Catastrophe Claims

Saturated: Claims Flood in After Harvey Exits

For more than a week, Tropical Storm Harvey left devastation in its wake. What will businesses face in the aftermath?
By: | September 5, 2017 • 8 min read

Tropical Storm Harvey hit the southeastern shore of Texas late Friday night as a Category 4 hurricane, then was soon downgraded to a tropical storm.

Yet its classification held no weight on the cities below — rivers lined what once were streets; citizens evacuated in boatloads; 50 inches of rain poured down from the skies as Harvey slowly dredged its way onto land and continued into Louisiana and Mississippi.

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The storm has passed, but the total destruction Harvey caused remains to be seen in full. While Texas grapples with the biggest hurricane-turned-tropical-storm to breach its shores, insurance agencies are inundated with the influx of residential and commercial claims.

“I can’t put a number to it,” Bentley Laytin, senior vice president of operational strategy and innovation at Engle Martin & Associates, said of the scale of claims. “We’re seeing auto claims for flooding, wind damage, spoilage claims. Houston is the biggest hit, and there’s limited access to the city.”

Crawford Catastrophe Services deployed its induction team to Austin and has a team of 5,000 adjustors on hand to help with claims from Harvey. To date, the claims adjustor received almost 10,000 calls. Crawford expects that number to rise significantly as the storm passes and people return to their homes and businesses.

Ken Tolson, CEO of U.S. Property & Casualty at Crawford & Company, said, “Our number one priority is to respond quickly and in a highly co-ordinated fashion once we can get access to the worst affected locations. Initial indications are that the majority of claims will be caused by the rising flood waters with wind damage having a lesser impact.”

Sheri Wilson, national property claims director, Lockton

Areas in Texas, including Corpus Christi, Galveston, Beaumont, Austin and the surrounding cities, saw the wind, storm surge and flood damage up close. Harvey shut down over 16.5 percent of U.S. refining capacity, according to Goldman Sachs, and at least 20 refineries have closed down or reduced operations to date, according to the Department of Energy.

“I live in Dallas,” said Sheri Wilson, national property claims director for Lockton. “We’re about 300 miles away, and we can’t buy gas. Harvey is going to affect the supply chain.”

The storm also created a temporary slowdown in retail sales, construction spending and industrial production. According to the Lloyd’s of London insurance markets, the construction and shipping industries will also likely bear the brunt of the commercial damage.

Damage Done

More than 50 percent of properties, both residential and commercial, not in designated flood zones are at high to moderate risk of flooding, according to CoreLogic.

Karen Clark & Company estimates the total industry-insured loss will be about $15 billion. RMS, in a preliminary analysis, estimated economic losses as high as $70 to 90 billion in wind, storm surge and inland flood damage dished out by Harvey.

Crawford’s global chief operating officer, Rohit Verma, expects to see the highest winds claims volume from Nueces County, while the highest flood claims volume is expected to come from Harris and Galveston counties.

“I live in Dallas. We’re about 300 miles away, and we can’t buy gas. Harvey is going to affect the supply chain.” — Sheri Wilson, national property claims director, Lockton

“Wind damage is expected to be minimal, with most of the rebuilding work due to flooding,” he said. “Large parts of Houston are still inaccessible, but we are looking for ways to access these areas as quickly as possible.”

Insurer Novae added that it was too soon to comment on the scale of the losses.

“We have to assess any insurance coverages that might apply,” said Lockton’s Wilson. She predicts numerous business disruption claims in addition to property damage. Power outages, interruptions from mandatory shut downs, flooding and the state mandated curfew have all cut in to business’ daily functions.

Business interruption, agreed Laytin, is going to come into play.

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“We don’t know how bad it will be or how long it will take,” he said, “but we do anticipate it.”

Once the storm moves out, Crawford said it will be ready to receive requests for forensic accounting services to support business interruption analyses.

“Sadly, this emphasises the vulnerability of our key industries and the hundreds of thousands of U.S. citizens who work in them to the effects of catastrophic weather,” added Tolson.

Assessing Without Access

“Houston is flat; Louisiana is a bowl. Because of the area affected, it doesn’t drain. That’s keeping the proper resources from getting in,” said Wilson.

Over the course of six days, Harvey dumped an estimated 27 trillion gallons of water onto Texas and Louisiana. The flooding is so vast and the affected population so scattered that it’s difficult to say what damages commercial properties might face once the water drains.

“This is particularly true in relation to Houston, where rainfall has left thousands of homes and businesses unoccupied. It is important to remember that we are witnessing catastrophic flooding at the very heart of the country’s energy industry,” said Tolson.

Laytin echoed, “The adjusters living near or even living in the areas affected by this event, who have lost their homes, are dealing with regular life.

“The ability to get around and get a job done is a challenge right now.”

Social media played a huge role in the search and rescue efforts during the storm. Now that the sun is starting to shine, technology will continue to play a role in servicing this area and its people.

