Industry Reacts To Miss. AG Suit To Force Flood Payouts

Should other states take similar approach, industry losses couldreach $75 billion

By steven Tuckey

While the property-casualty industry braces for a record tab forHurricane Katrina, with some estimates as high as $60 billion, thepossibility looms that the figure could jump to more than $75billion with the stroke of a pen. A lawsuit filed by MississippiAttorney General Jim Hood to force companies to cover flood damagesin addition to those caused by wind-driven rain has promptedinsurance industry representatives to lay out frightening scenariosnot only for insurers, but for the nation as well.

Roger Schmelzer, vice president for the National Association ofMutual Insurance Companies, feared "profound, unintendedconsequences for Mississippians and the insurance industry in thatstate."

"If [it is] granted, the motion will effectively bring theentire claims paying process in Mississippi to a halt," Mr.Schmelzer said. "Taking this action may have made a great headline,but its success will only leave people more confused than everbefore."

In the suit filed Sept. 15 in the Chancery Court of HindsCounty, Miss., First Judicial District, the attorney generalalleges that certain insurance contract provisions that attempt toexclude damage caused by water--whether or not driven by wind--arenot enforceable.

Jacob Ray, a spokesperson for the attorney general, said theinsurance industry would like to make the issue about the sanctityof the flood exclusion.

"But this is not Flood Katrina, this is Hurricane Katrina," hesaid.

Essentially, a hurricane actually lifts the Gulf up and carriesit forward with the front as it moves inland creating a stormsurge, rather than a flood, Mr. Ray said.

The New Orleans situation presents totally different issues, Mr.Ray added.

So far, attorneys general in Alabama and Louisiana haveindicated no interest in filing a suit similar to Mr. Hood'ssuit.

Robert Hartwig, chief economist for the Insurance InformationInstitute, estimates that if the Mississippi suit is successful,losses for the industry could mount to $75 billion, assuming allstates must follow suit.

"The flood exclusions are very broad and cover rising waters,regardless of the cause or circumstance," Mr. Hartwig said.

In fact, the issue has rarely arisen in past hurricanes. "Theseclaims usually run pretty smoothly. Whether it is flood, or justflood and wind, adjusters are pretty experienced" at making thedistinction, he said.

Mr. Hartwig said the fact that the chief insurance regulator inthe state, George Dale, has not joined in the suit issignificant.

Commenting on the suit, Mr. Dale said only that he would followthe law, but asserted the potential ramifications of the suit couldbe "troubling."

Insurers maintain that policies approved by Mississippiregulators should not face alteration retroactively.

But even industry leaders such as Allstate Chief OperatingOfficer Tom Wilson conceded there will be "issues" when trying todetermine wind or flood damage.

And Mr. Hood said that when such issues arise, "provisionsshould be strictly construed against the insurance companies whodrafted the insurance policies and their exclusions."

Vince Vitkowsky, New York-based senior partner in the insuranceand reinsurance practice for Edwards & Angell, said the fact astate attorney general, as opposed to a plaintiffs' lawyer, filedthe suit gives it "an additional layer of concern."

"The courts in that part of the world have been pretty good indistinguishing between perils such as hurricane, on the one hand,and flood, on the other, and typically able to do it," he said."They have always been disciplined and treat it, for the most part,as an issue of fact."

Mr. Vitkowsky also said "what is telling about the debate isthat they couch it in terms of 'equity' and 'unjust enrichment,'rather than a cause of action for a breach of contract."

"Unjust enrichment is what you use when you don't have a realcontract claim," he said.

Ernst Csiszar, president of the Property Casualty InsurersAssociation of America, joined the chorus of industry leaders whenhe labeled the suit "about politics, not fairness or justice underlaw."

Fitch Ratings analyst James Auden said the perception of theindustry's "deep pockets" could play a crucial role in determiningthe outcome of this case, since only about a quarter of thepolicyholders have purchased flood insurance, which will hinderrebuilding efforts.

"This has put the insurance industry in the center of a heatedpolitical issue," he said.

The state itself can be seen as part of that equation in thatMr. Hood's predecessor, Mike Moore, made a national name forhimself in taking on the tobacco industry. In addition, while tortreform has improved the state's image from the insurance industrystandpoint, it still has a reputation for not being friendly tolarge corporate interests.

At the federal level, Congress will face some pressure tomaintain the sanctity of the flood exclusion if only to provide thecoverage needed to fuel the rebuilding effort that is now a toppriority in Washington. Lawmakers are also in the final stretch ofthe debate to extend the Terrorism Risk Insurance Act, and Katrinawill only reinforce the notion that natural catastrophes are stilla potent threat in the post 9/11 era and should be a part of anyoverall scheme for federal protection.

Last Wednesday, Standard & Poor's estimated insured lossesfrom Katrina will be at least $35 billion. At the high end of arange of estimates predicted by modeling firms, Newark,Calif.-based Risk Management Solutions said Katrina could costinsurers anywhere from $40-to-$60 billion--of which $15-to-$25billion is related to private insurance costs for the flooding inNew Orleans (excluding National Flood Insurance Programcoverage).

As those insured losses threaten to eclipse those from the 9/11attacks, analysts are starting to ponder the impact on the industryif Mr. Hood's efforts achieve their ultimate goal.

S&P analyst Thomas Upton sees increasing pressure,regardless of the suit's outcome, on insurers to provide floodcoverage for homeowners and small businesses, even when excluded,if primary and secondary cover is exhausted.

And Mr. Auden of Fitch sees downward pressure on ratings, if therating firm can no longer rely on basic policy exclusions in theircalculations of a carrier's risk profile.

"Although reinsurers are intended to 'follow the fortunes' oftheir primary companies, we believe it is highly likely reinsurerswould dispute payment of flood related claims," he added.

Photo of Hood with caption

Filing a lawsuit in Hinds County, Miss., Attorney General JimHood is accusing insurers of "unjust enrichment," and seeking tocompel them to pay flood claims that insurers say are not coveredunder their policies.

"Taking this action may have made a great headline, but itssuccess will only leave people more confused than ever before."

Roger Schmelzer

V.P.

NAMIC