On Wednesday night, New York Governor Andrew Cuomo made a
startling announcement: Homeowners "will not have to pay"
so-called hurricane deductibles when they file insurance claims
for damages caused by Sandy. In a follow-up press release
Thursday morning, after other governors joined Cuomo in
outlawing hurricane deductibles related to Sandy, Cuomo's
Department of Financial Services, which regulates insurance
companies, said that it had "informed the insurance industry
that hurricane deductibles should not be triggered for this
storm."
Can Cuomo and his DFS chief, Benjamin Lawsky, do that? Are
state governors empowered to determine, by executive fiat, what
constitutes a hurricane? The answer to that question, according
to three insurance lawyers, is no -- and yes.
Here's why. The insurance industry, as you know, is
state-regulated. In New York, insurance policy language on
hurricane provisions -- which typically impose deductibles of
between one and five percent of a home's value for damages
caused by hurricanes -- must be approved by the Department of
Financial Services, according to Marshall Gilinsky of Anderson
Kill & Olick, who represents policyholders in disputes with
insurers. So, in a way, state insurance regulators have already
decided what constitutes a hurricane, for the purposes of
insurance coverage, by regulating the provisions that define
hurricanes.
That's not as absolute a definition as you might think,
though. Gilinsky and Texas policyholder lawyer Steve Mostyn of
the Mostyn Law Firm pointed out that there's often considerable
uncertainty in meteorological parameters included in hurricane
deduction provisions. One critical factor, for instance, is wind
speed, which is how the weather service distinguishes hurricanes
from less severe storms. (Other factors are the National Weather
Service's categorization of the storm and the time lapse between
its landfall and the damage it caused.) But wind speed varies
depending on where, when and how it's measured. It's conceivable
that homeowners affected by Sandy could point to one measurement
of wind speed that wouldn't trigger the hurricane deduction and
insurers could point to another wind speed measurement that
would require the higher deductible.
With his pre-emptive announcement Wednesday, Gilinsky said,
Cuomo sent a warning message to insurers: The state is watching
you. "He's saying that the facts are such that higher hurricane
deductibles are not warranted," Gilinsky said. "That's
consistent with his role as a consumer advocate and regulator."
But for all the regulatory leverage Cuomo and DFS chief
Lawsky enjoy, they do not have the final say on whether Sandy
was a hurricane for the purposes of insurance deductibles.
Insurance policies are private contracts between property owners
and insurers. Even the state governor isn't empowered to
interfere with those contracts unless a court approves it.
"Ultimately," said one insurance lawyer, "this is something a
court will decide, not Governor Cuomo or Mr. Lawsky."
That said, the governor's pronouncement will probably
influence any court called upon to decided whether Sandy was a
hurricane when it hit New York. "Regulators can't decide what
the contract says, but a court would take that into
consideration," said Mostyn, who represented homeowners in
Galveston, Texas, in litigation stemming from 2008 ' s Hurricane
Ike. "The governor's view isn't controlling but it weighs
heavy."
If an insurer opts to defy the governor and his insurance
chief, it will face not only heightened regulatory scrutiny but
also public relations costs, said policyholder lawyer Gilinsky.
These are companies that run television commercials promising to
stand by their customers, he said. Imposing a hurricane
deductible in the face of Cuomo's pronouncement, he said, "tells
you you're not in good hands, you don't have a piece of the
rock, whatever."
Mostyn predicted that the real insurance fight will be over
whether wind or water caused the catastrophic destruction along
the Jersey Shore. Hurricanes Katrina and Ike spawned years of
litigation between insurers, who asserted damages were the
result of flooding and thus not covered, and homeowners who said
insurers were liable for havoc wreaked by high winds. After Ike,
Mostyn obtained more than $350 million from just one Texas
insurer that originally denied claims by property owners in
Galveston. "I looked at pictures of the Jersey coast," Mostyn
said. "They looked exactly like Galveston."
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