WE’RE HEARING one year after Hurricane Sandy wreaked havoc on the Eastern Seaboard, many victims remain furious at their insurance companies.
The problem, especially acute in New York State, is that many homeowners faced delays in obtaining insurance claims, were denied coverage or were compensated at levels below what they expected.
For a time, the issue ensnared mortgage servicers in the wrath of borrowers and public officials, since servicers often administer flood and homeowners insurance on behalf of mortgage borrowers.
New York attorney Edward Steinberg of Leav & Steinberg, which recently filed more than 20 lawsuits against insurers who allegedly shortchanged policyholders, told me part of the problem is that New York insurers don’t have as much experience assessing hurricane damage as insurers active on the Gulf Coast. Moreover, he said New York laws are more “favorable to the insurer” than in states where hurricanes strike land more frequently. (In both New York and New Jersey, state legislators are considering bills that would strengthen consumer protections and make it harder for carriers to delay or deny coverage.)
Steinberg said filing litigation now was important because some policies only allow a one-year window to challenge claims decisions after an event has occurred. Other policies allow a longer period to file claims or challenge denials, but he wanted to be on the safe side for all clients.
Many homeowners faced disputes about whether damage was caused by wind or flooding, with the carrier providing flood coverage pointing fingers at the carrier that covered wind damage, and vice versa. Steinberg is of the opinion that insurers haven’t lived up to their responsibilities in the wake of the storm.
“It certainly seems to be widespread among the communities that were most affected,” Steinberg said. “By and large I think it’s across the board. Carriers simply are trying to avoid paying what would be fair and deserved.”
The good news for the mortgage industry? He’s not taking aim at mortgage servicers. The litigation is targeting the insurers’ carriers exclusively.
After the storm, communication between servicers and insurers posed some problems, the attorney said.
“Early on, many of our clients were dealing with the mortgage servicer, because they were controlling the purse strings in terms of the release of funds,” Steinberg said.
The litigation against insurers in the wake of Sandy is unique because the storm’s damage was so extensive that claims of this magnitude and type have not been filed before. Steinberg hopes the litigation will help make New York law and common law more consumer friendly by discouraging “bad faith” attempts to avoid paying claims.
Steinberg isn’t the only one dissatisfied by the insurance industry’s response to the storm. New York Gov. Andrew Cuomo’s administration used the one-year anniversary to prod insurers to improve their response times for the next big storm that hits the Northeast. The new “emergency disaster protocol” is designed to speed up insurance claims and the delivery of disaster assistance.
The controversy surrounding denied insurance claims is not limited to New York. An analysis of 315,000 residential insurance claims filed in New Jersey, conducted by the Star-Ledger newspaper, found that a quarter of those claims were closed with no payment to the policy holder. (However, the newspaper noted that some people filed claims knowing their loss wasn’t covered, because they needed to document a denial of coverage to apply for FEMA aid.)
Just to recap the storm’s impact, FEMA estimates that 650,000 homes were damaged or destroyed by Sandy. The National Flood Insurance Program has paid out nearly $8 billion in claims related to the storm.
A RealtyTrac analysis found that the storm apparently contributed to a jump in foreclosures. Foreclosure activity in the first nine months of this year was up 33% from 2012 in New York’s five boroughs and the counties that constitute Long Island. In Queens, which includes the Rockaway barrier reef island, foreclosure activity was up 61%, according to RealtyTrac.
One thing we don’t know? How many borrowers received forbearance on loans backed by Fannie Mae and Freddie Mac? Although both government-sponsored enterprises announced forbearance policies at the time of the storm, neither one was willing or able last week to tell me how many borrowers received forbearance. For the record, a spokesperson for Fannie Mae told me he wasn’t sure if the company released that information, but he said he would check. (I didn’t hear back from him after that call.) That was a tad better than Freddie Mac’s response. A spokesperson for Freddie Mac did not even respond to my request for information about forbearance in the wake of Sandy.
Ted Cornwell has covered the mortgage markets since 1990. He is a former editor of both Mortgage Servicing News and Mortgage Technology.