I’ve been meaning to pass along this James Q. Wilson/WSJ ($) op-ed that lucidly describes the crisis that has developed in property insurance markets along the Gulf Coast as a result of the litigation risk and attendant cost of clearly inapplicable claims being asserted against property insurance policies:
When Hurricane Katrina hit our southern coast, it was the worst natural disaster in American history, killing 1,800 people, forcing more than a million to evacuate the area, and putting four-fifths of New Orleans under water. In the struggle to recover from this event, people turned to their insurance companies for help. Thousands of claims were handled, but for some people there wasn’t any coverage. The problem was they were not insured against flooding.
Insurance companies’ policies are quite clear on this, and state insurance departments, including the ones in Mississippi and New Orleans, have approved these rules. The homeowners’ policy issued by State Farm, for example, says that water damage from a flood, waves, tidal waves, or a tsunami are not covered. . . .
The reason for the exclusion of water damage is quite clear: Hardly any insurance company wants to encourage people to build or occupy structures in places where such damage is likely. If they did allow this, either the company would go bankrupt from losses it could not pay or it would have to charge a premium so high that hardly anyone could afford the insurance. Even without water-damage coverage, insurance companies paid out around $40 billion to Katrina victims. [. . .]
Not content with these policies and rules, trial lawyers and politicians in Mississippi demanded that insurance companies should be required to pay for flood losses even though they were not covered by the policies. Richard “Dickie” Scruggs, a veteran of class-action suits, and Mississippi Attorney General Jim Hood worked together to create a lawsuit that would retrospectively ban the flood exclusion rule. (Mr. Scruggs was a major source of campaign money for Attorney General Hood.) At the same time, Rep. Gene Taylor from Mississippi urged Congress to require a retroactive payment of flood insurance. Never mind what the homeowners’ insurance policies said or what their coverage was, demanding money to which they were not entitled became “good public policy.” [. . .]
In time some measure of sanity was restored. A federal district court judge upheld the flood exclusion in insurance policies, a view that was affirmed by the Court of Appeals for the Fifth Circuit. More recently, the Fifth Circuit has affirmed that there is no coverage when an excluded peril (such as flooding) and a covered one (such as windstorms) both contribute to the same damage. A Louisiana state judge agreed that policies not written to provide flood insurance did not, in fact, provide it. . . .
But the return of sanity was of short duration. In June Mr. Scruggs filed a lawsuit against State Farm saying that it engaged in racketeering, and Attorney General Hood filed a new civil lawsuit — and then followed up with another grand jury investigation contrary to his prior agreement with State Farm. One wonders how its claims adjusters feel when they are told that they are no better than members of the Mafia.
In light of all this, State Farm announced earlier this year that it would no longer sell new homeowners’ policies in Mississippi, not to punish people there but because politicians had made it impossible to do business in an orderly way. In response, Attorney General Hood demanded that the governor order State Farm to write new policies. Gov. Haley Barbour replied, quite reasonably, that he does not have the authority to tell a private company that it must do business in his state. There will no doubt be congressional investigations of the insurance business because it did what it told people it was doing.
And Hood calls himself a public “servant” (see earlier post here)?
