There have been several reporters do excellent work on the societal issues Katrina brought to the fore here in the GO Zone. Chris Joyner at the Clarion Ledger has done several excellent stories on affordable housing issues for example. The list is too long to mention everyone but two reporters stand out from the rest to us here at slabbed for their coverage of the resulting Katrina insurance litigation, Anita Lee at the Sun Herald and Rebecca Mowbray at the Times Picayune. Today I highly recommend Ms Mowbray’s story Insurers Use Federal Cash to Help Pay Claims which contains a great synopysis of Louisiana insurance litigation. First she starts with a history lesson and then identifies the major issues:
The overarching question was whether the flood exclusions on insurance policies applied when the flood was caused by a levee breach. In other words, was a man-made flood a flood, and could insurance companies be held responsible for paying for it?
In August 2007, the 5th U.S. Circuit Court of Appeals upheld a lower court decision and said a flood was a flood. Homeowners’ insurance companies were off the hook, because people could have bought a flood policy from the government.
The question was transferred to state court in the case Joseph Sher v. Lafayette Insurance Co., the first full-blown trial decision from the storm to make it all the way to the Louisiana Supreme Court. After both the trial court in New Orleans and the appeals court found Lafayette liable for flood damage, policyholder hopes were dashed in April when the state’s highest court came up with the same conclusion as their brethren on the federal bench and knocked the financial award from $870,652 to $247,001.
In June, the Louisiana Supreme Court ruled in favor of Louisiana Citizens Property Insurance Corp. in a much-watched valued policy law case that illustrated the steady erosion of pro-policyholder rulings.
A trial court in Vermilion Parish ruled in December 2006 that a century-old state law could trigger payment of the full value of a homeowner’s insurance policy when a home was destroyed by two causes of damage, even if one of them was not supposed to be covered, in a ruling that struck terror in the hearts of insurers. A state appeals court modified the ruling to something more of a mixed bag before the state Supreme Court delivered the final blow this spring and threw out the application of the valued policy law to hurricane claims.
The third major legal issue from the 2005 storms, the question of whether insurers can limit their liability by taking a credit for whatever the flood program has already paid, has not been considered by either a federal or state appeals court.
The question concerns whether the flood and wind policies should work in tandem or independently. Essentially, if a homeowner whose $200,000 home is destroyed collects $150,000 from the flood program, is that person limited to a maximum of $50,000 on his wind policy? Or, can he collect whatever amount of money it takes to repair the wind damage on his house from his homeowners policy, even if he ultimately collects more than $200,000 between the two policies?
So far, most federal judges have ruled in favor of insurers, finding that their potential payments can be limited by the flood program. But two federal judges in southwest Louisiana ruled in favor of the policyholders in Rita cases, finding that one policy should not circumscribe the other. A writ application asking the Louisiana Supreme Court to consider the issue has been languishing since March.
It is worth noting the federal courts in southern Mississippi have sided with those in Western Louisiana on the issue of offset. It has public policy implications as the story makes clear:
To Gisleson, the “flood offset” question gets to what he believes is the most galling development of the Katrina insurance litigation: insurers leaning on government programs to protect their pocketbooks.
After the storm, insurers paid flood claims quickly and generously with government money, but held the line on wind claims while they filed motions in court arguing that flood program payments, disaster loans from the U.S. Small Business Administration and even Road Home grants should be deducted from what they have to pay.
“They’ve created a disaster model now, where it’s not based on the contract with their insured, but it’s based on federal relief and aid coming in to save them and their payments,” he said. “The lesson they learned from Katrina is how to use the biggest bank around, and that’s federal money.”
If the courts do not stop the practice of turning disaster aid into insurance company subsidies, Gisleson said, state insurance regulators need to take a more active role in protecting policyholders by setting clear rules for what insurers have to do and when, and by developing more sophisticated computer models to spot statistical patterns of underpaying claims.
Of course, the industry sees things differently and would prefer not to talk about claims dumping. Ms Mowbray uses insurance industry defense lawyer Randy Maniloff from Philadelphia as her industry source and he makes a good point:
Maniloff sees exactly the opposite dynamic. To him, Katrina highlights the enormous societal pressure that falls on insurers to pay, regardless of whether their contracts call for them do so when disasters strike. Whether it was political pressure in Mississippi for investigations or efforts to sue the Army Corps of Engineers and hold insurers responsible for damage from levee breach water in New Orleans, he said insurers are unfairly in the hot seat in a catastrophe because no amount of government aid or charitable donations can cover the costs.
An insurers ability to accurately price their risk is key to having a stable insurance market. In their defense insurers did not anticipate Sher nor Landry. But those cases also worked out in the industry’s favor.
However, as cases like Weiss proved the totality of the insurance litigation in Louisiana also includes a healthy dose of Mississippi style wind-water litigation as well.
Judy Guice opined at Gene Taylor’s town hall meeting last month the courts were not equipped to handle the volume of cases, insurers knew that and took full advantage of that fact. Ms Mowbray closes her story with quotes from Loyola insurance law professor Mitchell Crusto:
…..the most important point is that three years after the storm, thousands of people are still stuck in litigation, waiting for proper payment for their storm damage. Although the Louisiana Department of Insurance ran a mediation program after the 2005 storms that served 12,242 people, more needs to be done to resolve claims and get people paid.
“Under these circumstances, litigation is not very effective in getting citizens back to where they need to be,” he said. “We almost need more mediation strategies, and processes by which insurance companies are encouraged or forced to get things resolved.”