Post-derecho insurance lessons

Even as the winds died down in the wake of the Aug. 10, 2020, derecho that devastated the Corridor with wind speeds up to 140 mph, another storm began building with some local businesses’ recovery efforts. The costliest thunderstorm event in U.S. history, the derecho left more than $11 billion in wind and water damage […]

Even as the winds died down in the wake of the Aug. 10, 2020, derecho that devastated the Corridor with wind speeds up to 140 mph, another storm began building with some local businesses’ recovery efforts. The costliest thunderstorm event in U.S. history, the derecho left more than $11 billion in wind and water damage in its wake, with at least $7.5 billion reported in Iowa alone. And as insurance adjusters and companies began processing thousands of derecho-related claims, many businesses found that their insurance coverage was insufficient to cover the volume of damage they had sustained. “One of the biggest (issues) we saw was the total amount of coverage for a building,” said Andrea Rogers, director of operations for the Accel Group, a Cedar Rapids-based insurance brokerage with an office in Coralville. And it’s not just a matter of calculating the business’ investment in their current facilities, Ms. Rogers said. Replacing a facility destroyed by a catastrophic weather event could easily cost more than a business had invested in that facility – a situation many businesses faced as they evaluated derecho damage – so it’s important for business owners to understand the different types of available property coverage. “You can have replacement cost coverage, which would replace up to the full amount of the insurance on the building,” she said. “If a building cost $10 million to build, you could have $10 million of coverage on replacement cost.” Even with that coverage, Ms. Rogers said, there may be extra insurance endorsements needed to cover increased construction costs or other factors. “If they have to have their current building torn down before they rebuild, there are endorsements for demolition costs and removal of debris,” she said. Other options include actual cash value coverage, which will cover the value of the building after depreciation is considered, and “inflation guard” coverage, which will automatically add a percentage to the value of your building each year and adjust coverage and premiums accordingly. “Blanket” coverage may also be a feasible option for businesses with multiple locations. Some businesses have chosen lower coverage options to save money on premiums, but Ms. Rogers said that choice could come with costs beyond simple shortfalls on claims payments. “A lot of times, we saw businesses trying to cut corners,” she said. “They probably knew the value wasn't where it should be. If you insure a $10 million building for $8 million, just because it makes the insurance premium less, (often) the insurance company will charge a coinsurance penalty if you didn't insure your building to its value. You could also be deducted a percentage of the (coverage) amount, so you wouldn't even get the full $8 million if your building was totally demolished, because you were deliberately uninsuring your building.”

Unprecedented challenges

In many ways, the derecho brought previously unfathomable challenges for insured and insurers alike, since damage was so severe and widespread, said Spencer Stephens, president of Sheets Forrest Draper Insurance in Marion. “It’s not often that we basically see a hurricane come through, compared to people on the coasts,” Mr. Stephens said. With supply chain issues already emerging from the COVID-19 pandemic and other factors, post-derecho repairs often took longer than expected, due to shortages of contractors and laborers, and costs soared due to shortages of construction materials, Mr. Stephens noted. A large-scale, total-loss event like the derecho put more of an emphasis on replacement cost, as opposed to typical repairs from a severe thunderstorm or high-wind event. “Oftentimes, people look at what it would cost to rebuild my building,” Mr. Stephens said. “When we talk about insurance, that's only a piece of it, because we're not just building a new building on a fresh piece of ground that hasn't been touched before. If you’re rebuilding a building, you might have debris removal expenses to clean up the place. You’ll have more permitting, you might have more engineering fees.” A new building also may not be an exact replica of its predecessor due to changes in materials and construction technologies, Mr. Sheets noted. “A brick building could cost more to remove than a frame building,” he said, “Someone may say, ‘I bought this building for $600,000.’ Well, that's good and all, you might have gotten a good deal, but that doesn’t mean that’s going to be the cost to replace it. This is a skewed area. You've got market value, you've got replacement value, you've got assessed value, and very rarely do those three meet at the same intersection. And for the insurance policy, it doesn't matter what it’s assessed at. If they want replacement cost, the coverage has to be what it would cost to replace it.” A total loss can also impact other business costs, Mr. Draper said, including interruption of business and revenue flow, temporary relocation and replacement of expensive high-tech equipment or inventory. Even if premiums may be higher to cover such contingencies, Mr. Draper said, the cost-benefit analysis can still favor the business owner. “In the grand scheme, it’s fine to have insurance, but if you don't know what you're covered for, and more importantly, what you're not covered for, what's the point of even paying for it?” he said. ”If you're going to have that expense, you might as well have the expense that covers what you're looking to do."

Issues between adjusters and property owners

Of the 5,500 derecho-related claims processed by Accel Group, about 40% came from businesses, said Tyler McAndrew, head of the brokerage’s claims advocacy department. “Probably 80% of our policyholders in the Cedar Rapids area had some sort of claim,” he said. And of those claims, Mr. McAndrew said the most common disputes arose between insurance adjusters and property owners, who were working with their contractors to complete derecho repairs. “The adjuster would say X, Y and Z were damaged, and the insured and their contractor would think A through Z was damaged, and there was a difference in resources to close that gap,” Mr. McAndrew said. “That’s the most contentious thing that came up, and it came up often – that difference of opinion on the scope of repairs.” Another issue that arose on occasion was the time gap between the appraisers’ estimate and the availability of a contractor to complete the work. “A year later, they were finally able to get someone, but the price of lumber or construction materials had grown so exponentially, my $15,000 claim is now going to cost $25,000, and the adjuster might still say, ‘no, my estimate says it's $15,000’ and they wouldn’t come back,” he said. “Then the insured is in the middle. That’s where we would come in, get all these parties together, take a look at things and try to find a reasonable agreement.” Roof claims were especially problematic at times, because an adjuster would often claim that damaged roofing sections could be repaired without a full roof replacement, while contractors would assert that patchwork repairs were inadequate and would create future issues. The situation would occasionally result in litigation, but avoiding the court system is generally best, Mr. McAndrew said. 

Report focuses on Cedar Rapids derecho response

A report commissioned by the city of Cedar Rapids and received by the city council in late July summarizes the city’s response to the August 2020 derecho, highlighting both strengths and weaknesses and setting standards for future disaster response. The “After Action Report,” conducted by Atchison Consulting, was designed to help develop a roadmap to improve core capabilities city-wide. The report allows city officials to enhance and implement operational and tactical plans, as well as policies and procedures to strengthen individual city departments and the city government capabilities as a whole. It also includes a Process Guide for Requesting Resources, which details how local jurisdictions, like Cedar Rapids, are the first tier of the incident management process. The guide details how resources are requested and who has authorization to activate particular resources at a county, state and federal level. The report focuses on five core capabilities – operations communications, operational coordination, situational assessment, risk and disaster resilience assessment, and mass care services. “The After Action Report is an integral part of disaster response assessment and further emergency preparedness,” Cedar Rapids fire chief and incident commander Greg Smith. “It is important to recognize strengths and build upon those successes. Nearly every disaster unveils opportunities for growth. It is important to recognize growth opportunities and take steps to incorporate recommendations. Improving disaster preparedness and response capabilities is essential to reducing the risk of serious injury and property damage in our community when a disaster strikes.” To read the full report, go to www.cedar-rapids.org/derecho/review.php.