As the Gulf Coast braces for Hurricane Isaac, one hopes the region will avoid not only the massive destruction wrought by Hurricane Katrina eight years ago, but also what came next: a raft of uncertainty as the courts became deluged with disputes over whether particular damage was caused by wind, or by water.

Ordinarily, such distinctions are not terribly hard to make. Windstorms tend to damage roofs, windows, trees and the like. Floodwaters from a storm’s tidal surge tend to be relatively limited in geographic impact, and they generally leave behind a tell-tale water mark that an adjuster can rely upon to divine which portions of the damage are related to which peril.

But when a property is totaled, particularly where wind and wind-driven water appear to have worked either concurrently or in sequence to destroy the structure, confusion can arise. And given that nearly all flood insurance is written in this country by the federal government’s National Flood Insurance Program, making the right call in these cases is an important issue of public policy. It was precisely to address these kinds of so-called “indeterminate losses” that Congress included language creating an alternative loss allocation system as part of the five-year NFIP extension that President Barack Obama signed in early July.

Under the Consumer Option for an Alternative System to Allocate Losses Act, the Federal Emergency Management Agency will use data gathered from both public and private sources by the National Oceanographic and Atmospheric Administration to apportion losses between wind and flood. The assessments would also take note of the property’s elevation and the building’s construction materials.

Originally introduced as a separate piece of legislation by Sen. Roger Wicker, R-Miss., before being attached to the final NFIP reforms that passed Congress, the COASTAL Act is based on a proposal formulated by former South Carolina Insurance Commissioner Scott Richardson, who is now an associate fellow of ours at the R Street Institute. The process is designed to offer certainty to both policyholders and insurers that claims are properly assessed using the best available science, while minimizing the cost associated with protracted litigation. A FEMA-appointed arbitration panel would resolve disputes how the allocations are determined, although insurers and policyholders also would be free to opt out of an assessment by agreement.

But another key motivator for the change is to protect the U.S. Treasury – and by proxy, U.S. taxpayers – from paying for windstorm damage that should properly be assessed to private insurers. It is probably the case that fears of insurers sloughing off claims onto the public are largely overblown; as previously mentioned, in most storm claims, causation is fairly clear. But the conflict of interest embedded in the NFIP’s Write Your Own program — in which private insurers who frequently are also the primary homeowners’ insurer on a property are paid to adjust claims on behalf of the NFIP —  is readily apparent to everyone. Even if only to avoid the appearance of a conflict, a system that makes use of the best available science to delineate wind claims from water claims will serve everyone involved much better than the current system.

Alas, these changes arrive too late for any Isaac claimants. It will take roughly two years to finalize the new process. Here are some key dates to look forward to as the federal government works toward implementation of the COASTAL Act:

To all of our Gulf Coast readers, stay safe and best of luck!

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