ANY PORT IN A STORM?

Oct 11, 2024

7 min read

DISASTERS ARE INCREASING IN NUMBER AND SEVERITY – AND SO ARE LOSSES

This week we’re following up on our article, The Trillion Dollar Time Bomb, we dive deeper into the problem of insurance coverage in Disaster Areas which Mark Gongloff, a Bloomberg Opinion editor and columnist described by taking a deep dive into “why” this is such a large problem.

The statistics are staggering. The year 2024 is the 14th consecutive year during which the U.S. has experienced 10 or more one-billion-dollar disasters. It should surprise no one that the number and severity of weather-related disasters in the U.S. are growing. There were 28 separate billion-dollar disasters in 2023, and 2024 has recently passed that benchmark with the arrival of Hurricane Milton. And the year is not over.

According to Forbes, “Between January 2013 and January 2023, 88.5% of all U.S. counties declared a natural disaster, including 95% of the 200 most populated counties.”

The devastation to residents in hard struck areas has been catastrophic. What safeguard do homeowners have when a flood, hurricane, fire, or tornado damages or destroys their home? They must rely on insurance protection, but that is becoming increasingly difficult.

AccuWeather estimates that the losses from Hurricane Helene that tore through a half dozen states in September of 2024 will be as high as $250 billion. Unfortunately, most of those losses were not covered by insurance. The Public Broadcasting Service reports that the insurance industry estimates only about $5 billion of those losses were insured.

INSURANCE COVERAGE AVAILABILITY IS SHRINKING AND PREMIUMS ARE RISING

It seems inconceivable, but even as premiums go up, people are having trouble even finding insurance coverage.

As is the case with most hurricanes, much of the damage caused by Helene was flood damage, and a good deal of the damage was concentrated in areas outside of FEMA’s existing flood maps. That’s not a surprise – FEMA’s flood maps have not been updated in several decades, and don’t take into account changing weather patterns. Consequently, as reported by Politico, in those counties flooded by Hurricane Helene in North and South Carolina, and Georgia, just 2% of households had flood insurance.

Many homeowners are unaware they live in flood zones (designated or not), and many of those that are aware decline to enroll in FEMA’s insurance plan because the cost of the insurance is so high. The maximum coverage provided for building repairs is $250,000, which is often inadequate despite the high cost of the policy.

According to a study performed by Politico’s E&E News, in Florida, which has among the highest costs for coverage, only 24% of homes in designated disaster areas have FEMA flood insurance.

An article published in the Claims Journal on August 24, 2024 (The Growing U.S. Flood Insurance Gap: A Wake-Up Call for the Industry (claimsjournal.com )) states:

“Despite the increased frequency and severity of storms driven by climate change, fewer properties are being covered by flood insurance. Data from the National Flood Insurance Program and Neptune Flood highlight this troubling trend, showing a 2.4% decrease in coverage nationwide from July 2023 to July 2024. This equates to a loss of 87,159 policies, leaving only 2.7% of the 133.8 million buildings in the U.S. insured against flooding.”

According to a report that appeared in The Conversation on 9/24/24, US home insurance rates are rising fast – hurricanes and wildfires play a big role, but there’s more to it (theconversation.com ):

“To compound the problem, basic homeowners’ insurance, which does not cover flooding, has become increasingly expensive. As homeowners’ insurance premiums increase, coverage is shrinking. Some insurances companies are simply withdrawing from markets altogether, canceling existing policies or refusing to write new ones when risks become too uncertain, or regulators do not approve their rate increases to cover costs.

About 7.4% of U.S. homeowners have given up on insurance altogether.”

The report goes on to state the obvious. Insurance companies must hedge their bets as well, and they often turn to reinsurance companies that essentially insure insurance companies. Because of the rise in losses, these companies have raised their rates as well. Property reinsurance rates increased by 35% in 2023, and those increases are passed directly on to homeowners.

Deloitte reports that:

“…between 2019 and 2022, the number of severe climate-related disasters in the United States escalated by 32%, causing insured losses over the same period to rise by nearly 300%.

Several US insurers are reacting to this untenable situation by either limiting—or entirely withdrawing—coverage in disaster-prone areas, such as California and Florida. In markets at high risk of climate-related damage, insurers have also introduced double-digit rate hikes that are making it challenging for many homeowners to maintain their coverage.”

