Cover Story

SANDY: One Year Later

The number of potential triggers and coverages affecting commercial claims is as massive as Sandy was.
By: | October 1, 2013 • 11 min read

A year after a storm bigger than the country of Mongolia hammered the northeastern United States, many commercial clients are still slogging through the claims adjustment and review process.

But for all of the complexities and intricate calculations required, the outlook is mostly sunny. That’s a good thing because Superstorm Sandy “is not a freak event by any means,” said Claire Souch, vice president of Model Solutions, Risk Management Solutions (RMS).

In fact, in the future, she said, “there could be more severe storms than Sandy hitting the northeastern U.S.”

As risk managers continue to crunch numbers, agonize over policy terms and negotiate their way through the claims adjustment process, they should also make sure to acknowledge shortcomings in disaster planning and risk transfer strategies.

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As always, too many organizations did not protect themselves from flooding, thinking their properties were immune. That came back to haunt many of them.

“Business entities should not look at insurance as their only way to plan for what happens if there is a natural disaster,” said Marty Frappolli, senior director of knowledge resources at The Institutes, a nonprofit educational organization that provides professional development and research for the insurance industry. “They should have an enterprise risk management approach, or an agent or broker should serve in the risk management role.”

Superstorm Sandy, which remained at hurricane strength until just before making landfall near Brigantine, N.J., about 7:30 p.m. on Oct. 29, was close to 1,000 miles in diameter, according to the National Oceanic and Atmospheric Administration (NOAA). While the effects were felt as far west as Wisconsin — and resulted in blizzards in some areas — the states most affected were New York and New Jersey.

Total economic losses have been estimated at up to $70 billion or higher, with insured losses between $25 billion and $35 billion. Souch said about 65 percent of the insured losses were due to surge-related flood damage, with the remainder caused by wind-related damage.

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But nothing is simple when adjusting property, business interruption or contingent business interruption claims, particularly in this situation, when the affected geographic area was so large.

A business could have multiple locations and each location could have been affected in one or different ways — flood, water, power outage, evacuation orders, ingress/egress — and that’s before determining whether coverage was triggered and what sublimits, deductibles and waiting periods applied.

“You have all of these different factors applying on a massive scale, all at the same time,” said John Shugrue, an attorney and partner with Reed Smith. “And the larger the claim, the more likely it is to be resisted by insurers. It’s sort of the law of large numbers.”

For all of the immensity of the damage, it’s important to remember that it was insurance professionals who were the “second responders,” Frappolli said.

“First responders get a lot of praise and attention for putting their lives on the line during a disaster,” he said. “But the very next day, insurance people with water, meals, supplies and checkbooks start to provide the grease to the economic engine.”

Insurers sent in tens of thousands of adjusters and experts to “get a jump start on claims,” he said. Liberty Mutual, alone, assigned 18,000 employees to respond to Sandy.

Claims Surge to 1.52 Million

The catastrophic commercial losses from Sandy were not all that different than the losses sustained in hurricanes Katrina or Ike. What was different was that New Yorkers just don’t expect hurricanes to hit their businesses or homes the way residents in Florida or North Carolina do.

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“The Northeast region is not accustomed to handling property claims [resulting from named windstorms], even though they did get somewhat of a wake-up call with Hurricane Irene,” said Clark Schweers, principal and lead, Insurance Claims Service Practice in the United States for BDO Consulting.

“Sandy was a different scale,” he said. Plus, the Northeast is denser, with both people and buildings, than further south. That ratcheted up the difficulty in preparing for the storm and in responding to it.

More than 1.52 million total claims were filed for losses resulting from Sandy, according to the Insurance Information Institute (III) and Property Claim Services (PCS). About 13 percent were from commercial clients, which accounted for 48 percent of the insured dollar losses.

III reported that 93 percent of all claims had been settled by the six month anniversary of the storm.

“By and large, the vast majority of these claims, they were filed, they were settled and they were closed,” said Robert Hartwig, an economist and president of the III.

In just New York and New Jersey alone, nearly 880,000 insurance claims were filed. About 36 percent of commercial claims filed in New Jersey were closed without payment. New York does not keep separate numbers for business or personal claims. In all, 19 percent of New York’s total claims were closed without payment.

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Bill Krekstein, an attorney and partner at Nelson Levine de Luca & Hamilton, said the interactions between insureds and insurers have been mostly positive.

“It appears most people would tell you the majority of insurance claims are going pretty smoothly,” he said. “I think carriers are stepping up. They are being very proactive in the adjustment process.”

Obviously, the first step was establishing the cause of loss. It may sound simple, but it’s not.

“The term that really bubbled up was ‘storm surge,’ ” said Frappolli. Surge is defined as rising ocean water driven by wind, so is it a flood event or a wind event?

“The insurance carriers,” said Al Tobin, national property practice leader at Aon Risk Solutions, “very much tried to push ‘surge’ into the definition of flood. … They were not as successful as they would have liked to have been, so ‘surge’ still remains in windstorm for key customers.”

Concurrent Damage

Then, there is the question of whether coverage is triggered when damage is caused by a combination of wind and flood. That’s when a policy’s “anti-concurrent causation” (ACC) exclusion plays a big role in determining whether a payout will be forthcoming.

Say an insured has coverage for wind damage but not for flood damage — and it suffered both wind and flood damage. The ACC clause will exclude the loss, in whole or in part, because the act occurred concurrently with the excluded act of flooding.

For example, when New York companies lost power after a lower Manhattan substation of the city’s utility ConEd exploded on Oct. 29, their coverage may have depended on the cause of that explosion, said Reed Smith’s Shugrue.

