The residents of Texas and Louisiana have begun to assess the scope of damage caused by Hurricane Harvey. On August 25, 2017, the storm made landfall near Rockport, Texas, as a Category 4 Hurricane. The next day, the storm made a second landfall north of Holiday Beach, Texas, and began to slowly move northeast. Given the slow moving nature of the storm, southeast Texas endured days of torrential rain and winds, and the greater Houston metropolitan area experienced widespread flooding, power loss, and explosions at chemical plants. By August 28, the storm had weakened to a tropical storm and had moved to Louisiana, where hundreds of people were evacuated due to the risk of flooding.
The devastating impact of the storm will likely raise several reinsurance issues. For example, reinsurance treatises may include an hours clause, which limits the time that loss arising from a specific peril, such as a hurricane or windstorm, can be aggregated into one occurrence if the loss was sustained during a long-lasting event. Thus, cedents are able to aggregate claims that occur within the hours period specified by the reinsurance contract, typically 72 or 168 hours. Usually, the reinsured has the ability to choose the start time for the applicable hours period.
Harvey’s brutal trek through southeast Texas and Louisiana lasted days, so hours clauses in reinsurance contracts may impact aggregation of claims. It is entirely possible that early losses, such as storm and wind-related losses occurring in Texas, are not aggregated with later flood-related losses in Texas or Louisiana. Under this scenario, the losses would be split into multiple occurrences, and the earlier occurrence could exhaust layers of reinsurance coverage. It may also be possible for cedents to recover in respect of two or more occurrences—one for earlier loss in Texas and another for later loss, either in Texas or Louisiana—subject to a right to reinstatement of the reinsurance cover.
It will take time for the devastating losses attributable to Harvey to make their way through the claims process. Cedents’ attempts to aggregate or disaggregate loss attributed to Harvey will need to be examined against the aggregation language in the reinsurance contracts in the context of when the losses occurred.
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