Insurance companies are smarting over the decision by six statesand the District of Columbia to tell insurers they cannot imposehurricane deductibles for losses suffered from "Superstorm"Sandy.

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Neil Alldredge, senior vice president, state & policyaffairs, for the National Association of Mutual InsuranceCompanies, says the ultimate impact from the decision will likelybe higher insurance rates for everyone.

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Moreover, Alldredge says, it will result in another rethinkingby companies as to how much coastal risk they can afford tounderwrite.

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Rhode Island was the latest state to notify insurers they couldnot invoke the hurricane deductible in settling personal-linesclaims stemming from the storm.

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Besides D.C. and Rhode Island, New York, New Jersey,Connecticut, Pennsylvania and Maryland have made similar statementsto insurers.

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Alldredge says the states acted based on a decision by theNational Weather Services just before Sandy's landfall to changeits designation from a hurricane to an "extra-tropicalcyclone."

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But he contends that the NWS acted despite the fact that Sandyhad all the characteristics of a hurricane, which would havetriggered the deductible.

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"These deductibles are important risk-management tools,"Alldredge says. "An insurer makes decisions on the coastal propertythey will underwrite based on these practices. This changes theeconomic impact on insurers.

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He adds, "We recognize that there is a human element to all ofthis. We acknowledge that it will change the out-of-pocket costsfor a person with a loss," but he explains that "insurancecompanies need to rely on the certainty of the policy language andto after-the-fact determine that that language is not enforceablealters the economic decision-making that a company can make."

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He the risk-profile now changes substantively, and that impactsthe costs that an insurer anticipates it will absorb if an eventtakes place.

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"That is the situation we are dealing with now," Alldredge says."If we are going to have this type of revolving door of decisions,then why have the hurricane deductible at all?" he asks.

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He notes that the issue first arose last year, when HurricaneIrene came ashore. "This is what spawned the controversy, in mostcases, in the same states," he says.

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The difference was that Irene was a hurricane and the NWS didnot change the designation before it hit land.

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Alldredge says many insurance companies were asked not toenforce the hurricane deductibles and some complied and othersdidn't.

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But with Irene, Alldredge says, "It was a hurricane. In thiscase [Sandy], you have this phantom decision just before landfallthat all of a sudden this was not a hurricane, even though itwalked like a duck and quacked like a duck."

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