Can governors bar insurers from charging hurricane deductibles?

By Alison Frankel
November 1, 2012

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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