Katrina

One development in the wake of Hurricane Katrina was the creation of “Katrina cottages” — cheap, easy-to-build housing intended to be a viable, attractive alternative to FEMA trailers as a form of post-disaster housing.

There have actually been problems with coastal Mississippi towns not wanting the cottages because they’re “too nice”.

Well, they’re so nice that apparently Lowes is selling blueprints to various models of Katrina cottages for $700 per set of 6 (waived, if you buy construction supplies from Lowes).

One of the more annoying messes in the wake of Katrina was, at least among those homeowners who had flood coverage, how claims settlement could be delayed by wind and flood coverage being provided in two policies, each with somewhat different terms.

Some Gulf Coast politicians would have this, as well as many other wind vs. water issues, resolved by expanding the National Flood Insurance Program to provide wind cover as well.

However, in a Times-Picayune blog post made over the weekend, comes word of an idea being circulated by Adam Scales, an associate professor at the Washington and Lee School of Law:

Rather than having homeowners buy two policies — a flood policy from the government and coverage for fire, theft, liability and wind from a private insurance company — Scales advocates making companies sell policies that would provide all the coverage people need and having the government reimburse the companies for flood claims.

The idea is that changing the flood program from a retail venture to a reinsurance program operating behind the scenes would allow consumers to collect one insurance check and start rebuilding their homes and the broader economy while leaving any disputes for the companies and the government to resolve. Mandatory coverage would also solve the problem of not enough people having flood insurance, and would put the program on better financial footing.

“It would push disputes up one level to the wholesale level. Now you would have an argument, say, between State Farm and the federal government about how to deal with the aggregate loss,” said Scales, who began studying the flood program after watching New Orleans fill up with water on television. “It clearly makes the wind-water distinction meaningless to the average consumer.”

Part of that sounds quite a bit like an idea I floated post-Katrina.   If coverage exists, then the insured’s claim ought to be paid, with the question of how much of it is wind versus water pushed to the back room for lawyers and accountants to deal with without interfering with the customer’s recovery.

Of course, that would require that some of the differences in coverage terms in flood versus traditional homeowners insurance be smoothed out.  For example, the maximum amount of coverage available under the NFIP is lower than what can be obtained in your typical homeowners program.  And even if limits were the same, the nature of what personal property or ancillary structures are or aren’t covered can vary between the two contracts.

But we’ve known that updating the NFIP standard contracts to fit modern personal insurance needs is one of the items on the flood insurance reform agenda…albeit further down the list from near-insolvency and questions of rate adequacy….and from the foolishness of expanding the program to cover wind.

Seen at ABC News:

The Army Corps of Engineers can be held liable for flood damage caused by a “hurricane highway,” a navigation channel that is believed to have funneled Hurricane Katrina’s storm surge into the city, a federal judge ruled Friday.

The Corps of Engineers had argued that it was immune from liability because the channel is part of New Orleans’ flood control system. The law says the federal government cannot be sued if something goes wrong with a flood control project such as a levee, reservoir or dam.

Judge Stanwood Duval dismissed that argument, saying the Mississippi River-Gulf Outlet, or MRGO, was clearly a ship channel and not a flood control project.

You may recall that plaintiffs are seeking $3,014,170,389,176,410 in damages from the Corps.

As a result of the 2004 and 2005 hurricane seasons, many Americans became familiar with FEMA trailers—the little white structures driven in after a catastrophe, to provide basic shelter to area residents whose homes had been destroyed.

Unfortunately, FEMA trailers have problems. They’re extremely cramped, somewhat dehumanizing, rather susceptible to wind damage, emit toxic fumes…and oh yes, we found out the hard way that they have to be stored properly, or they become useless. (Witness the large trailer-park of unusable FEMA trailers in Arkansas.)

Not surprisingly, folks have been looking for alternatives.

One of the more interesting alternatives has been the “Mississippi cottage”, which was mentioned recently in the New York Times:

The only units FEMA says it is planning to test are the Mississippi Cottages, which have tin roofs, small porches and are colored like Easter eggs — rose-hip pink, malted mint, cloudless blue. The cottages are on wheels, but the larger models can be put on permanent foundations. All are equipped with appliances, beds, a table and chairs, ceiling fans, even pots and pans, and cost an average of $32,000 apiece to build.[...]

