Spiking Premiums Lead Some Florida Owners to Forgo Flood Coverage

Policyholders in Lee County — including such hard-hit places as Cape Coral, Captiva Island, Fort Myers, Fort Myers Beach, Pine Island, and Sanibel Island — have accounted for one-third of the 700,000-plus property insurance claims in Florida arising from Ian, according to the Florida Office of Insurance Regulation.

In Florida, property insurance covers windstorm risk, while flood insurance is sold as a separate policy, but coastal and inland flooding may have caused as much property damage as Ian’s destructive winds. Up to half of these flood damages are uninsured, according to estimates by CoreLogic, an Irvine, Calif.-based real estate data provider. Uninsured flood losses in Florida from Hurricane Ian range from $10 billion to $16 billion, while total losses from flooding and wind damage combined, insured and uninsured, range from $40 billion to $64 billion in the Sunshine State, per CoreLogic.

Uninsured flood damage, for example, includes the destruction of four stores owned by Naples Soap Company, a Fort Myers-based retailer of health and beauty products. “Four of our 10 stores had 4 to 9 feet of water in them,” said Deanna Wallin, founder and CEO of Naples Soap Company. “We are still digging out from it.” 

The company has rebuilt three of the flooded stores and expects to finish rebuilding the fourth by the end of 2023. Ian’s total cost to Naples Soap Company is $1.5 million “and counting,” Wallin said, including lost sales as well as reconstruction costs. Total losses from Hurricane Ian are still mounting at the company because tourist traffic in the Fort Myers area has slumped since the storm, and tourists account for 50 to 70 percent of the company’s sales.

Yet Naples Soap Company still operates without flood insurance because coverage costs too much, compared to the out-of-pocket cost of rebuilding stores. “The cost of flood insurance is still too prohibitive,” Wallin said. “If replacement costs me $60,000 and my flood insurance is $30,000 — and then you’ve got to fight for a claim, and argue for every penny, which you only may acquire a portion of — it just doesn’t make financial sense.”

Rental property investor Andrew Zullo agrees. He doesn’t insure any of his rental homes in Florida against wind or flood damage. So far, so good. He hasn’t had any major property damage. But the risk remains. A former banker who now runs a Broward County leadership program, Zullo owns three rental houses in Lee County that sustained minor wind damage from Hurricane Ian, but no flood damage. Zullo paid cash to acquire all three houses, and the absence of debt has allowed him to avoid lender-mandated insurance on the houses. 

“Insurance is just too expensive. I never got a mortgage, so I never had to get wind or flood insurance on any of the investment properties. If you look at it right now, over time, I’m ahead of the game,” Zullo said. “But you never know.”

In Florida, flood insurance policies largely come through the national flood insurance program managed by the Federal Emergency Management Agency, or FEMA. Flood insurance through FEMA covers up to $500,000 of damage. And under the so-called 50 percent rule, the agency rejects policyholder claims for dollar amounts that would boost the value of a flooded property by more than 50 percent of its value before the flood.

Policies known as excess flood insurance covers what FEMA does not, but it’s pricey. The latest quotes ranged from $5,000 to $6,000 a year for each of his rental homes, said Zullo. “It seems a little high.”

Basic FEMA flood coverage is insufficient for owners of large, luxurious homes, said Michael T. Traficante, managing partner at the Naples office of law firm Gunster. “When you have these higher-end homes that are 10,000 to 15,000 square feet, the $500,000 FEMA flood policy is not going to cover it.”

Excess flood insurance is expensive even for mansion owners, he said. “I had one client whose excess flood insurance was around $50,000 to $70,000 a year before Hurricane Ian, and now, to renew, it’s jumped up to about $150,000 to $250,000,” he said. “So, it’s not cheap, and a lot of people didn’t get it.”

Some Florida property owners unintentionally go without flood insurance because they mistakenly assume their property insurance covers flood damage. “Prior to Hurricane Ian, a lot of people in Florida didn’t realize – just because they don’t read the fine print – that your property insurance doesn’t cover flooding,” Traficante said.

A full, dollar-for-dollar financial recovery is rare for owners of hurricane-damaged property, even if they are fully insured. They face deductibles, of course, and may struggle to recover any amounts that exceed the deductibles. If time is money, then time spent on cleanup, repairs, claims and contractors is expensive as well as unrecoverable.

Last September, Hollywood resident Pamela A. Butler purchased a ranch-style vacation home on Pine Island, a lightly populated island community just off the southwest coast of Florida, for $535,000. She planned to retire to the island with her husband when the time came. 

Just one week after she closed on the purchase, Hurricane Ian made landfall over Lee County. Butler watched the Category 5 storm unfold on TV from primary residence in Hollywood on Florida’s east coast, a three-hour drive from devastated Pine Island, which was cut off from the mainland when the lone bridge that accesses the island buckled during the onslaught. 

“We never even moved in,” she said. “We bought the house on a Wednesday. We picked up the keys on Friday. We left that Monday after meeting with the painters and the storm hit on Wednesday.”

The hurricane had slammed into the one-story house, leaving a damaged roof, missing windows and doors, and extensive interior water damage. After the storm, Butler drove down each weekend to make repairs to the home, spending $34,000 out-of-pocket  to remove mold, tear down walls, board up windows, and gut the interior of her concrete home. “You have to mitigate. You have to stop any further damage, or your insurance policy is null and void,” Butler said. “You can’t just sit there and let it deteriorate.”

In April, Butler got her first payment on a claim for wind damage, a check for just $13,000 from state-run Citizens Property Insurance, the dominant underwriter of windstorm risk in Florida. “That is not going to get it done,” she said. “I need a new roof. I need windows. I can’t even buy doors for the entire house for $13,000, let alone a roof and windows. So, it’s very discouraging.” 

