you should download this report and read it.  It's long (over 200 pages), its detailed and documented, and it covers concrete recommendations for transportation, energy, land use, insurance, and infrastructure finance. Additionally, the report highlights nine major cross-cutting recommendations that are relevant to multiple sectors and systems:

• Protect, upgrade, and strengthen existing systems
• Rebuild smarter: ensure replacement with better options and alternatives
• Encourage the use of green and natural infrastructure
• Create shared equipment and resource reserves
• Promote integrated planning and develop criteria for integrated decision-making for capital investments
• Enhance institutional coordination
• Improve data, mapping, visualization, communication systems
• Create new incentive programs to encourage resilient behaviors and reduce vulnerabilities
• Expand education, job training and workforce development opportunities

The insurance section recommends state-level risk management, consideration of options to pre-fund disaster recovery and transfer catastrophic risk to capital markets, promote investment in risk mitigation, improve consumer awareness and education, prevent underinsurance for flood risk and certain covered perils, expand business interruption coverage, provide catastrophe response services, and promote a Comprehensive Insurance Emergency Measures Act.

In the insurance area, the Commission found the following problems:

• In the event of a disaster, consumers are unaware of what damage their insurance covers and there is confusion over deductibles and policy exclusions
• Risks are managed separately and without a unified scope across the state's various agencies and authorities

The insurance recommendations are wide in scope and are detailed at pages 147-57 of the report.  Consideration of a pre-funded disaster recovery program through the capital markets and insurance is one of the more significant options being considered for New York (similar to cat funds in other regions like the Alabama State Insurance Fund and the MultiCat Mexico program).  The Commission is urging the Department of Financial Services to study the use of anti-concurrent causation clauses.

This is a report worth studying.  It is one of the few responses to disasters that provides this level of detail.

New York City Proposals For Change After Sandy

In the wake of Sandy, the New York City Council is considering sweeping changes to zoning laws, building codes, and other regulatory initiatives to prevent the disruption caused by this storm.  In the weeks and months ahead there will be hearings and proposed legislation to make changes to how buildings are built in NYC. 

As reported in Law360, Council members made several suggestions for new legislation to determine the feasibility of relocating power lines underground, adopt the Federal Emergency Management Agency's flood elevation maps and strengthen flood-proofing requirements for buildings in vulnerable areas and health care facilities.

One suggested bill, proposed by Council Member Sara Gonzalez, would change the city's building code to match with those at the national and state levels when it comes to construction requirements meant to deter flooding.  Gonzalez's bill would raise elevation requirements for buildings in flood zones, requiring that their boilers and other critical equipment be kept above ground level. It would also create stricter construction standards for buildings in Zone A, the area closest to the waterfront where property is most vulnerable to flooding.  Other suggestions include locating power lines underground (this would help in the outlining boroughs where power lines were felled when trees came down) and requiring hospitals to have critical systems on floors above ground level.

Many of these suggestions mirror suggestions made in Florida and Louisiana and other Gulf states over the years.  By making changes like these, disruption can be lessened and insurable losses will be less.  It will be interesting to see how the debate goes and whether the will to make significant changes in light of Sandy stands firm in the face of what surely will be opposition to these changes.

Personal Thoughts on Sandy and Its Aftermath

It's now been almost seven weeks since Superstorm Sandy.  I thought I would give some personal reflections on the storm and its aftermath and some of the preparedness and response lessons we can learn and are still learning.  I live on the south shore of Long Island.  As you know, virtually all coastal communities on Long Island, New Jersey, New York City, and Connecticut suffered catastrophic damage.  My brother lives in Long Beach.  Long Beach is a war zone.  Still.  Numerous houses were destroyed, there is no boardwalk, businesses are just starting to reopen, cars are still being towed out, and thousands still have no place to live.  My mother lived in Rockaway Beach (where we grew up).  Rockaway is also a war zone.  Still.  Everyone heard about the houses that burned down in Breezy Point.  Other houses burned down as well.  The boardwalk is destroyed.  Thousands have no home.  My mother is moving to East Meadow and will not be going back to Rockaway.  There are other communities that can all say the same thing across the south shore, Staten Island, and New Jersey.

Yet in mid-town Manhattan, where I work, everything is normal.  Frankly, it was normal by the time I was able to return to the City on the Thursday after Sandy hit.  But downtown, there are office and residential buildings that are still unoccupied because there is no power or phone or internet service, or no heat or electric.  And outside of the coastal areas and outside of the New York, New Jersey, and Connecticut tri-state region, Sandy is an old story as the news cycle passes it by.

So what did we learn?  Some old lessons.  Building on sand spits is not a great idea.  Critical infrastructure has to be above the water line -- above the 1000-year storm water line.  Generators, heating systems, electrical panels, phone panels, computer hubs, all have to be out of the basement and sub-basement and be put on middle to upper floors.  Easier said than done.

