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Hurricane Ike Storm Surge Damage Should be Covered by Windstorm Insurance, Consumer Group Says

Sep 25, 2008 | Parker Waichman LLP

A consumer group in Texas is taking issue with the Texas Windstorm Insurance Association's assertions that it will not pay for storm surge damage from Hurricane Ike. The group Texas Watch, contends losses from water damage should be covered because there would have been no storm surge without the hurricane.

The Texas Windstorm Insurance Association became the wind damage insurer of last resort for thousands of Texans in 14 counties because private-sector companies largely pulled out of the coastal market following Hurricanes Katrina and Rita in 2005. The windstorm association has more than 142,000 policies in the six most affected counties.  It faces roughly $2 billion  potential damage claims from Ike  in those counties.

Last week, on a conference call with insurance industry representatives, association general manager Jim Oliver said:"It will be our intention not to pay surge losses. Period."  Oliver said.  However, Oliver promised that each Hurricane Ike claim will be examined on a case-by-case basis, and no one area will be classified as damaged completely by storm surge.

But Alex Winslow, executive director  of Texas Watch, argued that insurers should consider storm surge from hurricanes a wind event.  "Though this is a predictable industry attempt to deny thousands of legitimate storm surge claims, this position is ludicrous. After all, storm surge is a phenomenon peculiar to windstorms, which should be covered by windstorm insurance," Winslow said in a memo to state and local officials.

If storm surge damage is categorized as flood damage by insurers, it would only be covered by national flood insurance.  According to the Houston Chronicle, only about 20 percent of Galveston County property owners have flood insurance.  Galveston was one of the areas hardest hit by Ike.

The total cost from Hurricane Ike is expected to be high.  Texas Insurance Commissioner Mike Geeslin told a legislative panel Wednesday that more than 50,000 insurance claims have already been filed and the number could go as high as 300,000. As a result, insurers will be looking for ways to limit their exposure.  Attributing damage to storm surge, rather than wind, will help in that effort.

The storm surge conflict was a major source of complaints among policyholders affected by Hurricanes Katrina and Rita in 2005.  A 2008 Government Accountability (GAO) report urged better assessment of “the accuracy of flood payments on hurricane-damaged properties.”   Insurance companies’ handling of damage claims from hurricanes, where both wind and water destroy property, needs closer government scrutiny, the report said.

Conflicts between Hurricane Katrina homeowners and insurance companies over the storm surge issue led to more than 1000 lawsuits against insurance companies, the largest number  ever to follow a natural disaster in the US.

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