Instead of helping residents, the legal strategy of Mississippi could backfire and do the state more harm than good. At worst, the suits could end up driving insurers out of the region, bankrupt some smaller, regional firms and impair redevelopment in the area.
In the first lawsuit, filed in September, Mississippi Attorney General Jim Hood claims that insurance companies should pay for all hurricane damage, even floods, because waters were wind driven. Attorney Richard Scruggs, known for successful litigation against tobacco companies, filed a similar suit.
The suits come despite the fact that flood exclusions have been standard in homeowners' policies since around 1968, when the federal government's National Flood Insurance Program was established. The industry, therefore, has not collected any premiums to pay for flood damages.
Those exclusions should be declared void, Hood says, because Mississippi common law requires full coverage be provided if proximate cause of the loss--the hurricane wind--is covered, even if other noncovered causes also contributed to the loss.
The insurance contract language, however, clearly excludes coverage for floods, whether driven by the wind or not, says Robert Hartwig, chief economist for the Insurance Information Institute. The language, he says, has been clear, long-standing, upheld by courts, regulator-approved and recognized by the federal government in all 50 states.
Declaring those exclusions void would make it impossible to do business in Mississippi, he says.
"Insurers sell one product. People call it an insurance policy, but it's a contract. And unless the terms of that contract are enforced, then we can't price our product," Hartwig says. "We cannot therefore offer a product in an environment where we can't price the product and where, in fact, there are legalized grabs on shareholder and policyholder assets.
"The certain outcome of a victory by Scruggs or Hood would be the virtual overnight disappearance of insurance in the state," he says.
Regional insurers would be bankrupted if the lawsuits were successful, he says. State guarantee funds would then have to pick up the policyholder claims of the bankrupt insurers. Those costs would be passed on to the rest of the policyholders in the state, who would have to pay an extra charge to cover the claims.
Premiums for other policyholders also could go up if insurers are forced to pay what Hartwig estimates could be a minimum of $15 billion in additional losses for a risk the industry didn't assume.
If insurance became unavailable in Mississippi, reconstruction efforts could also grind to a halt, and the state could be forced to step in to become the insurer of last--and first-- resort.
As Florida residents have discovered, an unfriendly legal and regulatory climate doesn't always pay off in the long run.
"We have a very weak homeowners insurance industry in Florida," says Martin Grace, the James S. Kemper professor of risk management and insurance at Georgia State University.
In Florida, the state is one of the largest homeowners insurers, and other insurance companies have set up firewalls around their Florida subsidiaries to prevent catastrophic losses in those units from harming the parent companies.
"If that happens all along the Gulf Coast," Grace says, "homeowners is going to become a dying market in these areas.
"Don't use Florida as a good example. Use Florida as an example of just about everything the state could do that has gone wrong," Grace says.
A decision to make insurers pay for the excluded flood losses also would effectively terminate the National Flood Insurance Program. "It would end the flood insurance program as we know it," Hartwig says. "Why buy it if you're going to get it for free?"
There is a risk that if the case goes to a jury, the jury would be sympathetic to homeowners and decide against insurers. Such a verdict would likely be overturned at the appellate level, says Randy Maniloff, an attorney with White and Williams in Philadelphia who represents insurers in coverage disputes.
If the lawsuits are unsuccessful, though, it will increase the perception of risk in the area, Grace says.
"Once something like this has been raised, it still casts a shadow over future contracts," Grace says. "It makes writing contracts even more risky. There's a little bit of contract interpretation risk now built into the potential loss for an insurer."
For Hood, though, there's not much downside risk.
As retired insurance analyst Michael Smith says, "No one ever lost a vote for beating up on the insurance industry."
December 1, 2005
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