Houses by the water have to either not have basements or be elevated so that the living quarters do not flood.  A friend of my brother and mine just finished his basement and first floor after Irene only to see everything totally destroyed by Sandy.  I am confident that throughout Long Beach and other communities others suffered the same fate.  Will insurers continue to "rebuild" in these coastal communities?  I had to change my insurance this year because my carrier of over 20 years dropped all policies on Long Island.  I am not on the water.  Insurers will start insisting on mitigation and prevention when rebuilding.

Dunes.  Dunes are cool.  People in Belle Harbor didn't want the dunes built up in front of their oceanfront views.  Those people no longer have houses as the nine to eleven foot storm surge swept over Rockaway and joined with Jamaica Bay.  Dunes and barrier islands help mitigate against storms and tidal surges.  So do groins and jetties.  In Rockaway there are rock jetties (really groins) in certain areas.  The beaches there are wide and the boardwalk was not as destroyed where the jetties were situated.  Where my mother lived, the boardwalk (for a short stretch) is somewhat intact, but literally two blocks west there is no boardwalk and the ocean flows under what was the boardwalk.  The rock jetties helped.  But there are environmental issues with jetties and groins. 

Generators.  I am contemplating installing an emergency generator hooked up to my gas line so I don't have to go through nine days of no power with dropping temperatures and standing on stupid gas lines because of panic.  Permanent generators are not cheap.  You have to create the proper hook-up to the electrical panel, properly place the generator and have it tied into the systems you want to run, and also run the gas line to feed the generator.  Is this an overreaction?  Not if Irene and Sandy are just the beginning of what is to come.

Backup and records.  We all do it.  We keep records and family memorabilia in the basement.  Not a good idea.  Electronic inventories of contents, important papers, etc. held in the cloud or offsite is the way to go.  But it's a lot of work.  I was lucky.  I only lost power for nine days.  I had no water and only minimal wind damage.  Five houses from me lost the entire first floor to water and a few houses from that had a major sewer back up.  The restaurants that I went to within a few weeks of Sandy in Freeport and East Rockaway were all destroyed.  Read the stories about how peoples lives are dumped in piles on the curbside.

Boats and shipping containers do not belong on railroad tracks.  But that's what happened on the Long Beach Branch of the Long Island Railroad.   Public transportation agencies have to make themselves less vulnerable to flooding.  We did not have our trains for almost 3 weeks.  The PATH in Hoboken may not come back until next year.  Trains and buses cannot be housed in lowland areas near water that might overflow with a surge.  Stations need to be build to withstand flooding and tracks and electrical sub-stations have to be raised or build to withstand water.

Cell phones.  How cellphone companies built cell towers with no generators or generators on the ground is shocking.  We had virtually no cell service for a week or more.  All the towers on the south shore were knocked out.  Redundancy and proper watertight back-up power is necessary for cell towers.

First responders and others.  Everyone should thank all the first responders, municipal workers, and volunteers who continue to work hard even today to take care of those who were devastated by Sandy.  Many of you saw the 121212 concert.  Folks from all the communities that are suffering were there.  The suffering continues unabated.  Go on Facebook and view the various pages set up by each community on their disaster recovery efforts.  This will be going on for months if not years in some areas.

Disaster preparation and response is no joke.  Take it seriously as an individual, in your business, and with your clients.  We hope this blog and the efforts of the American Bar Association's Tort Trial & Insurance Practice Section's Task Force on Disaster Preparation & Response helps.

Coast Guard Joins Admiralty Committee on Call

Chris Nolan of Holland & Knight, who is the immediate past chair of the Admiralty Committee of the American Bar Association's Tort Trial & Insurance Law Section, asked to post the following announcement:

The TIPS Admiralty Committee is proud to inform you that Captain Gordon Loebl, US Coast Guard , Captain of the Port for NY/NJ, will be joining us for our committee's monthly call on Thursday, December 20 at 12:30 Eastern.  Chair Laurie Sands will introduce Captain Loebl to lead off the call and the Captain will chat about the USCG's disaster preparedness efforts -- actions during and after Superstorm Sandy.  It is valuable insight into the USCG's emergency actions and time permitting, Captain Loebl may take questions.

Because of TIPS' commitment to disaster preparedness issues, this meeting may be of great interest to members and readers of this Blog.  if you are interested in listening in, we of course welcome you.  The dial-in number is 866-646-6488 and the conference code is 1885350536. 

A Twitter Conversation -- The Underinsurance Gap

Lloyd's of London, one of the leading insurance markets in the world (for over 350 years) conducted a Twitter conversation today for one hour on the global insurance gap that exists.  Lloyd's recently published a study on the issue of the underinsurance gap that exists worldwide and some ideas on how to fix it.  Lloyd's has on its website an interesting piece on this that all businesses should review.

A lot of the Twitter conversation focused on catastrophes and the need to have mitigation and prevention processes in place to allow for insurance to be affordable and available.  You can check out the Twitter conversation by searching the hashtag #insurancegap.  Some of the concepts discussed were location of business assets in the supply chain, the lack of insurance for substantial parts of natural disasters, the value of insuring for catastrophic losses lowering the burden on taxpayers, and the need to invest in mitigation and preventative measures.  This was an interesting way to learn more about issues affecting disasters and disaster recovery.