This hurricane season has packed a powerful punch to the south and southeastern United States and Caribbean Islands, causing widespread devastation that could take years to overcome and will surely have ripple effects throughout the reinsurance industry.
Hurricane Harvey first made landfall as a Category 4 hurricane on August 25, 2017 near Rockport, Texas. 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.
No sooner had Harvey begun to weaken, its successor, Hurricane Irma, ventured across the Atlantic to pummel the Caribbean, first hitting Barbuda on September 6. Four days later, Irma made landfall in Florida and travelled up the state as it weakened into a tropical depression and made its way into Mississippi, Georgia and Alabama. Irma was no kinder to its victims than Harvey.
The devastating impact of the storms will likely raise several reinsurance issues, not the least of which is the implication of “hours” clauses. 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.
Each storm lasted days, so hours clauses in reinsurance contracts may impact aggregation of claims. Losses incurred by each storm could be split into multiple occurrences, and the earlier occurrence could exhaust layers of reinsurance coverage. It is entirely possible that early losses attributed to Harvey, such as storm and wind-related losses occurring in Texas, are not aggregated with later flood-related losses in Texas or Louisiana. Likewise, Irma spent at least five days on its course of destruction between the outer Caribbean and Florida, and the losses in the Caribbean may not be aggregated with those in Florida or Georgia. Notably, it may be possible for cedents to recover in respect of two or more occurrences, subject to a right to reinstatement of the reinsurance cover.
It will take time for the devastating losses attributable to Harvey and Irma to make their way through the claims process. Cedents’ attempts to aggregate or disaggregate loss will need to be examined against the aggregation language in the reinsurance contracts in the context of when the losses occurred and the law of the controlling jurisdiction.