As the water levels finally begin to recede in New Orleans and the astonishing scale of the property damage throughout the region becomes clearer, the question for many people is painfully simple: who is going to pay for the damage? Thousands of homeowners are facing an enormous problem of coverage. If hurricane winds destroyed the house, they are covered. If, on the other hand, the rising flood waters caused the damage, homeowners may not be able to collect, due to a standard policy exclusion for flood damage. The stakes couldn’t be higher.
One news article put it this way: falling water is covered by homeowner’s insurance, but rising water is covered only if you carry optional federal flood insurance. So if your roof blows off and rain falls in, that’s a homeowner’s insurance issue. But if the levee breaks and water floods into your home, you need flood insurance.
It’s not difficult to imagine the arguments between insurers and homeowners: sure, the wind damaged your house, but the floods destroyed it, so we’re only paying for part of the damage. Yikes! The Wall Street Journal, in an article by Theo Francis and others (subscription required) quotes a lawyer, formerly the proud owner of a coastal home in Gulfport with 6,000 square feet of living space: “I know when I file a claim, the insurance company is going to say the house was destroyed by flood…A neighbor down the street saw our roof and furniture flying by his house long before the deluge, so I know it was the wind that knocked the place down.” I can hear defense counsel already, cross-examining the neighbor: “How did you know for sure that the sofa flying past at 100 mph belonged to Mr. Woodall?”
Good News May Be Bad News
One of the many ironies in all this: if your house is still standing, relatively intact, you may have a harder time collecting on your homeowner’s policy. For homeowners whose houses were totalled, the insurer will have difficulty separating the damage caused by the wind from that caused by the rising water. There is simply no evidence to examine. If the house is still standing (which under ordinary circumstances would be good news), it will be relatively easy to distinguish between wind damage (covered) and flood water damage (denied). So the “lucky” homeowner with less damage (but a home rendered uninhabitable by toxic waste and mold) might be confonted with bad news indeed.
Class Action Litigation
The Journal article notes that famed class action litigator Richard Scruggs has taken the hurricane personally and is contemplating a loss suit against all the insurers. Scrugg’s own beachfront house in Mississippi, which carried flood insurance, was partly destroyed by Katrina. Mr. Scruggs said he plans to urge Mississippi Attorney General Jim Hood to try to override flood-exclusion clauses in homeowners’ policies in that state in the interest of public policy, a move that could force insurers to pay many billions more toward rebuilding costs. Through a spokesman, Mr. Hood said: “I’m reviewing these contracts to determine if there are unconscionable provisions.”
Needless to say, the insurers are not impressed with his argument. Industry officials argue that they can’t afford to take on flood risks because they haven’t been paid to do so.
“Where does that money come from?” said Allstate Corp. spokesman Mike Trevino. “We didn’t collect any premiums that contemplated flood as an exposure that we would have to cover.”
I tend to agree with another attorney, Stephen Cozen, whose Philadelphia firm does extensive work for the insurance industry: “This is not a public-policy issue. This is simply an insuring agreement between two parties in plain English where there’s plenty of notice.” It’s a simple and painful matter for thousands of homeowners: read the words in your policy (which you probably never read before) and weep.
Everyone Pays
All we know for sure is that Katrina has caused damage in the vicinity of $100 billion, with around 25% of it covered by conventional insurance. It’s also safe to say that one way or the other, we are all going to pay for it. The greatest and least quantifiable cost falls on the homeowners themselves, whose lives have been utterly compromised. For the rest of us, it’s a matter of rising costs in fuel, insurance premiums and goods from the regions damaged by the storm. Given the proposed federal expenses beginning at $50 billion, there should be the shared cost of increased taxes, but somehow I think that’s just not going to happen — we’ll put it on the deficit tab for future generations to pay. All this is a reminder that despite our presumption that we are in control of our destinies, nature calls the shots. No word-smithing of insurance policies or act of congress is going to change that.
