Learning Lessons the Hard Way After Sandy
Based on our experience, how might the industry help policyholders mitigate losses and manage claims more effectively?
By Sam Friedman
It’s been a year since Superstorm Sandy turned my sleepy community upside down, and life still hasn’t entirely returned back to normal. In fact, the very definition of “normal” has likely been changed forever after a veritable tidal wave laid waste to the Sheepshead Bay, N.Y., business district and a large portion of its residential area on Oct. 29, 2012.
Other communities were hit far harder by Sandy, to be sure. But for someone like me, whose only flooding experience in 55 years had been a backed-up sewer (despite living just a mile from a bay and the Atlantic Ocean beyond), seeing my co-op apartment building’s lobby and first floor filled with three feet of salt water was an experience I never want to relive.
I live on an upper floor, so I didn’t have to worry about direct flood damage. But I knew my building was in deep trouble because, during the height of the overnight storm, I peeked out of my living room window and observed water sloshing against the side-view mirrors of cars in our outdoor parking lot.
Still, I was unprepared for the devastation I encountered as I inspected not just my own property but the surrounding neighborhood. Cars and trucks had been totaled on every block, many left adrift in the middle of the street where the floodwater had carried and abandoned them—including one that had been slammed through the plate glass of a coffeehouse before erupting into flames.
Meanwhile, shell-shocked homeowners were tossing ruined furniture and clothing into huge piles on their curbs, which quickly began to resemble the makeshift barricades from Les Miserables. Dozens of local businesses were wiped out as completely as if someone had intentionally gutted their storefronts.
It took quite some time to restore power for many in the commercial district—the sound of portable generators reverberated for weeks throughout the neighborhood—but some businesses got back on their feet faster than others. A local sports bar owner who had lost his restaurant, home, and car in a matter of minutes thanks to Sandy’s wind-driven floodwaters managed to reopen his watering hole by Christmas. Others struggled to rebuild, including a Japanese steakhouse across from the bay that didn’t fire up its hibachi grills again until mid-September. Others closed up shop forever.
In my own building, the remnants of Sandy linger nearly a year after the storm. Restoring the apartments of our washed-out first-floor residents was the first priority. But even as I write today, repairs and refurbishment of our badly damaged lobby, laundry rooms, maintenance shops, and underground garage have yet to be completed.
It all comes down, as it usually does, to money. And that’s where the insurance industry comes into play—or not, in many cases, because flooding was involved.
Don’t get me wrong, the industry paid plenty of Sandy-related claims. In fact, total insured losses are approaching $19 billion from more than 1.5 million claims, making Sandy the third-costliest windstorm in U.S. history, according to the Insurance Information Institute (I.I.I.). After restating prior catastrophe losses in 2011 dollars, Sandy was topped only by Hurricane Katrina’s $47 billion in 2005 and Hurricane Andrew’s $23 billion in 1992.
While most of the media attention focused on the thousands of unfortunate people left homeless or without their cars by Sandy, this superstorm was a bigger-than-normal financial disaster for commercial policyholders and their insurers, as well.
The I.I.I. reported that, although commercial lines accounted for only about 13 percent of the total number of Sandy claims, the more than 200,000 commercial claims caused by the catastrophe generated nearly half of all financial losses paid. That’s much higher than the average of about one third of insured losses coming from commercial lines in a hurricane, I.I.I. pointed out.
Keep in mind these insured damage assessments don’t include losses covered under the National Flood Insurance Program (NFIP). A report from the federal government’s [Superstorm] Sandy Rebuilding Task Force noted that NFIP claims totaled about $8 billion. That makes Sandy the country’s second-worst flood event behind Katrina, which produced twice as much in flood damages.
In reality, Sandy could have been far worse—for the NFIP, that is. Unfortunately, many property owners in New York and New Jersey—the states hardest hit by Sandy—simply did not have flood coverage.
Some believed the coverage was too expensive, particularly for small-business owners struggling to keep their heads above water in a tough economy, as well as homeowners whose mortgages may have been underwater already thanks to the collapse in housing prices a few years ago.
But others simply decided to gamble and hope for the best. In my neighborhood, for example, some rationalized that, despite being so close to the bay and ocean, there hadn’t been an inch of water on their floors outside of the occasional broken pipe or leaky roof. Why bother with additional insurance they might never need?
Of course, going bare on flood likely meant many people had to dig deeply into their own savings and perhaps borrow from friends, family, and even the government to rebuild after this (hopefully) once-in-a-lifetime event. Yet even if some had non-buyer’s remorse after Sandy, I still doubt many will purchase flood coverage, especially with prices likely to go up dramatically.
Additional fallout from Sandy was reputational damage to insurers. There was the usual grousing about policyholders not being told by their agents or carriers that they might need flood insurance. And private insurers came under fire in some cases for failing to get adjusters on the scene or checks cut more quickly.
That’s pretty normal after a catastrophe and was likely the case for only a small minority of claims. While I realize insurers need not be congratulated for doing their jobs, I must say the dozens of vans with insurer logos parked on nearly every block in my neighborhood was one of the few comforting sights in the days after Sandy devastated our area.
So where do we go from here? Based on our experience with Sandy, how might the industry help policyholders mitigate losses and manage claims more effectively?
There were a number of takeaways from a claims management perspective, particularly when it came to business interruption. One is that companies cannot necessarily rely on their employees to be able to work from home after their offices are incapacitated in a catastrophe, particularly if a Sandy-like event is so big it impacts telecommuters’ property as well.
In addition, cellphone service often was interrupted when towers lost power, making mobile communication for personal or business use spotty at best. For key personnel, alternative sources of communication—perhaps satellite phones—might be required.
Companies that have their data backed up offsite may have learned the hard way that it would have been prudent to store their critical data outside not just their own offices but somewhere beyond their state or even their region so a massive event such as Sandy doesn’t negate the security of their redundant systems.
By the same logic, firms that rely on vendors to supply critical services also need to be aware of the disaster recovery plans these third parties have in place so clients are not left high and dry after a catastrophe because an outside firm was incapacitated, too.
Of course, it’s also difficult for people to focus on work at all if they have lost power at home or suffered damage to their personal property after a storm. So companies may want to explore the potential for outsourcing to temporary staff outside of a disaster area if local recovery efforts lag, as they often did after Sandy. All easier said than done, right?
Superstorm Sandy was indeed a game changer. Yet how the rules of the game might be changed in response is as uncertain as the potential for another megastorm.