The industry took some devastating blows during a Congressionalhearing yesterday on insurer handling of Hurricane Katrina claims.I was actually on Capitol Hill to witness the public flogging firsthand, watching lawmakers–some overtly hostile, others merelyignorant–take turns beating insurers like a piata. Below are someof my personal observations and analysis, following up on ourbreaking news story.

It was a long afternoon for the industry, which was certainlyplaying against a stacked deck during the hearing convened beforethe House Financial Services Subcommittee on Oversight andInvestigations–the first of many, no doubt.

The most bizarre part of the hearing was that Rep. Gene Taylorgot to serve as both witness and inquisitor! The MississippiDemocrat–who had his own battle with State Farm over the cause ofloss that destroyed his home in Katrina–at first testified beforethe panel…and then was invited up to join his fellow members ofCongress to question other witnesses! While this is apparentlycommon practice on the Hill, it's a scene right out of a Kafkanovel…or perhaps a Marx Brothers movie.

I also found it rather odd that the “star” of the hearing–StateFarm, at which most of the specific criticism wastargeted–apparently wasn't invited to testify. The carrier wascertainly conspicuous by its absence, as Rep. Taylor and his stateattorney general, Jim Hood, kept presenting documents allegedlyproving that State Farm intentionally blew off legitimate windclaims. There were also allegations of adjusters and engineersbeing pressured to change and falsify their reports to get rid ofmany claims. But was State Farm in the room? Nope.

In a broader attack, lawmakers kept hammering away at how unfairit was for the insurance industry to have recorded big profits thelast two years while many Katrina claims went unpaid. The clearimplication was that insurers got fat by not paying policyholderswhat they are owed on hurricane damages.

The industry's sole witness and sacrificial lamb–InsuranceInformation Institute President Bob Hartwig–kept politely remindingthe panel that while the industry posted profits when combining alllines of coverage nationwide, the homeowners insurance sector tooka huge loss. In fact, he pointed out, that catastrophe-prone linehas been unprofitable on an aggregate basis for quite sometime.

But why would carriers continue writing coverage at a loss, thelegislators demanded to know? Mr. Hartwig cooly explained that inless disaster-prone states, homeowners coverage could be writtenprofitably, but thanks to record catastrophe losses, that's not thecase nationally.

Meanwhile, many of the lawmakers insisted that insurers haddumped unwarranted claims onto the National Flood Insurance Programthat should have been covered under standard homeowners policies.NFIP Director David Maurstad was raked over the coals, with Rep.Taylor ripping him to shreds for his agency's appalling lack ofoversight.

Mr. Hartwig tried valiantly to keep the scope of the problem inperspective, reporting that insurers had paid an estimated $40.6billion on 1.7 million claims for damage to homes, businesses andvehicles in six states from Hurricane Katrina–the largest loss byfar in the history of insurance, dwarfing Hurricane Andrew's totalin 1992.

He said that more than 95 percent of the 1.1 million homeownersinsurance claims from Hurricane Katrina in Louisiana andMississippi–totaling over $15.5 billion–were settled within oneyear of the storm. He estimated that fewer than 2 percent ofhomeowners claims in Mississippi and Louisiana are in dispute,either through mediation or litigation.

But Rep. Maxine Waters, D-Calif., did score two points incross-examining Mr. Hartwig. First, she got him to concede that hisfigures on the percentage of claims settled do not includeapplications for coverage that were rejected outright under policyexclusions. We consider that a claim, she snapped. You evidentlydont.

Second, she demanded to know “whether insurance companies talkedtogether” about how to handle Katrina claims–presumably about howto deny them and get away with it, characterizing any suchdiscussion as “behavior normally called collusion” under federalantitrust law. Mr. Hartwig emphatically stated that “no suchconversations” took place. However, when pressed later on aboutthis point, he wisely retreated to safer legal ground, saying onlythat, “I am absolutely unaware of any such conversations.”

Of course, no one presented any hard evidence that insurersactually did get together to conspire on how to cheatpolicyholders. It was all conjecture and innuendo, but the damagewas done.

After the hearing, the Institute put out a statement that “theindustry did not, as was suggested, conspire to defraud homeownersseeking compensation for property damage they suffered. Thestatement that insurance companies are legally allowed to discussand agree on claims handling activities is untrue.”

State Farms's vice president of public affairs, Mike Fernandez,also issued a statement, calling it “absurd” to charge “that theindustry colluded to avoid paying claims and to push claims to NFIPbecause the companies are exempt [from federal antitrustlaw]…Insurers do not and did not operate in this manner.”

But, of course, those industry disclaimers came after thehearing.

So, where do we go from here?

For all the bluster and showboating, Rep. Taylor and friends didraise some very valid criticisms of how the system operates. Theremay in fact be conflicts on the part of adjusters and carriers whenit comes to determining causation. There might have even been somebad actors at work–when you have nearly two million claims, there'sbound to be some misdeeds (just like there are bound to befraudulent claims filed). Those responsible should be heldaccountable if the evidence confirms the charges.

My concern is that we may be witnessing a repeat of thecontingency fee scandal that rocked the industry a couple of yearsago, in which you have a very small group of individuals caughtabusing the system with smoking gun documents, which then sets offa chain reaction that harms the vast majority of those in thebusiness just doing their jobs as best they can under difficultcircumstances.

After all, I can't help but wonder, if the industry was reallyinvolved in a massive conspiracy to deny legitimate wind claims anddump them all on the federal flood program, they didn't do a verygood job if they ended up paying over $40 billion in losses tonearly two million policyholders. And would State Farm riskterrible retribution in rejecting claims by two members of Congressif they didn't believe they had contract law in their favor?

The only thing for sure right now is that the industry won't beallowed off the hot seat anytime soon. There will be plenty morehearings, including next Wednesday's Senate Judiciary Committeeextravaganza on whether to repeal the industry's limited federalantitrust exemption–a threat I'll discuss in more detail in my blogon Monday afternoon.