Day: September 2, 2009

A virus called

A lot of Mississippians woke up on August 30, 2005, to no house, and thus no net worth. Estimates are 100,940 homes were destroyed or major damaged in the three coastal counties. These families lost nearly everything they owned. Most didn’t even have a copy of their policy, and God forbid, had to trust State Farm to faithfully reproduce it. Homeowners knew little or nothing about FEMA, wind-water protocol, George Dale, Computer Science Corp., David Maurstad, WYO’s or the strychnine phrase “anti-concurrent cause” (“ACC”). Some had policies with “Hurricane Deducible” emblazoned across the top page. (Right away the court declared, nothing misleading about that, it’s okay for insurers to write “hurricane” on the top page of the policy; that doesn’t mean you’re covered for a hurricane). However, in due time all these homeowners would come to realize insurers had sold them a rigged all-risk policy form, approved by a kept man facetiously known as “the insurance commissioner.” Yep, it was some awakening people were in for on August 30, 2005 . . . the nightmare called “Katrina” hadn’t ended, it’d just begun.

The virus that did them in was buried in the labyrinthine FP-7955, a 25 page word salad created exclusively by State Farm’s team of scriveners. The FP (form policy) – 7955 contained 13,859 copyrighted words, not a one of which was ever negotiated or actually consented to. Here was a stupefying irony: the biggest asset most people owned, very often the predicate of their entire net worth, was wrapped up in a junk contract they had no part in making or negotiating, and hadn’t even signed. For all the high and mighty principles contract law stood for, sermonized in treatises like Corban on Contracts, “bargained-for-exchange, reasonable expectations, mutual consideration, good faith and fair dealing,” this most precious of all contracts was nothing but a pile of 13,859 rigged words tethered to a central trap door – the ACC clause.

The fantasy of policy negotiation had been entrusted, “proxied” if you will to Mr Insurance Commissioner. Here again lay a hidden problem. Mr Commissioner was so in the pockets of big insurance he nearly went to prison back in the early 1990’s. Indicted January 12, 1994 on two sets of federal charges involving campaign contributions (bribes) from big insurance, somehow all the charges got mysteriously dismissed without a trial the very next year. I suspect big insurance wasn’t about to sit by and let an investment they’d been building on since 1975 just get pushed off a cliff.

It didn’t take long to see the trap people had stepped into. State Farm began to paper everyone with denial of coverage letters featuring the ACC. If fully invoked, the ACC was a fast action trap door that could drop an insured out of coverage in a nanosecond. Applied full nelson, the insurer could simply declare: “look, read the ACC, anything touched by a molecule of water, at any time, regardless of prior or concurrent wind, is not covered, period.” Of course insurers know pigs get fat, hogs get slaughtered. The better approach was half nelson because the real objective was to buy off legal liability with cheap releases, not break necks and hatch lawsuits. The wise corporate predator knows the policy is a tool to diminish the actual and full value of claims, not renounce all coverage and provoke ugly, one-sided lawsuits.

The ACC virus had been imported into Mississippi in the mid 1980’s, ironically by the same company (Nationwide) whose attorney explained in the Corban v. USAA hearing how the ACC applies. Continue reading “A virus called”

News from the Cat House Part Deux: Bondage and Discipline sometimes missing from the equation

I’ve been sent several articles on the Cat Bond market of late, some very good and some not necessarily worthy of the publication in which they were printed. I’ll start with an article from The Banker Magazine which is not yet online which I read courtesy of Factiva. While the article is generally good the author, Edward Russell-Walling parrots some long discredited facts about Cat Bonds, such as their being non correlated with the broader financial markets which the financial crisis of last year exposed as pure BS and it is there we start:

In 2008, the annus horribilis, non-correlation did not prevent it slumping to $2.7bn. Some hedge funds, which had been prominent players in this market, became distressed sellers and depressed pricing. The situation was aggravated by the downgrade of four cat bonds exposed to Lehman Brothers which, as total return swap counterparty, was effectively holding the investors’ capital.

What the author neglects to mention was “the innovation” of stuffing issues full of subprime mortgages whose accompanying (illusory) high yields no doubt drastically lowered the cost to the issuer. Lehman, as the guarantor, is cited as a problem because of its insolvency but the fact is TARP and the United States taxpayers are what has propped up every such issue so structured as major guarantors like AIG and the other Wall Street investment banks were essentially insolvent meaning their financial guarantees were worthless. Without the Lehman guarantee for instance Allstate’s Willow Re, which defaulted on their interest payments to investors earlier this year, plunged to around 50 cents on the dollar or roughly about what the underlying subprime mortgages were worth.

That said Russell-Walling did give a good explanation of the concept of the “trigger” in these agreements and it is there we pick back up:

One important choice that had to be made was the nature of the trigger. An indemnity trigger is activated by the issuer’s actual losses. So if the cover is for $100m with an excess of $400m, the bond is triggered once claims exceed $400m. Non-indemnity triggers may be based on other mechanisms, such as modelled loss, insured industry loss or physical parameters such as earthquake magnitude or wind speed. Continue reading “News from the Cat House Part Deux: Bondage and Discipline sometimes missing from the equation”