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Why insurance might not cover billions in hurricane Irene damage

Damage estimates run in the billions for hurricane Irene, but with flooding the main culprit, a majority of damage will be items not covered by insurance claims, experts say.

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Even with its diminished winds, the storm ranks as "significant ... because it hit such a populous area, and in an area that hasn't seen hurricanes for a while," Mr. Larsen says.

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His firm expects to release an estimate of damage in the Northeast later Monday. Already, EQECAT has pegged insured losses in the Caribbean at $300 million to $600 million, and in the Carolinas at $200 million to $400 million.

The forecasting firm Kinetic Analysis, in an estimate prepared as the storm was weakening in strength and nearing New York, predicted that Irene's economic damage will total $5 billion to $10 billion, with the likeliest outcome in the middle of that range.

Why Irene could baffle insurance

A majority of the damage, in the end, will be items not covered by insurance claims, both firms say.

That's not unusual for hurricanes, but there are several reasons why it's the case for Irene in particular.

One is that the storm delivered more of its impact through floods than wind.

Much flood damage won't be covered by insurance, since relatively few Americans participate in the National Flood Insurance Program. Still, if floods block access to a commercial properties, insurance policies might allow interruption-of-business claims, Larsen says.

Another factor affecting insurance liabilities: Insurers have boosted wind-damage deductibles in recent years, so homeowners will often bear costs equaling several percentage points of a home's value.

Much of the storm's impact comes in economic activity that is shifted or postponed rather than lost entirely.

For instance, consumer "back to school" spending will still occur, but with an Irene delay.

By Monday, air travel at the major New York City airports was resuming, after a weekend in which some 9,000 flights along the East Coast were canceled. New York's subway system also restarted, but commuter rail lines near the city were disrupted as crews worked to clear debris from tracks.

Some economists offered higher tallies of potential losses.

Peter Morici, a University of Maryland economist, estimated that if the storm caused roughly two days of economic activity to be lost (spread over a week), that might might total $20 billion in this thickly populated region, he estimates.

After an initial hit to the economy, he adds in a written analysis, there's often a swing in the other direction, as people catch up on postponed spending or rebuild with help from insurance payments.

But in its report, Kinetic Analysis noted that Irene comes as consumers and governments don't have a lot of spare cash.

"Irene is potentially different in impact [from other storms] given the weaker state of the overall economy," the report said. Many businesses and homeowners "can't handle another shock to the budget.... Insurance won't be covering as much, government budgets are stretched, and there is a question mark as to if banks will want to loan money to cover repairs or cover operating losses in vulnerable areas."

Storm cleanup will also affect tourism business for coastal region on Labor Day weekend.

IN PICTURES: Hurricane Irene

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