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Ambiguities and Problems with Insurance The sheer magnitude of the damage caused by Katrina-related events has led to difficulty in determining the cause of building destruction. The ambiguities in homeowner’s insurance policies have led to multiple lawsuits. The typical homeowner’s insurance policy, HO-3 policy, is for broad risk and covers everything except for specifically stated exclusions such as flooding. Although water damage is explicitly defined as “flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind; and water or water-borne material which backs up through sewers or drains,” the leveling of homes has led to the inability to differentiate between wind-related damage, which is covered by homeowner’s insurance, and flood-related damage, which is only covered by the optional National Flood Insurance Program, or NFIP. Court Cases/Legal Atmosphere In the case Leonard v. Nationwide Mutual Insurance Co., the court ruled in favor of the insurance company citing the damage to the plaintiff’s residence as “attributable to the incursion of water.” This court case applies to thousands of Nationwide Mutual Insurance policyholders also affected by Hurricane Katrina. The complexities inherent in insurance policies and the lack of transparency of insurance companies contributed to the large volume of Katrina-related lawsuits clogging the Louisiana courts. Specifically in the Leonard v. Nationwide Mutual Insurance Co. case, the attorney for the plaintiff claimed the references to windstorms and hurricanes led the client to believe hurricane damage would be covered. Richard Scruggs filed a suit for 669 State Farm policyholders claiming the reports issued by State Farm were biased. (Kunzelman, 2006) According to Richard, State Farm reassigned its adjustors who designated wind as a factor and generated a generic report that blanketed all damages as “storm surge” based. In State Farm’s homeowner’s policy, storm surge is included in the definition of flood water and therefore is not covered. State Farm defended the validity of its assessment and stood by its story of the storm surge serving as the reason for the damage. The burden of determining the cause of destruction lies with the insurance company, and if the damage is determined to be water-based, then “they must clearly demonstrate the cause of the loss,” according to the Insurance Commissioner of Mississippi on September 7, 2005. (Goldberg, 2005, 4) Although insurance companies have been bombarded with class action law suits concerning competing water and wind damage claims, the buzz in the current legal atmosphere surrounds two major cases, namely Mierzwa v. Florida Windstorm Underwriting Association and the battle between Mississippi Attorney General Jim Hood and a consortium of insurance companies including Mississippi Farm Bureau Insurance, State Farm Fire and Casualty Company, and Allstate Property and Casualty Insurance Company. In the Mierzwa case, the court ruled the defendant insurance company owed the full amount of the policy in a “total loss” situation including the damage caused by flooding, which is excluded from the homeowner’s policy. This decision had a huge impact on the insurance carriers because they essentially became responsible for an externality specifically excluded from their contract. Mississippi Attorney General Jim Hood added to this momentum when he won the case declaring “certain provisions” in the insurance contracts “void and unenforceable because of consumer’s reasonable expectations.” (Wilson, 2005, 2) The legislative atmosphere post-Katrina favors policyholders, and this relationship is demonstrated by Louisiana’s Rule 23. Rule 23 “suspends the right of any insurer to cancel or nonrenew any personal residential, commercial residential or commercial property insurance policy covering a dwelling, residential property or commercial property located in Louisiana that sustained damage as a result of Hurricane Katrina or its aftermath, or Hurricane Rita or its aftermath.” “Rule 23 provides sufficient time for the Louisiana Citizens Property Insurance Corporation to prepare insurance products that provide adequate property insurance to Louisiana citizens subsequent to Hurricane Katrina and Hurricane Rita.” (Wooley, 2005, 2) |
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Pre-Hurricane Katrina Background |
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Insurance Ambiguities |