Writing flood coverage in a "watercolor" world

More and more insurers are considering venturing further into the flood insurance market given the recent and regular improvements made by FEMA to the flood maps. Many in the industry therefore question how this will impact their work?

Written by Jane Warring, Senior Counsel, Clyde & Co Atlanta

To borrow a helpful analogy(1), whereas the old FEMA flood maps were drawn with 4 crayons, these new maps will be more like watercolors blurring the bright and imprecise lines between high and low risk zones, and creating a more nuanced and accurate picture of flood risk.

What does this watercolor world mean for insurers writing flood coverage and insureds purchasing their products?

The current flood coverage landscape – common disputes and coverage gaps

Commercial property insurance that includes flood cover frequently contains sublimits as a means of controlling an insurer's risk, and reducing a policyholder's premiums. A policy might, for example, be written such that property in flood zone X is subject to a $100 million limit whereas a property in special flood hazard area (SFHA) is subject to a $10 million sublimit. From a legal perspective, flood sublimits are a significant source of dispute.

Disputes can arise when a property straddles zone boundaries, specifically disputes tend to center on whether the sublimit applies only to property damage sustained in a high hazard zone.

Sublimits that apply to "flood at any location within flood zone A or V," for example, may lead to dispute or difficult adjustment decisions when a property straddles multiple zones. Some policies attempt to deal with this issue by applying the sublimit to the entire property where any part of the property is within a high hazard zone. At least two courts(2) have found these types of provisions ambiguous as to whether the sublimit applies to an entire facility or only buildings situated partially in the SFHA. Other cases have analyzed whether the sublimit applies only to property damage or also limits recovery for time element loss or debris removal, with some courts finding for or against application of the sublimit depending on the language used.

Not surprisingly, this lack of predictability in legal outcomes, the questionable reliability of the existing maps, and the increasing frequency and severity of extreme weather events, has left many insurers wary of entering the flood coverage market, and many policyholders uninsured.

What can underwriters and risk analysts expect in this new world

With the advent of the new flood maps, it is likely that three things will happen:

  1. There will be more boundaries
  2. The jumps in risk between neighboring zones will be less pronounced
  3. There will be opportunities for resilience

What does this mean for insurers and policyholders?

It may mean a change to policy wording to address the increased likelihood that a property straddles a hazard boundary. Insurers might apply certain sublimits for all real or personal property damaged within a certain distance from specific zones or classifications. This might alleviate complexities with the new flood maps, and allow insurers to sidestep difficult decisions regarding which zones to include in various tiered sublimits.

Insurers need to be mindful that when they write a policy and wish to apply their sublimit to an entire location the courts have previously found that the use of language such as "all property at a 'location' that is partially or totally situated in an area" was ambiguous. Terms like "property", "location", and "area" need to be applied carefully and used to mean the entire facility, complex, campus or insured location facing the loss.

The new maps should also mean that insurers and policyholders, particularly in renewal situations, assess the risk anew each year for the next several years. Sublimits are often applied based on flood designations in effect at the time of the loss, and if these revisions are as substantial as analysts suggest, outdated risk assessments could be misleading.

While risk analysts are keenly aware of the perils of geocoding, such as using the wrong address or errors in the program, the dawning of this watercolor world should remind us all of the particular dangers of plotting a single address with respect to flood risk. Models that allow an overlay of a property's boundaries on the current flood map will provide a more accurate picture.

Ultimately, better flood models will allow insurers and policyholders to better analyze their flood risk. Policyholders may then be incentivized in their resilience efforts to increase coverage and decrease premiums. Indeed, using these models, municipalities and business leaders will be able to pinpoint the areas of greatest weakness and better prioritize their resilience-based investments.

The flood insurance landscape is changing. If insurers can apply lessons learned by the courts when interpreting flood zones and anticipate future changes to the maps, disputes can be avoided and it will encourage greater confidence when creating risk assessments and policy forms.

(1) Nancy Watkins with Milliman who spoke on Flood Insurance Reform at RMS's 2018 Exceedance Conference

(2) Penford Corp. v. Nat'l Union Fire Ins. Co. of Pittsburgh, No. 09-CV-13-LRR, 2010 WL 2509985 and New York Univ. v. Factory Mut. Ins. Co., No. 15 CIV. 8505 (NRB), 2018 WL 1737745

Find out more from our Resilience Expert:

Nigel Brook