If another hurricane the size of Katrina or stronger strikes a metropolitan area this summer or fall, I am certain that we will have a repeat of the litigation and problems associated with Katrina. On May 8, the United States Senate voted against increasing the role of the National Flood Insurance Program to include coverage for "wind" peril. (See Miami Herald, Chicago Tribune, Biloxi Sun Herald) The Senators supporting the measure were from the coastal states most effected by hurricanes. These southern Senators and their constituency are increasingly facing the problem that private property insurance carriers will not sell a policy that covers the perils posed by a hurricane.
I met with Gene Taylor, a United States Representative from Bay St. Louis, Mississippi, in early 2007 regarding this problem. Hurricane Katrina destroyed his home and those of friends. He understood that coastal policyholders with complete destruction were only getting the flood damage paid for under the coverage purchased through the National Flood Program. Despite homes miles inland being paid significant benefits under their all risk coverage from wind damage, coastal insureds suffering from a combination of wind and flood were generally getting paid pennies on the dollar for wind related damage. He and other coastal Representatives believe that the only solution available is to make available a policy that covers both the water and wind perils which occur during a hurricane.
As I previously stated, the Senate voted against such coverage. The experience of Gene Taylor is accurate. I often indicated that it was easy to determine the State Farm adjusters working the policies issued under the National Flood Program versus State Farm’s own policies. The State Farm flood adjusters were the ones dressed in red coats with very long white beards, freely giving money away. The State Farm company adjusters dressed like funeral directors with much sympathy, but little that would really help you out of your predicament. Some in the industry may think this is a "cheap shot" taken at State Farm. However, I had discussions with management at National Flood about this, and they indicated they were instructing adjusters to act in "good faith" and "give the benefit of the doubt" to the unfortunate flood policyholders regardless of whether the private carriers were just going to pay lip service to that very basic good faith claims handling philosophy when faced with the wind related claims.
Most people not in the insurance business wonder why they cannot simply get one policy to cover everything caused by a hurricane and have the carrier treat them in good faith. It is hard to explain why we can do so much in society and fail to make a working product available to so many that want and need it. The Government Accounting Office ("GAO") issued an interesting report late last month explaining our current insurance situation for coastal states in the South, and increasingly up the eastern seaboard. The report critically noted the multitude of problems associated with the government adding wind peril to the flood policy. It also noted that most of the recurrent problems of wind peril combining with flood peril at the same time occur in Florida and along the northern Gulf Coast.
The bottom line from the GAO report is that the National Flood Program is already deeply in debt to the national treasury, with flood rates expected to rise in 2010 increasing this deficit. Adding a "wind" peril to these policies with no actuarial support would add to to the deficit funding problem if Congress were to mandate that the government go into the wind insurance business. With a war raging, the economy faltering, and a White House promising to veto the measure, it should be no surprise that this legislation went nowhere.
But maybe I shouldn’t be too pessimistic. Since Katrina, Congress has made one major change regmrding insurance coverage. The Federal Flood Program increased its coverage available to $500,000 on residential structures and $1,000,000 on commercial structures. So long as Federal flood adjusters continue to act like Santa Claus and pay liberally, the amount in controversy will be smaller next time a policyholder has to prove how much wind damage occurred before the flood washed the proof of wind damage away.