Rain Check for Reform

With his feet planted firm on the sand, Hank Iori squinted as he scanned the beach shoreline – spotting ramshackle homes, transplanted utility pipes, and scattered debris in every glimpse of his hometown Rockaway, Queens. “FEMA and the federal government have done a marvelous job cleaning up the blocks and getting sand off the streets, but that money dries up,” he told reporters at Newsweek.

Out-of-pocket-costs, too, became a daily reality for Iori post-Sandy. “I probably spent a minimum of $2,000 in Home Depot and each day I’m still finding more things I need to replace: new lawn mower, power washers, tools, table saw, snow blower.” Iori, nevertheless, considers himself lucky as he was able to afford repairs for his home himself. Most aren’t.

“Every family I know has burned through whatever money has been provided,” said Belmar Mayor Matt Doherty of New Jersey. “People are staying with family and friends. It is wrecking lives.”

Seven years ago, Gulf Coast residents were also reaching their hands deep into empty pockets after Hurricane Katrina. Not only was Katrina the third-deadliest hurricane of the past hundred years, but it was also the largest natural disaster in terms of personal insurance claims in American history. The Insurance Services Office (ISO) defines a catastrophe as an event that causes $25 million or more in insured property losses. In 2005, Hurricane Katrina generated privately insured property losses of $41.1 billion. To put this in perspective, Hurricane Katrina caused $22.3 billion more in insurance losses than the 2001 attacks on the World Trade Center and the Pentagon combined, which generated $18.8 billion in insured damage. Estimates after Superstorm Sandy pegged the costs covered by insurance companies at no less than $10 billion. While demonstrative of the general size of the damage and recovery efforts that super-hurricanes leave, these numbers can never truly reflect the financial punch in the gut that Sandy and Katrina have dealt countless Americans within the past decade.

Within the delicate dance of the local, state, and federal governments planning for and responding to natural emergencies, the dilemma of “who pays for what” is often the central drag that slows recovery efforts. The most recent saga of dispersing federal funds to hurricane victims started to unfold days after Sandy struck – with elected officials of all shapes and sizes heralding a collective call for Congress to pass a bill of aid for the stricken tri-state area. Congress passed $62.3 billion in aid 10 days after Hurricane Katrina hit, and that’s not including the additional $20 billion that was appropriated in 2006. In contrast, it took 91 days for Congress to pass two Sandy relief bills. Albeit not suggested by the long wait, the effort to pass aid was not without multitudinous public threats from governors and congressional members.

Part GOP ideological resistance to what conservatives called “pork” and part congressional preoccupation with the unpleasant dilemma that the whole nation’s economy could possibly collapse beneath us, the Sandy relief bill became a political football of blame this past December and January. After the Senate passed the bill in mid-December, Republican House leadership had “promised” that they would vote on the Sandy relief package before the 112th Congress ended its session the first week of January. This, of course, did not happen. On January 1, once the House passed the bill to avoid the fiscal cliff, Boehner, despite the pleas of tri-state area House members, did not allow a vote on the Sandy bill that same night – meaning that new legislation would have to be introduced and voted on in the next session of Congress. The reasons for Boehner’s decision could be hashed out for hours (Boehner had just voted on a lot of spending with the fiscal cliff; Boehner was worried about Republicans publically splitting on another piece of legislation; Cantor is really the one responsible for the decision and the one to blame).

Whatever the reason, “Boehner’s betrayal” – punting Sandy relief to the 113th Congress – resulted in newspaper headlines evoking the classic “Ford To City: Drop Dead” and in local officials telling the House of Representatives that they should be ashamed, with Representative Peter King (R-NY) even calling the legislative move “a cruel knife in the back.” Days after New Jersey’s and New York’s public scolding, the House and Senate finally passed $9.7 billion in aid to temporarily cover the National Flood Insurance Program (NFIP). At the end of January, Congress passed a subsequent $50.5 billion of aid money, which is being used today to repair public transportation systems, rebuild public housing, and to even fix up the Statue of Liberty – now slated to open on the Fourth of July. While Congress eventually passed greatly needed recovery funds, the case of Sandy demonstrates that federal disaster relief funding is far too susceptible of becoming a legislative hostage in partisan and ideological deficit battles or of simply getting gummed up in congressional procedures – at the considerable cost of communities who can’t afford to sit and wait to rebuild.