With its built-in closets and spacious kitchen cupboards, their cottage feels like a mansion, said Vicki Ladner Meshell and her husband, Rickey, whose apartment in Long Beach was washed away by Hurricane Katrina’s storm surge.[...]

The Mississippi Emergency Management Agency has installed more than 2,000 of them throughout southern Mississippi, and plans to put in 3,500.

But local governments in Mississippi have resisted the cottages. They fear people who get cottages will simply live in them and not rebuild their houses, said Mike Womack, executive director of the Mississippi Emergency Management Agency.

“They’re too nice,” he said. “I’ve heard this over and over again.”

“They’re too nice”?!!

So we have an area, which is suffering from lack of affordable housing, a need to keep workers in the area both to staff recovering businesses and to help with reconstruction, a need to reduce stress in difficult recovery process, and problems with “demand surge” prompted by a lot of pressure to reconstruct as quickly as possible.

“Too nice” seems like a rather foolish concern under such circumstances.

David Rosmiller has posted a decision from the Fifth Circuit Court of Appeals on the Broussard Katrina-slab case:

We REVERSE the judgment of the district court entering JMOL in favor of the Broussards. We REVERSE and VACATE the jury’s award of punitive damages. We AFFIRM the district court’s admission of testimony from the Broussards’ expert witness. We AFFIRM the district court’s denial of State Farm’s motion to change venue. We REMAND the case for a new trial.

The Broussards were the State Farm policyholders who brought one of the landmark Katrina slab cases. The judge in the case essentially ruled from the bench that State Farm was liable to pay policy limits since they “failed to prove” the damage wasn’t caused by flood, and let a jury determine punitive damages.

(Yes, I know that a lawyer could wax poetically to point out the technical inaccuracies in that last statement. However, I’m not a lawyer. Net effect was that it was a big slap-down upon State Farm.)

So, with the appellate decision, State Farm looks to get its day before the jury in this case.

As someone who’s been in claims limbo for over six years due to my wife’s car accident, I can empathize with the Broussards over what waiting for the appeal, and now the new trial, must feel like to them.

Hopefully, the aftermath of this and the other Katrina homeowners cases will lead to better coordination between wind and water claims, as well as less of a need to plug extremely paranoid scenarios into the cat models…all of which should mean not-quite-as-astronomic costs for Gulf coast insureds.

So, while the attention of the Mississippi legal and insurance communities has been focused on the Scruggs circus, it looks like a bit of work has still been going on elsewhere in the state. For example, consider
this story at Insurance Journal:

California-based law firm Irell & Manella reports it has won a partial summary judgment on behalf of national gaming operator Pinnacle Entertainment Inc., in an insurance coverage case arising out of Hurricane Katrina.[...]

In August 2005, Pinnacle’s facility in Biloxi, Miss., sustained property damage and business interruption loss.

According to Irell & Manella, two of Pinnacle’s insurers, Allianz Global Risks U.S. Insurance Co. and RSUI Indemnity Co. (together providing more than $100 million of excess coverage), took the position that coverage for all storm surge damage falling within their policy layers was precluded by flood exclusions contained within their policies.[...]

After a two-hour oral argument on the motion, Judge Sandoval took the motion and cross-motions under submission. On March 26, he issued his ruling in Pinnacle’s favor.

The IJ article reads like this is a case of a Mississippi judge rewriting property insurance contracts after the fact. However, while that is an attractive thought to someone in the industry…I don’t think that is actually the case here. IJ skipped over a key paragraph in Irell and Manella’s press release:

According to Pinnacle’s CEO Dan Lee, “Pinnacle has always maintained that it has coverage for flood and other related damage caused by Hurricane Katrina. We specifically bought $400 million of coverage for Weather Catastrophe Occurrences like Katrina, including any resulting flood. We have been extremely disappointed that it has taken a lawsuit to convince our excess insurers of this fact.”

The phrase “Weather Catastrophe Occurrences” is the telling phrase here. A “Weather Catastrophe Occurrence” peril is a feature of some property insurance contracts written by London brokers. It’s my understanding that, at least at the time of Katrina, it was not uncommon for London to exclude Flood but provide coverage for the specific peril of “Weather Catastrophe Occurrence”, which in the case of a hurricane, arguably includes storm surge.

