Sept. 23, 2005 – With hundreds of thousands of buildings damaged by Hurricane Katrina, homeowners, consumer advocates, the insurance industry and government officials are squaring off in what is shaping up to be a showdown over who, if anyone, will foot the bill for helping consumes back onto their feet.
Last week, Mississippiâ€™s top prosecutor broke the conflict open when he filed a lawsuit against several major insurance firms. Attorney General Jim Hoodâ€™s suit challenges policies that exempt companies from paying for damage caused by flooding. Hood also accused some companies of offering money to people to entice them to sign forms saying that flooding, instead of other elements, brought about the damage to their homes â€“ a pact that could later render null and void those clientsâ€™ claims for full compensation.
Though perhaps the most powerful, Hood is not the only one attempting to make companies shoulder more of the financial burden in reconstructing Gulf Coast communities. Consumer advocates began warning early on that insurers might try to squirm out of obligations to their customers. Furthermore, say activists, the industry might paint itself as a victim of Katrinaâ€™s wrath, but most major companies have plenty of cash to reimburse their devastated customers and still turn a healthy profit.
"The fact that the insurance industry should even be questioning their obligation to pay these claims is the height of corporate irresponsibility," Joanne Doroshow, executive director of the Center for Justice & Democracy, said in a press statement. "What is so morally outrageous about this is the fact that the property-casualty insurance industry made more money last year than ever in its history."
According to a report by AM Best, an insurance-rating and information agency, the US property-casualty industry recorded a $45 billion profit last year and carried a $425 billion surplus over to 2005.
The risk-modeling firm Risk Management Solutions estimates that the insurance industry will be liable for $40-$60 billion as a result of Katrina, But that projection is based on assumptions that companies will not be compelled to pay for most of the flood damage.
As early as the beginning of last week, groups like the Foundation for Taxpayer and Consumer Rights and the Center for Justice and Democracy began reporting that people were having conflicts with their insurance companies. The two organizations reported gripes ranging from customers being unable to reach their companies by phone, to problems coaxing assessors to come to hard-hit areas, to firms downright refusing to pay for damages.
Spokespeople for the Mississippi and Louisiana Departments of Insurance, which regulate the industry in those states, told The NewStandard some problems could be attributed to the havoc the hurricane wreaked on the areaâ€™s communication infrastructure and the evacuation of many company employees from effected regions. Other delays, they said, resulted from the sheer number of people who are filing claims and from impassible roads and ongoing travel prohibitions that kept company assessors from accessing heavily damaged areas.
But the insurance regulators acknowledged that other, deeper conflicts and uncertainties were emerging, stemming from the issue of who is responsible for covering damage resulting from Katrinaâ€™s storm surges and flooding.
Determining the cause of the damage â€“ especially whether from flood or wind â€“ is key in assigning who, if anyone, will pay. Typical homeownersâ€™ insurance policies do not cover flood damage. Instead, the US government sells separate flood insurance policies, which cover up to $250,000.
Many people in areas hit by Katrina did not buy such policies because they either lived in areas not known to flood or they believed that their homeownersâ€™ policies would protect them in the event of a hurricane, regardless of how the damage was ultimately meted out.
FEMA spokespeople have told reporters that an estimated 40 percent of housing units in New Orleans were covered by flood insurance. In hard-hit areas of Mississippi, the number is estimated at just 10 percent.
With the latest projected price tag for fixing or rebuilding what Katrina swept away reaching well into the hundreds of billions, insurers are generally promising to pay for damage as quickly and efficiently as possible, but most insist that they will not pay for destruction caused by flooding.
Consumer advocates call the companiesâ€™ refusal a moral outrage.
"To get out of paying claims by arguing that flooding caused the loss and not the hurricane is the moral equivalent of letting a murderer off the hook because it was actually the bullet that killed the victim," Foundation for Taxpayer and Consumer Rights Executive Director Douglas Heller said in a press statement.
"While the rest of the country is emptying its pockets to help these victims, the insurance industry is discussing how to pocket more money as victims face financial ruin," said Doroshow of the Center for Justice and Democracy. "This is unacceptable."
Mississippiâ€™s lawsuit, if successful, would resolve the flood issue altogether in that state by voiding the parts of insurance policies that exempt companies from paying for flood damage.
The complaint, filed against State Farm, Allstate, Mississippi Farm Bureau Insurance and other companies, asserts that provisions exempting flood damage from coverage are "unconscionable" and illegal under Mississippi law.
