Hurricane-Hit Businesses Brace for Drawn-Out Insurance Disputes

Following catastrophic losses caused by hurricanes Helene and Milton, local companies’ expectations are colliding with the reality of insurance coverage in an unfriendly market.

Businesses may be surprised to learn their policies cover disruptions only for a limited number of days, or for a limited number of properties, policyholder representatives said. Many disputes over insurance coverage will likely end up in court, delaying payouts and burdening policyholders with legal expenses.

Insurers that are still selling in high-risk areas like Florida have gotten more “creative” in how they cover commercial property, said Thomas Cotton, president of insurance agency AssuredPartners’ Orlando office.

Although some limits are laid out in policies, Chris Kuleba, a partner in Reed Smith LLP’s insurance recovery practice, said he’d encountered several large commercial policyholders who were “unpleasantly surprised” to learn how they applied to their losses.

“We’re going to see policyholders disappointed with the responses from their insurance companies,” Kuleba said. “I do anticipate that there will be litigation. It’s just an inevitable part of the process and an inevitable result of the tension that insurance companies unfortunately face between paying out to their policyholders and protecting their bottom line.”

Big Losses

Helene and Milton could join the ranks of Katrina, Harvey, and other hurricanes as the most destructive in recent history.

The back-to-back storms are slated to cost insurers more than $50 billion, according to initial industry risk estimates. And that’s not counting uninsured losses, which could be particularly high in areas hit by Helene, where many businesses lacked coverage to begin with.

Factor in the federal government’s perennially inadequate flood insurance program, and many businesses may be left wondering: Does commercial insurance in disaster-prone states work at all anymore?

Even before the latest hurricanes hit, the US in 2023 experienced a record number of major disasters amid rising temperatures. Frequent and severe weather events and rising construction costs are among the factors pushing commercial property insurers to limit coverage or make it more expensive, industry professionals said.

“Because of the increase in the amount and the location of natural catastrophes, we’ve seen policies and premiums change,” said Marc Ladd, a partner at Cohen Ziffer Frenchman & McKenna who represents corporate policyholders.

What’s Driving the Hard Market

The hardening of the insurance market can’t be attributed to just one factor, such as the effect of climate change on severe weather events, industry professionals said.

Rising repair and rebuilding costs due to inflation, volatile reinsurance prices, and increased exposure resulting from development in high-risk areas are also drivers, said Gary Sullivan, senior director for emerging risks at the American Property Casualty Insurance Association.

Cotton also attributed premium increases to reconstruction costs, noting that insurance prices rise with property value.

“We have 127 million people living in coastal areas, which represents 40% of the population living in about 10% of the land area. So as that development continues, that is driving the insurance costs quite a bit,” Sullivan said, noting the population growth means more businesses in those areas.

Sullivan also blamed excessive regulation and abuses of the legal system for pushing up costs. Regulatory price controls for insurance that suppress rates and delay approvals have contributed to insurability challenges, he said.

In 2022, Florida adopted insurance changes that were in part aimed at reducing costly litigation. That helped revive the state’s struggling insurance market, according to Cotton.

However, policyholder attorneys say the law created new hurdles for insured parties seeking to recover from insurers by eliminating their right to attorneys’ fees if they prevail in their suits.

Higher Costs, Less Coverage

For commercial policyholders, the hard market means insurers are charging higher premiums, narrowing the scope of coverage, or requiring higher deductibles.

“The insurance market does not seem seriously concerned about the losses they’re going to take on for these two hurricanes, because they don’t believe they’re going to take on that many losses,” Ladd said. “Because of the hard market, the policies have been written differently.”

Policies can be designed to manage property risk in an affordable way despite the tough insurance market, said Brent Vincent, a partner at Lathrop GPM who advises policyholders.

Some policyholders may opt to pay higher premiums for coverage that is triggered at a lower threshold, while others take on a higher retention to keep premiums low, he said. While “some smart commercial entities are doing that consciously,” according to Vincent, “for others, it’s more involuntary, right? This is what the carriers are going to give you.”

Hurricanes typically result in a mix of wind and flood losses, and because commercial property insurance doesn’t cover flood damage, insurers will likely try to classify the least amount of damage possible as wind, Ladd predicted.

“They’re going to try and blur the lines between the damages caused by the hurricanes,” he said, adding that the damage caused by the two storms likely varied.

In some cases, businesses aren’t aware of the policy limits that may apply to their claims, attorneys said.

Insurance policies may limit specific types of coverage to a certain sum or time span—for example, paying business interruption losses only for a set number of days or only after a certain amount of time has passed after the initial loss event. Sub-limits on coverage may also restrict the amount a company can recover on each component of a loss event, or on each property if a business has multiple properties covered under the same policy.

And in some cases, businesses may decide it isn’t worth the headache. More than half of businesses struck by disaster don’t reopen or fail in the first two years, according to various industry estimates.

“The main impact storms will have, honestly, is businesses picking up and leaving the area,” Ladd said. “Policyholders in Florida are getting the first taste of how little coverage and how little support there will be.”