As diaried here, thousands of residents of New Orleans who have been fighting with insurance companies for reimburment for their lost homes got a big win Tuesday in court (article here). At least those not represented by State Farm.
"In the New Orleans area, everyone who bought insurance from a company other than State Farm at the moment now stands the prospect of getting full coverage under their homeowners policy for their damages, to the extent those damages were the result of water being released from the levee," John Ellison, co-lead counsel for the plaintiffs, said on Tuesday.
Even this victory could be fleeting, as insurance companies are threatening to appeal. But, rather than get caught up in complex legal issues--like what the meaning of the word "flood" is--I think we need to discuss the root of the problem, the need for reform of the insurance system.
There have been a number of diaries about the ineptness of the government's response to Katrina. But what about the response of the private insurance industry, which most homeowners rely on to protect them in the event of such a catastrophic event?
Well, it's so bad even Trent Lott wants an investigation. And last year's headline,
Trent Lott Sues State Farm over Katrina Damage, pretty much speaks for itself.
Hey Trent, you know what a Progressive is? A Conservative who's been screwed by big business.
Meanwhile, here in Florida this month, a panel appointed by Governor Jeb Bush, in response to public demand for insurance reform, released their recommendations. They range from minor improvements on side issues (more uniform building codes, making the Consumer Advcate a cabinet position), to outright handouts for the insurance industry (making it easier to raise rates, and subsidizing private market reinsurance--with no gaurantee it will impact consumer rates). Don't pay any attention to the man (or the insurance companies) behind the curtain.
Florida Democrats instead are fighting to cover all hurricane damage, both wind and water, in a statewide non-profit hurricane insurance fund.
A similar approach was suggested back in August by J. Robert Hunter and Joanne Doroshow, the co-founders of Americans For Insurance Reform, in an op-ed in the Miami Herald.
The time has come for Florida to remove the private sector from the hurricane-insurance business -- for both homeowners and commercial insurance -- and establish a privately run state plan for the hurricane wind portion of insurance coverage.
A solution like this is different from current state plans, like the JUA and the Citizens Property Insurance Corp., into which policyholders in high-risk areas are dumped while private insurers keep the lower risks for themselves. That type of solution is obviously unfair to Florida taxpayers and does nothing to solve this problem. It is the equivalent of trying to solve the health-insurance crisis by having the state insure only terminally ill patients.
By eliminating the profit motive, cutting overhead significantly, eliminating the need to purchase reinsurance and allowing for tax-free reserve build-up, this plan would result in $3 billion more in the bank each year. Policyholders would benefit immediately, with huge drops in premiums. Similar positive benefits would accrue to business policyholders if they were included in the plan.
And a third plan, in a similar vein, was intorduced last month on the national level, by the Democrat's Katrina Task Force, appointed by Speaker Pelosi (then Minority Leader). Dubbed "Katrina and Beyond", the plan (pdf) is descibed in this article.
Rep. Gene Taylor, D-Bay St. Louis, laid out a wide-ranging legislative plan Thursday for the U.S. government to deal with disasters in the wake of Hurricane Katrina, hitting hard on the need to reform the insurance industry.
"No. 1, we have to take the antitrust exemption of the insurance industry away," Taylor said at a press conference. "No one should be above the law."
"No. 2," he said as he released the report, Katrina and Beyond, "we have to have all-perils insurance." With private insurers saying hurricane damage was caused by water, which is covered by federal insurance, and not wind, which they cover, most claims are being dismissed, said Taylor.
Taylor, who lost his home in Katrina, said his third priority was to have "some form of federal oversight." Insurers are regulated by the states and Taylor said one of his greatest frustrations as a congressman was to have constituents come up to him "with their policies and tears in their eyes and not be able to do anything."
No doubt, the usual suspects will try to argue that this involves too much government interference, free markets are more efficient, etc. But does this make any sense at all?
You can't argue "free-markets" when you're handing an industry an anti-trust exemption that ends up limiting competitiveness. And how could anyone think that having segmented policies, where one company is covering one thing, and another covering something else, and you have to go to court to fight it out to get anyone to pay anything, is efficient?
The current system has also most certainly not developed in response to consumer demand. Would anyone buying home insurance, for example, really want coverage against only some risks, rather than a lesser amount of coverage if needed, but against all risks?
All this while Insurance companies are using natural disasters as an excuse to further push up rates, despite making record profits. And they can get away with this now only because of a 60 year old law (McCarran-Ferguson) exempting them from antitrust laws.
And while they are also denying valid claims.
State Farm, Nationwide, Allstate, and other insurers paid hundreds of thousands of wind claims inland, where they could not possibly blame the storm surge, but denied wind claims near the coastline, where winds were stronger and water also was present.
Cori and Kerri Rigsby, who adjusted claims under a contract with State Farm, have revealed that they were instructed to pay NFIP claims as quickly as possible, while refusing to acknowledge any evidence of wind damage. The sisters also claim that State Farm and its contractors revised engineering reports and coerced engineering firms to assign all damages to flooding, despite hours of hurricane winds before the storm surge.
-Katrina&Beyond p.1
There's no sensible reason for the current system. Repealing the antitrust exemption, requiring companies to make policies available that cover all perils in one policy, and providing sufficient regularoty oversight are simply common sense solutions.