GCN Special Report Filed 4/5/06
Katrina’s Receding Waters Left Waveland Apartment Renter Sheila Floyd Far Away In Warrensburg, Missouri. Like Coast Homeowners, She Was Blindsided By Insurance Policy Water Exclusions. This third part of GCN's Special Report examines the insurance industry’s possible future strategy in Mississippi and compare it to what it did in Florida after Hurricane Andrew. - GCN
Receding Storm Waters Has Left Insurance Commissioner George Dale Up The Proverbial Creek Without A Paddle. In The Boat With Him Is All Of Mississippi.
By Perry Hicks & Mark Proulx- Special to Gulf Coast News
“Every industrialized nation relies on insurance.”
George Dale, Mississippi Insurance Commissioner
It is easy to blame George Dale for all of your woes if you are one of the unfortunate ones with a concrete slab where there was once a home. After all, he is Mississippi’s elected insurance commissioner and it is his job to tell the companies they have to pay. Bitterly, you note as you climb the stairs to your tiny FEMA trailer, recovery as yet to begin seven full months after Katrina.
Attorney Zach Scruggs of Scruggs Katrina Group, the firm representing Senator Trent Lott, Rep. Gene Taylor, and many other homeowners in litigation against insurance companies, also points an accusatory finger at Dale. He says that conflicting language that excludes water in one part of the policy and “hurricane windstorm” deductible in another should never have been allowed.
“It should be crystal clear,” Zach has recently told GCN, “If the policy doesn’t cover it then it should say so.”
Zach went on to say that people should understand what protection they are paying for and the policy price should be set accordingly.
It is precisely this language and price that has sabers rattling over whether or not there will be payouts, and if so, the amounts for what and from whom.
In watching all of this, it is also easy to believe that insurance companies have yet to pay out anything, which, according to George Dale, is not true.
“Statewide, insurance companies have paid out about $8.7 billion with about 6 of that in the coastal counties,” Dale told GCN, “And that is both wind and flood.”
That is a lot of money but nowhere near the $100 billion or so it will take for the Coast to rebuild. Then again, this is a problem of unprecedented magnitude that must be resolved on a case-by-case basis. That takes time. As such, insurance companies have been inundated in a veritable sea of paperwork.
Much of the wrangling revolves around the legal definition of “water:” Can the storm surge that encroached miles inland bringing 6 foot seas to normally dry land be considered flood, overflow, tidal water, or is it a merely a “wind-driven object” no different than debris or sand? Couple the water exclusions to hurricane windstorm deductibles and the policy language can be truly confusing.
When asked who permitted such policy language, Dale quite candidly told GCN:
“It is the same language used in all the states around us,” said Dale
It is precisely the same language because the insurance policies are written to comply with ISO standards (International Standards Organization.) Dale would have had little control over changing what is considered an industry-wide (read nation-wide) practice.
And in regard to ordering insurance companies to pay, Dale has no such authority. All of GCN’s contacts agree, ordering payment is a purview of the courts.
There is some evidence that ambiguity can give insurance companies wiggle room in the event of catastrophic levels of destruction such as has been realized with Hurricane Katrina.
For example, following Hurricane Fredrick in 1979, State Farm Insurance won the hearts and business of Mississippians by the high level of service afforded their policy holders.
“As a result, 1 out of 4 Coast households are currently insured by State Farm. However, after Katrina, I doubt this will continue to be the case,” Dale told GCN, the dissatisfaction with State Farm evident in the tone of his voice.
Of course, Fredrick’s damage pales against Camille so that the size and cost of cleanup back in 1979 was far more manageable than Camille and certainly easier than the broad swath of utter devastation wrought by Katrina.
If one examines the basic foundation on which all insurance is built- spreading risk- the motivation some companies may have to drag their feet or obfuscate the facts about any particular claim could be just that, spreading risk, not over a wider field of customers but over a longer span of time.
Looking to the future, Dale, the consummate insurance insider, admitted to GCN that in his meetings with industry leaders, much discussion and planning is going on concerning post-Katrina rates and coverage saying:
“But if (attorney-general) Hood and Scruggs have their way, they (meaning the insurance companies) say all of this is out the window.”
Lesson from Florida
Insurance industry spokesman and attorney Bill Bailey, brother to famed trial lawyer, F.E. Bailey, resolves the issue down to capital vs. commitment- also called the premium/surplus ratio. Insurance companies must maintain sufficient reserves to handle future disasters.
