Flood Insurance News

Some of the country's top insurance companies were sued in September to force them to pay for wind damage associated with Hurricane Katrina.

The wind damage - often referred to as storm-surge damage - as well as wind-driven damage, is often covered under a homeowner's insurance policy, while flood damage is covered by government issued insurance. A key question has been whether storm surges caused by hurricanes are in fact covered under homeowners' policies.

The lawsuit was file by in Hinds County, Miss. Chancery Court by Mississippi Attorney General Jim Hood, against Allstate, State Farm, Nationwide, USAA and Mississippi Farm Bureau. The next day it was moved to federal court. Hood, a first-term Democrat, claims the companies have "attempted to exclude coverage for storm-surge damage" caused by the hurricane.

At the time, Risk Management Solutions estimated that insurance companies would eventually wind up paying $60 billion in damages related to the hurricane and more than $125 billion in total economic damages.

The insurance companies respond to the suit by saying that they do not charge customers for flood insurance and that a large settlement would bankrupt smaller insurance companies in the southeast and hinder larger ones from settling their obligations from Katrina. They also say that many policies don't cover damage caused by wind driven water, and that insurance policies can't be rewritten after a disaster to force coverage.

The storm struck Aug. 29, causing billions of dollars worth of damage to the coastal areas of Alabama, Mississippi and Louisiana. Insurance companies have argued that wind damage is the same as flood damage. Hood maintains that insurance companies don't mention wind damage in their policies and that they should not be allowed to point to the fine print to deny payouts for wind damage.

At a Capital press corps luncheon this spring at Mississippi State University, Hood was sharply critical of insurance company denials, saying the companies are "in lock step like Nazis locking arms, coming at those people down there on the coast," according to an April 16 account of the speech in the Insurance Journal.

Public payments like those that went to Sept. 11 victims could also wind up going needy victims of Katrina, Hood said. Hood added that insurance companies have made a conscience decision to allow taxpayers to bail out policyholders from whom they have profited. Meanwhile, in Mississippi, as many as 30,000 homeowners were expected to apply for $3.4 billion in federal grant money to help homeowners whose structures were damaged by water outside federally designated flood zones. To be eligible, the structures must have been covered by homeowners' insurance.

Hood's comments followed a ruling by U.S. District Judge for the Southern District of Mississippi denied a motion for partial summary judgment by plaintiffs Elmer and Alexa Buente for partial summary judgment against Allstate Insurance Co. Three national trade organizations - including the National Association of Mutual Insurance Companies - filed an amicus brief in the case. In a joint statement, they wrote, "In its ruling, the court held that the water damage exclusion in this policy is clear, unambiguous, `drawn quite broadly' and with `the clear purpose of excluding damage caused by inundation from coverage.' "The court concluded that `Exclusions found in the policy for damages attributable to flooding are valid and enforceable policy provisions."

"The court is clearly putting to rest the trial bar's unfounded argument in this and other cases that `wind-driven water' or `storm surge' is not covered by plain language exclusions." The statement continued, "As stated by the court, `the inundation that occurred during Hurricane Katrina was a flood, as that term is ordinarily understood, whether that term appears in a flood insurance policy or in a homeowners insurance policy.' The court concluded that, `since the water that entered and damaged the plaintiff's home was tidal water, I find that the damage caused by this inundation is excluded from coverage under the Allstate policy."

A week after Hood's comments, Charles Chamness, president and CEO of the National Association of Mutual Insurance Companies, issued a response, characterizing them as hysterical and irresponsible. "Last week a judge ruled that flood exclusions are valid and legally enforceable, so Mr. Hood has upped the ante by calling insurers `Nazis,'" he wrote. "The fact remains that no private insurer ever collected a dime for flood coverage. Mr. Hood would force them to pay flood claims anyway in direct contravention of the principles of risk sharing and underwriting on which the property-casualty industry is built. One wonders what other industries Mr. Hood will sue for failing to provide goods and services to people who don't buy them."

In a statement posted on NAMIC's Web site, Chamness also said that forcing insurance companies to pay for wind damage and wind driven water damage could be economically disastrous for Mississippians. "If insurers must pay claims for losses their policies didn't cover, they will be forced to raise premiums to cover every conceivable peril, irrespective of whether it's excluded in the contract," he said. That, he said, could make homeowners' insurance - and thus home ownership - unaffordable for many Mississippians.

U.S. District Judge L.T. Senter ruled on May 24 that provisions in a State Farm Fire and Casualty Co. policy that exclude certain damage from Hurricane Katrina are unenforceable. The case was brought by a Long Beach, Miss. couple whose home was destroyed in the storm and who filed suit against State Farm for denying their claim. The couple argued that wording of their policy was ambiguous and could not be enforced. While Senter agreed with the insurance company that tidal surge is not covered in the policy, he sided with the couple in saying that a policy that purports to deny coverage when wind acts in any sequence with tidal surge - an excluded event - to cause damage is ambiguous.

In mid-May, Mississippi attorney Richard "Dickie" Scruggs filed a lawsuit against Allstate on behalf of more than 300 policyholders who were allegedly denied rightful claims of hurricane damage. According to the suit, the company sent adjusters and engineers to the scene of the damage and told policyholders that the damage was caused by storm wind. According to the suit, "Allstate expected its adjusters and retained engineers to reach conclusions that all of the damage to plaintiff's insured properties was caused by `storm surge' (which Allstate unilaterally classifies as `flood' and contends is excluded by the `flood' exclusion of the subject policy) and not by hurricane wind (which is undisputedly covered under subject policy)."

Scruggs also filed one of the first lawsuits to be filed in the wake of Hurricane Katrina. In early October, he filed a suit in Mississippi state court, accusing Nationwide Mutual Insurance Co., and others, of failing to provide adequate coverage, alleging that the companies misled policyholders about what was covered. Scruggs filed the suit on behalf of Paul and Julie Leonard, whose Gulf Coast home was damaged by storm surge.

And in mid-May of 2006, he filed a federal lawsuit on behalf of 240 Gulf Coast residents against Nationwide, claiming that Nationwide routinely denied policyholders' claims without investigating whether Katrina's wind or water was responsible for the damage. That suit also alleges that Nationwide denied many claims on the basis of engineering reports that blame all of the damage on storm surge, which is excluded from coverage.

Furthermore, in a May 18 ruling, a Louisiana federal judge ruled that insurance companies are not responsible for hurricane-related flood damage if homeowners carry coverage only for windstorms. That suit was filed in the wake of Hurricane Rita. Said U.S. District Judge Richard Haik: "You get what you pay for, and what they paid for was wind damage." According to several accounts, Haik added, "I wish I didn't think that, I am not a fan of insurance companies."