19 September 2005

Up the Mississippi Without a Paddle

While acknowledging freedom of contract as a general concept, governments at all levels have rarely been shy about infringing upon that freedom when doing so is politically advantageous or expedient. Notwithstanding, those encroachments are rarely so brazen or devoid of any rational foundation in law as is a current effort by Mississippi Attorney General Jim Hood.

Hood's state lawsuit against five insurers, including Allstate, State Farm, and USAA, seeks to force those insurers to pay flood damages suffered by their Mississippi policy holders despite clear exclusions in those policies and the ready availability of flood coverage from federal programs. As reported by the Wall Street Journal (subscription required):
The suit, filed in state court in Jackson, seeks to override the exclusions. It comes as tens of thousands of Gulf Coast property owners struggle with the cost of rebuilding homes damaged by the wall of water that surged with the hurricane Aug. 29. Standard homeowners' policies typically cover wind and other storm damage, but not flood damage.

. . . .

"You can't provide free flood insurance by rewriting contracts," said Jane Boisseau, a New Orleans native and co-chair of the insurance practice for law firm LeBoeuf, Lamb, Greene & MacRae LLP in New York, which represents many insurers. A spokesman for State Farm Mutual Insurance Cos., the nation's largest home and auto insurer, said the attorney general's move "threatens the foundation of the economy of the state" by attempting to undercut legal contracts. The insurers maintain they never collected any premium money from customers to cover flood damage.

. . . .

The suit seeks to void flood exclusions, arguing they are "unconscionable," unreasonably favorable to insurers and a "violation of the public policy of Mississippi."

The suit argues that policyholders bought insurance to protect property against hurricanes with the "reasonable expectation" it would cover flood and other water damage. It accuses insurers of deceptive trade practices. The suit argues that Mississippi law and court precedent require insurers to pay according to the original cause of damage, and that flooding from Katrina was caused by the storm and its high winds.

The suit argues the policies deprive policyholders of "meaningful choice."

. . . .

Allstate's general counsel, Michael J. McCabe, said the company expects Mr. Hood's challenge to fail, in part because state regulators approved the contracts, "but while it's being adjudicated, it will delay and complicate the process." He said Allstate is paying covered losses "fairly and as swiftly as humanly possibly."

. . . .

A spokesman for USAA said that, while sympathetic to Gulf Coast residents who didn't buy flood insurance, "we cannot compromise the interests of our members who have covered losses by being forced to pay for uncovered losses."
Whatever merit governments' insurance oversight efforts might have before disaster strikes, after-the-fact tinkering with policy terms is entirely without merit.

Regardless the undeniable disparities in bargaining power between big insurers and individual policyholders, insurance contracts are no less bargained-for exchanges than are other contractual relationships. Moreover, unlike many bargains between unequal bargainers, insurance policies are approved and overseen by state regulators. In Mississippi, this regulation is performed by the Mississippi Department of Insurance and its Commissioner (and William H. Macy lookalike), George Dale. It appears to be undisputed by Hood's department that the "unconscionable" policies issued to Mississippi homeowners were duly reviewed and approved by Dale's department.

The National Flood Insurance Program, administered by the Federal Emergency Management Agency, offers coverage to both residential and non-residential property owners in flood-endangered areas. One NFIP website spells out such owners' options fairly well:

Option 1: Hope that you'll receive Federal disaster relief if a flood hits.

Many people wrongly believe that the U.S. government will take care of all their financial needs if they suffer damage due to flooding. The truth is that Federal disaster assistance is only available if the President formally declares a disaster.

. . . .

[I]f your home is flooded and disaster assistance isn't offered, you'll have to shoulder the massive damage costs alone.

The bottom line? If you're looking for secure protection from financial loss due to flood damage, Federal disaster assistance is not the answer.

Option 2: Buy flood insurance and stay protected no matter what.

When disaster strikes, flood insurance policyholder claims are paid even if a disaster is not Federally declared.

Flood insurance means you'll be reimbursed for all your covered losses. And unlike Federal aid, it never has to be repaid.
There doesn't appear to be any shortage of Mississippi communities for which flood insurance coverage was available. If, for whatever reason, an affected community did not participate in the program, perhaps Attorney General Hood would be better-advised to focus his attention on those communities' municipal leaders rather than on those insurers who issued and abide by state-approved policies.

In reality, the problem appears to simply be that, of the options described by FEMA supra, most Mississippians chose Option 1. According to the Wall Street Journal, "fewer than one in four Mississippi properties in areas most at risk of flooding are insured through the federal program."

It is all-too-common for bureaucrats to compensate voters for those voters' own short-sightedness, but such public charity is properly done, if at all, with public funds. To essentially penalize insurance companies after-the-fact for doing business in the State of Mississippi seems a certain way to ensure no insurer will do business in the state again. As in other states where insurers have found that government heavy-handedness has created an unfavorable business environment, consumers in Mississippi will likely discover far fewer insurance options for themselves in the very near future. Fewer options will mean that what coverage is available will be more expensive -- the law of supply and demand tends to govern rationally even when governments alter other laws irrationally. Fewer options also will mean that more individuals will be unable to secure coverage at any affordable price -- a circumstance with many collateral effects. No available insurance coverage usually means no available capital and no capital means no progress, on either the individual or community levels.

Whatever short-term political gains might be had in Mississippi by putting a thumb on the scales will be outweighed many times over in the longer term as the effects of this intervention cascade through the post-disaster commercial environment. Certainty of contract is not a luxury -- it is an absolutely necessary precondition for modern commerce. Whether national sympathy and governmental largesse after Hurricane Katrina will be enough to rebuild Mississippi, it is beyond reasonable argument that only modern commerce can sustain it once collective memories of Katrina's damage fade beyond Mississippi's borders.

UPDATE: J. Craig Williams of May It Please the Court has also noted this case.

UPDATE 2: Walter Olson and the Wall Street Journal join in my righteous indignation.

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