I’ll make an educated guess that the excess property carriers, Allianz and RSUI, issued “follow-form” excess contracts. They probably provided their own exclusions of the flood peril…but didn’t exclude WCO since WCO isn’t a peril you normally see on primary contracts written by American insurers.

The insurers likely tried to argue that the flood exclusion was unambiguous and superseded all other perils. However, I’d bet that either “flood” was not redefined in the excess contracts, or that the judge thought the flood exclusion was ambiguous when it comes to WCO. Ambiguity tends to be interpreted in a manner favorable to the party with the shallower pockets.

Moral of the story: If you’re an excess insurer, you need to be familiar with the language of the forms you’re following, and either price or exclude accordingly.

You’ve already probably heard this news, but in case you haven’t and were wondering about all the raucous partying occurring in Bloomington, Illinois. From an AP article at the Wall Street Journal:

Citing ethical breaches, a federal judge Friday barred a group of Mississippi attorneys once affiliated with a well-known tort lawyer from representing any policyholders in lawsuits against State Farm Fire & Casualty Co. over Hurricane Katrina damage.

U.S. District Judge L.T. Senter Jr. in Gulfport, Miss., also disqualified two key witnesses in the lawyers’ cases from testifying against State Farm or their former employer, a firm that helped the Bloomington, Ill.-based insurer adjust Katrina claims.

Senter’s rulings cited improper payments that Richard “Dickie” Scruggs [...] made to Cori and Kerri Rigsby.

The Rigsbys, of course, are the two sisters who allegedly “liberated” some apparently damning paperwork from adjusting firm they formerly worked for, and which assisted State Farm in dealing with claims in the wake of Katrina.

Seen at Business Insurance:

The U.S. Supreme Court refused Tuesday to hear a case in which a federal appeals court ruled that property insurance policies did not cover flood damage in New Orleans caused by the failure of levees during Hurricane Katrina in 2005.

In its Aug. 2, 2007, decision in the Katrina Canal Breaches Litigation, which it revised on Aug. 30, the 5th U.S. Circuit Court of Appeals held that “even if plaintiffs can prove that the levees were negligently designed, constructed or maintained and that the breaches were due to this negligence, the flood exclusions in the plaintiffs’ policies unambiguously preclude their recovery.”

Repeat after me: A flood is a flood is a flood.

It’s nice to see the courts continuing to see sense here, and hopefully this will finally close the book on this unfortunate chapter of the Katrina mess.

Remember the $3,014,170,389,176,410 sought from the Army Corps of Engineers for post-Katrina flood damage in New Orleans?

The judge has thrown out the case, and federal bean-counters are thanking their preferred deities for legislated grants of immunity. From the AP:

U.S. District Judge Stanwood Duval ruled that the Corps should be held immune over failures in drainage canals that caused much of the flooding of New Orleans in August 2005.

The ruling relies on the Flood Control Act of 1928, which made the federal government immune when flood control projects like levees break.[...]

In his ruling, Duval said he was forced by law to hold the Corps immune even though the agency “cast a blind eye” in protecting New Orleans and “squandered millions of dollars in building a levee system … which was known to be inadequate by the Corps’ own calculations.”

But, Duval said, “it is not within the Court’s power to address the wrongs committed. It is hopefully within the citizens of the United States’ power to address the failures of our laws and agencies.”

Seen in the Biloxi Sun-Herald:

Chaney said Friday he is working with state legislators, who convened their 2008 session Tuesday, and state wind-pool officials to lower wind-pool rates that increased 90 percent for homeowners and 162 percent for businesses after Hurricane Katrina. Chaney said it is too early to discuss details, but he has met with the Coast legislative delegation and is talking to other lawmakers about insurance needs in South Mississippi.

Chaney said his top priority is to stabilize the property and casualty market so insurance is available and affordable. Working to improve the wind pool, insurer of last resort for South Mississippi, also will help stabilize the insurance market statewide, he said.

The article also mentions that Chaney is supporting the concept of a national cat pool.

As long as the Commissioner is looking at realistic solutions…or improvements, at least…rather than attempting reform by fiat, I wish him the best.

However, I would also suggest that taking a close look at what’s already in place…perhaps even seeking outside opinion… should be a fundamental component of evaluating potential reforms.