State Farm raised the white flag and cut a deal on water-related Hurricane Katrina claims with Mississippi Attorney General Jim Hood. This one is going to be hard for the industry to swallow, but what choice did State Farm have, with hostile juries lined up hear flood exclusion disputes, and a grand jury being coaxed into handing down criminal indictments?
Once State Farm got hit with a $2.5 million punitive damage award for just one disputed Katrina claim, it was just a matter of time before the carrier struck a deal to make all the other claims go away. This promises to send shock waves through the entire industry, as Mr. Hood said he hopes the deal serves as a template for other carriers to follow suit. That's exactly what I expect the others to do.
It seems like a lousy deal to pay claims you truly believe are excluded. But given the stacked deck against carriers in Mississippi courts, and with the odd circumstances of wind-driven water claims, insurers are likely to literally cut their losses and get this nightmare behind them.
What will this mean going forward? Mississippi policyholders might win the battle but lose the war. How are carriers expected to write in the state after this debacle?
Some suggest carriers will simply rewrite the flood exclusion to take wind-driven storm surges explicitly out of the policy. But will regulators allow them to do that? Will they have any choice if carriers throw up their hands and leave states that do not cooperate?
I spoke last night at a meeting on Long Island of the Suffolk Big I and the local CPCU and insurance women group chapters, and those folks are worried sick about placing property coverage as one carrier after another either stops writing new business, non-renews certain areas too close for comfort to the water, and others bail out altogether, leaving agents scrambling to find coverage in the surplus market at sky-high prices. I was sorry to inform them I thought things would get a lot worse before they get better.
Carriers, after all, are under increasing pressure from rating agencies to get a better handle on their cat exposures–fueled by more dire assessments from modeling firms. Just driving out to the meeting in Long Island makes you realize how vulnerable the area really is if even a mild hurricane hit, with such expensive properties packed so close together.
Makes you wonder how the new governor, Eliot Spitzer, will respond as the property market continues to contract in water-exposed areas of the Empire State.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.