Mississippi Sues Insurance Companies for Welching

The mess that Hurricane Katrina left behind is going to be very expensive to clean up. Mr. Bush’s proposal for the region runs to $200 billion, and that won’t get it all done. The insurance industry is likely to pony up $60 billion. However, it will be like pulling teeth to make them pay. Mississippi Attorney General Jim Hood has sued five insurance companies saying adjusters have tried to trick Hurricane Katrina survivors out of millions of dollars in homeowner claims.

The insurance industry points out that most of the homes in the region do not have flood insurance as part of the standard homeowner’s policy. And they point out that federal insurance against floods has been available for 40 years. Quite simply, they maintain that they never collected a premium to protect most of those affected from floods. So, they aren’t going to pay.

Quite clear and concise, except the facts aren’t really that clear cut. Adjusters examine a house and look for blown out windows and torn away shingles as signs of wind damage, which is covered. They also look for water marks, indicative of flooding. In a hurricane, there are both sorts of damage, but it must be remembered that the “flood” is actually a storm surge in many cases caused by Category 4 or 5 hurricane winds. A good lawyer arguing in front of a Mississippi jury has a pretty good shot at winning a verdict against the insurers.

About 100 years ago, the world was in a similar position. The city of San Francisco had fallen apart due to the 1906 earthquake. Insurers argued that the earthquake wasn’t covered, but since the earthquake caused fires and such that were covered under the terms of the policy, things were looking just as sticky. Insurers nickeled and dimed their policyholders right, left and center. Enter a most unlikely hero, Cuthbert Eden Heath a major underwriter at Lloyd’s of London. From the city on the Thames, Mr. Heath wired his agents in San Francisco “Pay all our policyholders in full irrespective of the terms of their policies.” One hundred years later, Lloyd’s still benefits from the reputation for security that message created.

The world has changed a bit since 1906, but the premise is the same. An insurer needs a reputation as well as an actuarial knowledge. If a similar act occurred today, the company paying would lose millions while securing for itself the kind of support in the community insurers rarely enjoy. Some stockholders might sue for breach of fiduciary responsibility, it is true. But it is hard to see them prevailing when management could argue that the payment protected the good name of the insurer. And besides, what jury would fail to back a management team that just helped put the Gulf Coast back together? It's called enlightened self-interest, long-term planning. They don’t make them like Cuthbert Heath anymore, and that’s a pity.


© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
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