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Insurers know: The sky is falling and the water is rising p3

Thu Jun 26th, 2014 on     Homeowners Insurance,    

In April 2013, it rained especially hard in Chicago for two days. According to local news outlets, some areas reported as much as 6.69 inches of rain in a 24-hour period. And that was just the first round of storms.

It was all too much for Chicago’s sewage system to handle. Sewage backed up into basements and spewed from manholes. The Metropolitan Water Reclamation District had no other choice than to force the wastewater — some of it untreated — into local waterways and Lake Michigan. The runoff mixed with the water supply for millions of people in the area.

Insurance is about risk, about calculated risk. Insurers cover, as one industry analyst said, unforeseen risks. Lightning strikes your home, or a wind storm rips the roof off your garage. These are unforeseeable — insurers weigh the chances that something like that will happen and set their rates accordingly.

These floods, though, were foreseeable, according to the lawsuit we have been discussing. City officials in the region were aware of the general risk of heavier rainfall and the specific risk of these storms, and they still failed to protect homeowners’ property. Insurance companies were left holding the bag, and, as we know, insurance companies are not used to that.

How this lawsuit will affect policyholders is not quite clear. We know that insurance companies set rates, in part, based on experience. For those homeowners in Chicago, then, premiums could go up. If the city would fix the sewer system and pay more attention to forecasts, though, the risk of future claims would decline, and premiums could remain the same.

That may not be the best outcome of all for homeowners. If the city were to upgrade its deteriorating infrastructure, their homes would be protected from floods like the ones last year. And any day that does not include untreated sewage filling up your basement has got to be a good day.

Sources: 

Nature World News, “Lawsuit Warns Politicians That Climate Change Can Cost Them,” Brian Stallard, May 23, 2014

Chicago Tribune, “Flooding forces sewage to be diverted into Lake Michigan,” Michael Hawthorne, April 18, 2013

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