Challenger Logo by Alan White   A Science Fiction Fanzine   Spring - Summer 2007

I asked Tom to explain the insurance situation in New Orleans, and sure enough, here’s

NOLA and IN$URANCE

Tom Feller

One of the conditions for rebuilding New Orleans, southeast Louisiana, and the Mississippi Gulf Coast is money from insurance companies to pay claims. The main issue regarding insurance payments is that standard homeowners and business insurance policies exclude flood damage. Many homeowners and business only take out flood insurance if their financiers, usually banks, require it.

Sometimes businesses think they have flood insurance, but their insurers disagree. For instance, Allianz Global Risks refused to pay a $100 million claim by Tulane University in New Orleans on the grounds that the policy excludes floor damage, and the university sued them for $250 million. Northrop Grumman Corporation sued its insurance company, Factory Mutual. It had shipbuilding operations for the U.S. Navy in Pascagoula, Mississippi, and Avondale, Louisiana. Northrop was Mississippi’s largest private employer with 10,000 employees in the state before Katrina. In Pascagoula, the hurricane damaged 1.75 million square feet of buildings and destroyed 301 vehicles, 81 pieces of heavy equipment, and 26 cranes. The issue is that much of the damage was a result of flooding, and Factory Mutual disputed whether the policy covered it. Northrop argued that it was an “all-risk” policy that did not exclude flooding.

Paul and Julie Leonard, homeowners in Pascagoula, Mississippi, who did not have flood insurance, lost their lawsuit against Nationwide Insurance to overturn the flood exclusion in their homeowner’s insurance policy. Their house, 515 feet from the beach, suffered $130,000 in damages, but the insurance company had only paid them $1,661 for wind damage and argued that the remainder of the damage was caused by flood. The judge ordered the insurance company to pay $1,238 more, but upheld the principle that flood damage was excluded.

State Farm was the single largest homeowner insurer in Mississippi, so they had many Katrina-related claims. They denied many of them on the grounds that the damage came from flooding rather than from wind and rain and were accused of not acting in good faith. Eventually however, they lost a case in a Federal district court in southern Mississippi. The court decided that they could not arbitrarily deny a claim based on the flooding exclusion, but actually had to prove that flooding was the cause of the damage.

Then State Farm settled a lawsuit with the Mississippi Attorney General, the Mississippi Insurance Commission, and a lawyer representing individual homeowners. They will eventually pay at least $50 million and possibly as much as $500 million to homeowners in the settlement. Around 1,000 homeowners, whose houses were so thoroughly destroyed that it is impossible to determine whether flood, rain, or wind caused the destruction, will be compensated for 50% of the value of their homes. The insurance company re-opened the claims of about 35,000 homeowners and re-examined whether wind caused any of the damages.

I don’t know whether these developments influenced their decision, but a short time later State Farm announced that they would stop writing any new homeowner insurance policies in Mississippi. This became a trend. Allstate, the country’s second largest property insurer, cancelled 95,000 homeowner policies in Florida and 28,000 in New York, specifically New York City, Long Island, and Westchester County. Although no hurricane has hit New York since 1938, the insurance company decided that the risk is too great. It also does not write any more new policies in the 14 counties along the Texas Gulf Coast.

In general, businesses operating in hurricane-prone regions have found that their insurance premiums have risen and their coverage has decreased, assuming they can buy insurance at all. The August 28, 2006, issue of Business Insurance cited Nashville-based HCA (formerly Hospital Corporation of America) as one example. It operates hospitals on the gulf coast and found their property insurance premiums increased by 167% for less coverage. Total insured losses world-wide for all insurance companies from catastrophes were $61.2 billion in 2005 and $27.5 billion in 2004.

 

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