As Harvey dumped trillions of gallons of water on Houston in 2017, leaving homes and belongings permanently destroyed, many communities faced another disaster—a flurry of insurance companies that refused to honor their policies. Dan Karr, the founder of a company that creates reports on insurance providers, likened the aftermath of Hurricane Harvey to that of Superstorm Sandy and Hurricane Katrina.
Insurance executives say California, Florida, Texas, Colorado, Louisiana, and New York are the most difficult states in which to insure homes. In today’s home insurance crisis, the risk tolerance in each state must be reassessed and home insurance rates, which have been artificially low for decades according to the Insurance Information Institute (III), must be adjusted.
We’re already seeing that happen in Florida, where average annual rates are expected to rise around 43% to approximately $6,000. Many homes throughout the United States are being deemed as “uninsurable” by the Federal Housing Administration (FHA) thanks to the risks that disasters like wildfires in California and hurricanes in Texas, Florida, and Louisiana pose.
How Home Insurance Affects Purchasing Power
Aside from the clear cost prohibitive nature of rising home insurance rates for current homeowners, potential buyers are also put in hot water when homes are uninsurable. In fact, uninsurable homes are either ineligible for homeowner’s insurance or for a mortgage, making the cost of entry increasingly high. Many residents are expected to be pushed out of certain areas, most notably coastal areas, due to unaffordability.
While homeowners insurance isn’t required by law in any state, not having it can cause serious issues. Should a current homeowner be unable to get it, or cancel the policy during the life of their loan, their lender may force them into an expensive policy or send the loan into default. This threatens the homeowner’s credit score and increases the risk of foreclosure.
The Ghost of Katrina Continues to Haunt the Gulf
In 2006, hundreds of destitute homeowners on the Gulf Coast filed lawsuits against insurance companies who denied claims after Katrina. The core issue was whether or not a client’s home was destroyed by floodwaters or by wind.
If it was a flood, then the homeowner would need to file a claim under National Flood Insurance Protection, which is underwritten by FEMA. For most homeowners, their coverage under NFIP is fairly modest (or nonexistent). State Farm, one of the insurance companies sued by policyholders after Katrina, only covered wind damage in a hurricane—and thus refused to offer relief for damages that seemed to be caused by storm surges or floods.
Even worse, “anti-concurrent causation” clauses state that if a home was damaged by both flooding and wind, the insurer doesn’t have to cover a single cent of it. In other words, the insurance company says they’ll only cover your home’s damages if only wind caused the damage. Courts applied these clauses inconsistently after Katrina—some enforcing the clause, others ruling around it.
Proven History of Insurance Bad Faith
As reported by NPR, two former State Farm adjusters came forward to aid a plaintiff’s case against the insurance company. They had compelling documents that suggested that State Farm had willfully and knowingly denied valid claims—the bedrock of a bad faith lawsuit. State Farm was found guilty of defrauding the U.S. government by changing damage reports to say that a homeowner’s damages were caused by flooding rather than the wind.
After Katrina, State Farm changed damage reports to avoid paying homeowners the money they needed to rebuild. State Farm is among the top three insurers who currently insure homes and commercial properties in Hurricane Harvey’s damage radius.
Policyholders Left on the Hook after Superstorm Sandy
The same flood vs. wind damage debate ignited for homeowners in New York and New Jersey. After Superstorm Sandy, insurance companies refused to provide financial relief for damage caused by flooding. At best, homeowners received payment that didn’t come near providing for their needs. In many cases, claims were refused outright.
In Bannon v. Allstate Insurance Company, a plaintiff’s claim alleged that the insurance adjuster admitted that the damages listed in the claim were caused by wind from Superstorm Sandy. In addition, the insurance company sent an engineer to inspect the site after coverage was denied. After Allstate requested dismissal of the case, the Court denied a total dismissal, stating that the facts brought by the case were enough to justify a trial.
It’s a matter of record that State Farm created two damage reports—the factual one, and the one they use to deny coverage. It may be that it’s an industry-wide practice.
For the record, Allstate is also among the top 3 property insurers in Houston.
Hurricane Harvey’s Impact on Texas
Hurricane Harvey, like other storms before it, presented several insurance problems. Flooding and power outages forced tens of thousands of people from their homes, while at least one million vehicles were destroyed in the storm.
As of September 30th, 2018, more than a year after Harvey hit Texas, more than 763,000 claims had been filed, 414,000 of which were residential property claims. Those claims, alongside 212,000 automobile claims, rendered about $125 billion in damage, putting it second in cost only to Hurricane Katrina.
What Can Be Done for You
Homeowners in the Northeast and the Gulf Coast believed combining NFIP coverage with private coverage would help them recoup their losses from a disaster like Katrina or Sandy. State Farm, Allstate, and other insurers robbed them of the money they needed—sometimes through unethical and illegal means.
However, as Dan Karr notes, the larger problem is a lack of accountability and transparency in the insurance industry. If there’s no way to know if an insurance company has honored or denied claims in the past, how can consumers make an informed decision about their insurance coverage? If there’s a standard for reviewing claims, what good does it do if no one holds insurance companies to the standard? His solution is simple: complain. Specifically, Karr urges consumers to file formal complaints about their insurance companies, which can then be reviewed by government regulators.