A Rising Tide Lifts All Rates: More Frequent Floods Make Property Insurance An Increasing Headache

Ten years after Hurricane Sandy caused an estimated $19B of damage in New York City, the risk of catastrophic flooding has only increased. The National Oceanic and Atmospheric Administration said in February the city should expect up to 15 days of flooding every year due to sea level rise, compared to just five two decades ago.

The grim reality of climate change means extreme weather events are becoming more frequent and more intense. For property owners in the city, that also means facing rising insurance premiums at a time when the real estate sector is still trying to recover from the pandemic.

“When a carrier comes to you and says ‘Sorry, we can't do it this year,’ you can't make the decision to just buy less insurance,” Aron Sotnikoff, director of risk management at Time Equities, told Bisnow. “You have to find it somewhere."

Flood insurance isn’t typically covered in standard insurance packages, but most lenders and mortgage providers still require it. The majority of commercial property owners use the Federal Emergency Management Agency’s National Flood Insurance Program for a part of their property’s coverage.

But the first problem for most building owners in NYC is that NFIP only covers up to $500K in damages.

“It doesn't cover a lot at all,” said Laurie Schoeman, director of Climate & Sustainability and Capital at housing nonprofit Enterprise Community Partners. “In fact, it will barely cover the cost of repairing your mechanical systems.”

Flood insurance is typically restricted to surge flooding, when nearby waterfronts swell and overflow into streets, but doesn't cover flooding from excessive rainfall, experts told Bisnow. That could be a huge issue: NYC is also predicted to receive more rainfall in addition to surge flooding from its seas and rivers, increasing the risk of flooding due to inadequate storm drainage.

Nor does it cover flooding due to sewers backing up — the culprit of flooding in thousands of homes last year when Hurricane Ida hit NYC — requiring owners to buy additional riders to cover those risks.

“It really is the city's responsibility for maintaining the drainage piece,” Lockton Cos. Flood Program Manager Brian Linneman said. “There's only so much you can reasonably expect a single building owner to do.”

The New York City Department of Environmental Protection is working to address the issues that led to flooding during Hurricane Ida, communications director Ted Timbers told Bisnow in an email. However, insurance for commercial property owners is outside of the agency’s purview, he said.

One initiative, highlighted by DEP Commissioner and Chief Climate Officer Rohit Aggarwala during recent testimony to the city council, is investing in green infrastructure such as rain gardens and ponds to capture stormwater, as well as requiring private developers to use materials capable of retaining excess water.

During his testimony, Aggarwala acknowledged that potential resiliency measures will be expensive, and that New York is often responsible for funding its own infrastructure investments.

“Adjusting to our new climate will take time, lots of money, difficult tradeoffs and potential controversy. We will have to give up things we like,” Aggarwala said, adding that he hopes to see funding from the Bipartisan Infrastructure Law, the Inflation Reduction Act and the potential New York State Environmental Bond Act.

For now, increased risks mean most building owners are using a patchwork of insurance policies to reach the coverage amount they need for their building, said Timothy Dodge, assistant vice president of research and information at Big I New York, a trade association representing independent insurance agents and brokers.

While that’s not a new arrangement for commercial properties in NYC, increasing prices are adding complications as owners try to find coverage.

“Insurance is becoming a little more difficult to get, and a little more expensive over the last five years because of the erratic weather, the more frequent, more intense storms,” Dodge said. “Everything south of Westchester County — that’s Westchester, the five boroughs, and the counties on Long Island — are really areas you have to worry about.”

As a result, property owners are playing a dangerous game to ensure they stay covered — signing deals with lower premiums that mean paying higher deductibles if something happens, Schoeman said. 

“That’s a problem, because then you have to have a million dollars in reserves to cover a loss if there was to be an event,” Schoeman said. “If you don’t have a reserve, you can’t pay the deductible.”

Owners are looking at making changes to their buildings that they can leverage toward discounts on their insurance, Schoeman said. Mechanical equipment can be moved from basement floors to higher up in the building, avoiding some of the mechanical and electrical damage that accompanies flooding. They can also add vents to flood-prone areas like basements, allowing trapped water to drain out.

But those measures are already a heavy lift for some of the city’s smaller multifamily landlords.

“The large majority of multifamily building owners, to be honest, are just trying to keep the lights on,” Schoeman said. “We’re not in a place where we're better prepared after Sandy than we were [before].”

Some developers and investors, like Time Equities, have oriented their building designs around rising sea levels and flood threats. But even that doesn’t necessarily translate to insurance discounts, Sotnikoff told Bisnow.

When seeking coverage for 50 West, a luxury residential condominium building in Lower Manhattan, Time Equities received a quote upward of $3M, Sotnikoff said. Because NFIP only recognizes floodproofing efforts for commercial developments, 50 West’s geographical risks — right on the edge of Lower Manhattan, roughly 1,000 feet from the Hudson River — contributed to the high cost of coverage.

“We floodproofed the building to one foot above the base flood elevation, all of the machinery, all of the electrical, is very high up in the building,” Sotnikoff said. “So we went out to the private flood insurance market, and we hoped to find one or two carriers out there who might be willing to take a closer look at the building and give us some credit for all the work that was done to make the building resilient from the get-go.”

Time Equities managed to find coverage for $250K, Sotnikoff said, but last year, their insurance carrier told them they could only cover $20M of coverage as opposed to the $51M that 50 West needed to find in order to placate its lenders. 

“We had to find other carriers who would be willing to provide layers of insurance above that $20M,” Sotnikoff said. “We managed to build two layers on top of that primary $20M to get to the amount that we needed, but the pricing was up considerably. We paid, I don't remember the exact numbers, but I'm gonna ballpark 30% to 40% [more].”

Those increases are the first warning signs of an insurance market that sees a troubled future, Schoeman said.

“First, you see the insurance companies raising their insurance rates. When the rates are rising by 20%, 30%, 40%, that sends a market signal, which is to say, ‘This is a riskier deal,’” Schoeman said. “And then what you start seeing is, it just becomes untenable to continue to do business in that jurisdiction. So you start to see insurance companies pulling out.”

Insurers aren’t leaving the NYC market yet, Dodge said, but they are already fleeing some high-risk areas. Multiple insurers have already stopped offering coverage for homeowners in Louisiana and Florida, leaving thousands of property owners without coverage.

Some insurers still operating in those markets are going bankrupt: By June this year, four providers had declared bankruptcy in Florida.

Time Equities’ difficulties could also foretell difficulties for other developers focused on resilient buildings.

Lendlease, which is developing One Java Street in Brooklyn to feature a living shoreline that will absorb water and break up waves — thereby meaning less water from surges is able to get into the building — is unsure what future insurance bills will look like for the project.

“We have very strong relationships with our insurance partners, but we imagine that this is going to be an evolving conversation,” Lendlease Head of ESG Sara Neff said.