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September 19, 2005

Mississippi attorney general moves to kill homeowners insurance industry in that state

Associated Press, September 15 (emphasis added):
Mississippi on Thursday sued insurers to force them to pay billions of dollars in flood damage from Hurricane Katrina, saying standard insurance polices have led homeowners to believe they are covered for all hurricane damage, whether from high winds or storm surges.


[Attorney General Jim Hunt] asked a Chancery Court to void provisions in the policies that attempt to exclude from coverage losses or damages directly or indirectly caused by water, whether wind-driven or not. He said he would seek a restraining order next week pending a full hearing.

Only about 30 percent of the houses in disaster-struck portions of Mississippi and Alabama had flood insurance, according to Federal Emergency Management Agency estimates.

Allstate Property and Casualty Insurance, one of the companies named in the lawsuit, said in a statement that it was unfortunate the litigation had begun so early in the recovery process.

"The fact is flood insurance protection has been offered by the federal government for nearly four decades precisely because flood damage is not covered by private insurers like Allstate," company spokesman Michael Trevino said.

Chicago-based Property Casualty Insurers Association of America, an industry group, said the lawsuit threatened to undermine the viability of every insurance policy in the state and the integrity of every legal contract in the nation.

Chief Executive Ernie Csiszar said the action was also unfair to consumers who have paid the federal government for flood insurance.

"This would establish a dangerous precedent and expose insurance companies to potentially billions of dollars in claims costs for a risk in which not one dollar of premium was collected," he said. "This lawsuit is about politics, not fairness or justice."
In other words, the AG, in a move sure to gain him political favor in the eyes of Mississippi voters, is seeking to compensate homeowners who (a) didn't bother to read their insurance policy, or (b) thought they could beat the odds by skipping on the flood insurance.

If the AG succeeds, what reputable insurance company would be willing to continue to do business in Mississippi at a price its customers could afford? Not that the state would allow these companies to increase premiums to a level commensurate with the risk they're being told they must undertake.


Glenn said...

Why is it that private insurers don't provide flood coverage? Are they precluded from doing so by government regulation? It seems to me that if there were a market for it the insurance companies would prefer to collect those premiums rather than watching all that revenue go to the government.

Tim said...

It's probably because in areas potentially affected by hurricanes, a significant storm surge event can break the bank.

The comment from the Allstate rep suggests that the feds stepped in to offer the coverage because the private insurers didn't think the risk to be worth the risk. The fact that the government doesn't force companies like Allstate to offer flood insurance tells me that the government agrees that the risk is too high (and thus decided to shift the potential payout to deeper pockets, namely, the taxpayers).

Ray said...

The following is from the FEMA NFIP web site (http://www.fema.gov/nfip/). Take it for what it's worth:

The NFIP is self-supporting for the average historical loss year, which means that operating expenses and flood insurance claims are not paid for by the taxpayer, but through premiums collected for flood insurance policies. The Program has borrowing authority from the U.S. Treasury for times when losses are heavy, however, these loans are paid back with interest.

Tim said...

Okay, I learned something new today. The reason NFIP works is that they have access to Scrooge McDuck's vault of cash in a heavy-loss year. I'm curious to see how much they'll have to borrow to cover the Katrina (and perhaps Rita, depending on what she does this weekend) payouts.