September 8th, 2005

Me 2012

(no subject)

Though home-insurance providers face little or no exposure to flood damage, some are calling for them to step in, given the widespread, costly scale of damage. Among them is Richard Scruggs, a well-known class-action attorney who made his name suing the tobacco and asbestos industries -- and whose own beachfront house in Mississippi, which had flood insurance, was partly destroyed by Katrina.

Mr. Scruggs said he plans to urge Mississippi Attorney General Jim Hood to try to override flood-exclusion clauses in homeowners' policies in that state in the interest of public policy, a move that could force insurers to pay many billions more toward rebuilding costs

Source. (Originally seen in the Wall Street Journal).

Of all the things to get upset about lately, this is probably one of the dumbest. And yet I am truly angry over this bit of news. Not because I think it's unjust that insurance companies will not bear the costs for rebuilding New Orleans ... but because I think it is unjust for anyone to ask them to.

As I stewed over this and considered writing this post, I wrote in a letter to koogrr that I wasn't sure I should say anything. "Who else but me would care about the profit margins of fatcat insurance companies, when there are poverty-stricken individuals suffering?"

Then again, maybe that's the best reason to post. If I don't speak up, who will?

My objections are twofold:

First, Mr. Scruggs is a class-action attorney. Now, this snippet doesn't say he's planning to file a class-action suit against the insurance companies in New Orleans, so this concern is probably premature. But a class action suit is a terrible way to relieve the suffering of indiviuals. A class-action lawsuit offers huge benefits to the attorneys who win it, and inflicts huge penalties on the losing company, and give a rather small benefit to the injured parties. A class-action lawsuit isn't going to replace anyone's home. It'd probably net the injured parties pennies on the dollar for whatever their actual losses were.

Second: pretty much everyone who buys standard homeowner's insurance has been told, multiple times and in multiple ways, that their insurance does not protect them in the event of flooding. This isn't a footnote buried in the minutiae of the policy: it's something that your mortagor will tell you at the time you purchase the home, and that the insurance agent will tell you when you get the policy, and that the policy will specify if you read it. And you'll get a brochure about the National Flood Insurance Program, because the federal government is about the only place in the nation you can purchase flood insurance. I will grant that some people may not have had this fact adequately explained to them, but I think the vast majority of insurers and insurance agents have taken reasonable and appropriate steps to make policyholders understand what is and is not covered by their policies.

It actually boggles my mind that the majority of home owners in New Orleans don't have flood insurance, for two reasons:

1) Federal regulations state that, if a lending institution has a lien on a property in a flood zone, they have to require flood insurance on it. If you have a house in a flood zone, and a loan on it, the terms of your loan would require you to have flood insurance on it. So the only way you wouldn't is if you didn't have a loan or were in violation of the terms of it.

2) How can a house in a city that's below sea level and surrounded on three sides by water not be in a flood zone? I mean, I can see some house getting exceptions because they're built on stilts or otherwise protected, but ... Wow. I would not have believed it possible. Then again, some parts of New Orleans never did flood at all, so why not?

Anyway, assuming the article is correct and that the majority of flooded homeowners don't have flood insurance (presumably they didn't have loans or weren't in a flood zone) the fact remains ... they don't have flood insurance. And having the government order companies that sold people fire insurance to pay for flood damages is like ordering a company that sold ammo to a group of people to send them free guns six months later because what they really needed was guns.

Yes, I'm profoundly sorry that these people needed flood insurance and didn't have it. And if they weren't in a flood zone, you could make a good case that they're entitled to government assistance to rebuild, because the levees and pumps that were supposed to prevent flooding (and presumably are the only reason the whole city wasn't a flood zone) were government responsibilities, and those are what failed. I have no problems with the feds sending big bucks to help, and any and all charitable assistance is reasonable and appropriate.

But sticking it to American Family and Farmers Insurance because they don't sell flood insurance is just plain wrong. Insurance companies carefully calculate their risks and assess the cost of premiums based on those risks. These careful calculations do not include the potential costs of flooding because they don't cover flood damages. IIRC, the National Flood Insurance Program, which covers floods and only floods, typically charges two to four times the premium of standard insurance. The NFIP also loses money at those premiums. That's how expensive floods are when they happen. There's a reason standard insurance doesn't cover flooding: it'd be a lot more expensive, and a lot more difficult to assess the risks on. (Floods also tend to be a matter of "when" rather than "if": a house might easily stand for a hundred years without ever having a fire, but a house in a flood zone WILL flood, someday.)

It's not that I don't want to see the refugees helped, and I'm not even saying "They didn't buy flood insurance so they should just suffer the consequences of that choice".* But I am saying that insurance companies should not be made to suffer the consequences of the customer's choice not to buy flood insurance, either.

We all have a moral obligation to help those in need; there is no reason to single out a special category of people or companies and claim that obligation belongs to them alone.