Flood Exclusion Puts Insurers

Democrats in the House introduced legislation that would give victims of Hurricanes Katrina and Rita retroactive coverage under the National Flood Insurance Program. However, draft legislation on the issue being circulated by the Republican leadership of the House Financial Services Committee contains no provisions providing victims of the disaster with any financial support.

The draft Republican bill obtained by National Underwriter calls for a Government Accountability Office study of how flood insurance claims can be processed more efficiently. It also "encourages" the Federal Emergency Management Agency, which administers the NFIP, and state regulators to consider developing alternative dispute resolution programs to settle any arguments over whether claims are flood-related.

The distinction is critical since private insurance usually does not cover flood losses. Those seeking coverage for that exposure must buy a supplemental policy from the NFIP. It is estimated that only about 30 percent of Mississippi coastal residents had flood insurance.

The debate is more than academic, as potentially billions of dollars in disputed claims are at stake. Mississippi Attorney General Jim Hood and Richard Scruggs, a highly-respected plaintiffs' lawyer in the state, are among those who have filed suit to force the insurance industry to foot the bill for hurricane-related flood damage.

In his complaint, Mr. Hood argues that residents bought homeowners' policies to insure against "any and all" hurricane damage, "with the reasonable expectation that these policies would provide such coverage."

However, Mr. Hood acknowledges in his complaint that policies excluded coverage for "loss or damage resulting from water, whether or not driven by wind."

Moreover, according to The Washington Examiner–which lambasted the litigation in an editorial–the "Insurance Consumer's Hurricane Checklist," published by the Mississippi insurance department, has for years warned consumers about the coverage gap in the plainest possible words: "Remember that homeowners' policies do not cover flood damage caused by rising water…If you live in a flood-prone area, contact your agent about obtaining flood insurance."

The American Trial Lawyers Association added fuel to the fire with a release contending that "after living through what should have been the worst of the trauma, the victims of Hurricane Katrina shouldn't have to suffer all over again because insurance industry executives don't want to dip into huge profits to honor their contracts."

The Democrats' bill on retroactive coverage was drafted by Rep. Gene Taylor, D-Miss. A key co-sponsor is Rep. Barney Frank, D-Mass., ranking minority member of the House Financial Services Committee, which has oversight of FEMA.

However, the Democrats' approach is opposed by a leading consumer advocate, and has failed to draw support among either the insurance or mortgage industries.

J. Robert Hunter, director of insurance for the Consumer Federation of America in Washington, said that while "well-intended," the legislation, if enacted, would "undermine the flood insurance program."

He said the bill would "harm taxpayers, bail out mortgage lenders who should have required homeowners to purchase flood insurance, and encourage insurers not to pay damages that they should cover."

Anne Canfield, executive director of the Consumer Mortgage Coalition, said that given the opposition of Republicans on the House Financial Services Committee, her group has "decided not to publicly support the bill and to continue to review all options."

Dennis Kelly, director of media relations for the American Insurance Association in Washington, said the Taylor bill "does not directly affect private sector property insurance contracts. It affects the National Flood Insurance Program, and Congress is responsible for changes to the NFIP."

David Winston, senior vice president for federal affairs at the National Association of Mutual Insurance Companies in Indianapolis, said that "while NAMIC understands Congressman Taylor's frustration that many of the hardest hit victims were not in flood zones, NAMIC believes a better way to solve this problem is for Congress to provide the adequate funding for updated flood mapping that better identifies those areas in which homeowners should be required to purchase flood insurance."

The Property Casualty Insurers Association of America in Des Plaines, Ill., warned that "allowing the retroactive purchase of flood insurance would do a disservice to the NFIP by creating a disincentive for the future purchase of flood insurance," calling retroactive coverage an "ineffective mechanism for the delivery of badly needed relief."

Meanwhile, Rep. Richard Baker, R-La., chairman of the Capital Markets Subcommittee, has prepared legislation being considered by the White House that would create an agency designed to coordinate and disburse federal funds for areas struck by the hurricanes–especially for devastated residential and commercial properties, likely many of them without flood insurance.

The program would be similar to the Resolution Trust Corp. established by Congress in 1989 to pay off depositors and liquidate the assets of insolvent savings and loans.

Rep. Baker discussed the proposal with several industry lobbyists, but his staff declined to provide details pending determination whether the Bush administration and key Republicans in Congress would support it.

Flag: The Skinny

Head: What Would The Taylor Bill Do?

A bill proposed by Rep. Gene Taylor, D-Miss., would offer victims of Hurricanes Katrina and Rita the ability to buy retroactive coverage from the National Flood Insurance Program. Under the bill:

o Victims would be given an opportunity by buy coverage by paying 10 years of back premiums, with a 5 percent penalty, which could be subtracted from any claim settlement.

o The insurance would cover up to the amount of the damage or $250,000, whichever is less.

o Premiums would be set at a rate equal to the prevailing premium charged in the area prior to Hurricane Katrina.