Research & Commentary: Standardized Loss Allocation System for Hurricane Claims and the COASTAL Act

Published June 28, 2011

The two major forces of a hurricane—wind and water—can do grave damage to homes. This can pose a problem because private insurers cover almost all wind damage while the National Flood Insurance Program (NFIP) handles all flood damage to ordinary homes. This split responsibility results in arguments over the cause of losses when a property is classified as a “total loss” and adjusters cannot agree on how much damage to attribute to wind or water, respectively.

Thus many post-hurricane insurance claims end up in court and impose unnecessary legal bills on insurers and policyholders. As a result, many proposals—ranging from privatization of the flood insurance program to a government takeover of wind insurance—have received hearings and even votes in Congress.

One such proposal is the COASTAL Act, introduced in Congress by Sen. Roger Wicker (R-MS), which would create an alternative, known as a standardized loss allocation system. Federal and state regulators and private parties would agree in advance to assign responsibility for losses to wind insurers and the NFIP based on standardized formulas using scientific data.

COASTAL Act proponents say a standardized loss allocation system would speed up the claims payment process while relieving some of the burden on the failing NFIP.

The following articles examine the wind-flood problem, the proposed standardized loss allocation system, and the COASTAL Act.

Solving the Flood/Wind Problem after Hurricane Losses: The Case for a Standardized Loss Allocation System
This Policy Brief from The Heartland Institute describes the problem of indeterminate losses, outlines the shortcomings of two other frequently proposed solutions, and describes a better solution: a standardized loss allocation system in which federal and state regulators and private parties agree in advance to distribute losses in specific ways.

Wicker Charts New Course for NFIP Changes
The Biloxi Sun-Herald discusses Sen. Roger Wicker’s (R-MS) COASTAL Act proposal and reforms to the NFIP.

The Wind versus Flood Dispute: A Conflict of Interest; a Review of the Proposed Multiple Insurance Act of 2009
This Federalist Society paper reviews the Multiple Insurance Act of 2009 and the overall wind-versus-flood problem.

FEMA Concedes Need for More Private Sector Involvement in Flood Insurance
This article from FIRE Policy News discusses the recent admission by the Federal Emergency Management Agency that more private-sector involvement is needed in the flood insurance market to help the overburdened NFIP.

Research & Commentary: Windstorm Expansion of the National Flood Insurance Program
This Heartland Institute Research & Commentary examines the wind-versus-flood problem and the proposed expansion of NFIP.

Wicker Seeks Flood Insurance Reforms
Senator Wicker’s office explains the rationale behind the COASTAL Act and how it addresses several problems of the current system.

Industry, Taylor React To ‘Compromise’ Senate Wind vs. Water Bill
National Underwriter examines the COASTAL Act and the responses from several insurance groups.