I read an article in the local paper today stating that Washington State Insurance Commissioner Mike Kreidler has mailed out notices to about 200 commercial insurers telling them not to use the “governmental action” exclusion to deny flood claims - Read the Article.
Here’s the problem - many Kent Valley (south of Seattle) homes and businesses are being told they will flood this year due to the restrictions being put on the Howard Hanson dam. It can only be filled up to 1/3 capacity until it can be tested later this spring. Because of that, there is almost a certainty that some flooding will occur. The federal government has a program through FEMA, but for many businesses, the coverage is too low, so they’ve gone to private insurers to pick up the slack. FEMA has no exclusion for governmental actions; private insurers always have. Mr. Kreidler has made his political statement by wagging his finger at insurers telling them not to go down this path.
What he has now also done is basically closed off the tap to those businesses who haven’t purchased flood insurance through the private companies. If they weren’t scared off before, they are now. My guess is that this action was taken for political reasons. It makes Mr. Kreidler look good to voters. The reality is that private insurers don’t go into a situation where there is a certainty that they are going to pay for a loss. It’s part of a concept called “adverse selection.” Put yourself in their shoes. If you were an insurer and all the media is guaranteeing flooding in an area, and the state insurance commissioner is telling you that your exclusions won’t carry any weight, why would you insure anyone in that area? The answer is, you wouldn’t.
I met last week with a business owner that sits right next to the Green River. You can barely see the river now, but in the next 60 days, he expects a real chance that his building will flood. He’s purchased flood insurance within the last 3 weeks. His timing may be good to have the coverage, but will it stand up when claims roll in? Mr. Kreidler has thrown down the gauntlet. Will it end up in court?
The real victims in this mess are the homeowners and businesses. Many will undoubtedly flood, causing damage to property and potentially long-term damage due to loss of clients who go elsewhere for their business. That will never be recouped from insurance. In the meantime, I envision a scenario where insurers and government get into a finger-pointing duel over who is responsible.
If you are in this situation, here are my suggestions:
- If you’re a homeowner, buy the flood coverage through FEMA. It should cover the vast majority of your claim.
- If you’re a business, purchase flood insurance NOW, if it’s still available.
- Be open about the situation. Get written (e-mail works) confirmation from the insurer that if it does flood due to the dam situation that there will be coverage. You don’t want to pay thousands of dollars in premium just to have coverage denied.
- Plan for the worst. Find alternate locations for property or workers; reassure customers; set up triage areas, buy sandbags; create e-mail and phone trees; buy supplies; head for the hills and high ground; whatever it takes to set yourself up to continue operations.
- Video record your operations and/or take photos. You may need documentation about your property in the case of a loss.
You’ve been given fair warning. Don’t get caught unprepared. The business owner I met with has already started preparations. He is smart. Whether it’s your home or business you need to do the same thing.
Final thoughts - I understand the media attention and the insurance commissioner taking a strong stand. The problem now is that with all the hype, it will become virtually impossible to find private insurance if you don’t already have it. If you are affected, take action now.
OK, I lied…one more final thought. Flooding will also occur outside the Kent Valley. Regardless of where you live or have a business, you MUST consider this an exposure. Even if you’ve never flooded, be prepared and honestly look at your risk. Take a lesson from Hurricane Katrina where claims for flooding were denied because of the levy failures. This winter, re-evaluate your exposure to flooding and talk with your agent or consultant.