February 14th, 2007
By Larry Lubell
Urban Insurance Blog ________________________________________
State Farm Insurance Company anounced that it. is suspending sales of any new commercial or homeowner policies in Mississippi starting Friday. A company official said that the wave of litigation it has faced since Hurricane Katrina, was the main reason. Mississippi’s “current legal and political environment is simply untenable. We’re just not in a position to accept any additional risk in this homeowners’ market.” said Mike Fernandez, vice president of public affairs for State Farm State Farm has argued that their homeowner policies were worded to cover damage from wind but not from water - even if hurricane-force winds were the cause of the rising water. They also state that their policies exclude damage that could have been caused by a combination of both wind and water. Hundreds of State Farm policyholders have challenged that claim, saying they were “Sold” Hurricane policies and storm surge is a part of a hurricane, and they are therefore entitled to Compensation. In the case of Norman and Genevieve Broussard VS State Farm a jury awarded the Broussard’s $2.5 million in punitive damages against State Farm for refusing to cover Hurricane Katrina storm surge damage to their Biloxi home. U.S. District Judge L.T. Senter Jr. later reduced the award to $1 million, even though the judge found that State Farm acted in a “grossly negligent way” by denying the claim filed by policyholders.
Last month Attorney General Jim Hood reached a settlement with State Farm requiring them to pay about $80 million to more than 600 policyholders who sued the company for refusing to cover damage caused by Katrina. Judge Senter later refused to sign off on part of the agreement, a deal between State Farm and Mississippi
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In an article titled Miss. AG Hood Attacks State Farm as ‘Robber Baron’ By Brian Kern, posted in the Insurance Journal; The Attorney General, Hood, expresses his Frustration over the lack of progress made in his negotiations with State Farm insurance.In a second press conference in as many days, Mississippi Attorney General Jim Hood came out fighting against a recent decision by State Farm Insurance Co. to stop writing new home and commercial property policies in the state.“We’re looking a robber baron in the face,” Hood said. “State Farm is not a responsible corporate citizen.”In the responces to this article and another posted on Netscape Titled “State Farm Shredded Documents to Avoid Paying Katrina Victims”, Brian Ross and Joseph Rhee Report:News – state farm insurance Insurance supervisors systematically demanded that Hurricane Katrina damage reports be buried or replaced or changed so that the company would not have to pay policyholders’ claims in Mississippi, two State Farm insiders tell ABC News.It seems clear that all of this ill-will stems from the basic fact that the storms of last year left not only home, but lives in shambles. State Farm, being the largest insurer in the area, of course has taken the brunt of the complaints.In all fairness state farm is a well respected company with a long reputation of handling claims in a responsible maner. The scale of the damage hurricane katrina left in it wake, clearly exceeded companies expectations. I certainly can understand the frustration that States Attorney, Hood expresses. He is responding to the complaints of thousands of citizens in his state. People who’s lives have been torn apart and trying franticly to rebuild both their homes as well as return to some sense of normality. It is easy for me, sitting in my office in Chicago, to explain the logic and legality behind State Farm’s decisions. My home and or office were not destroyed. As an agent, I’m use to reading policies; I understand the importance of reading the “Fine print” Insurance companies are held to the letter of the law and in turn expect the courts to hold policyholders to the exact terms and conditions of the policy. One of the problems in discussing this case is the difference between the legal definitions based on the wording in the policy, compared to the commonly understood definition. Katrina was a hurricane. It is common sense that if stand outside during hurricane you are going to get wet. Hurricanes cause high winds, massive amount of rain and yes, storm surge. It goes against reason to argue that hurricanes do not cause flooding. However, while it is silly to contend that flooding is not connected to hurricanes, it is not silly to argue that it’s not covered on your homeowner’s policy. If a client calls me to report the theft of his car and his guitar in the back seat; I can’t tell him that the stealing of the instrument was not connected to the theft of the auto. But I can tell him that the guitar is not covered under his auto policy. To make matters more confusing, a storm can cause damage to a structure in multiple different ways at the same time. Your building can be damaged by wind, which is covered, and also by flood that is not. How does the insurance company deny damage caused by a covered peril because additional damage was done by a peril not covered? To anyone out that that thinks our country would be better off replacing private insurance companies with government agencies, let me remind you of the dismal job FEMA did. Last I checked, FEMA still had thousands of trailers sitting empty. Flood insurance has substantial conditions, limitations, and deductibles. The terms of the government sponsored Flood insurance plan leave enormous gaps, and offer only partial coverage. The people who are now fighting to get their flood claims settled through the plan, might be quite disappointed as well. I would have hoped that after these storms of 2005, that the government would have stepped in addressed the wisdom of rebuilding structures in low-lying damage prone areas. (There is a reason it’s called a “Flood Plain”) New Orleans was below sea level before Katrina, it is still below Sea level. It is unrealistic to assume that the levies will hold when the city is hit again. The plans need to include replanting the buffer of vegetation that had been replaced with homes throughout the last 20 years. The plan must leave room for controlled flooding to take the pressure off of the levies in times of high water.There is a lot that the government can do, but becoming the nation’s insurance company is not the right move.
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