Another option to fund natural disaster recovery is for states to pitch in aid – as evidenced in the aftermath of Hurricane Katrina. While not an issue during Sandy because most of the damaged structures were still remaining onshore, a key question blocking Katrina recovery was whether the damage was caused by wind-driven storm surges or flooding. The media quickly coined this as the “wind v. water” debacle.

The case of James “Bud” Ray illustrates how many insurance companies took advantage of the uncertainty in wind and water damage. After Hurricane Katrina, Ray started the insurance claim process with a notice of loss to the insurer. This is followed with the insurance company’s investigation to determine the cause for the loss, the extent of the damage, and the cost for repairs or replacement of damaged property. If the cause of damage is excluded, such as flood, the claim is denied. In situations where multiple causes of damage can be separated, the insurer typically pays for the portion of the damages that are caused by a covered loss. If the causes of loss are not distinguishable, the analysis can be more complicated. In the case of Ray, the insurance company’s inspection centered on one question: Was the damage due to wind or flood damage?

In addition to the ambiguity of whether a storm surge counts as flood or wind damage, most hurricane contracts had “Anti-Concurrent Causation” (ACC) clauses. If wind and flooding both caused damage to a home, insurers could interpret the ACC clause in a way to assert that the presence of flooding nullified payment of damage covered in an all-risk hurricane policy. Instead, insurers would only pay wind damage, accompanied with water damage, under flood coverage, if it is available. Since most damage to homes included both wind and water damage, a homeowner would have to have flood coverage to receive money that could be used to repair wind damage. While overall all-risks policy appear to offer broad coverage, the exceptions – such as floods – take away some more, and then the anti-concurrent clause takes most of which was left, unless the claimant has flood insurance.

While an individual’s home on a beachfront may have suffered water damage, the main instigator might have been the powerful winds driving ocean water and not the rain contained in a hurricane, which traditionally is considered flood damage. It is this vagueness, along with the lack of witnesses due to the mass evacuations, that lead many insurance companies, as in the case of Ray, to arrive at the blanket conclusion that flooding mainly damaged their homes.

At the time, however, nearly 75 percent of Mississippi homeowners did not have flood insurance. These homeowners may have not been aware of this program or, as disputed in many Scruggs-Katrina Group lawsuits, may have been assured by the insurance agent that purchasing separate flood insurance outside a designated flood zone was not necessary. For example, James Lucas, a resident of Gautier, Mississippi has asserted that after asking if he should buy additional flood insurance – due to a canal behind his house – when purchasing his hurricane policy, the Allstate agent allegedly informed him “that he was covered for any damage incurred during a hurricane, including storm surge.”

As a result of these insurance disputes, many homeowners brought their denied claims to the state government to mediate. In total, the Mississippi Insurance Department reported that over 380,000 insurance claims were filed in response to Katrina, and the Insurance Institute estimates 1.75 million claims were filed across the region. In order to rectify disputes that did not have jurisprudence to be heard in court and were denied by insurance companies, the state’s “wind-pool” was used. Mississippi’s wind-pool was created in 1969 due to the problems that arose in Hurricane Camille. A wind-pool, sometimes referred to as “beach plans,” is a program created by state statute and regulation to provide wind insurance coverage in high-risk areas when insurance companies can no longer provide or refuse to provide coverage. As a result, a wind-pool can be considered a residual market plan, where home and business owners buy premiums into the pool. When damage exceeds the money collected in premiums, the companies that do business in the state have to pay the difference. As insurers stopped issuing wind coverage after Katrina, the wind-pool had a 150 percent increase in policies – 16,000 to 40,000 and suffered a $745 million loss, which was four times greater than the $175 million it had as assets. Even now, this rapid expansion has left the state’s wind-pool underfunded, which has resulted in a rapid jump in rates for wind-pool premiums.

Another glaring problem in government-funded hurricane relief today is the National Flood Insurance Program (NFIP), which is managed by the Federal Emergency Management Agency (FEMA). Until the Mississippi River flooded in 1927, most insurance companies nationwide regularly offered flood coverage in a basic homeowner’s insurance policy. As a result of this natural disaster, private insurance companies increasingly dropped its flood policies, which then led Congress to create the NFIP in 1968. Under current legislation, residents who live in designated flood areas are required to buy federal flood insurance while voluntary coverage is available to all homeowners.