She isn’t suing the insurer, but she’s working with a public adjuster to squeeze more out of Citizens. “They want you to fight, and that’s fine, I’ll fight,” she said. “I guess that’s part of the process.”

Butler also received $77,000 from QBE Flood Insurance to cover the flood damage costs. She and her husband have tried to squeeze more out of each insurer but there’s no guarantee they’ll succeed. “We are probably about $170,000 shy of being made whole,” she said. “That doesn’t even cover the contract to put the house back together on the inside.”

Not all of the owners of damaged homes on Pine Island are prepared to battle over claims with insurance companies. “I’m in it for the long haul,” Butler said. “I’m young enough. I’m able bodied and able minded. I have ‘fight’ in me. But there are people on the island who don’t have any fight left in them.”

Butler’s tussle over claims is just one of many pushbacks against insurance companies in the aftermath of Hurricane Ian. As of March 9, insurers were still trying to close 100,379 of 468,800 Ian-based claims in Lee, Charlotte, Sarasota and Collier counties, the four Florida counties with the largest number of claims,  according to the Florida Office of Insurance Regulation. 

“Mostly everybody is getting denied on wind claims,” said Jacki Liszak, executive director of the Fort Myers Beach Chamber of Commerce. She owns a home and other properties in Fort Myers Beach, and  two of her own insurance claims for wind damage were denied. Liszak said windstorm insurers are paying far fewer claims in full than flood insurers because they tend to underestimate wind damage. “They always make sure it comes underneath the deductible amount,” she said. “That seems to be the standard operating procedure, and that only changes when you start to push back really hard.”

Property owners also are trying to recover from Hurricane Ian with government aid. Federal disaster relief funds have flowed into Florida in the form of loans and grants to assist renters, homeowners, businesses and local governments affected by Ian.

As of May 26, FEMA had obligated $874 million of grant money to local governments to offset the post-Ian cost of debris removal, emergency protective measures, and the restoration of damaged facilities. The agency also obligated $1.9 billion of grants to local governments through its hazard mitigation program, and another $1.1 billion of public assistance grants to needy individuals and households facing  challenges that Hurricane Ian compounded.

The U.S. Small Business Administration has made about 28,000 loans totaling $1.86 billion to Florida businesses that took a hit from Ian. Among Florida businesses lined up at the SBA’s loan window is Naples Soap Company, which has applied for a low-interest loan of $1.5 million through the agency’s Economic Injury Disaster Loan program. But the process has barely moved forward. 

“We filed our initial claim one week after the storm, but we have just now had someone assigned to our case,” Wallin, the CEO, said in a May 25 interview. “It has been very slow going and very difficult… We are still dealing with unmitigated losses.”

The federal Department of Housing and Urban Development (HUD) approved a $1.1 billion grant that will help property owners in low- and moderate-income areas of Lee County repair storm damage, build affordable housing, and increase the structural resilience of homes and businesses. 

Fort Myers Mayor Kevin B. Anderson said 70 percent of the HUD money will go to lower-income areas in the interior of the city, which had wind damage, primarily. Flood damage devastated upper-income areas along the Caloosahatchee River. 

“Along the river, we lost about 300 homes that were uninhabitable, 50 of which had to be torn down,” Anderson said. “Obviously, along the river, land is usually more valuable than inland. Most people on the river probably have the means to recover.”

Indeed, empty lots in waterfront locations have gained value since Hurricane Ian ruined the structures that once occupied them, the mayor said, citing as an example a 1940s-era, cottage-style house in Fort Myers Beach that Ian destroyed. “With the house, the property was valued at $800,000,” he said. “It sold for a little over $1 million without the house.”

Southwest Florida is now flooded with real estate investors trying to buy prime properties at distressed prices, said Randy Thibault, founder of LSI Companies, a real estate services provider based in Fort Myers.

“There’s been a run from investors from all over the place, initially thinking that they were going to buy things at discounts, like vulture buyers,” Thibault said. “There are multiple buyers with multiple bids trying to buy up these properties as quickly as they can to reposition them into higher-end projects. … Local developers are willing to buy these existing homes and waterfront tracts for more than they were worth, or being asked, prior to Ian.”

But fast-rising premiums for commercial property insurance are adding to the operating expenses of income-producing real estate in Florida and slowing the pace of commercial property sales.

“It is definitely affecting transactions,” Kristin Repp, Miami-based managing director of valuation and advisory services at brokerage firm CBRE. “We’re seeing it in all types of properties, office, industrial. I don’t think anyone is exempt from being impacted.” 

Repp cited a retail property in a waterfront area of coastal Lee County, the Florida county that took the biggest hit from Hurricane Ian last year. Repp, who worked on an appraisal of the retail property, said the owners’ property insurance expenses surged after Ian, wiping out their operating profits and forcing them to default on debt secured by the property. 

“Buyers are placing much more weight on accurately underwriting insurance costs from the beginning of a transaction,” Repp said. “It used to be that insurance was more of an afterthought.”

Along with higher insurance premiums, higher interest rates and tighter bank lending criteria also have contributed to a slump in commercial property sales in Florida, said Shannon Rex, a Delray Beach-based executive vice president of brokerage firm Colliers International.

Rex said bank failures including the collapse of Silicon Valley Bank have made financing for commercial property acquisitions scarce. “The bank failures have pushed banks to be a lot more cautious. They’re focusing more on issues like insurance. So, underwriting is getting tighter,” Rex said. “The volume of deals is way down this year, and all of those factors are contributing.”