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Basement Definition Could Impact Hurricane Sandy Flood Claims

Source: A.M. Best

Posted on 19 Dec 2012 by Neilson

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Flood insurance and Sandy lossesA Jersey City man has filed a class-action lawsuit in U.S. District Court in New Jersey arguing over the definition of a basement under the National Flood Insurance Program that led to claim denials following Hurricane Irene and could lead to denials in the aftermath of Hurricane Sandy, according to his lawyer and court records.

Patrick Donnelly filed the suit against his insurer, New Jersey Re-Insurance Co., and eight other companies that participate in the write-your-own program in New Jersey for the NFIP. The companies named in the lawsuit include some of the state's largest personal lines insurers like Liberty Mutual Fire Insurance Co., State Farm Fire and Casualty Co. and Travelers Insurance Cos., according to court records.

Donnelly, who had a flood policy written by New Jersey Re-Insurance for the NFIP, said a flood claim he made following Irene was denied because of the erroneous classification of the lowest floor of his building as a basement. According to court papers, the standard flood insurance policy defines a basement as "any area of the building, including any sunken room or sunken portion of a room, having its floor below ground level on all sides."

The lawsuit claims the denials were made by the Federal Emergency Management Agency at the request or recommendation of the particular write-your-own insurance company that issued the policy.

Donnelly's lawyer, Jeffrey Bronster, would not speak in specifics about his client's claim, but said since he's been working with Donnelly, he's learned there are many people in New Jersey dealing with a similar situation.

"Especially in Jersey City, Hoboken, areas like that, where you have a lot of, what are colloquially sometimes called, garden apartments," Bronster said.

Bronster said there is a huge variation in buildings in New Jersey that make some of them subject to interpretation under the NFIP's definition of a basement. "Some of these buildings are slightly below ground level on all sides, some are slightly below ground level on some sides but not others," Bronster said.

Bronster said there have not yet been any instances of denials over the basement issue from Sandy, but he expects the practice to continue during the claims handling from the storm.

"We have a significant number of insureds who are telling us that the insurance company adjusters have already told them that they will not be fully paid because their ground floor is going to be considered a basement," Bronster said.

Sandy struck on the evening on Oct. 29 just southwest of Atlantic City, N.J. as a post-tropical cyclone. The storm brought with it strong winds and damaging storm surge, which could contribute to insured losses of up to $25 billion, according to RMS.