26 September 2005

Still Not Paddling

Walter Olson, of the Manhattan Institute and the Overlawyered blog, has an opinion piece in today's Wall Street Journal (subscription required) concerning the possible invalidation of flood exclusion clauses in Mississippi insurance policies, which I discussed last week:
The flood exclusions, Mr. Hood asserts, were hidden "in the fine print" of coastal residents' policies. If so, it was some of the most publicized fine print in history. "Homeowner's insurance doesn't cover flood damage" -- blares the warning on one of the federal government's own consumer-affairs Web sites. In fact, the well-known exclusion dates back decades and has been generally respected by courts.

"Unconscionable"? Contrary to "public policy"? The exclusion prevails in all 50 states, including those states -- Mississippi is one -- where regulators must okay the offering of new standard policies. Mississippi's insurance authorities, like their counterparts elsewhere, had green-lighted the flood exclusion, amid little controversy.

Then there's the federally sponsored flood insurance program, which exists in large part because storm surge perils in hurricane country are considered too severe to insure commercially at politically palatable rates. For years, insurance agents and the government have urged property owners to buy that added coverage. But why should they bother, if the Hood/Scruggs arguments are to be taken seriously? Can't their ordinary homeowners' policies just be redefined retroactively as covering the risk?

. . . .

Mississippi insurance commissioner George Dale is already worried that as panicked insurers pull out of the state, first-time customers -- such as construction contractors moving into the area -- will be among the earliest casualties: "Contractors got to have insurance; they can't build without insurance."

WSJ's editorialists add their own two cents:
As it is, insurers may be on the hook for $60 billion. Sticking them with flood damage could add another $15 billion to the tab, which would certainly send several insurers into bankruptcy.

Insurance companies that survived would have to assume that flood liabilities are now theirs to pay, regardless of the contracts they write. They'd then have to charge everyone in the region higher premiums -- by one estimate, as much as $500 a year -- to cover this flood risk. Or they could take the more rational option of fleeing a state where contracts aren't worth the paper they're written on.

In other words, Mr. Hood is guaranteeing that victims of the next hurricane will have even less financial protection than Katrina's. And he's complicating the entire reconstruction effort by raising the cost of insurance for the contractors, union workers, homeowners and businesses that are all going to need liability and/or property and casualty insurance before they rebuild. The attorney general is a Category 5 destructive force all by himself.

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