What If A Hurricane Or Other Catastrophic Event Hits New York: Insurance Preparation And Recovery

On September 27, our law firm together with the restoration firm, Maxons Restorations, Inc., sponsored an in-depth presentation, held at the Association of the Bar of the City of New York, focusing on the potential consequences to large property owners in New York City and in the metropolitan area in the event a hurricane or other catastrophe hit the New York metropolitan area.

From the perspective of our law firm's practice in representing large property owners on construction and environmental issues and in carrying out long-term capital programs, I served as the program's moderator.

The impetus for the program derives from questions raised in the aftermath of Hurricane Katrina. The financial impacts from Katrina were devastating with some commentators projecting the overall financial damages, once quantified, to be in excess of $100 billion. As we examined the physical and financial recovery effort, it became clear that there were three major and specific areas of focus which, if attended to in advance, could diminish the financial impact of a hurricane or of a similar disaster or terrorism event.

The three areas of focus are:

1. Risk Management Planning: Upfront insurance planning and understanding of coverages and upfront protection of the physical plant in anticipation of the catastrophe in order to mitigate damage;

2. Financial Recovery Strategies: Framing and progressing the insurance claim in such a manner as to maximize prompt recovery; and

3. Physical Recovery Strategies: Speedier and more strategic first response through planning the recovery strategy as a part of the insurance and risk management planning process.

To examine the issues and develop specific advice and recommendations, the presentation featured a keynote multimedia presentation by leading hurricane expert, Professor Nicholas K Coch, Ph.D., School of Earth & Environmental Sciences, Queens College, followed by a panel of leading experts on property management, risk management, insurance underwriting and coverages.

Professor Coch pointed out that the New York - New Jersey region has a unique set of topographic, oceanographic, demographic and geographic characteristics that guarantee maximum damage when a hurricane makes landfall. Professor Coch pointed out, "Hurricane winds will have a complex interaction with high-rise structures, and the degree of surface paving in New York City will decrease the lag time and increase street flooding. Salt water flooding will cause great permanent damage to underground power, computer and transportation facilities."

Summing up the central focus of our presentation, Professor Coch observed, "Unless we act on what we have learned, the impact of a major hurricane, along the most heavily developed and populated, hurricane-prone urban shoreline in America, could have catastrophic consequences!"

The panel discussion featured the following industry experts:

Damon Gersh: President and CEO of Maxons Restorations, Inc., one of the premiere restoration and recovery firms in New York City. Maxons has played a major role in restoring many New York City properties, including large-scale response to help restore lower Manhattan following 9/11.

Lynn K. Neuner: an attorney representing insurance companies in litigation matters, as a member of Simpson Thacher's litigation department. Ms. Neuner has extensive experience as a trial lawyer in federal and state court as well as having participated in two cases before the United States Supreme Court.

Barry J. Fleishman: a partner at the law firm of Dickstein Shapiro, who represents insureds in litigation matters, and whose practice focuses on the representation of companies in insurance disputes relating to property damage, natural disasters, fires, and explosions, including representation relating to the events of 9/11.

Brian Schley: the Assistant Vice President of Risk Management for Archstone-Smith, a recognized leader in apartment investment and operations with a current market capitalization of $19 billion, representing 82,491 units, including those under construction. Mr. Schley has negotiated in excess of $75 million in insurance claims since joining the company.

Daniel Lentz: a Partner in Ernst & Young's Fraud Investigations and Dispute Services Group with responsibilities relating to insurance claims, fraud and litigation services, including serving as a testifying expert.

Michael Chang: the head of Chubb Specialty Insurance Worldwide Real Estate Practice with responsibilities for growth, retention and profitability in property, casualty and financial lines.

Steve Curlen: the Worldwide Loss Control Manager of Chubb's Specialty Real Estate Insurance Practice, who has 25 years of risk management and loss control experience, having written in depth on risk of catastrophic loss.

When it comes down to it, the basic issue is whether large property owners learned lessons from Katrina's disastrous losses and implemented reforms that will help when the next major hurricane hits.

To focus this issue, the panel answered the following questions:

1. What are the lessons learned, from Katrina, on the purchase of insurance?

As Barry Fleishman puts it, "Wording of insurance policies is horrendous. The policies can be called 'all risk' but they contain 75 exclusions. It is impossible to know what is in the fine print."

Lynne Neuner emphasized, on behalf of the insurance company, "With the right knowledge and approach, settling the large catastrophe claim does not have to be wholly adversarial."

2. What pre-planning can be done to protect real estate assets from a major storm?

It is clear that an 'expense to reduce loss' can be covered by the insurance company. As Brian Schley sees it, "The owner can tarp the roof, board windows and take steps to prevent water intrusion, and contractors are selected in advance to undertake these tasks at an agreed price. What is more of a problem is deciding when to bring in a catastrophic contractor, to supplement recovery efforts; this can be extraordinarily expensive," Mr. Schley observes.

3. Is the property owner necessarily in an adversarial position to the insurance company?

Damon Gersh urges, "Insurance companies do not like surprises; from the very beginning, it is essential that the insurance company and property owner have matched expectations in scope, approach and dollars. This way litigation can be avoided, and the claim can be resolved promptly."

4. What market conditions exist for catastrophic insurance coverage?

"With all of the catastrophes, including 9/11, earthquakes and Katrina, there is a scarcity of re-insurance, and there are availability and rate issues for coverage, particularly relating to the gulf coast and Florida," according to Michael Chang of Chubb.

5. Insurance companies have sustained monumental losses in Katrina; what are the economics of coverage of future catastrophes? When the insurance company looks at risk, what is the distinction between insuring against a natural disaster like a hurricane as opposed to other types of catastrophic loss?

As Michael Chang of Chubb puts it, "Corporately, we manage our total aggregation of risk similarly to how a bank manages its loan portfolios. We want to have diversification in our portfolio and not a huge amount of exposure aggregated in any one area or territory. Managing this process aggressively ensures that we are able to meet our claims obligations to our clients in the event of a CAT loss."

6. From an underwriting standpoint, how important is it to meet with the direct customers, listen to their corporate story, and how they manage their overall risk?

As Steve Curlen of Chubb puts it, "For the comfort and effectiveness of the underwriter, knowing your customers and building relationships with their key personnel is critical."

7. Looking at Katrina as an example, why does it take so long to restore a building after a loss?

Steve Curlen of Chubb responds that "There are so many steps involving so many people. You need to deal with local politics, and demolition and reconstruction of partially destroyed buildings must take place."

8. How can claims best be determined, preserved and adjusted after a natural catastrophe? Who is involved and at what stage?

As Daniel Lentz of Ernst & Young observes, "The first call is to the insurance company and broker to put them on notice; followed by the restoration contractor; quite often a consultant with accounting background will be retained at the outset, as well."

9. What specifically do owners need to know about their business interruption and property damage coverage?

As Barry Fleishman states, "The property damage claim is all about coverage and quantum. In large catastrophic claims, as those post 9/11, you cannot always locate all of the receipts for the work."

As to business interruption claims, Mr. Lentz observes, "These claims are more difficult to document as the business or property owner will have to demonstrate, from books and records, what the expectation was for the company's earnings, if the catastrophe had not occurred."

10. What are the lessons learned from Katrina about the claims process? How can it be handled more effectively?

As Damon Gersh observes, "Don't issue a press release before matching expectations with the insurer, and never commit to an unrealistic time frame for claim recovery. Good communication and a close working relationship with the insurer are critical."

Published December 1, 2006.