In the thick of responding to Katrina, adjusters for Nationwide Insurance (search) (a White Plains, N.Y., firm for whom I am an attorney) — came to need a security escort to do their work.
They didn’t need protection from armed looters or the law enforcement-free conditions that prevailed in the days after the hurricane struck. Instead, they needed protection from the company’s Gulf state policyholders.
What had been frustration at a hurricane’s aftermath became anger at insurance companies, precipitated by the Mississippi attorney general’s lawsuit against Nationwide and four other insurers for failing — or so the attorney general alleged — to pay policyholders for flood damage.
And that anger has just been compounded by trial lawyer Richard Scruggs’ filing of a second lawsuit against State Farm, Nationwide and Allstate.
Mississippi Attorney General Jim Hood and Scruggs are asking courts to compel insurance companies to pay policyholders for damage caused by rising water. In doing this, they are asking that the black-and-white terms of a longstanding, standard insurance contract be changed after the very damage it sought to avoid has occurred.
They also give us one more example of people taking advantage of catastrophe: Hood to enhance his public profile and Scruggs to enhance his bottom line.
The argument is whether the damage sustained by policyholders was caused by water driven by wind, which is covered, or by flood, which is not. For 35 years, the standard homeowner policy — the policy at issue — excludes coverage for damage caused by rising floodwaters.
This is commonly referred to as the “flood exclusion.” Hood, in particular, understands this: The relief he requests from the court specifically asks that the section of the insurance policy excluding coverage for flood damage be declared void.
Scruggs employs a different strategy. He contends that the homeowner policy is not clear as to what damages are and are not covered, and that settled contract law mandates that ambiguities in the policy be construed against the insurers.
Except that there is nothing ambiguous about the standard homeowner policy; at least that is what courts have almost uniformly held since the standard homeowner policy was designed to dovetail with the federal flood insurance program decades ago.
Scruggs probably realizes that he is walking into a thicket. Unless he prevails in his ambiguity argument — a remote prospect unless there is a radical change in the law — he can succeed only if he demonstrates that the defendants have not compensated his plaintiff policyholders for damage caused by wind-driven water. And that would probably require the use of an expert in each individual case of each plaintiff policyholder.
Hood has complained that insurers are “cajoling” policyholders to sign a form that admits the damage sustained was the result of flood. Even if this were true, the signed form would have virtually no legal effect, as it would do nothing to end an insurance company’s obligation to investigate a policyholder’s claim — that is, to examine the damage to a policyholder’s house, determine its causes, estimate its value and write a check.
No admission by a policyholder regarding the cause of damage would alter this. It’s extremely doubtful that the forms that the policyholders have been asked to sign could do anything to deprive them of any money they would be due under their insurance policies.
There are sound reasons behind the flood exclusion. Hurricanes regularly deal insurers blows from which it can take years to recover. From 1985 to 2004, hurricanes and tropical storms accounted for 34.6 percent of total catastrophe losses, followed by tornado losses with 30.4 percent.
Floods are altogether different. Not only are they difficult to predict, they tend to cause damage so comprehensive and costly that inclusion of flood coverage in a standard homeowner’s policy would drive the premium price so high it would be beyond the cost of an average consumer, who might then opt to go uninsured.
The lawsuits will have unintended consequences. Consumers have an interest in the ongoing financial viability of insurance companies as a mechanism to spread and decrease the cost of risk. Insurance companies further spread that risk through reinsurance with other companies.
Nearly every day since Katrina and Rita hit, reinsurers have released their estimates of the total insured loss companies will be facing, with some of the combined estimates as high as $100 billion (bear in mind that that is the estimate of insured losses, not combined insured and uninsured losses). Many have said that Katrina represents the largest insurance loss in history.
When one considers that the world’s largest company, ExxonMobil, takes in annual revenues of $25 billion, it’s easy to see how these hurricanes can endanger the prospects of insurance companies that take in much less than that. On Thursday, Standard & Poor’s revised its outlook on the global reinsurance industry from stable to negative, citing the impact of Katrina and Rita. The lawsuits are placing additional pressure on an industry that is, at the moment, stretched thin.
Suppose that a Mississippi court decides that Hood and Scruggs are right, or, more likely, that they are wrong but nonetheless feels compelled by the magnitude of recent hurricanes to apply bad law and give them what they want. Could any insurance company ever again regard the Gulf states as a reliable enough legal environment to do business? They would not. Insurers would pull out at the first opportunity, leaving citizens of those states with little insurance choice.
People thought that the scenes of looting of stores after Katrina were disturbing. People being robbed of their ability to insure their homes against such future catastrophic events is even more so.
Matt Hayes began practicing immigration law shortly after graduating from Pace University School of Law in 1994, representing new immigrants in civil and criminal matters. He is the author of the soon-to-be-published "The New Immigration Law and Practice," and is an attorney for Nationwide Insurance in White Plains, N.Y.