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This article describes different risks that homeowner policyholders face

After Katrina, many homeowners who had not purchased federal flood insurance tried to recover under their homeowners insurance policies for flood claims that were specifically excluded. Consider State Farm’s account of its response to Katrina, widely considered to be the largest deployment of resources.

Claims

State Farm assigned more than 5,600 employees and contract adjusters to the Gulf Coast after the hurricane, and its call centers logged 1.1 million calls from customers. It processed more than 295,000 property claims and 99,000 auto claims, for which it paid $3.6 billion. Although its conclusions were contested by policyholder advocates, a study of State Farm’s response by the Mississippi Department of Insurance found that the company “did make errors”, but it found no violations of the unfair claim practices laws. As insurance commissioner Mike Chaney said in releasing the report, “Although there were questionable decisions and irregularities by State Farm in handling claims, no scheme or plan to systematically mistreat policyholders was found.”1

Are Policyholders Covered?

Policyholders, their attorneys, and consumer advocates tell a different story. Insurance companies and their agents assure policyholders they are covered for hurricane claims, but when the hurricane comes the companies rely on arcane language, dubious interpretations of insurance policies, and outright fraud to limit or deny their responsibility to pay for losses.

The companies manipulate the software that evaluates claims, generate inadequate or biased inspections of damaged property and fraudulent or doctored engineering reports, and otherwise distort the claims-handling process as part of a large-scale, industry wide system of underpaying claims. James W. Greer, president of the Association of Property and Casualty Claims Professionals, lamented, “It was as if some small group of high-level financial magnates decided that the only way to save the industry’s financial fate from this mega disaster was to take a total hands-off approach and hide beneath the waves and the flood exclusion.” 2

Insurance Companies’ Authority

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And they can largely get away with it because of massive public relations, campaign contributions producing industry-friendly judges, and lobbying efforts to influence legislators and regulators. The vast majority of claims are settled, but that does not mean they have been settled fairly, for the proper amounts due. Insurance companies have inherent authority to which their policyholders often acquiesce, so that the overwhelming proportion of claimants take what the insurance company offers, lowball or not, and even those who complain do not necessarily sue.

Particularly after a traumatic event such as Katrina, policyholders are in great need, financial and emotional, and are even more inclined to accept an insurance company’s payment and try to rebuild their lives. Ordinary biases may be at work too. After Hurricane Andrew in Florida, Hispanic policyholders were only 50 percent to 60 percent as likely to receive prompt payment from their companies as other homeowners, probably because adjusters’ prejudices led them to treat them as hard to communicate with or untrustworthy.

Maximizing Profits

In order to maximize profits, insurance companies take fewer and fewer risks, shifting some to the public risks through programs like the National Flood Insurance Program and state catastrophe funds and some to homeowners who find less coverage available. As a result, the federal and state governments pay a large part of the losses from Katrina, most of the losses are borne by homeowners themselves, and insurance company profits rise; in 2005, the year of Hurricane Katrina, property/casualty companies amassed recorded profits of $48.8 billion, a record exceeded the next year when profits rose to $68.1 billion.

As is common throughout the United States, the homeowner’s insurance policy would be an all-risk policy, which would suggest to the homeowner that it covers the insured property against damage caused by all risks.

NOTES:

1. Mississippi Department of Insurance, “Report of the Special Target Examination (Katrina Homeowners Claims) of State Farm Insurance Companies, “October 17, 2008

2. J. Robert Hunter Before the Committee of Commerce April 11, 2007

© 2010 Tony Hodgison

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