We’re only a week into 2023, and 90% of Californians are under flood watch due to excess rainfall threatening mudslides, power loss, and severe water damage across the state. Officials have sent evacuation orders as the risk of severe injury is high, and total loss of use for households and businesses is a possibility due to these “atmospheric rivers”. Already, experts are predicting this storm will cause billions in losses and join the list of the nation’s most expensive catastrophes.
Unfortunately, these types of natural disasters are becoming more prevalent, and the current storm is a reminder of what so many people are up against on a regular basis. In the past decade or so, the systemic effects of weather change were underestimated, leaving individuals and businesses unable to protect themselves, and inadequately managing their risk. As we make our way into 2023 and reflect on 2022, it's crucial to understand the reality of catastrophic weather, and put adequate plans into place to keep yourself and your businesses safe.
2022 was a pivotal time for businesses and the insurance industry to recoginze the impact of environmental factors. This year saw not only some of the most costly disasters but record-setting catastrophes that proved how volatile our current environment is. Some key weather disaster information from 2022 includes:
The impact climate has had on property risk is so severe, that some insurance companies have pulled out entirely from covering certain high-risk areas like California and Florida. Florida’s property risk is so high due to hurricanes and flooding, that insurance companies struggle to adequately cover the risk without suffering a loss themselves. In response, insurers have pulled out and insureds are left with 30 days to find a new policy, or risk being uninsured during a catastrophic event.
Similarly, insurance companies like AIG and Chubb have notified thousands of insureds across California that they will not be renewing their home and property policies for another term due to the threat of wildfires. This comes after AIG was given the approval to increase premium costs by more than 17% for renewing policies. This tells us that insurance companies are fearful that the losses will still outweigh the profit, despite significant premium increases.
Not all insurance companies are pulling out of risks, of course. That would be detrimental to insureds and insurers nationwide. However, with the obvious risk of catastrophe looming over property and homeowners, there needs to be changed to prepare both parties in case an event were to occur. Flood insurance, for example, is a high-risk coverage facing a lot of problems. A standard homeowners and property policy exclude flood coverage, and insureds are required to purchase a separate standalone policy if they are in a flood risk zone. Private flood insurance does exist, but close to 80% of flood coverage is purchased through the National Flood Insurance Program, managed by FEMA and funded by congress.
Decades ago, this fund could manage and split the risk of disastrous floods and easily pay out premiums and damage costs. Today, with so many catastrophic events occurring, the fund is 20 billion dollars in debt and forced to borrow money from the U.S. treasury. Though the fund will continue to source investment and find ways to provide coverage, people who do receive payouts will not get nearly enough to cover all of their losses. This trend is continuing in other aspects of coverage, like standard home and property insurance. Premiums will increase, but coverage may actually decrease and include a higher number of exclusions.
Whether you live in an area that is prone to intense storms or not, the conditions the US is currently experiencing are a reminder for all property owners to review their coverage. The biggest threat of climate changes right now is the unpredictability of events. Where decades ago, it was easy to predict when storms would most likely occur, this is proving to no longer be true. In fact, 2022 saw some of the most unpredicted weather events nationwide. Even areas that don’t typically see disasters have been more prone to severe tornadoes, blizzards, earthquakes, and flooding.
Most standard homeowners and property policies have little or no coverage for disastrous events. Common exclusions include:
Policies that do have weather-related coverage will likely have pricey deductibles, up to 5% of the total limits. So for example, if you have $1 million in coverage, your deductible may be as high as $50,000. Insureds are responsible for paying the full deductible before any insurance payout would kick in.
In response to the catastrophic weather events of the past few years, almost every state has been given the approval to increase rates for the same coverage amount by 5%. In more high-risk areas, coverage has already increased on average by 10% in 2022, will additional increases being made for 2023. As weather-related events increase in severity and frequency, more states may see these higher-than-anticipated spikes in cost, as well as non-renewals.
While weather events may be out of your control, preparing for one is not. There are ways you can help your business stay safe, even with the threat of catastrophes.
The first step is always to review your current coverage to ensure you have adequate protection. If additions to your insurance coverage are needed, make these changes sooner rather than later. Insurers won’t allow you to add coverage if a threat of an event is already present. Rather, you will need to have the coverage already in place for at least 30 days before the event in order for the coverage to come into play. This is known as a waiting period.
You may also want to increase your limits if you’re in a high-risk area. Claims are continuing to prove more costly than ever before, and a low coverage policy may leave you with financial burdens if a catastrophic event were to hit your property.
In the event of a weather disaster, you’ll want to understand the true value of your property and what it would cost to replace it. If you’ve recently remodeled or added new features to your building, make sure you update your insurance provider.
Some may want to consider adding replacement cost coverage vs market value. You may have features of your property that are not the same cost now as they were today, and a replacement cost coverage policy will provide you adequate funds or items to actually replace your losses. For example, if you had an older item that’s no longer on the market, a replacement cost policy will provide you with the modern equivalent.
There are steps you can do to minimize risk, even if you’re in a high-risk zone. For example, if your property is in a high flood risk zone, ensure your building is up to code and built to withstand normal flooding.
If you’re doing any remodeling or building on your property, use higher-quality materials that are more likely to survive a weather event. This could make your insurance policy premium go down, but also help you avoid a total loss.
It's also important to schedule all of your personal property items on your insurance policy. If you lose an item that wasn’t listed and valued, there won’t be any coverage included. Whether these are work computers or personal belongings, if they are regularly housed within your building, you need to schedule them.
Weather events have been steadily increasing, and it can be challenging for businesses to understand the complexities of what coverage they need. Between deductible options, coverage caps, exclusions, and conditions - having an expert team of consultants and agents will ensure your policy is providing the necessary coverage. ECBM’s team can review your current coverage and help you understand what changes and additions would better serve your business. For more information on our services, or to schedule a consultation, contact one of our agents today.