“We’re in more of a technological environment,” said Laytin. “Drones are important. They’ll be a great safety feature. Instead of sending an adjuster onto a roof, they can do the assessment from the ground.”

Video feed and mobile estimating will keep business owners informed and updated on what their adjusters are finding. These tools will also help in documenting property damage in the aftermath of Harvey.

Crawford has 2,000 drone operators standing by to carry out roof and property inspections once the Federal Aviation Administration lifts flight restrictions.

While planning to have some drones involved, Lockton’s method is to be side-by-side with their customers while assessing the damage.

“We are the technology,” said Wilson.

Reporting Claims and Following Procedure

Regardless, Texas business owners need to be ever-vigilant as they begin to process their claims.

Stephen L. Moll, partner, Insurance Recovery Group co-leader, Reed Smith LLP

“The volume of claims coming in will be unprecedented,” said Stephen L. Moll, co-head of Reed Smith’s Insurance Recovery Group in the Houston Office. “Policyholders need to document their claims each and every step of the way.”

Moll also noted that, in addition to property claims, business interruption claims will be a large component of the losses suffered.

“It will be months before businesses are up and running again.”

Among the businesses reaching out to Reed Smith, Moll and his insurance recovery partner, Jim Cooper, said that the industries run the gamut, from energy to entertainment. Construction firms, hotels, restaurants, oil refineries, banks — the water is preventing people from their means of making a living.

One thing driving commercial claims in the wake of Harvey is Texas House Bill 1774. In May, Gov. Greg Abbott of Texas signed into law new legal parameters surrounding weather-related insurance claims.

“This new act was intended to address perceived abuses in residential hail storm claims,” said Cooper. “Unfortunately, the impact of the legislation goes beyond residential hail claims. It impacts commercial policyholders on all types of weather-related events.”

Cooper explained that the law mainly affects the prompt payment statute in Texas. Before, an 18 percent penalty rate greeted insurers slow to pay weather-related claims. Now, it’s a 10 percent rate.

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One thing to note, however — the insurance claims process is not expected to be impacted under this law; any lawsuit stemming from a claim might bear the weight of the law’s restrictions.

Cooper and Moll advised that businesses should determine if they have an insurance policy which provides coverage for business losses and property damages caused by Harvey.

“Knowing your policy is very important before making your claim,” said Cooper.

“When reviewing your policy, look for flood and wind sublimits, deductibles and deadlines for filing proof of loss,” added Moll.

Additionally, businesses and their adjusters should keep photographic record and video of the damages.

A Risky Hurricane Season

The Climate Prediction Center predicted that 2017 would be the busiest hurricane season in 7 years, with a likelihood of 11 to 17 named storms. An estimated five to nine of these storms are projected to reach hurricane status, with winds of 74 mph or higher.

Jim Cooper, partner, Insurance Recovery Group co-leader, Reed Smith LLP

So far, five tropical storms and three hurricanes, including Harvey, bubbled up in the Atlantic. Currently, forecasters are tracking Hurricane Irma, a hurricane rolling up from the Cabo Verde Islands toward the Caribbean that was classified as a CAT 5 on Sept. 5.

“Our thoughts and prayers go out to those who have sadly lost their lives, and Crawford will be doing everything it can to support people in returning to their homes as quickly as possible,” said Tolson.

Reed Smith’s Cooper and Moll, who are right in the thick of Harvey’s aftermath, have seen firsthand not only the destruction, but also the comradery and kindness the storm has brought.

“The Houston community at large has responded with so much support,” said Moll.

“Events like Harvey are devastating to the people in the area,” said Laytin. “I don’t think anyone could have prepared more than what they did. Everyone did the best they could under the circumstances.” &

Autumn Heisler is a staff writer at Risk & Insurance. She can be reached at [email protected] Additional reporting by contributing writer Alex Wright.

More from Risk & Insurance

More from Risk & Insurance

Alternative Energy

A Shift in the Wind

As warranties run out on wind turbines, underwriters gain insight into their long-term costs.
By: | September 12, 2017 • 6 min read

Wind energy is all grown up. It is no longer an alternative, but in some wholesale markets has set the incremental cost of generation.

As the industry has grown, turbine towers have as well. And as the older ones roll out of their warranty periods, there are more claims.

This is a bit of a pinch in a soft market, but it gives underwriters new insight into performance over time — insight not available while manufacturers were repairing or replacing components.

Charles Long, area SVP, renewable energy, Arthur J. Gallagher

“There is a lot of capacity in the wind market,” said Charles Long, area senior vice president for renewable energy at broker Arthur J. Gallagher.

“The segment is still very soft. What we are not seeing is any major change in forms from the major underwriters. They still have 280-page forms. The specialty underwriters have a 48-page form. The larger carriers need to get away from a standard form with multiple endorsements and move to a form designed for wind, or solar, or storage. It is starting to become apparent to the clients that the firms have not kept up with construction or operations,” at renewable energy facilities, he said.

Third-party liability also remains competitive, Long noted.