In Florida after Hurricane Andrew (1992,) Bailey points out that 11 insurance companies failed and another 33 left the state due to a number of factors including the size of judgments against them.
Florida courts had interpreted valued-policy laws in a way that made insurance companies pay for perils other than those stated in the policy. Relief to insurance companies came from legislation that is now called the "Mierzwa fix” just last year.
According to Bailey, insurance companies pulled back from Florida markets because they perceived rates to be too low in high risk areas. He says that in order to slow the retreat, Florida ordered companies not to reduce policies overall more than 5% in any one year or 10% in any one county in any one year.
Although companies complied, they also stopped writing new coverage. As a result, it wasn’t long until Florida was realizing an availability crisis in homeowner insurance.
In order for coastal homeowners to have insurance, Florida had to pull together several preexisting programs to form Citizens Property Insurance Corporation which covers a combination of wind and fire. Flood, of course, is underwritten by the Federal Flood Insurance Program.
Still, Citizens premiums are threatening to soar 110 percent in 2006 after a 25 percent increase in 2005. The hikes come even though Citizens premiums are higher than any private windstorm insurer and Citizens shortfalls are covered by special assessments levied against every privately written insurance homeowner policy in the state.
Jackson attorney Greg Copeland, an insurance industry lawyer involved somehow with almost every Mississippi case, agrees that Citizens is hardly a good model to follow:
“Citizens has had premiums skyrocket; the company has financial problems for a variety of reasons.”
Louisiana also has its own state-owned multiple peril insurance provider, coincidently named Citizens, which is also in financial trouble.
In Louisiana’s case, the sheer magnitude of Katrina caused losses is overwhelming that company. Again, risk is not sufficiently spread out wide enough.
Bill Bailey noted that since Hurricane Andrew, a combination of legislation and industry preparedness has dramatically strengthened the industry as a whole. For example, Katrina has resulted in only a single company failing in Mississippi, Farm Bureau Mutual Insurance Company.
“Farm Bureau Mutual had never paid out more than $30 million protected by $75 million in reinsurance. Katrina claims were about $400 million,” Dale explained.
This doesn’t mean that Mississippi has not had to create a high risk joint venture of its own. Since 1987, Mississippi has operated its own insurer of last resort, the Mississippi Windstorm Underwriting Association.
Like Florida’s Citizens, this entity levies an assessment on every homeowner policy written in the state. If an increasing number of coastal homeowners are forced into the wind pool as suspected, then home policy holders far away from the Gulf will likely see their premiums rise as well.
Furthermore, Coast residents could find themselves having to buy separate policies to cover the principle perils of flood, fire, windstorm, and theft; this, too, will likely ratchet up Mississippi’s insurance costs.
Small Market Reality
“My job is to see to it that as far as possible every claim is paid while still maintaining a market.”
George Dale, Mississippi Insurance Commissioner
One of the common complaints about Dale is that he too often sides with the insurance industry suggesting that he is in their hip pocket.
The question GCN posed to Bill Bailey was what would the insurance companies do if Dale really leaned on them hard or criticized them openly to the point of impacting their standing with the public? Would insurance companies simply pull out as they did in Florida?
“When you (insurance companies) think a commissioner has gone too far, you go for a private audience and say to them, you are making it difficult to deal with the policy holders. If he continues to slant attitudes toward us in a negative way, we would scale back business until we could decide what market we wanted to be in.” Bailey told GCN matter-of-factly.
“Florida and Texas are big, attractive markets for insurance companies. They want to be there and the risk can be spread out lowering exposure,” Bailey continued, “So they will put up with a bit more in a big market. But, Mississippi’s market is small and so they are not going to put up with as much.”
Bailey then went on to explain, “If you doubt this, just take a look at New Jersey. Auto insurance companies decided that they were being treated unfairly and so they pulled out. The legislature had to make some changes to entice them to come back.”
The inability to be insured also impacts the ability to secure loans. Without insurance, building and buying, much less ownership could literally come to a halt.
Thus, Dale’s statement regarding his job entailing both payouts and maintaining a market is quite apropos.
It is interesting to note the comparative funding level of Dale’s combined office of insurance commissioner and state fire marshal and the revenue stream of the U.S. insurance industry.
According to George Dale, his annual budget for both insurance regulation and fire, to include running the fire academy, is about $6 million.
According to Bill Bailey, the sum total of premiums collected by insurance companies in 2004 was $960 billion- $370 billion from life and $430 billion from property. That is nearly a trillion dollars each and every year.
