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Capstone Responds to Hurricane Harvey Disaster

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August 31, 2017

Houston-based Capstone Associated Services, Ltd., one of the largest and oldest captive managers in the US serving the middle market, reports that it is still up and operating in the aftermath of Hurricane Harvey.

Capstone Associated Services, Ltd.As businesses begin to recover and take stock of their situation, certain questions should be asked, Mr. Feldman said, including, "Where is the money coming from to pay for the damage?" and "Is my business properly insured for a major weather-related event?"

"The events of the last week underscore the need for a comprehensive insurance program, which has an alternative risk/captive program as one of its key components," said David Overbeck, CPCU, Capstone vice president of insurance operations. "Solely relying on the limited Federal flood program and few, limited conventional market alternatives leaves most businesses with large gaps in critical risk areas. How many risk management professionals would have objected to a coverage exclusion of an 800-year flood with over 40 inches of rain in a few days? This is why a broad-based, enterprise risk management program, with few exclusions is necessary."

Mr. Overbeck is one of five CPCUs at Capstone with combined experience of more than a century.

"The commercial markets do not typically sell broad based business interruption (BI) and property policies that respond to all scenarios," said Lance McNeel, CPCU, a Capstone vice president with 30 years of insurance industry experience. "Contingent BI is even more unusual, especially for flood-related disruption. Typically, property and business interruption excludes events such as rising water damages and loss of revenue/operations associated with off premises events such as the lack of power from a substation. The commercial flood policies usually provide named-peril coverage for specific assets. The critical days after a major storm or flooding event are a poor time to get into a dispute with your broker or insurer with its narrow coverages and carefully drafted exclusions. Through its captive program, Capstone offers our customers the option of having broad form policies covering a wide array of property damages and business interruption events, including direct storm damage, loss of profits from electrical/gas/water issues, civil disturbance, supply chain disruption of all sorts, etc."

"Fortunately, for many of our clients, broad based business interruption and Contingent BI policies are in place through their captives which can provide valuable Hurricane Harvey protection," said Steve Lonergan, CPCU, who works from Capstone's Minneapolis office handling the Great Plains and Pacific Northwest.

Although the National Flood Insurance Program (NFIP) is the first line of insurance available for flood losses, that coverage is limited, said David Osbourn, CPCU, who works out of Capstone's Pittsburgh office serving the Northeast and Mid-Atlantic states.

"The maximum business limits are $500,000 for each of the buildings and another $500,000 for each building's contents, which is a fraction of what most businesses need," Mr. Osbourn said. "Further limits above the NFIP program must come from the commercial insurance market, if available, or from a captive program. And commercial insurers limit their exposure to loss by excluding high flood risk properties, or by charging uneconomical rates, forcing reduced limits or high deductibles. It is problematic obtaining coverage in the Gulf Coast, in many areas of the Southeast, in Florida and in areas affected by Storm Sandy. Said another way, a captive program is often the best alternative."

Commercial insurance policies and coverage under the NFIP have many exclusions. Business income losses are not covered; neither is damage caused by mildew or mold. Coverage is also limited in areas below the lowest elevated floor.

Recently, many flood losses have occurred on properties not located in designated flood zones. Heavy rains despite long-adequate storm drains have caused significant flood losses to properties outside of the NFIP's Zone A and other flood-prone areas. These claims often go uninsured with the entire loss being borne by the property owner, unless a captive insurance program is in place.

Planning for flood losses is critical in any business's enterprise risk management program. A captive insurer can provide a business the necessary funds to pay for flood and other business losses due to risks that are otherwise uninsured or underinsured.

Mr. McNeel provided further historical context on the lack of availability of flood coverage.

"Almost 90 years ago, the commercial insurers largely abandoned the flood insurance market following the Great Mississippi River Flood, which was one of the worst natural disasters in U.S. history. Flooding inundated dozens of counties in seven states. To put matters in perspective, damages totaled about one-third of the federal budget at the time, the equivalent of more than $1 trillion today."

With a pre-Harvey NFIP deficit of close to $25 billion, the federal government is unlikely to increase its role, so proactive business owners need to take the lead and pre-fund business risks in their captive for the proverbial "rainy day" that inevitably happens.

"Ultimately, businesses, families, and all those affected will need time to rebuild. Capstone will continue to help mid-market businesses prepare for major perils with comprehensive insurance through captive planning," Mr. McNeel said.

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