The Calm Before the Storm at the Beach and Windstorm Pools

The Calm Before the Storm at the Beach and Windstorm Pools

September 19, 2009 14:51
by J. Wylie Donald

The Wall Street Journal reported this week on North Carolina's attempt to fix one of the more vexing problems of increased coastal development in a climate of increasing hurricane aggression: how to insure those homes without driving all the insurers out of the state. See Leslie Scism, Insurance Pool's Coverage to Coastal Carolina Ebbs, Wall Street Journal (Sept. 14, 2009). The general solution of these "beach pools" is to provide insurance through so-called insurers of last resort who offer coverage at above-market rates. To the extent those plans are inadequate, then assessments on insurers and their insureds are anticipated. Some states, such as Texas and Florida, back up their programs with catastrophe funds.

North Carolina's fix addressed two problems. First, how much can one squeeze from a carrier before it bails out of the state (as State Farm did with Florida, see our February 5 blog). North Carolina capped assessments on insurers at $1 billion. Second, to quote one legislator, "To require somebody who owns a house that sells for $150,000 to subsidize the insurance on somebody's house that is valued at $1 million just isn't right." Id.  Accordingly, although inland insureds are subject to additional assessment, homeowners in coastal areas are now capped at $750,000 in coverage (with an additional $300,000 in personal property coverage), down from $1.5 million (and $1.1 million for personal property) .

Notwithstanding their name, the various pools and their backups are not fountains of liquidity. A quick review of internet sources reveals that Florida's Hurricane Catastrophe Fund has an estimated payment capacity shortfall of $7 billion. The Texas Windstorm Insurance Association Catastrophe Reserve Trust Fund was wiped out by 2008 hurricanes. Texas passed an emergency bill to fix the problem covering $2.5 billion in losses (to be funded from future assessments). A loss in excess of $2.5 billion is simply not addressed. In a recent report in the Mobile Press-Register on Alabama's Beach Pool, "more coastal homeowners are turning to the state's insurer of last resort, concentrating risk in a pool that experts agree couldn't cope with all the costs if a big hurricane hit." George Altman, As private insurers reap profits, Alabama beach pool strains to cover coastal homeowners, al.com (Aug. 31, 2009).

In conducting this review, I was struck by the analogous attempts by the states to address carbon dioxide emissions. Various programs are put together either in individual states or regionally (compare RGGI with AB32 with the Midwestern Green Gas Reduction Accord with the Western Climate Initiative) and various results are achieved. Many view the state programs as a laboratory for the drafting of a federal program. I see a similar outcome here. All that is required is a failure by one beach pool leaving thousands of homeowners unable to rebuild. (This is not just in my imagination. The obvious parallel is the subprime mortgage meltdown.) So far, that failure is not on this year's horizon. Notwithstanding the experts' early predictions of an above average hurricane season, see our February 11 blog, researchers at the Colorado State University: Tropical Meteorology Project <http://typhoon.atmos.colostate.edu/forecasts/> now are betting the season will be below-average. But it is only a matter of time before the beach pools are put to the test. Will they be up to it?

Of course another solution that will cost a lot less money and reduce rather than increase government bureaucracy can be found. As posted by workforlivn: "Wait, I just had an idea. Don't build houses where they won't last so the rest of us don't have to pay for them."

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