Hurricane Matthew Puts Spotlight on Storm Surge and Policy Definitions

With the cleanup underway as Hurricane Matthew dissipates, we are once again seeing the damaging impact from a combination of wind and storm surge. And with that comes a reminder of the importance of understanding how your insurance policy will respond to a natural disaster.

Wording Matters

An insurance policy is a contract, a promise to pay. The clearer your understanding of what it says, the more prepared you will be in the event of a claim. Nearly every major catastrophe brings questions around coverage in a property policy. For example, if a company has $100 million of windstorm coverage, what is the policy definition of “windstorm?” Does it include storm surge or is that part of the flood sublimit, which is less than $100 million?

Storm surge — basically wind-driven water above the predicted tide — is often responsible for much of the damage from a hurricane or other coastal storm. Hurricane Matthew brought record storm surge in many areas, from Florida to the Carolinas. If past storms are any indicator, some businesses may face an unpleasant surprise: Despite having windstorm coverage, some may not be covered for storm surge, as that was likely a flood peril on their policy — and they had not purchased coverage. A related area is the potential difference between storm surge and surface water from heavy rainfall.

We have seen many disputes over cause of damage end up in court. And while policyholders may win occasionally, a victory in court will not make up for the time and energy diverted from recovery.

Over the past decade, the use of named-storm or windstorms with storm surge clauses have become more common, and coverage limits and how deductibles are applied have changed dramatically.

Clarity is critical in any definition, for example the definition of “windstorm” versus “flood.” You should know whether the named windstorm definition in your policy includes “storm surge,” which is basically wind-driven water. Or does the flood definition exclude storm surge?

Drilling Your Policy

One way to make sure you are familiar with your policy is to run a drill with your insurer and other key stakeholders to understand coverage triggers, deductibles, definitions, information to be collected before and after an event, and more. Yet despite the importance of policy fluency, more than one-third of companies (37%) have never conducted such a test, and only 25% have done so in the past two years, according to a Marsh survey.

Whether the damage is from wind, storm surge, or something else, working with your insurance advisors to review your property policy regularly can help you recover in the wake of disaster.