Hurricane Sandy Rebuilding Task Force Addresses Insurance Challenges

The Hurricane Sandy Rebuilding Task Force, led by the U.S. Department of Housing and Urban Development, issued a report Monday that provides recommendations for mitigating harm from future storms.

Recommendations include assisting homeowners to stay in their homes after disasters by allowing quick emergency repairs, and making housing units more sustainable and resilient by encouraging smart recovery steps including elevating above flood risk and increased energy efficiency.

Other recommendations include improving the wireless communications networks, making the electrical grid more flexible and protecting the supply chain for fuel.

The task force also recommended more consistent mortgage policies to keep responsible homeowners from being forced out because of short-term financial hardships. It also recommended communicating to state and local governments, residents, and workers consistent guidance on how to remediate indoor environmental pollutants such as mold.

Insurance is an area of focus in the report. The task force said that in New York and New Jersey — as of June 2013 — 830,000 homeowner, 165,000 auto, and 126,000 residential flood insurance claims had been filed. An additional 71,000 commercial property claims and 5,000 flood claims have also filed by businesses.

And given “this incredible volume of claims,” the task force said, it’s not surprising that many home and business owners got frustrated by the adjustment and inconsistent disbursement processes.

Addressing Disbursement Delays

The task force noted that policyholders with mortgages faced a particular set of frustrations. For these policyholders, insurance claim checks were sometimes issued jointly to the property owner and the property owner’s mortgage provider.

In some cases, the claim proceeds were immediately available to the property owners. But in other instances, funds got held up by banks and were released in increments as repairs were completed.

The task force noted that in March 2013, four months after Sandy, some banks were holding back 44 percent of Sandy insurance claims (compared to the industry average of 17 percent) amounting to more than 1,100 checks totaling nearly $41 million. The report says the delays have been a source of great frustration in the Sandy-affected region.

The task force said one of the reasons for the delay was that Fannie Mae, Freddie Mac, the Federal Housing Administration, and other private sector lenders had different policies for approving the release of insurance claim funds.

To address this issue, the task force said it has created a working group of lenders to review and propose unified policies and processes that could be adopted by financial institutions. The task force said implementation is now underway for revised disbursement process for current Sandy recovery efforts that would be applicable to future disaster recovery efforts.

Consumer Confusion

Another challenge arose from consumer confusion. The task force said that after Sandy — as is the case after most other large hurricanes — many homeowners were surprised to learn what was and was not covered under their insurance policies.

The task force said many property owners were surprised to find out that their homeowners’ policies did not cover floods. This confusion was especially true for property owners who did not live in FEMA-designated flood zones.

The task force said such misunderstandings were compounded by confusion over whether damage was caused by flooding (covered only by flood insurance) or by wind and rain (covered by some, but not all, homeowners’ policies).

Further, businesses also got confused over what was covered and not covered by commercial insurance policies. The task force noted that, according to a survey by the New York Federal Reserve Bank, only 8 percent of small businesses that incurred Sandy damages had flood insurance.

The task force added that another source of confusion stemmed from many property owners not realizing that they were at risk of flooding.

The task force said it is recommending leveraging the lessons learned from National Flood Insurance Program’s (NFIP) “FloodSmart” marketing and outreach campaign. These lessons include communicating probabilities of flooding and encouraging individuals to assess the consequences of not carrying insurance on their individual financial situation.

The task force also said Federal Emergency Management Agency (FEMA) will soon launch a nationwide, community-based campaign to boost emergency preparedness and build understanding of risk and insurance. The campaign is called “America’s PrepareAthon!”

Twice yearly, in the spring and fall, the campaign will highlight a “national day of action,” during which millions of citizens can participate through drills, group discussions, and exercises to practice for local hazards. The soft launch of “America’s PrepareAthon!” is scheduled for Sept. 5, 2013.

The task force is also recommending steps to help improve NFIP policyholders’ awareness of factors that impact flood risk and insurance rating decisions. The task force is recommending that the NFIP provide structure-specific information and hazard mitigation suggestions for Sandy-impacted customers’ premium bills.

NFIP: Adopting Actuarially Sound Rates

The task force said that so far, over 99.5 percent of the more than 143,000 Sandy-related NFIP claims have been closed and more than $7.8 billion have been paid out to policyholders.

The task force noted the Biggert-Waters Flood Insurance Reform Act of 2012 requires the NFIP to phase out subsidized and grandfathered rates so that policy premiums reflect true actuarial risk. As the NFIP transitions toward full risk rates, there will be significant increases in premiums for some subsidized and grandfathered policies.

The NFIP currently assesses a structure’s general characteristics to determine actuarial rates by setting premiums that vary based on a number of factors, including the structure’s flood zone, elevation, number of floors, construction, and occupancy, among other characteristics.

The task force said that, based on its initial analysis, the 100-year flood plain areas (including coastal V zones) hold about 5.6 percent of the U.S. population, of which 41.4 percent are low-to-median Income. The task force said the affordability issue will be one of the topics to be examined in the upcoming government studies.

The Biggert-Waters Flood Insurance Reform Act authorized FEMA, the National Academy of Sciences, and the Federal Insurance Office to analyze “methods to encourage/maintain participation in the NFIP, methods to educate consumers about the NFIP and flood risk, and methods for establishing an affordability framework for the NFIP… including the implications of affordability programs for the NFIP and the Federal budget.”

The task force noted, however, that the study will not be done in the time frame originally scoped in the law, due to a dearth of data on structure-specific risks and policyholders’ incomes. Scoping the study is now expected to take 18-24 months.

The task force said the Administration is committed to working with Congress on additional reforms to help economically distressed homeowners that strengthen the NFIP and are consistent with the President’s budget.

One of the programs highlighted by the task force is New Jersey’s Community Development Block Grant Disaster Recovery program that provides a one-time payment of $10,000 to as many as 18,000 homeowners who can use it for any purpose, including payment of premiums if homeowners commit to stay in the community for a period of three years.

The task force is encouraging increased hazard mitigation activities including elevation in order to protect property against future losses. Additionally, the task force recommends assessing actuarial soundness of decreasing premiums based on mitigation activities other than elevation.

Sandy highlighted the fact that many urban areas have high concentrations of older row homes or brownstones, with basements, that are not easily elevated. The task force said FEMA has reevaluated the credit available under existing authorities to nonsubsidized, undiscounted, basement rates to ensure adequate credit is given when electrical and mechanical equipment is elevated at or above the base flood elevation. The task force said these activities will significantly lower the total claim payment, and will therefore result in rate reductions that reward homeowners for good mitigation practices.