The lawsuit drew a staunch defense from insurance companies.
"Insurance policies are legal contracts, specific policy terms and conditions that both sides agree to," Joseph Annotti, a spokesperson for the Property Casualty Insurers Association of America, told Knight Ridder news service. "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."
But according to law professor Adam F. Scales, "homeowners insurance agreement is one of the most complicated contracts the average person will ever sign," and existing case law leans toward favoring the client.
In an opinion published on the legal website FindLaw, Scales said that courts often recognize the "complexity of such contracts, and the central importance of insurance in people's lives" and tend to "honor the â€˜reasonable expectationsâ€™ of a policyholder even where a â€˜painstakingâ€™ reading of the contractâ€¦ would reveal the absence of coverage."
This, he said, "reflects the fact that insurers know a great deal about what peopleâ€¦ expect from their insurance contracts," adding that "it would be wrong to permit insurers to reap the benefit of those expectations (in the form of premiums), while subtly eliminating the very coverage the policyholder thinks he is buying."
Scales, who teaches at Washington and Lee University and serves as the chair of the Association of American Law Schools Section on Insurance Law, also said that "in Mississippi, and elsewhere, courts have frequently held that where a covered cause [for instance wind] contributes in some significant way to the loss, then there is coverage even though an excluded cause also contributed to the loss."
Meanwhile, state insurance regulators are taking a more conciliatory attitude in their dealings with the companies they monitor than that of the Mississippi attorney general. Mississippiâ€™s insurance commissioner, George Dale, publicly disagreed with his attorney generalâ€™s lawsuit, though he said he would respect the outcome of the court case.
In a letter to congressional representatives, Dale, himself an elected official, parroted the concerns of the industry his constituents expect him to regulate. Dale told representatives he was "fearful" that if insurance companies were compelled to pay for claims that are technically excluded in policies "we would be forcing many insurance companies, including our domestic [Mississippi-based] companies, into insolvency."
The alternative to insurance-company payouts on policies held in good standing by their clients is personal insolvency for countless homeowners who lack flood insurance but lost their homes to a massive hurricane.
In an interview with The NewStandard last week, Dale said he had instructed insurance companies not to deny any claims until they physically inspect all damage on-site. He additionally told them that if there was any question about whether the damage was covered by a policy that the company should just pay it. Dale also said he had ordered companies to give customers a 60-day grace period for paying their insurance bills so that no one loses coverage as a result of interrupted mail or residential displacement.
Asked what kind of enforcement mechanism are in place to make sure companies complied with his edicts, Dale replied, "I donâ€™t think any company wants to get cross with the commissioner of insurance because thereâ€™s all kinds of legal ways that we could deal them considerable grief."
But despite this supposed clout, Dale and his counterpart in Louisiana appear more concerned with keeping insurance companies in the black than providing for tens of thousands of hurricane survivors.
In Louisiana, Insurance Commissioner J. Robert Wooley, implemented a similar grace period for insurance premium payments and said that insurance companies cannot cancel or non-renew policies in the affected areas.
Yet Wooley has come under fire in the last several days from consumer advocates for remarking to National Public Radio that if insurance companies have to pay for Katrina-related damages the industry would go bankrupt. Critics have also highlighted his close financial ties to the industry he regulates. An analysis by the Foundation for Taxpayer and Consumer Rights found that Wooley received about $577,000 in campaign contributions from insurance companies between 2003 and 2004.
"Katrina survivors desperately need an insurance commissioner who is fighting for them and isn't compromised by a half million dollars in insurance industry campaign contributions," said FTCR executive Heller.
There is little safety net for those without insurance. Although a press release put out by the Alabama Department of Insurance directs those without flood insurance to apply for assistance from the Federal Emergency Management Agency (FEMA), Ed Pasterick, senior advisor with the mitigation division of FEMA, told TNS there is not much his agency can do.
First, he said, FEMA directs people to apply for loans from the Small Business Administration (SBA). Qualified homeowners can receive up to $200,000 low-interest loan from the SBA. For those who do not qualify, FEMA offers grants through its housing assistance program, but the amounts available â€“ up to about $27,000 â€“ are not intended to cover the full cost of replacing a home, Pasterick said.
Commissioners Wooley and Dale have both asked Congress to provide money to help those who will not be reimbursed for their losses by insurance companies.
But Heller said, "Government officials should not be calling on taxpayers to cover claims that insurance companies should pay."