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.
For years it lay dormant like an arctic virus until Katrina struck August 29, 2005. The story of how big insurance smuggled the ACC into Mississippi without anybody watching, is pretty interesting stuff. But first, a thumbnail on how the 900 lb insurance gorilla got his legs.
After the great depression, every major business sector in the US, except insurance, fell prey to top down legal reform. The existing Sherman (1890) and Clayton (1914) antitrust laws already forbid price fixing, monopolies, tying agreements and the like. But since 1869, insurance had been exempt from federal regulation. Paul v. Virginia, 75 U.S. (8 Wall) 168. (Oddly, back in 1869 it was the insurers who wanted federal regulation, and ended up losing in Paul). Post depression, the new ’33 and ’34 Securities Acts mandated signed and filed registration statements, and strict disclosure. The new Glass-Steagall Act walled the banks out of stock trading. Many a good lawyer argued an insurance policy was as much a “security” as any other “investment contract,” and insurance certainly qualified as affecting interstate commerce, but time after time, big insurance won. All in all, a lot of rat’s nests were burned out after the depression, except one.
So, here was big insurance by the 1940’s feeling pretty bullet proof until some cracker from north Georgia snatches up 90% of a six state fire market and gets nailed for price fixing. (Jesus . . . didn’t he know pigs get fat . . . all it takes is one freelancing Georgia hog). The case goes up to the big court and bang, 40 years of crafty lawyering to keep insurance out of the commerce clause goes up in smoke.
I suppose a red alert went out to every lobbyist on terra firma, “get your bucket of cash and your Besty Ross ass up to the Hill ASAP, the f-ing Sherman act is fixin’ to hit us!” Duly compensated, Congress passed the McCarran-Ferguson Act the very next year and exempted insurance from federal securities regulation (’33 and ’34 acts) and again, federal anti-trust laws (Sherman and Clayton).
In time all this gave rise to an astounding phenomena: uniquely, the largest private sector business in US corporate history, big insurance, operated 100% exempt from federal regulation. Emancipated, free of any anti-trust threat, big insurance flexed, caucused and cooked up a new industry shill – Insurance Services Office (“ISO”), based in the Soprano’s home state, New Jersey. ISO was let loose on the puppet commissioners to fix rates, and control policy language.
Fast forward to the 1980’s and here’s big insurance in the room alone with Mr Commissioner, and nobody’s watching. Men in suits went to work on a new concept – lock premium, shrink coverage, double profit (LP+SC = 2P). The idea was remarkably simple. Chop coverage, lock the rate and premium dollar returns up to twice the profit. By this time insurers acting through ISO controlled 100% of policy content, and fixed their own rates, subject of course to approval by the pimp commissioners. The problem was the court system still had the final say and could always strike down an invalid clause. Insurers knew some things were simply verboten, like changing the statute of limitations, or writing your own definition of proximate cause. In those days, intellectually honest supreme courts were the norm, and the prevailing view was you can’t use private contracts to dodge a state’s own law. In other words, just because you control the marketplace through millions of form contracts you’ve composed, doesn’t mean you get to decide what state law should be. But wait . . . was there a way to write a new definition of proximate cause and not rouse the court? Genius in boldness. Imagine for example trying to redo a fire policy form and make it exclude smoke damage. Could it be pulled off? Hey, fire and smoke can be concurrent causes can’t they?
The way to shrink coverage was to tranche loss events, and create an artificial exclusion. Suppose one could chop a fire in half, and create two loss events. Premium profit could possibly double by adding a simple smoke exclusion. Tranche a hurricane into two loss events, wind and water, then exclude the water. Lock the rate, and premium return could double. The trick was to lock the rate filings at the moment you did the coverage cut. Who knows, maybe later you go for rate increases. But, the point is never lose rate when you make the coverage cut. But wait a minute, whoever heard of a fire with no smoke? And, whoever heard of a hurricane with no water? Are they gonna buy this? Fugettaboudit, a deal this sweet . . . ISO’s already on it.
Once the hurricane loss event got tranched, the sky was the limit. Here’s where the ACC really shined. So, the hurricane, a single loss event, is redefined as two loss events, and the water’s excluded. The rates are held fast, thus premium return escalates. But efficient proximate cause could storm in and destroy this whole profit model unless there was some way to rein it in. Insurers went to work again, and came up with the ACC. The new ACC destroyed efficient proximate cause by directly overwriting settled state law, and at the same time created a magical trap door – ” Fugettaboudit, one drop of water, bada bing you’re outta here.” Say hello to the new ACC, aka All Coverage Collapsed.
Only one state court caught on. In 1989, the State Supreme Court of Washington bitch slapped Safeco for trying to overwrite its state law. Safeco Insurance v. Hirschmann, 773 P.2d 413 (Wash. Sup. Ct. 1989). Like Mississippi, Washington had the efficient proximate cause rule. Safeco decided it could draft its way out of efficient proximate cause with crafty exclusion language. Sitting en banc, Washington’s Supreme Court held Safeco could not circumvent the “efficient proximate cause” rule by drafting around it.
State Farm’s 25 page word salad, trap door included, proves an insurer can use the power of form contract to neutralize a court system, overwrite established state law, and define proximate cause any damn way they want. The cost bill for ignoring a kept man and hoard or free ranging racketeers: oh, conservatively speaking, about $89.6 billion in property damage paid for with over $105 billion of taxpayer money. This does not including future losses from depleted tax base, stagnant business growth, job loss, de-population and so on.