Hurricane Sandy Exposed Insurance Coverage Shortfalls — Will You Be Adequately Prepared for the Next Big Storm?

Hurricane Sandy caused serious damage and destruction after slamming ashore in New Jersey in late October 2012. It also exposed serious misconceptions that Garden State residents had about their homeowners and renters insurance coverage, according to Kevin P. McDonough, executive vice president of Dickstein Associates Agency, an independent insurance agency in Tinton Falls. “Even property owners who diligently carried special flood insurance quickly learned the limits of that coverage,” he said.

Summing up the frustrations of many adversely affected individuals, one displaced homeowner, when asked what he would have done differently to prepare for a storm like Sandy, told a New York Times reporter, “I would have carefully reviewed my homeowners and flood insurance policies and prepared for what it would take to get our claim resolved.”

Before the next catastrophic storm churns its way toward New Jersey, here are some lessons that may help you avoid what Sandy victims learned the hard way.

Lessons Learned: Homeowners/Renters Policies

1. No Coverage for Flooding The legal definition of “flooding” per the Federal Emergency Management Agency (FEMA) is a general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or two or more properties (at least one of which is the policyholder’s property) by water or mudflow.
   
   While homeowners insurance may provide coverage for certain events that can trigger flooding — hurricanes/tropical storms, earthquakes, and explosions, for example — it categorically excludes coverage for flooding itself as well as damages stemming from flooding such as mold and mildew. Only special flood insurance, which until recently was available solely through the federal government’s National Flood Insurance Program (NFIP), provides protections against this country’s most common and costly natural disaster.
   
   One source of confusion for policyholders surprised by the flooding exclusion may have been distinctions between water damage versus flood damage, McDonough observed. Homeowners/renters insurance generally covers water damage related to a “sudden or accidental discharge/overflow” affecting only the policyholder’s home or immediate surrounding area. Common causes are a plumbing, heating, air conditioning, or automatic sprinkler system malfunction, water damage from extinguishing a fire, or roof damage during a storm that allows rain to enter.
   
   "In general, water damage differs from flood damage in that it occurs before water comes in contact with the ground. If your house is damaged from water that comes from the ground up, you'll need flood insurance for that," McDonough said.
   
2. Higher Hurricane, Named Storm, and Wind Damage Deductibles In hurricane-prone areas like the East Coast, homeowners and renters insurance policies typically include hurricane, named storm and/or wind deductibles. Unlike traditional deductibles which are a specific dollar amount, those for hurricane, named storm, and wind are set at a percentage of  a home’s value — anywhere from 3% to 5%. For example, if your home’s insured value is $300,000 and your policy’s hurricane deductible is set at 4% percent, you would pay $12,000 out of pocket before your insurance would kick in. The details of hurricane deductibles are spelled out on the declarations page of homeowners policies.
   
   The hurricane deductible goes into effect when the storm is named a hurricane. New Jersey residents dodged a bullet after Sandy, which had started as a hurricane but was downgraded to a tropical storm right before landfall, because the state issued an executive order prohibiting insurers from imposing hurricane deductibles.
   
3. Actual Cash Value vs. Replacement Cost Will your homeowners insurer pay "actual cash value" or "replacement cost"? This is a crucial distinction. Replacement cost provides you with payment equal to what it would cost to replace lost items in the present day. But actual cash value is the depreciated value of an item of property. “Replacing lost property — or even worse, your home — on an actual cash value or depreciated basis leaves you at a loss compared to replacement cost settlements, entailing significant out-of-pocket expenditures,” McDonough observed.

Lessons Learned: Flood Insurance

1. No Coverage for Personal Property in Basements or Garages Personal property stored in a basement/walkout basement, crawl space, or garage isn’t covered by flood insurance. FEMA’s definition of basement is “any area of the building, including any sunken room or sunken portion of a room, having its floor below ground level (subgrade) on all sides.” This became an issue for insureds living in units that they characterized as being on the first floor but that insurers were characterizing as basements according to the FEMA definition. Like flood insurance, homeowners and renters policies typically do not cover damage to/loss of the contents of a basement.
   
2. No Coverage for Alternative Housing or Automobile Rentals Flooding forced many individuals to vacate their homes for extended periods post-Sandy. But flood insurance does not cover alternative housing expenses. Ironically, most homeowners/renters policies agree to pay some expenses if a home is damaged and you can’t live there, but only if the loss is caused by a covered peril.
   
   Flood insurance also doesn’t cover repair or replacement of vehicles damaged or lost due to flooding. For that, you need comprehensive auto insurance coverage. “Only comprehensive auto insurance will cover you if flooding washes away your car, renders it inoperable, or if a tree falls on it,” said McDonough.
   
3. No Sump Pump Failure/Sewer Backup/Overflow Coverage During Sandy, flooding created sewage problems for individual properties and communities. Raw sewage backed up into homes and spilled into bodies of water that subsequently inundated homes as flooding overwhelmed low-lying municipal sewer systems. Additionally many structures equipped with sump pumps and French drains were overwhelmed and failed. Federal flood insurance does not cover drain backup, sump pump failure and related damage. For that type of protection, you’ll need to purchase sump pump failure and sewer/water backup coverage (i.e., an endorsement or rider) to your homeowners insurance.
   
   Since Sandy, flood insurance has become available through private insurers that can provide rental expense, higher primary limits on buildings and personal property, and expanded coverage terms. In New Jersey, more insurance companies, including Chubb, now offer this type of policy through independent insurance agents.

Consult an Independent Insurance Agent

“Disasters like Sandy should be a wake-up call to everyone with homeowners/renters and/or flood insurance to ensure that they have an adequate amount of coverage to pay for rebuilding a home, replacing its contents, and providing additional living expenses in case they have to live somewhere else while their homes are rebuilt,” McDonough said.

It would be ideal if you could wait until the next catastrophic storm is looming to address coverage gaps and shortfalls in existing policies or purchase new ones. But there are often waiting periods for changed or new coverage to become effective, McDonough warned. It takes 30 days from the purchase date for federal flood insurance to kick in, for example.

Independent insurance agents, like McDonough, can provide guidance by reviewing your current insurance coverage, identifying gaps, and offering solutions including helping you prepare emergency planning and response procedures and pre-storm mitigation. They work with multiple insurers which gives them insight into variations in rate-setting criteria and coverage terms and helps simplify the insurance shopping process, e.g., applicants need to fill out only one form.