According to FEMA, the NFIP has at least $45 billion in flood policies in the tri-state area recovering from Sandy. Although the exact number of flooded homes and flood insurance claims are not yet available, in mid-November, Edward Connor, FEMA's deputy associate administrator for federal insurance, told a meeting of the Federal Advisory Committee on Insurance that FEMA estimated the number of Sandy-related losses under the program would be somewhere between $6 billion and $12 billion.

As a result, with only $900 million in cash and $2.9 billion remaining in NFIP’s borrowing authority, Sandy victims were not be able to settle claims and thus recover until the federal government bailed out NFIP once again in January. Further, FEMA has yet to fully repay the $18 billion Treasury-financed loan that bailed out the program in 2005. While nothing can be done to prevent this bailout, reforming how homeowners are insured against flood damage while the issue of hurricane home insurance is still on the public’s agenda is a step the government can and should take in the next year in order to make the latest bailout of the NFIP the Treasury’s last. With the evidence that is available to us now, NFIP most likely will go into debt again while or after paying Sandy-related claims.

Furthermore, this past summer, Congress passed the Biggert-Waters Flood Insurance Reform and Modernization Act of 2012 that reauthorized the NFIP until 2017, created an advisory council to modernize 100-year-old flood zones that went into affect at the beginning of 2013, and granted FEMA the authority to raise premiums up to 25 percent per year until the program is set to expire again five years from now. One result of the updated maps is that it will force more homeowners to buy mandatory NFIP policies next year, which could be considered a good thing since a problem on the Gulf Coast was the lack of homes with flood coverage before Katrina.

In requiring more mandatory coverage in flood-prone areas, the government would be able to spread its risk among a larger pool of homeowners. A problem of this, however, is that the increased premium hikes under the 2012 reforms may lead many residents to move away from coastal and flood-prone areas to avoid the costs of storm-proofing new homes along with higher premiums – ultimately leaving less and not more homes in the NFIP pool. Another approach is to encourage most of these residents to leave the area, as seen in New York Governor Andrew Cuomo’s buy-back program. Nevertheless, as evidenced in the post-Katrina Gulf Coast region, large departures of middle-class families from areas like Long Island, Queens, Staten Island, and the Jersey Shore would deal a devastating blow to this region’s local economy. While large-scale coastal departure would fix NFIP’s solvency problem, it would greatly hinder the tri-state as well as the national economy.

In short, the federally-subsidized flood program is incapable of fulfilling its central role – paying flood insurance claims – without going into severe debt and without hiking premiums after major hurricanes. In order to break this cycle of frequent bailouts at the expense of taxpayers across the country, the federal government needs to reform NFIP. One alternative is to modify NFIP so that it provides – in addition to flood – wind and other hurricane-related damage coverage through voluntary policies so that it expands its pool of covered homeowners and increases competition in the private insurance market. While I bet some would decry the federal government’s offering of optional comprehensive hurricane insurance as Obamacare’s inbred spawn of Satan, the current system isn’t looking any better. As we’ve seen in Sandy, having congressional members pass federal aid on a case-by-case basis to fund NFIP has not only been penny wise and pound foolish, but also has only been a drop in the bucket to the problem.

“Never let a crisis go to waste,” as former White House Chief of Staff and current Chicago Mayor Rahm Emanuel has said. When hurricane relief funding comes up on the national agenda once again, most likely through another large-scale hurricane, these problems need to be considered in order to have a better chance at formulating new policies that could permanently improve coastal insurance markets and save families from financial ruin. We cannot rule out governmental regulation on grounds that the private market will return to recover on its own. It is true that a comprehensive federal rainy day fund could address these problems in an ideal world. In the real world, however, finding revenue to pay for it – along with numerous other problems – makes it a rainy day dream away. Nevertheless, discussion and debate are always the first steps to finding practical and commonsensical solutions to the existing problems, including natural disaster recovery funding. That being said, let’s keep the conversation going – we shouldn’t take a rain check on reform.