(no subject)

[rowyn]

Though home-insurance providers face little or no exposure to flood damage, some are calling for them to step in, given the widespread, costly scale of damage. Among them is Richard Scruggs, a well-known class-action attorney who made his name suing the tobacco and asbestos industries -- and whose own beachfront house in Mississippi, which had 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

Source. (Originally seen in the Wall Street Journal).

Of all the things to get upset about lately, this is probably one of the dumbest. And yet I am truly angry over this bit of news. Not because I think it's unjust that insurance companies will not bear the costs for rebuilding New Orleans ... but because I think it is unjust for anyone to ask them to.

As I stewed over this and considered writing this post, I wrote in a letter to koogrr that I wasn't sure I should say anything. "Who else but me would care about the profit margins of fatcat insurance companies, when there are poverty-stricken individuals suffering?"

Then again, maybe that's the best reason to post. If I don't speak up, who will?

My objections are twofold:

First, Mr. Scruggs is a class-action attorney. Now, this snippet doesn't say he's planning to file a class-action suit against the insurance companies in New Orleans, so this concern is probably premature. But a class action suit is a terrible way to relieve the suffering of indiviuals. A class-action lawsuit offers huge benefits to the attorneys who win it, and inflicts huge penalties on the losing company, and give a rather small benefit to the injured parties. A class-action lawsuit isn't going to replace anyone's home. It'd probably net the injured parties pennies on the dollar for whatever their actual losses were.

Second: pretty much everyone who buys standard homeowner's insurance has been told, multiple times and in multiple ways, that their insurance does not protect them in the event of flooding. This isn't a footnote buried in the minutiae of the policy: it's something that your mortagor will tell you at the time you purchase the home, and that the insurance agent will tell you when you get the policy, and that the policy will specify if you read it. And you'll get a brochure about the National Flood Insurance Program, because the federal government is about the only place in the nation you can purchase flood insurance. I will grant that some people may not have had this fact adequately explained to them, but I think the vast majority of insurers and insurance agents have taken reasonable and appropriate steps to make policyholders understand what is and is not covered by their policies.

It actually boggles my mind that the majority of home owners in New Orleans don't have flood insurance, for two reasons:

1) Federal regulations state that, if a lending institution has a lien on a property in a flood zone, they have to require flood insurance on it. If you have a house in a flood zone, and a loan on it, the terms of your loan would require you to have flood insurance on it. So the only way you wouldn't is if you didn't have a loan or were in violation of the terms of it.

2) How can a house in a city that's below sea level and surrounded on three sides by water not be in a flood zone? I mean, I can see some house getting exceptions because they're built on stilts or otherwise protected, but ... Wow. I would not have believed it possible. Then again, some parts of New Orleans never did flood at all, so why not?

Anyway, assuming the article is correct and that the majority of flooded homeowners don't have flood insurance (presumably they didn't have loans or weren't in a flood zone) the fact remains ... they don't have flood insurance. And having the government order companies that sold people fire insurance to pay for flood damages is like ordering a company that sold ammo to a group of people to send them free guns six months later because what they really needed was guns.

Yes, I'm profoundly sorry that these people needed flood insurance and didn't have it. And if they weren't in a flood zone, you could make a good case that they're entitled to government assistance to rebuild, because the levees and pumps that were supposed to prevent flooding (and presumably are the only reason the whole city wasn't a flood zone) were government responsibilities, and those are what failed. I have no problems with the feds sending big bucks to help, and any and all charitable assistance is reasonable and appropriate.

But sticking it to American Family and Farmers Insurance because they don't sell flood insurance is just plain wrong. Insurance companies carefully calculate their risks and assess the cost of premiums based on those risks. These careful calculations do not include the potential costs of flooding because they don't cover flood damages. IIRC, the National Flood Insurance Program, which covers floods and only floods, typically charges two to four times the premium of standard insurance. The NFIP also loses money at those premiums. That's how expensive floods are when they happen. There's a reason standard insurance doesn't cover flooding: it'd be a lot more expensive, and a lot more difficult to assess the risks on. (Floods also tend to be a matter of "when" rather than "if": a house might easily stand for a hundred years without ever having a fire, but a house in a flood zone WILL flood, someday.)

It's not that I don't want to see the refugees helped, and I'm not even saying "They didn't buy flood insurance so they should just suffer the consequences of that choice".* But I am saying that insurance companies should not be made to suffer the consequences of the customer's choice not to buy flood insurance, either.

We all have a moral obligation to help those in need; there is no reason to single out a special category of people or companies and claim that obligation belongs to them alone.

Comments

[zaimoni.livejournal.com]

The majority of the structures in former New Orleans also predate the National Flood Insurance Program. Until they're retrofitted, they're uninsurable under that program.

The awful thing is that this class-action suit hasn't been ruled to be frivolous.

