A tale of three hurricanes

September 28, 2017
| United States

By Ken Giambagno and Henry Daar

Ken Giambagno, Global Head of Forensic Accounting & Complex Claims, on the aftermath of hurricanes Harvey, Irma and Maria

All eyes were on Houston as the unprecedented rainfall brought by Harvey turned much of the nation’s fourth largest metropolitan area temporarily into a lake. Then came Irma, and we held our breath as the giant storm wound a path that inflicted terrible damage but mercifully fell short of the worst-ever predictions that preceded it for much of Florida. And then Maria, hammering some of the islands that Irma had spared.

With record-setting rain in Harvey’s case and size in Irma’s case, businesses were devastated, some from flood, some from wind, some from both. But as we take a moment to catch our breath in this relentless series of storms, it might be useful to compare flood events, which are awful, but usually not catastrophic, and major wind events, which bring with them the possibility of total destruction.

Flood events

Flood events by and large are not catastrophic to businesses. Awful, but not catastrophic. Sooner or later, the water will recede and companies can begin to repair, replace and resume. The recovery process is not necessarily quick, as problems with mold contamination and other by-products of water damage may take time to emerge, and if they do, additional costs and headaches may follow. But the foundations of the business — and hopefully the foundations of the structures where the business operates — should be sound.

If flood coverage is a part of your organization’s insurance protection, the task of rebuilding may not deliver a big financial hit. If business interruption is part of the protection, the ripple effect of the disaster on the ability of your company to make money may also be protected financially. If contingent business interruption is part of the package, then the impact of an extended ripple effect can be covered — for example, when a vendor, client or other crucial business partner is damaged by the flooding and their incapacity affects your business. You don’t have to be close to Houston to face a loss from Harvey — or to be protected from that loss.

Another relevant cover is extra expense, which covers additional expenses caused by the storm. Examples include overtime and weekend rates for emergency repair work, higher costs for scarce construction materials, and additional transportation costs if infrastructure is damaged.

The issue of flood exclusions in property policies will play a big role here. But even with those exclusions, experts are looking at massive insured losses — approaching $20 billion in Harvey’s case, which would make it the most expensive storm in Texas history, according to the Insurance Council of Texas.

Wind events

Depending on the strength, duration and reach of those winds at landfall, catastrophic damage may result. Storm surges along coastal areas caused major flood damage, but for the purposes of comparison we’ll focus on the wind side. Wind caused the most dramatic and expensive damage in the areas that took a direct hit from Irma — at one point described as the largest hurricane ever measured in the Atlantic Ocean. Entire islands were just about destroyed. And entire businesses along with them.

In these stark conditions, the same coverage issues mentioned above will of course apply, and the wording related to named storm and wind storm will be particularly crucial. But the nature of the recovery challenge is fundamentally different. The survival of the enterprise may be at risk. Brand perception may be at risk. Access to any resources that would be needed to rebuild — whether financial or physical — may be at risk. When the waters of a flood recede, they reveal facilities that may be damaged but are usually intact. When the winds of a hurricane die down, there may be nothing much left.

Parallel and intertwined responses

So what actually happens, from an insurance perspective, in the aftermath of a major weather disaster, of either the flood or wind variety? Two things: claim advocacy and forensic accounting.

Claim advocacy, provided by a broker/partner as part of a service agreement or at an additional charge, starts with a deep look at the applicable insurance policies. Definitions of flood and wind storm and differing treatment for damage caused by named storms must be scrutinized, along with language regarding retentions and deductibles. Applying the wording in the insurance contract to the situation on the ground after a weather disaster usually requires careful interpretation — with which the insurer is likely to disagree. The claim advocate will be ready to lead at the negotiating table.

Forensic accounting, usually provided at additional cost by experts in the field, focuses on assessing and measuring the damage as well as the cost of rebuilding. As the term forensic implies, this effort amounts to a lot more than totaling up the cost of the property destroyed. Rebuilding might take place in physical or regulatory conditions far different from those at the time of the original building or outfitting of a facility. Calculating business interruption and contingent business interruption losses requires assessment of a marketplace that may have been irrevocably altered by the weather disaster at hand. That kind of assessment requires a deep, top-to-bottom understanding of every aspect of a company’s business, including their supply chain, products, customers and place in the market. The forensic accountant can expect to have their conclusions challenged by the insurers as well. And the insured can expect the forensic accountant to be ready for those challenges.

For recovery to proceed, claim advocacy and forensic accounting must work in tandem. The claim advocate will assess what losses are covered and to what extent. The forensic accountant will assign dollar amounts to those losses. Both are needed to get a claim paid. Both actions are usually put in motion as soon as possible after the damage can be surveyed.

The difference in responses

The fundamentals of the two-pronged disaster response are the same following any kind of disaster and the urgency is clear. But the timetables and response strategies will be different in the case of flood and catastrophic wind damage. For the latter, the recovery is a much longer and more complex process, but the need for speed in response is in some ways greater. Why? First, as mentioned above, the survival of the company can be at risk, so a response and recovery plan must be implemented as soon as possible. Second, because determining the ultimate losses will likely take considerable time, quick payment of partial or advance insurance payments becomes critical — to fund the next steps.

In the case of flood damage, the task at hand is hopefully more finite. Losses can be more readily determined, claims made, and the repair and replacement process can begin. Urgent, of course, but getting the information right is the key to making the process go smoothly. Also, as noted above, flood damage can take time to reveal itself.


The first key takeaway is to make sure you have both the claim advocacy and forensic accounting bases covered. Ideally, you should know who these resources will be before a disaster strikes. In the aftermath of a disaster, you will have untold distractions and shopping for response support will add to your stress.

For your claim advocate, you will want a professional already familiar with your policies. For your forensic accountant, you will want a professional familiar with your business and with your industry and the types of recovery issues you may not have foreseen. And in both cases, you will obviously want a partner you can rely on for a quick and effective response under tense and adverse circumstances.

The need for partnership is especially keen in the case of the catastrophic loss. Recovery is a long, often multiyear process. It involves several steps — from the crucial early response to the drawn-out final determinations and negotiations with insurers. The situation on the ground and the assessment of losses can change along the way. The effort is ongoing and your relationship with your support providers is going to be critical.

The second key takeaway goes back to coverage. In the case of non-catastrophic loss, you have to make sure your limits and your coverage are at levels you can live with. You have to be comfortable with the details regarding flood versus wind versus named storm. You should be clear on the business interruption protection you have and how far it extends into the realm of contingent losses. And you should be aware of the extra expense coverage you may want and need.

In the case of catastrophic loss, you need to consider all the issues above. And you also need to make sure you have properly valued your assets and business property. If you lose everything, the payout from insurance may be all you get.

If we’ve learned anything from this hurricane season, it’s that the perils businesses face are not once and done. They keep coming, one after another, like letters in the alphabet.