Thanks to Friend of the Academy of Insurance, Joe Harringon, for this guest post. Joe is an independent business researcher and writer specializing in property and casualty coverages. He is also a regular instructor with the Academy of Insurance.
As such suits go, the actions filed in late May 2020 by Michigan residents against the state and the operators of two private dams seem pretty straightforward.
The dams failed and properties were inundated. It’s not hard to make the connection. Establishing who bears what share of responsibility will be more complicated.
The connection between cause and effect for flood losses is rarely clear, which is why liability claims for property damage caused by flood have not been a major concern for insurers and reinsurers. Since time immemorial, it has generally been hard to determine who, if anyone, is responsible for the amount of water in an area, and where it flows.
Largely for that reason, while flood has long been an excluded peril under first-party property coverage, it is rare to see commercial liability exclusions for legal liability arising from flood damage to the property of others.
That’s all being tested under new conditions that may constitute a “perfect storm” for flood liability exposure. (Yes, “perfect storm” is an overused term, but appropriate in this case.) Several trends are coming together to potentially make third-party flood liability claims a major concern of private insurers:
The increased frequency and severity of flood catastrophes seen in recent years, due to the growth of property development in flood-exposed areas, and to increased amounts of rain in tropical storms.
The slow growth (or “no growth”) of first-party flood property insurance. The number of policies written under the National Flood Insurance Program (NFIP) actually fell during the mid-2010s, and vigorous efforts to promote private sector participation in the flood insurance market have produced only slow growth.
Vastly improved methods for detecting and analyzing an area’s propensity to flood. New flood risk assessment technologies are seen as boons to private sector flood insurance, but they can also be used to determine how alterations in land use have affected neighboring properties.
Widely publicized awards in flood liability cases and increased advertising by plaintiffs’ attorneys who are already practiced in contesting first-party flood claim denials.
In short, insurers have to consider that more and more floods will leave more and more property owners with very large losses, most of them uninsured. Distressed property owners will turn to an eager plaintiffs’ bar equipped with highly sophisticated means for determining who’s to blame for how water is flowing.
That will make insurers take notice.
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