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.
The Persian Hitler is coming to your University and you have nothing to say about it?
Posted by Dan
on Thu 20 Sep 2007 at 09:17 PM
Dean, it is highly interesting that you celebrate the Bloomberg Markets story, “The Insurance Hoax,” which at its best is a point of view rather than news and then you castigate news reporters with reputable publications who dare to tell both sides of the story.
I’m not sure if this is intended to shine light on an article for which you admittedly were a source, intended to show a preference for opinion over news, or intended to approve the unquestioning acceptance of information provided by a well-funded trial bar as fact.
In the spirit of trying to set the record straight, or at least provide another side of the story, let me offer up a few observations:
BROUSSARD, KATRINA & STORM SURGE
Despite your unequivocal assertion, it has never been State Farm’s position that Hurricane Katrina failed to cause wind damage. Quite the contrary, before any cases went to court we had paid out more than $3 billion in Hurricane Katrina claims and many of those cases involved payment for wind damage.
In the Broussard case, you call out part of a judicial opinion in attempt to make a point, yet you ignore the broader context and fail to point out that the case is still on appeal and that what is at issue is to what degree an insurance company is liable even when the “evidence is overwhelming impact that when the flood reached the Broussard property it was sufficient in force and duration to destroy the dwelling regardless of…wind” (Judge L.T. Senter’s words in quote, not mine). State Farm believes the judge’s ruling is inconsistent with the evidence presented at trial, the insurance contract that was in force, precedence and Mississippi law.
In the Broussard case, Dr. Kurt Gurley, a wind expert, testified that it was his opinion the plaintiffs’ home was destroyed by water and surge. Dr. Gurley testified that there was no physical evidence to support the plaintiffs’ theory that a tornado or hurricane winds destroyed the plaintiffs’ entire home. He said winds in the region were insufficient to entirely destroy any home and that there was a 75 percent probability that zero to 35 percent of the Broussard home’s shingles might have been damaged by wind. Dr. Gurley explained that he arrived at his conclusions by looking at official wind readings, applying scientifically accepted formulas to those readings, reviewing photos and inspecting the Broussards' home site.
Dr. Robert Dean, an expert on storm surge, testified that the structural damage to the plaintiffs’ home was caused by water and surge. He testified that the force of water was far stronger than the force of wind during Hurricane Katrina. In fact, Dr. Dean said the force of water on the Broussards' home was likely equivalent to a 520 mph wind.
Interestingly, Mr.Broussard said he never purchased flood insurance, yet admitted that his home received enough damage from water during Hurricane Camille that it had to be gutted and the interior rebuilt. He also said his home sustained very little, if any, wind damage from Hurricanes Camille, Frederick and George.
2005 PROFITS
The amount of profits is irrelevant to the issue of whether a company is required to pay a claim. Payment is dictated by the covered perils in the contract and the amount of coverage paid for.
But the discussion of profits is even more circumspect, when you realize that the profits State Farm reports, collects, saves and invests come from all lines of business (auto insurance, life insurance, mutual funds, State Farm bank, among others) in all states and Canada; not just from homeowners insurance.
Further, just like baseball, insurance is a cyclical business. (The White Sox – 2005 World Series Champs - as of this writing have the second-worst record in the Majors.) Regardless of whether profits are up or down, our customers expect us to remain solvent, and able to pay covered claims when they happen, and where ever they happen.
Just five years ago, we experienced record-breaking losses. It didn’t fit within the context of your piece (or the Bloomberg piece), so you didn’t mention it. We have to experience years like 2005 in order to balance years like 2000, 2001 and 2002, where we lost billions.
THE MEDIA
Beyond the inaccuracies in your piece, there are many inaccuracies and misrepresentations in the journalism you choose to glorify. The Bloomberg Markets story was rife with errors too numerous for me to fully reference here, but offer you a link to a letter I sent to the article’s editor(http://www.statefarm.com/about/media/bloomberg.asp), as well as one sent by Dr. Robert Hartwig of the Insurance Information Institute (http://www.statefarm.com/about/media/bloomberg_letter.asp). As you accuse other journalists of bias, you laud a piece that fails to report easily accessible data.
We see this infraction repeated in your piece when you reference that, “Brian Ross and ABC News have done groundbreaking work on two former insurance executives…” Dig a little deeper Dean. The two former insurance executives are two former independent insurance adjusters. A fact that’s been reported repeatedly and accurately by the same media you castigate for inaccuracies. You also fail to cite that these same informants are currently being sued by their former employer in federal court for stealing documents and not living up to their agreements with their employer.
CONCLUSION
What your observations do prove is that selective use of information, not making an unbiased effort to get both sides of a story and a failure to check facts are still the bane of modern journalism.
Hurricane Katrina was a horrific event. It caused suffering among hundreds of thousands people. Sensationalizing it or the response of insurance companies as told by aggrieved parties and trial lawyers in a handful of stories does not help recovery efforts nor provide insights as to what we all can learn from what transpired.
The facts from my perspective are that Hurricane Katrina was an unprecedented catastrophe. There were mistakes made, but where there were mistakes made by us we tried to right them. We did everything to live up to our agreements and more. We brought thousands of State Farm people into the region to pay claims, not deny them. We also have done our best to help respond to the challenges afterwards through community development efforts, support for Habitat for Humanity and the Red Cross, and major contributions to educational efforts.
As a mutual company, we do not have shareholders. We, instead, have built our company and its number one position in the industry on the principle of serving customers. That is probably why in 2006, the year after Katrina, we grew our business in Mississippi. That’s right, we added policyholders. And many of those who came to us from other carriers told us they were doing so because of the way we handled the claims of their friends and neighbors. Of course, that story never gets told.
Posted by Mike Fernandez
on Thu 27 Sep 2007 at 03:30 PM
Mike,
You are right about the article's glaring omissions. For example, it fails to point out that Alexis "Leki" King,one of State Farm's Mississippi claims managers, has hired a criminal defense lawyer and plead her fifth amendment right against self-incrimination in every case where she is asked about State Farm's role in defrauding policy holders, or her role in ordering Engineers to change their reports.
The fact of the matter is that Statefarm is a crooked company that epitomizes capitalism gone astray. They have put self-interest and profits over basic human decency.
Posted by nolahero
on Thu 8 Nov 2007 at 06:47 AM