A Difference In Policies
While the language written in to homeowner policies may meet an ISO standard, there can still be a considerable difference between individual policies. An example could be made between the policies of former Waveland apartment renter Sheila Floyd (featured in parts one and two of this series) and Sen.Trent Lott who is suing State Farm Insurance for recovery of the complete destruction Katrina wrecked on his Pascagoula home.
According to the “State Farm Memorandum of Law In Support To Dismiss Plaintiff’s Complaint,” dated January 9th, 2006, Trent Lott’s policy did not have the hurricane windstorm deductible that confused Floyd’s renters policy. If correct, this could substantially weaken Lott’s case.
As policy provisions can differ because of individual needs, locations, and covered perils, it is vital that policy holders read and understand exactly what coverage they are paying for and what exclusions are contained therein.
If a homeowner did buy flood insurance, that doesn’t mean the windstorm carrier is completely off the hook. The homeowner could see recovery from several sources.
For example, Dale relates the situation of one Mississippian who has an expectation to receive $149,000 for the damage to their home. The homeowner will likely receive $17 thousand for wind damage from their wind policy, $106 thousand from flood insurance, and the remainder from a Federal Grant.
“It will take time and that is frustrating, but eventually they will be made whole,” Dale said.
Rider of the Storm
A point that Dale makes is that unlike one of Florida’s former insurance commissioners, now U.S. Senator Bill Nelson, Dale hasn’t used his office to springboard to national prominence. Dale has been Mississippi’s insurance commissioner since 1975.
“I have chosen to stay here and literally ride out one storm after another.”
One could say that in deciding to stay he has to live with his decisions- and his neighbors who are affected by them.
In the wake of Katrina, that may prove a most difficult place to be.
A Sea Change of Historic Proportions
As they continue to sift through the debris that was once their homes and artifacts of their lives, many residents are only now able to see a glimmer of how utterly different the Mississippi Gulf Coast will become. Insurance is going to be one of prime driving forces for that change.
No longer will shoreline residents live in a setting of cozy little cottages set along narrow lanes shaded by live oak trees. That is already gone.
Many will not be able to afford to rebuild. They will eventually sell their empty lots and in its place there will either be large homes for the wealthy, or condominiums for the well-to-do.
Nothing else will have the size to meet minimum FEMA height requirements. No one else will have the wealth necessary to afford the cost of real estate- or the multiple insurance policies necessary to protect it.
For many Coast residents like Sheila Floyd who rented small a apartment near the beach, or those that rented older homes destroyed by Katrina, there is currently nothing for them to return to. Floyd now resides in a retirement community in Missouri,
To those that have known and loved the old Coast, this is a sad, sad commentary. To others, the Coast will literally be a whole new world.
Editor's Note: 4/29/06
A group that insures high-risk structures on the Mississippi Gulf Coast for wind damage requested a 397.8 percent rate increase April 28. The Mississippi Windstorm Underwriting Association filed the request with Mississippi Insurance Commissioner George Dale. The request by the Mississippi Windstorm Underwriting Association, normally referred to as the "wind pool," is for private residences. The association also requested rate increases of 268.3 percent for commercial property and 60.4 percent for mobile homes.
For Coast residents in the program the increase could be as catastrophic as a hurricane due to what they will have to pay to get insurance. According to the State Insurance Commission, under current rates, a Wind Pool insured with a masonry house south of I-10 with $100,000 of coverage, a 2 percent deductible for hurricanes and a $2,500.00 deductible for other wind and hail loss would pay an annual premium of approximately $641. But under the new proposed rate, the same insured house will pay an annual premium of approximately $3,191. The wind pool had around 15,200 customers prior to Katrina.
State Insurance Commissioner George Dale stated in a news release that he and his staff are examining the request with all due diligence. He will also be seeking public input through a public hearing at a date to be announced soon. This filing is available on the MID website at www.doi.state.ms.us.
Related: Florida Home Insurance Rates Skyrocketing, State May Have to Help - SunSentinal.com
About the Author.....
Perry Hicks is the senior writer for GCN. He is a former Mississippi Coast resident and was a correspondent for the old Gulfport Star Journal. He has appeared on Fox News Channel. Perry has also hosted his own radio talk show on the auto industry with a mix of politics. Perry is a former college professor and a frequent contributor to GCN writing on stories of national importance with local interests. His articles can be found in the GCN Archive.
Contact the Author: firstname.lastname@example.org