When applying for a grant last year from George Soros’s Open Society Institute to report on the insurance industry’s response to Hurricane Katrina, I anticipated two things: insurers would play a make-or-break role in the Gulf region’s ability to recover and the story would be poorly covered by the national business press.
Alas, on the first point, I was right beyond my expectations. The disgraceful state of the Gulf’s recovery can be traced in large measure to insurers’ wholesale—and I mean, by the tens of thousands—violations of their legal obligations to policyholders. While many blame the government, and I’m sure with good reason, it is worth noting that the recovery of Mississippi, which has an efficient state government under a Republican governor with close ties to Washington and two smart, active and influential Republican senators, has been only marginally more successful than Louisiana’s, where basically none of that is true, except Louisiana has one prominent Republican official, Sen. Very Serious Sin.
The common thread in these two states is insurance.
I was largely correct about the business press, too, I’m afraid. Somehow, national outlets devoted to business news, The Wall Street Journal, Forbes, Fortune, Business Week, and the Financial Times barely notice that 2005—year of the worst-ever insured loss in the history of the world—was also the most profitable insurance year ever, by a long shot. No one asked how that could be so.
No one asked, moreoever, how it could be that, according to State Farm Insurance, Allstate Insurance Co. and Nationwide Financial Services Inc., Hurricane Katrina caused no wind damage—none at all—in thousands of cases. Commonsense alone calls that assertion into question.
Worse, though, Forbes and The Wall Street Journal’s editorial page both mischaracterized the nature of the dispute between insurers and Katrina policyholders. Both frame the problem as one in which policyholders are seeking to force insurers to pay for flood damage, which private insurance does not cover. The dispute, according to these outlets, is a natural consequence of insurers’ unavoidable (albeit regrettable) decision to protect their solvency by denying illegitimate claims and to prudently (again regrettably) leave unprofitable coastal markets.
As Forbes writes:
After Katrina, Allstate and other insurers refused to pay for flood damages. Why should they? The policies excluded floods. Many homeowners didn’t buy coverage available from the federal government.
Unsurprisingly, the exit from unprofitable markets prompted a lot of anger. People must now scramble for coverage from smaller carriers at much higher rates, if they can get coverage at all. The Mississippi attorney general and irate flood victims have sued Allstate and its peers in a bid to force payments for the water damage.(1)
Audit Readers, this representation of reality, while hewing closely to a talking point of the Insurance Information Institute, is flatly false. That this mischaracterization has gained saliency among the public is worth billions to insurers. Among its other faults, it falsely portrays policyholders as either too stupid to know what their policies say or too desperate to care.
As even a half-hearted attempt at reporting would have discovered, plaintiffs in the Gulf overwhelmingly are suing for noncoverage of wind damage. Wind. Not water. Hurricane winds are explictly covered in homeowners’ policies, and that’s the basis of the complaints in most all of the key early cases, including Broussard, Guice, Shows, and Weiss. Most were filed at the time of the November 2006 Forbes piece and covered extensively—available online, for free—by the New Orleans Times-Picayune and the Biloxi Sun-Herald.
These cases allege, among other things, that State Farm, Allstate and their ilk manipulated and destroyed engineering reports in a systematic and concerted scheme to avoid paying wind damages.
Whatever the merits of the allegations (Don’t worry, Forbes; I’m sure there’s nothing to them), it is inaccurate—sloppy to the point of irresponsibility—to suggest that Katrina plaintiffs are mainly after flood coverage from private insurers.
And of course, not only do policyholders allege that wind did some damage, it did. That’s why State Farm lost Broussard, which involved a total loss in Biloxi. As the federal judge in the case wrote (emphasis added as an aid to Forbes editors and other business experts):
All of State Farm’s evidence was directed to proving that 100% of the damage to the insured property was caused by rising water, yet State Farm’s own expert witness, Dr. Gurley, testified that it was more than probable than not that the Broussard’s dwelling sustained at least some wind damage to its roof.
The key issue is how much damage had occurred as a result of wind before the storm surge arrived.