Also building on stilts, etc. does not exempt from the NFIP. However, the laws behind the NFIP criminalize basements in particularly bad flood zones.

[rowyn]

It is possible to build a house that's physically located in a flood zone in such a way that the house is classified "not in a flood zone". I know this, because we had a customer build a house in a flood zone. I believe the builder raised the level of the ground to put it above the flood level. Anyway, it was a fight with the people who make flood determinations, but eventually we got one that said "Not in a flood zone" for the house.

[rowyn]

I should add -- I don't know if that means you can't get flood insurance through NFIP any more. I just know that the mortgagor is no longer required to make the loan contingent on the possession of flood insurance.

[zaimoni.livejournal.com]

I'm thinking the simplest legal defense would be to punt to the Federal court system, and force that class action suit to name the United States government as defendant.

Turns out the National Flood Insurance Program is delineated in Federal law: Title 42, Chapter 50.

[prester-scott.livejournal.com]

Welcome to the Club Of Mean-Spirited People Saying Cruel Things In The Face Of Terrible Suffering.

[rowyn]

Well ... it's nice to have somewhere to belong.

[jordangreywolf.livejournal.com]

Yeah, I basically see it as a lawyer looking to score from a tragedy against an "easy target". Big corporation (INSURANCE corporation) = evil. Therefore, any proposal to stick it to them MUST be good, in the kneejerk quick reaction to the news.

Doubtless there would be many to disagree with you, but I think you're right on this one.

[rowyn]

Yeah, it just seemed so much like "let's find someone unsympathetic and make them pay for it!" Very political. :(

[kawaiijen.livejournal.com]

I, for one, agree with you. It would bankrupt them, and then other people with valid claims wouldn't get them fufilled. Or it would cause rates to jump up so much that NO one could afford insurance regardless of being in a flood zone or not.

Not that I don't hate that insurance companies are there to make money....and screw the common man sometimes -- however, that being said, there are somethings like that idea that would just make insurance premiums even worse.

It's kinda like the people that get paid out for stupid coffee cups in the lap that got awarded un-godly amounts of money. It only forces the insurance up and hurts EVERYONE. It's a lawsuit like that which will force everyone to bear the burden for some people deciding to live in a flood zone.

[rowyn]

I fully expect there will be a lot of legitimate trouble getting insurance companies to cover claims they ought to -- wind damage from the hurricane, for instance, should be covered and I can easily see companies trying to argue it's all flooding and not covered. Insurance companies aren't particularly good. Some of them are better than others, just like any other business.

But yes, making insurance companies pay for flood damages in New Orleans will skyrocket insurance premiums for the whole US. Because suddenly the companies will have to be prepared not only to cover what their policies say they'll cover, but they''ll have to be prepared to cover disasters they explicitly say they won't. Those exclusions are worthless to them if the feds are going to step in and declare them invalid whenever they feel like it. So insurers will be want to collect a whole lot more money against whatever and whenever the next big disaster is.

The last few years have been pretty bad for insurance companies anyway, in fact. Big disasters like 9/11 and the three hurricanes that hit Florida last year and the tsunami (which did affect quite a lot of insured property, even if most of the affected people didn't have insurance) have been hard on the industry as a whole. And haven't done premiums any good, either.

[howardtayler.livejournal.com]

I agree, too. There's no winning this one, if you're an insurance company. You either end up paying out enormous amounts of non-underwritten money, destroying your ability to insure others, or you get labeled "heartless fat-cats" by those who don't understand how tiny the profit margin in the insurance business really is.

--Howard

[ltwarhound.livejournal.com]

How tiny is that profit margin? Speaking as someone who has paid out thousands to insurance companies, just for car insurance, over the course of almost 25 years of accident free driving (i.e. no pay outs from the insurance company to me or to others due to my actions) I do wonder what their profit margins are like.

Just because I'm a raving socialist....

[ex-strangess744.livejournal.com]

...doesn't mean I disagree with you on this one.

Now, I imagine part of why there was no flood insurance was because insurance companies have been very picky in how they assign policies...esp. high risk policies. But _that is their right_.

Insurance is _commerical enterprise_. They aren't giving you money from nothing. If no-one thinks that they can make money offering mitigation of damages to "high risk" (or even "normal risk" people) then this is a legitimate market correction.

Now, as a raving socialist, this is where I say there should be a coordinated, central, disaster-relief mitigation agency...if BC can find good enough talent to run an efficient auto-insurance policy, I'm sure we can find a way to take from general tax revenues and audit responsibly the allocation of aid.

Though, again, as a raving socialist, I also think that as environmental conditions change (and they changed in the past, even without global warming), that agency should essentially list marginal areas that become unsubstainable as "no longer protected" and offer internal-migration funding. And put everyone who stays on notice that on their own heads if things go to shit.

