September 16, 2005

Katrina: Who Pays? (part 2)

We've been tracking the saga of who is going to pay for Katrina's havoc. If Jim Hood, the attorney general of Mississippi, has his way, insurance companies will be on the hook for all the homeowner losses, even those caused by flooding -- despite the fact that floods are excluded from homeowner's policies. Hood has filed a lawsuit against five major insurers, alleging that they're cheating Hurricane Katrina survivors. He asks: "Is it right to write in the fine print a provision that takes away the reason for the contract in the first place?...You can't put this stuff in fine print and bankrupt half the coast and say, `Oh well, they should have known.'"

Perhaps insurance companies should use a larger font in homeowner's policies, so they cannot be accused of hiding the details in "fine print."

Hood has been joined in his effort to redefine homeowner's insurance by the ubiquitous Richard Scruggs, who made his reputation suing the tobacco industry. (By the way, Scruggs is the brother-in-law of former Senate Majority Leader Trent Lott, R-Miss.) Scruggs says he will stand up in court for homeowners by arguing that homes were damaged by wind-driven water, not floods. Let me see if I get this straight: a flood is not a flood when it's wind-driven. Perhaps the only way for a true "flood" to occur is during an eerie calm.

Valued Policy Law
Scruggs is going to file thousands of suits in state courts. He said the effort would be aided by a Mississippi statute known as the "valued policy law." (Read more about this legal concept here.) In a controversial decision last year, a Florida appeals court held that a similar state law required full restitution when a house was partly destroyed by hurricane winds, even though flooding did most of the damage.

"The statute provides in these states that if there's any damage at all by wind, they must pay the full amount," Scruggs said.

A spokesman for the Property Casualty Insurers Assn. of America said insurers wouldn't pay for uncovered flood damage and that adjusters were trained to determine when flooding was the main culprit. See you in court, sonny!

Defending the Insurance Industry
It's never easy defending corporate giants, especially in this type of circumstance where the losses are so heartbreaking. Insurers point out that contracts are contracts -- and that floods are specifically excluded from homeowner's policies. That's why we have separate flood-insurance, backed by the federal government -- under a program managed by everybody's favorite "best practice bureaucracy" - FEMA. (Do I hear a "neigh"?)

FEMA officials have acknowledged that 60 percent of the affected property owners in Katrina's zone of destruction may lack federal flood insurance. To rebuild, they would have to take out low-interest government loans -- unless Hood and Scruggs prevail.

"Insurance policies are legal contracts, specific policy terms and conditions that both sides agree to," said Joseph Annotti, spokesman for the Chicago-based Property Casualty Insurers Association of America, which represents most major insurers. "To come in after the fact and arbitrarily rewrite the policy coverage to cover losses that premiums were never collected on and reserves never set aside for, that's an extraordinary legal precedent to set and a very dangerous one." As it is, the insurance industry is now projected to be on the hook for $40 billion to $60 billion in claims, apart from the Mississippi lawsuit.

We'll All Pay
One thing is certain. If Mississippi prevails and is able to force insurers to pay for flood damage, we will all see our homeowner's premiums rise to incorporate the new risk. At the heart of every insurance policy is the esteemed work of the actuaries. They like to know the parameters of the risk ahead of time -- and I imagine they will be really annoyed if the rules suddenly change after the fact. Stay tuned. Despite the inordinate human calamity and suffering, this is going to be a very compelling -- and at least in some respects entertaining -- drama.



I agree that contract law must be upheld at all costs. A written contract presumes that it states the complete agreement; extraordinary consequences will flow from a court decision to the contrary! On the otherhand, if wind-driven water damage can be shown to have occurred BEFORE the storm surge came and wipped out the structure, I do think the insurance companies are liable; this follows from the same reasoning that they use regarding fire coverage. If a stucture is damaged by water before a fire they will only pay for fire losses to the "fair value" that remained.

Of course to be completely fair, a retroactive change in benefit parameters should result in a retroactive change in premiums. You could apply that to the affected policyholders as a benefit offset, which would be (pun alert) a wash, or to the entire policy class, which would be a lot of fun to try and collect.

Most policies do not cover wind-driven rain unless it enters the home through a storm created opening. I personally feel terrible at the incredible losses suffered, but water exclusions are not new to insurance policies. Insurance companies quit providing flood coverage over 40 years ago, hence the federal flood policies starting back in the 1960's. Hurricanes and tropical storms were at the center of the flood exlusion decisions made in the 1960's. Retroactive premium charges would blow people's minds in the amounts owed since the reason insurer's abandoned flood insurance was the premiums charged would prevent most people from being able to afford the policy, once again, hence the federally subsidized flood policies.


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This page contains a single entry by Jon Coppelman published on September 16, 2005 2:02 PM.

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