Rebecca Mowbray’s usual fine writing wasn’t enough to keep me from seeing Pepto Bismol pinks as I read American Bar Association recommends flood insurance reform after picking up the link posted with this suggestion on a finance message board:
This Tulane Law professor needs to teach a course in securities fraud, or better yet take one, maybe at the Reinsurance University of Bermuda!
However, this “Tulane Law professor” turns out to be the former Dean of the Law School, not just a professor – a fact that does nothing to improve the recommendations but better explains the how they came about.
Edward Sherman served as Dean of Tulane Law School from July 1996 through June 2001…Professor Sherman is an expert on civil procedure, complex litigation, and dispute resolution and is co-author of widely-used casebooks and treatises on those subjects… He has been…active as an arbitrator and mediator.
Before I say more, take a look at Mowbray’s story (emphasis added).
The American Bar Association recommends that insurers offer customers the option of buying insurance policies that cover flooding from storm surge to help cut down on legal disputes after events like Hurricane Katrina.
The suggestion is part of a set of recommendations issued by the ABA’s tort, trial and insurance practice section after a year and a half of study.
“The insurance industry needs to get creative in offering all kinds of policies, rather than just saying, ‘No, we don’t cover it,'” said Ed Sherman, a professor at Tulane Law School who served on the task force and helped draft the proposals.
The majority of the 25-person task force represented an insurance company perspective.
As such, the report includes a number of proposals that companies have advocated, such as seeking a greater federal role in insurance regulation and giving insurers incentives to build catastrophe reserves over multiple years.
Bob Hunter, director of insurance at the Consumer Federation of America, said the report breaks little new ground but contains some sensible recommendations for the flood program and for building codes. Hunter believes the best way to solve insurance disputes caused by Hurricane Katrina is to make insurers sell all-risk policies and to turn the federal flood program into a reinsurance program.
The ABA does not advocate requiring insurers to offer all-risk policies, but rather calls upon the government to allow insurers “broad flexibility” in offering coverage for flooding caused by storm surge. Currently, homeowners insurance rates are regulated by the states, and the federal government sets rates only for the National Flood Insurance Program.
The ABA report contains a number of revelations about the flood program. Of the $17 billion in flood claims paid after Katrina, $10 billion came from flooding caused by breached or over-topped levees, while $7 billion of came from storm surge. It also says that more than half of the flood claims submitted after the storm exceeded the $250,000 cap on coverage.
The report calls for the federal government to step up efforts to require consumers to buy flood insurance. The report also urges the program to update its maps and set rates based on flood risk to help make the program actuarially sound.
The report also grapples with the appropriate mix of help after a disaster from insurers versus the federal government. The report urges the federal government to assist in meeting the cash needs of individuals and businesses through government-issued debit cards and calls for the U.S. Department of the Treasury to be given authority to make emergency loans to state guaranty funds to help them avoid insolvency and make sure money is available to pay claims quickly.
It also urges the federal government to take a stronger role in mandating building codes appropriate to different regions and placing restrictions on development in high-risk areas. Building codes have traditionally been enacted by state or local jurisdictions, but not all regions have had the political will to enact or enforce them.
A multitude of ideas for reforming the insurance industry have been floated since Hurricane Katrina, and Sherman said the recommendations in the ABA report do not preclude insurers from pursuing other suggestions. Some reform groups have ventured that insurance companies could meet consumers’ cash needs by advancing disaster victims money on their claims, rather than encouraging the federal government to issue debit cards, for example.
The ABA task force obviously operated on the assumption the fox should guard the hen house – and if you don’t believe that by now, read on.
The biggest push-back the task force got from insurers, Sherman said, was over a suggestion for the government to create a database of construction and materials prices in different regions that would help consumers guard against price-gouging by contractors or underpaying by insurers.
The subject of how to price construction materials and labor after the storm has been a flash point, as insurers claim they do not want to feed inflation after disasters by turning on a limitless spigot of cash, and plaintiffs’ attorneys charge that insurers manipulate construction pricing to underpay claims.
Because insurers involved in the panel would not support a national database of prices, Sherman said the task force compromised on calling for a study of labor and materials costs after a catastrophe. “The insurance companies were unhappy,” he said.
When property is damaged in a disaster, it needs to be repaired quickly to reduce the likelihood of further damage. However, the ABA allowed the “insurers involved in the panel” to reduce a viable recommendation to one with little, if any, value.
Insurance reform is not a dispute that can be arbitrated and mediated into taxpayer investment in the profitability of the insurance industry.
Reform is a corrective action – one that is only imposed when self-correction fails, if even attempted.No one should understand that better than the powerful ABA – and, sadly, that does not appear to be the case. A better approach, IMO, would be for the ABA to appoint a task force of members to analyze the complaints of those who filed suit to settle their claims and make recommendations for reform measures that would resolve those problems before recommending the taxes these policyholders pay underwrite the insurence industry.
Bob Hunter, on the other hand, simply appears in need of a vacation.