Insurers are keeping a close eye on Hurricane Sandy as it churns off the U.S. East Coast, preparing to dispatch rapid-response teams to the hardest-hit areas once the storm passes.
There is just one problem: The storm is so large that most of the Northeast appears poised to endure at least some of the storm's wrath. No one knows yet where the hardest-hit areas will be.
Even after it passes, it will be days, or even weeks, before the full costs of the storm are known. A large part of the damage tab will be handed to the federal government in the form of flood-insurance claims.
Sandy is headed toward a densely packed part of the country, and most models now predict that a landfall in New Jersey or Delaware is likely late Monday or early Tuesday.
The storm is already kicking up tropical-storm force winds more than 500 miles from its center, and the National Hurricane Center is warning that New York Harbor and Long Island Sound may rise as much as 11 feet above normal levels.
Given its size, "the exact landfall location is less important" than for most hurricanes, disaster-modeling company Eqecat Inc. warned in an alert to clients. "The potential impact of the storm will likely be widespread."
Alerts from Eqecat and its rivals are studied closely by the insurance industry as companies try to assess where and how to respond to major storms.
But Dave Crowe, global head of commercial property claims for American International Group Inc. (AIG), said it wasn't yet clear whether Sandy would live up to the hype.
"The next 24 hours are going to be the tell-tale time," said Mr. Crowe said. "We're hoping the intensity is going to drop drastically when it makes landfall and that it'll move out quickly."
For now, insurers are assembling rapid-response teams along the Eastern Seaboard, and preparing to deploy claims specialists into hard-hit communities once the storm passes by.
Allstate Corp. (ALL), the U.S.'s largest publicly traded home and auto insurer, is staging its national catastrophe team in locations including Raleigh, N.C., and Roanoke, Va., spokeswoman April Eaton said.
Nationwide Mutual Insurance Co., meanwhile, is gathering its catastrophe response team in Harrisburg, Pa.
"Once we can figure out the greatest areas of impact we will begin assignments to support those areas hardest hit by the storm," spokeswoman Elizabeth Stelzer said.
No matter the cost to the insurance industry, its impact is certain to be less than it would have been a few years ago. Insurers have been raising home-insurance rates and tightening underwriting standards in recent years as claims costs from severe weather have risen.
Those changes come on top of steps insurers have taken since the 1990s to scale back selectively sales of policies in hurricane-prone areas and require consumers to pay steeper deductibles in some instances.
Some of those deductibles only kick in if the storms are hurricanes at landfall, which may not be relevant in Sandy's case, if the storm loses some power before coming ashore.
With so few hurricanes hitting the East Coast in recent years, Sandy could prove one of the biggest tests of those measures for many insurers. It also could be a test of "insurers of last resort" created by state governments to protect homeowners who don't get coverage from private insurers. Most of the U.S. states on the East Coast run insurance pools for homes in vulnerable areas.
The insurers of last resort offer coverage for wind damage. The policies they sell are separate from the National Flood Insurance Program coverage. That program is the federal government's attempt to fill a void left by a private- sector insurance industry that generally views floods as too unpredictable-and too expensive-to cover.
After past hurricanes, such as Irene in 2011, many homeowners realized only too late that water damage resulting from flooding that is churned up by a hurricane generally isn't covered under a standard homeowners' policy. And it is too late for consumers to rush out to buy a federal policy now to cover Sandy damage, with the storm bearing down, agents said.
Federal law requires people who buy houses in designated flood-hazard areas with federally backed mortgages to purchase the insurance, though not all maintain coverage for the life of the loan, a congressional report noted.
The federal flood program has faced significant criticism for not charging some homeowners enough.
The program has borrowed nearly $18 billion from the U.S. Treasury Department to pay claims resulting from the record hurricane season in 2005, which included Hurricanes Katrina, Rita and Wilma. A bill passed over the summer is designed to shore up the program's finances by cutting back subsidies and raising a cap on premium increases.
More than 20% of the 5.6 million homeowners in the program have been receiving subsidized rates. The subsidies are directed at homes built before 1975, and homes that were built before the nation's flood-mapping system was established to designate high-risk areas.
Meanwhile, some homeowners could well end up in fights with their private-sector insurers about what is and isn't covered and the size of their deductibles.
While extensive flooding from Hurricane Irene dramatized the fact that standard homeowners' policies don't cover flooding, a potential homeowners' insurance issue arising from Sandy is that loss of power may prevent sump pumps from operating, said Randy Maniloff, a lawyer in Philadelphia with White and Williams.
"But even policyholders that have a sump-pump coverage rider, to protect against this situation, may not realize that there is likely a dollar cap that is less than what it takes to deal with the clean-up and put a flooded finished basement back together," he said. "This coverage cap is sometimes in the $5,000 range."