The Legal Storm in Katrina's Wake
Wednesday, August 30, 2006
SLIDELL, La. -- When Hurricane Katrina roared through Linda and Charles Spears's neighborhood one year ago, a neighbor said he saw winds virtually explode houses on their block long before Lake Pontchartrain began to rise. When the wind died down and the waters subsided, there was nothing but a slab where their house used to be.
The Spearses filed a claim with their insurer, a unit of State Farm Insurance Co., for the face value of their homeowner's policy -- $232,000.
State Farm denied the claim, arguing that flooding -- not wind -- caused the damage. Flood damage was not covered in their policy.
After a mediation session, State Farm agreed to pay $10,000, including living expenses. The Spearses got $151,000 in taxpayer-financed flood insurance from the federal government -- leaving them at least $70,000 short of what they say they're owed and even less than what they need to rebuild under stricter building rules and with skyrocketing construction costs.
Then last month, a letter from State Farm arrived in the mailbox they'd erected on the slab that had held their house. It was a notice: Their insurance premium had been increased by 23 percent.
Struggles like theirs are going on across the Gulf Coast, where more than a million policyholders have turned to their insurers for payment on homeowner's, commercial and other insurance claims. Battles over claims have clogged state and federal courts here and spilled into state legislatures.
Reeling from the scale of the disaster, most carriers have stopped writing new policies along the Gulf of Mexico, forcing policyholders into state-backed insurers of last resort. Earlier this summer, Allstate Insurance Co. of Northbrook, Ill., tried to renounce wind and hail coverage on 30,000 existing policies in Louisiana, a move it is reconsidering after the state insurance commissioner threatened legal action. Rates, meanwhile, are soaring. In Mississippi, the state-backed insurer of last resort asked this year for rate increases of nearly 400 percent, an amount that Insurance Commissioner George Dale cut to 90 percent.
In the aftermath of last year's devastating hurricane season, these parallel problems of shrinking insurance coverage and spiraling rates have rippled across the country. Homeowners in coastal Maryland and Virginia, for instance, can expect rate increases of 25 percent this year, said Robert Hunter, director of insurance for the Consumer Federation of America, and coastal policyholders as far north as Long Island have found themselves unable to renew policies.
The rate hikes and claims fights are putting the insurance industry on the defensive. The industry's profit jumped 11.7 percent, to a record $43 billion, in 2005 from a year earlier, despite the record-setting losses, according to Insurance Services Office Inc., a firm that collects state regulatory filings from insurers.
Rep. Gene Taylor (D-Miss.), who represents the state's coastline, said the industry's strong performance is due in part to its "shamefully" ascribing damage caused by wind to floods, shifting costs to policyholders or the government-backed National Flood Insurance Program, which is expected to absorb $22 billion in claims stemming from Katrina and other storms last year.
"That's the biggest scandal of them all," Taylor said. "It's no coincidence the flood program posted a $20 billion loss the same year the insurance industry posted a $40 billion profit."
Insurance industry officials refute that assessment. "Not only isn't it a scandal, it isn't a mystery," said Robert Hartwig, chief economist for the Insurance Information Institute, a New York-based industry group. Hartwig said the profits came from product lines other than homeowner's insurance and regions other than the Gulf. Under law, he said, insurers are forbidden to subsidize losses in one state with premiums from another.