From WSJ...insurance controversies in Gulf states.
Robin Hoods
February 2, 2007; Page A18
Hurricane Katrina was ugly enough, but leave it to Gulf state politicians to guarantee that even a mild future hurricane may cause more human hardship. They're busy rewriting private insurance contracts in such a way that will raise property and casualty rates for everyone, especially if you live near the coast.
In Mississippi, Attorney General Jim Hood has bludgeoned insurer State Farm into a gigantic settlement over hundreds of dubious claims. His populist opportunism is matched by Florida, where legislators have passed a "reform" that forces insurers to lower their premiums and allows the state-run insurer to co-opt the local market.
Mr. Hood has been on a campaign to loot insurers from the first days after Katrina. His complaint is that it is "unconscionable" that insurers have refused to pay for flood damage. Never mind that their contracts specifically contain flood exclusions even as they pay tens of millions for wind damage. This water exclusion has been well known among homeowners and state regulators for years, which is why the federal government offers flood insurance. Mr. Hood nonetheless filed a civil suit and began a criminal probe.
The insurance industry has won a few of these legal skirmishes. But that changed last month when a judge told State Farm to pay a Mississippi couple a $232,000 claim and a jury awarded $2.5 million in punitive damages (since reduced by a judge to $1 million). State Farm is the nation's largest home insurer and has already paid $1.1 billion in Katrina claims in Mississippi alone. But the company looked at its hundreds of other pending suits, did the math, and threw itself on the mercy of Mr. Hood. State Farm agreed to re-open some 35,000 claims it had already settled and to pay at least $50 million more. The insurer also agreed to hand over $80 million to some 640 households represented by tort kingpin Dickie Scruggs.
The one bit of good news is that Federal Judge L.T. Senter Jr. blocked the settlement last week. The judge recognized the deal as an "arbitrary" publicity payout -- long on glory for Mr. Hood but short on the specifics of who would get money. The judge might also have wondered if Mr. Scruggs and his legal team were going to ride off with as much as $46 million.
The bad news is that the judge left the door open for a revised settlement, which is likely and would do unpleasant things to the state insurance market. Other insurers will feel pressure to follow State Farm's lead and pay the flood ransom. The obvious way to finance these unexpected claims will be to raise premiums for other policy holders, while refusing to sell policies in certain high-risk areas. Mr. Hood is basically stealing from future policy holders in order to pay off his current constituents.
As for Florida, insurers are understandably trying to build up their reserves against the likelihood of larger future payouts. Forecasters are predicting more frequent hurricanes for the state, which could mean hundreds of billions of dollars in claims. So premiums have been rising.
Florida legislators and new GOP Governor Charlie Crist have responded with one of the more un-Republican reforms on Florida's books. The measure mandates a reduction in homeowner premiums from private insurers by 5% to 25%, which means that companies are likely to be even less prepared to cover future damages. The legislation will also force insurers that write home and auto policies in other states to offer home insurance in Florida -- or be banned from the Sunshine State.
Another charming twist is that the new Florida law will allow the state-run Citizen's Property Insurance to begin competing with private insurers. This was done in the name of "competition," but it will have precisely the opposite effect. Citizens was designed as an insurer of last resort, but as a government company it will not have to worry about profits and other capitalist details. It will be able to offer lower prices because it has an implicit taxpayer guarantee, a la Fannie Mae. These arrangements typically end badly for the taxpayer, who in this case will be absorbing future hurricane risk without even realizing it.
Some insurers have already responded to all this by cancelling policies. And Governor Crist this week issued an "emergency" order freezing premiums and barring cancellations. So not only is the state imposing price controls, it is forcing companies to do business. Where'd the Governor learn economics -- Caracas?
More Americans are choosing to live in places at risk for natural calamity, only to seek a bailout from politicians when the worst happens. This trend is bad enough. But politicians compound the problem when they make insurers the scapegoats for acts of God. The insurance industry has spent billions of dollars to assist the recovery after Katrina. Who's going to pay when the next storm hits?
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