Amid all of this, the independent insurance rating s agency Weiss Ratings, found that many large Florida insurers denied nearly half of the homeowner’s claims closed in 2023. Consequently, the Insurance Information Institute reports that as many as 20% of Floridians have chosen to go without insurance. Those who have mortgages are required to maintain adequate insurance protection, but many of those opt to allow their lender to purchase a policy that covers the lender’s interest but does not provide coverage that extends beyond the amount of the mortgage, leaving the homeowner exposed.

And then there’s this: According to ValuePenguin by LendingTree, “Most policyholders (87%) haven’t updated or changed their current home insurance policy in at least a year, with 49% reporting they’ve had their current policy for more than five years.”

When one factors in the sharp rise in home values over the past several years, it is logical to assume that insurance coverage is likely inadequate for those who have not updated their policies.

In summary:

The number and severity of weather-related disasters are increasing annually. No state is exempt.
The losses resulting from these disasters are increasing exponentially. In 2023 the damage to property – without regard to infrastructure - exceeded $16B.
Even as insurance companies initiate severe rate hikes, many homeowners are opting to “go bare” without homeowners’ insurance – or purchasing only minimal policies.
Areas of the country that have never experienced flooding have recently been inundated. Despite this increased risk of flooding, the number of homeowners with flood insurance is declining annually (only 2.7% of all buildings in the U.S. are covered).

The obvious result of all this is that the number of disaster victims that suffer losses which are not reimbursed through insurance or government programs grows every year.

So where can they turn?

Lenders generally offer disaster victims a grace period during which they do not have to make mortgage payments. However, the term of the grace period varies (often as short as 90 days), and the payments that are skipped must be made up.

While some FEMA grants are available, they often take years to be dispersed. The Small Business Administration offers low interest loans as part of FEMA’s assistance to some of those who wish to rebuild, but that does not resolve the problem for those with an existing mortgage. They incur a second loan payment in many cases which does nothing to improve their financial security.

THE FEDERAL CASUALTY LOSS PROVISION AND DISASTER RELIEF

The saying, “Any port in a storm” suggests that when troubles arise, any solution will suffice. It need not be perfect. But resolutions that postpone mortgage payments for a short term, or that create additional payments, do not seem to fall within the definition of “solutions”.

There is only one source that provides real financial benefit for those who have suffered unreimbursed losses because of a federally declared disaster. That is the Federal Casualty Loss provision of the U.S. tax code.

The Casualty Loss provision provides that a taxpaying homeowner whose residence is damaged or destroyed in a federally declared disaster, may file a claim to recover unreimbursed losses in the form of a refund of federal taxes paid, or a reduction in the amount of federal taxes to be paid.

More importantly that filing can be used to amend a prior year’s filing and get immediate cash payments. This is money the homeowner does not have to repay, and on which no taxes accrue. It is quite literally their money.

Amazing as it seems, many victims have not heard about this opportunity and neither have most of those whose business it is to provide financial support to those who have experienced losses. Bankers, attorneys, accountants, realtors and FEMA officials seem unaware of the program and how it works.

Consequently, few disaster victims ever file claims. For the last year in which the IRS reported casualty loss claims as a separate line item for those individual taxpayers who itemized their expenses (2019), only 11,524 casualty loss claims were filed. That year, there were a total of 89 federally declared disasters, not counting events that occurred in U.S, possessions or on Indian reservations. According to NOAA, the United States experienced 14 weather and climate disasters with losses exceeding $1 billion each and totaling approximately $45 billion in losses.

Yet only 11,524 claims were filed. That’s probably fewer than 2% of all those who experienced unreimbursed losses.

The average deduction resulting from all casualty loss claims in 2019 was $33,560.

Interestingly, more than 3/4 of all claims filed that year were submitted by people earning less than $55K and their average deduction was slightly more than $40K. A taxpayer does not have to be wealthy to obtain a meaningful recovery.

Disaster Relief’s Free Online Recovery Estimator can show you how much money you can save by filing a casualty loss claim.

Tax Recovery Estimator | Disaster Relief (lossrecovery.biz)

CONCLUSION AND AN OPPORTUNITY TO HELP

As the gap between the size of losses and the amount of insurance protection to cover those losses widens, total unreimbursed losses will continue to rise. This leads to two undeniable conclusions:

1. No comprehensive disaster recovery plan is complete unless it includes a provision to provide victims with help filing federal casualty loss claims.

2. Those who suffer unreimbursed losses because of a federally declared disaster will never recover any of their unreimbursed losses unless they file a federal casualty loss claim.

There are many wonderful organizations who provide food, water, clothing, and temporary shelter to the victims of disasters. But no one really looks after their financial welfare.

Each of us can help.