After fires and floods, insurers have ways to recoup

For property-casualty insurers, this has been "the Season of the Witch," when flood, wind and fire descended on the US. A quick calculation of insured losses from the recent quadruple hurricane punch of Harvey, Irma, Maria and Nate, plus Oklahoma's tornadoes and California's devastating wildfires is a minimum of $86 billion and a probable maximum of about $166 billion.

Just how will these insurers recoup those losses? By raising the annual premiums that both homeowners and businesses pay to insure their property. "These disasters have been extraordinarily expensive for the industry, so premiums are going up," said lawyer Jared Zola, a partner in the Philadelphia-based firm of Blank Rome, which represents 100 companies now in negotiation with insurers.

But how much will premiums climb? That's still unclear because annual renewals don't begin until January. "But they're already being heavily negotiated," Zola said.

Homeowners are generally protected against massive premium increases by regulators, such as each state's insurance commissioner. And when the regulators do allow increases -- particularly in states hit by these disasters -- they're also aware of a potential public outcry. Auto insurance rates have already risen an average of 8 percent in the last year. But could homeowners in states like Florida and Texas really afford a homeowners' or renter's increase of that size?

Recognizing this, insurers instead subtly factor in methods to recoup their losses and protect themselves against future deficits in ways policyholders don't noticed, such as tightening up the annual contract. "The insurer can slip new limitations into the policy and not even inform you," warned Robert Hunter, insurance director at the Consumer Federation of America.

Lawyers and consumer advocates agree that the best strategy -- although tedious -- is to put last year's contract side-by-side with this year's and highlight the changes. If something isn't clear, call your insurer and ask for an explanation. If you don't get one, look for another insurer.

Here are some things to focus on:

Flood insurance. Losses that used to be covered might not be anymore, for example, if a levee breaks, or your local government has to release water because a dam might overflow. In the past you would have collected, but in the future maybe not.

"Anti-concurrent causation clauses" in recent homeowners' policies mean if flooding is even one of the factors included in a loss, you won't be paid. "Insurers say it doesn't matter what happened as long as water was involved," said lawyer David Wood of Barnes & Thornburg, an Indianapolis law firm that litigates against insurers. This is important because water damage can cause a variety of secondhand losses, like mold, which is aggravated if the electric power goes out.

Fire damage. Direct damage, such as when your house burns down, is covered. But what about when it's the house across the street from yours, which is untouched by flames, but crammed with smoke-infused carpets, sooty clothes, walls and appliances? Are you covered? You'll need to read your latest contract and be prepared to prove to an adjuster that you actually sustained damage.

Hurricane deductible. It's not necessarily true that wind damage is covered, no matter how forceful the gusts that blew against your home. Some homeowners' contracts include a specific "hurricane deductible." If a storm is strong enough, generally the 74-mile-per-hour mark of a Category 1 hurricane, your deductible kicks in and limits your coverage for a "named storm."

This alone could have cost New York homeowners millions of dollars from the damage done by Superstorm Sandy in 2012, except for one thing: When Sandy came onshore it was below the trigger point of a Category 1 hurricane. New York Gov. Andrew Cuomo insisted that insurers pay the full freight. But insurers have long memories and could tighten up the clause.

Percentage deductibles. Homeowners' policies used to have "dollar deductibles" of $500 or more, similar to those for auto insurance, before paying claims for damage. Many contracts now use percentage deductibles, rather than dollar deductibles, with amounts ranging from 2 percent to 10 percent. In the latter case, a storm or fire would have to cause $20,000 in losses to a $200,000 home before the insurer has to pay.

Sub-limits. "You could buy a $1 million policy, but look closely at the risks," said Zola. "You may find that you are 'sub-limited' to a certain amount by the specific peril." For example, the policy could have sub-limits on what you can collect for personal property. So an art collection or valuable livestock, such as horses, would require a separate policy.

Rising reconstruction costs. "At least 80 percent of the homes in the US have less than 80 percent of the coverage required to completely rebuild after a fire," estimated professor Kenneth Klein of the California Western School of Law, who lost his own home in a fire. "Buried in many California insurance policies is a clause that says the homeowner is the expert on the value of his or her home, so if the amount of insurance purchased is not enough, it falls to the homeowner to pay the difference."

Don't take comfort in the fact that your insurance covers 125 percent of your home's value, Klein warned. That percentage is based on the value of your home at the time of purchase, even if its value has risen since then. In addition, the cost of getting a contractor and supplies, particularly when everyone else is looking for the same things, is likely to raise the price way more than what your insurer will pay. 

Current building codes may also be more stringent than when you bought the property. For example, after a flood, you could be forced to elevate your home.

Like an earthquake -- which isn't covered under most policies unless you have a special rider -- the ground is constantly shifting under your feet when it comes to insurance. The only certainty is that the current crop of disasters is likely to keep the courts busy deciding on the specific language of insurance policies and how it applies in each case.

California's wineries are likely to be one example. The fires that swept the state's grape-growing region destroyed much of the Cabernet harvest that was still on the vines and cooked the wine that was already harvested in barrels and vats.

But how much did these vineyards actually lose? It depends on whether 2017 was going to be a "vintage year." Both sides will likely use wine connoisseurs as expert witnesses in this legal wrangle.

The upside: If your case is heard in court, judges often rule in favor of the homeowner/plaintiff if the policy language is unclear. The belief -- probably accurate -- is that most policyholders can't be expected to understand all the clauses and subclauses contained in the hefty booklet that's the average insurance contract.

The downside: Cases often don't get heard in court because your insurance company will have a legion of lawyers and experts at its disposal to stop a suit with legal maneuvers. "We are outmanned and outgunned," warned attorney Wood. That's not to say you can't win, but it's tough.