If the power failure was caused by flooding that resulted in arcing, then a company’s business interruption coverage, as well as the sublimits or deductibles that would apply, may depend on its flood coverage, he said. If it was caused by an explosion or mechanical failure, the coverage situation may be quite different.

The ACC exclusion, said Finley Harckham, an attorney and partner with Anderson Kill, has generally been upheld in New York courts.

“In New Jersey, it’s still an open issue,” he said. “That’s one component issue that will have to be resolved by the New Jersey Supreme Court so people will know if they have coverage when flood may have played a role, but was not the sole cause of their loss.

“We are seeing a lot of disputes, and some litigation, over policies which provide separate coverages, limits and deductibles for named storm and flood.

“The policyholders expect to be entitled to the most coverage available under both of those perils for Sandy losses, while the insurers try to limit coverage to the greatest extent possible under those clauses,” he said.

Harckham said he has seen fewer contested claims resulting from Sandy than from previous catastrophic events such as Katrina, but “I wouldn’t say the process is necessarily going smoothly.”

Many insureds whose claims were denied had electrical systems, HVAC machinery, computer hardware and other critical infrastructure in building basements.

“A lot of buyers who had buildings in flood zones were very upset about that,” said Tobin, noting that many organizations since then have made plans to move their equipment to higher levels. New York building codes may actually make that a requirement in the future.

It wasn’t just mechanical equipment that was damaged in basements. One insurer filed suit on behalf of a client against Christie’s Inc., claiming the well-known auction house left more than $1.5 million in artwork exposed to flooding on the ground floor of a warehouse in Brooklyn.

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Organizations also suffered unrecompensed losses because their employees or customers just couldn’t get to the area because roads or tunnels were closed, access was denied or gasoline was nearly impossible to get.

Physical damage is generally needed to trigger business interruption coverage, said Sheri Wilson, National Property Claim director at Lockton.

“I think there was a lot of exposure to companies that was just not insured,” she said. “It was not insured and it wasn’t insurable.”

One of the peculiarities of the storm hitting the Northeast, said BDO Consulting’s Schweers, is that the commercial organizations affected were predominantly retail or service establishments, which are “not as attuned to having these types of losses,” as manufacturing or tourism operations in the Southeast.

Plus, trying to determine the coverage and losses for as many as several thousand different locations is a huge undertaking. Just some of the questions that need to be answered for each individual location are whether the losses were due to flood, wind, power outages, evacuation orders, or inability to get supplies or even get to the business location, he said.

“To try to tell the story of each individual location, when you have so many properties impacted, can be very, very difficult and it takes time to gather that information,” Schweers said.

Establishing the period of restoration to bring the property to its pre-loss condition is also a potential dispute between insureds and carriers, Krekstein said.

“In a lot of these cases, you need a forensic accountant [to determine the loss],” he said. “Generally, only a small percentage of cases ever go to trial.”

In some states hit by Sandy, policyholders are usually required to institute legal proceedings within 12 to 24 months, so it’s not unusual that the courts have not seen a surge of lawsuits thus far. That’s not to say litigation is nonexistent, however.

In the Courts

As always, when insurance disputes hit the courts, decisions often turn on the choice of words used in policies, the definitions of those words and the relationship of various concepts found throughout the policy forms.

In one case, Fisker Automotive Inc. settled its $32 million lawsuit with XL Insurance America over the loss of 338 hybrid electric vehicles that were damaged at a Port Newark, N.J., facility. Before the settlement, Fisker argued the claim involved a loss in transit, as many of the cars were to be delivered to dealerships.

The insurer argued Fisker had no transit coverage, and the claim was limited to $5 million, at most, because Fisker’s commercial property policy had a transit sublimit. Fisker argued that a $100 million named storm sublimit applied. The amount of the settlement was not disclosed.

In another case, New Jersey’s utility, PSEG, filed suit against 11 insurers, claiming the carriers capped coverage at $50 million because of flood sublimits, instead of the $426 million in damage that it suffered from Sandy.

Some brokers, also, are finding their professional services questioned in legal complaints because of the wide-ranging impact of the storm. Companies, whose claims were denied, have filed suit against their brokers, claiming inadequate advice or a failure to purchase requested insurance.

“A lot of those claims,” Krekstein said, “fall back on ‘he said, she said’ types of situations, so it’s a little more fact-intensive” instead of interpreting policy language, as is common with many insurance disputes.
When it comes to contingent business interruption issues, it’s even more complex because that is a “relatively new type of coverage,” he said, that is triggered when a supplier has a loss that directly impacts the insured.

“The issue with that coverage is that there is not a lot of law on it,” Krekstein said.

Aon’s Tobin said the storm should bring “a greater awareness and greater attention to how clients buy insurance and it’s also driving significant attention for insurers on how to price the product and how much capacity they will offer, specifically for wind.”

The event has resulted in an “explosion of Cat bonds,” he said, since that’s a solution for some clients that have significant wind and earthquake limits. RMS has also been involved in a Cat bond deal for the MTA, New York’s transportation authority, which saw eight tunnels flooded and suffered about $5 billion in damage.

“It is important to remember,” Tobin said, “these Cat bond deals only work for modeled perils.”

III’s Hartwig said he believes “more businesses will start to get the message that they need to have complete and full protection against these types of events,” he said, “including flood, business interruption and, possibly, contingent business interruption coverage.”

“These are lessons very, very hard learned,” Hartwig said. “When you look at the experience of the past decade now, it’s very difficult to understand how businesses would not fully and completely insure themselves. Is coverage expensive in some areas? Yes, it is, but it is available.”

“It’s just the same lesson,” Frappolli said, “we keep learning over and over again.”

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]