“The traditional markets are doing liability very well. There are opportunities for us to market to multiple carriers. There is a lot of generation out there, but the bulk of the writing is by a handful of insurers.”

Broadly the market is “still softish,” said Jatin Sharma, head of business development for specialty underwriter G-Cube.

“There has been an increase in some distressed areas, but there has also been some regional firming. Our focus is very much on the technical underwriting. We are also emphasizing standardization, clean contracts. That extends to business interruption, marine transit, and other covers.”

The Blade Problem

“Gear-box maintenance has been a significant issue for a long time, and now with bigger and bigger blades, leading-edge erosion has become a big topic,” said Sharma. “Others include cracking and lightning and even catastrophic blade loss.”

Long, at Gallagher, noted that operationally, gear boxes have been getting significantly better. “Now it is blades that have become a concern,” he said. “Problems include cracking, fraying, splitting.

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“In response, operators are using more sophisticated inspection techniques, including flying drones. Those reduce the amount of climbing necessary, reducing risk to personnel as well.”

Underwriters certainly like that, and it is a huge cost saver to the owners, however, “we are not yet seeing that credited in the underwriting,” said Long.

He added that insurance is playing an important role in the development of renewable energy beyond the traditional property, casualty, and liability coverages.

“Most projects operate at lower capacity than anticipated. But they can purchase coverage for when the wind won’t blow or the sun won’t shine. Weather risk coverage can be done in multiple ways, or there can be an actual put, up to a fixed portion of capacity, plus or minus 20 percent, like a collar; a straight over/under.”

As useful as those financial instruments are, the first priority is to get power into the grid. And for that, Long anticipates “aggressive forward moves around storage. Spikes into the system are not good. Grid storage is not just a way of providing power when the wind is not blowing; it also acts as a shock absorber for times when the wind blows too hard. There are ebbs and flows in wind and solar so we really need that surge capacity.”

Long noted that there are some companies that are storage only.

“That is really what the utilities are seeking. The storage company becomes, in effect, just another generator. It has its own [power purchase agreement] and its own interconnect.”

“Most projects operate at lower capacity than anticipated. But they can purchase coverage for when the wind won’t blow or the sun won’t shine.”  —Charles Long, area senior vice president for renewable energy, Arthur J. Gallagher

Another trend is co-location, with wind and solar, as well as grid-storage or auxiliary generation, on the same site.

“Investors like it because it boosts internal rates of return on the equity side,” said Sharma. “But while it increases revenue, it also increases exposure. … You may have a $400 million wind farm, plus a $150 million solar array on the same substation.”

In the beginning, wind turbines did not generate much power, explained Rob Battenfield, senior vice president and head of downstream at JLT Specialty USA.

“As turbines developed, they got higher and higher, with bigger blades. They became more economically viable. There are still subsidies, and at present those subsidies drive the investment decisions.”

For example, some non-tax paying utilities are not eligible for the tax credits, so they don’t invest in new wind power. But once smaller companies or private investors have made use of the credits, the big utilities are likely to provide a ready secondary market for the builders to recoup their capital.

That structure also affects insurance. More PPAs mandate grid storage for intermittent generators such as wind and solar. State of the art for such storage is lithium-ion batteries, which have been prone to fires if damaged or if they malfunction.

“Grid storage is getting larger,” said Battenfield. “If you have variable generation you need to balance that. Most underwriters insure generation and storage together. Project leaders may need to have that because of non-recourse debt financing. On the other side, insurers may be syndicating the battery risk, but to the insured it is all together.”

“Grid storage is getting larger. If you have variable generation you need to balance that.” — Rob Battenfield, senior vice president, head of downstream, JLT Specialty USA

There has also been a mechanical and maintenance evolution along the way. “The early-generation short turbines were throwing gears all the time,” said Battenfield.

But now, he said, with fewer manufacturers in play, “the blades, gears, nacelles, and generators are much more mechanically sound and much more standardized. Carriers are more willing to write that risk.”

There is also more operational and maintenance data now as warranties roll off. Battenfield suggested that the door started to open on that data three or four years ago, but it won’t stay open forever.

“When the equipment was under warranty, it would just be repaired or replaced by the manufacturer,” he said.

“Now there’s more equipment out of warranty, there are more claims. However, if the big utilities start to aggregate wind farms, claims are likely to drop again. That is because the utilities have large retentions, often about $5 million. Claims and premiums are likely to go down for wind equipment.”

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Repair costs are also dropping, said Battenfield.

“An out-of-warranty blade set replacement can cost $300,000. But if it is repairable by a third party, it could cost as little as $30,000 to have a specialist in fiberglass do it in a few days.”

As that approach becomes more prevalent, business interruption (BI) coverage comes to the fore. Battenfield stressed that it is important for owners to understand their PPA obligations, as well as BI triggers and waiting periods.

“The BI challenge can be bigger than the property loss,” said Battenfield. “It is important that coverage dovetails into the operator’s contractual obligations.” &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]