(and given the mindset of first world citizens, I would have representitives of the government go door to door to such folk, and video tape where they explain this clearly, and get the acquiesence to stay _signed in blood and kept on file permanently_ as well as pass a specific constitutional amendment dismissing pre-emptively all challenges to this.)

But I am boggling at the mindset of your fellow citizens. For people who say they believe in "laissez faire, neo-liberal capitalism" you wouldn't think it from reactions like this. It's especially disheartening to see an educated person like this spout such idiocy; within the paradigm of your country, he's being an ass. Sadly, he is going to have hundreds of thousands of asses lined up behind him, I'm sure.

My condolences; you know I'm no fan of the corporations, but the sanctity of a contract and property should be absolute, in any law abiding system.

Re: Just because I'm a raving socialist....

[rowyn]

Yeah, and even if you're all for raving socialism, that doesn't mean (I should hope) bankrupting one particular business segment so that it can subsidize disaster relief for the rest. Socialism is supposed to spread out the pain a bit more than that. :D

Insurance and Buildings

[gleef.livejournal.com]

I dislike most insurance companies, but I have to agree with you on this one. I'm sure some people thought they were covered for flood damage, but for the most part, these people chose not to take flood insurance because of the cost. Insurance agents are generally not shy at suggesting additional policies or riders that might be attractive.

Any way you cut it, flood damage or flood insurance raises the costs of living in a flood zone. If a community wants to make sure that its homeowners are covered under flood insurance, it should subsidize the insurance and pay for it out of income or property taxes. Something tells me this isn't going to happen in the tax-phobic southeast.

Also, as you suggest, just like it's possible to build earthquake resistant housing (resulting in lower earthquake insurance premiums), it's also possible to build flood resistant housing. In the long run, this ought to be the most cost effective response to living in a flood zone, constructing homes appropriately to minimize the possible damage.

Granted, this doesn't help the older homes, but if you look at New Orleans, the really historic structures mostly did fine during this disaster, they're built better and on higher ground. The worst hit areas appear to be post WWII suburban sprawl, when we tended to build much the same houses whether you're in Louisiana or Kansas or New York.

Considerations between flood level and house construction really need to be foremost in our mind as we rebuild, both in construction, and in subsequent insurance policies. Sadly, I have no confidence, and expect most reconstruction to be farmed out to a federal low bidder with no such details required.

Re: Insurance and Buildings

[rowyn]

Well, it's happened before: Seattle and Galveston both raised the level of the ground when they rebuilt after devastating damage. So I have some optimism that whatever or wherever they rebuild in New Orleans, it'll be better than what they had before. Whether that means raising the land level, or requiring more stringent building codes, or some combination of other approaches, I don't know. But I think we'll see improvements.

Re: Insurance and Buildings

[gleef.livejournal.com]

I hope so. I don't know the details of Seattle, but I know the ground level problem was less severe in Galveston. They needed to raise the ground level from a hair above sea level to a little more above sea level (IIRC it averaged 8ft above, and they wanted 20ft).

In New Orleans, they are starting from below sea level, and if they want real protection against flooding via the Mississippi River, they need to get substantially above sea level, since the Mississippi is normally about 12ft above sea level as it passes through the city, and often floods significantly.

I fear they will throw up their hands and concentrate on the cheaper (in the short term) levee + pumping system. If we do, I hope we at least have the sense to allow Dutch engineers to help, they have valuable experience at protecting low lying cities from flooding. Sadly, the current administration seems bent on giving lucrative contracts only to friendly US companies.

[ceruleanst.livejournal.com]

I'm with you. The way to get greedy insurance companies to fulfill their obligations more often is not to further muddy and render irrelevant the difference between what they agreed to cover and what they didn't.

[rowyn]

Yes, exactly!

[garyamort.livejournal.com]

Flood insurance should be profitable at current rates:
http://www.fema.gov/nfip/cy04prem.shtm
http://www.fema.gov/nfip/cy2004lsdl.shtm

You have to go back to 1995 to find a year where there were more losses paid than premiums collected. Most years they collect between 500 million and 1 billion more in premiums than they pay out.

That aside, insurance companies that did not provide it in their policies should not be required to pay for damages for it. The real question is, if a house was hit by a hurricane, partially burned, and than was completely destroyed by a flood, should the insurance company pay for the damage BEFORE the flood hit?

[rowyn]

Hmm. Now I'm curious how much of insurance money is used to pay administrative overhead. I'm thinking the WSJ had said the NFIP was unprofitable, but I could certainly be wrong about that. It'd be pretty scary if program administration ate up THAT much of the premium money.

[gleef.livejournal.com]

This is speculation, but I would not be surprised if the source of the WSJ article was a press release from Insurance Companies. They are very good at cooking numbers, and pretending to take a loss when they are actually profiting quite happily.