Gulf Watch: Insurance industry on trial over Katrina claims

A jury trial gets underway today in Mississippi involving Katrina insurance claims that State Farm says refusing to pay claimsare not covered:

Many policyholders with damage, including those who had coverage from companies other than State Farm, contend that they received nothing or only small payoffs from their homeowner policies because insurers blamed their losses on storm surge, which is not covered, rather than on the hurricane's winds.

Hundreds of Mississippi homeowners have sued their insurance companies for refusing to cover billions of dollars in damage from Katrina's storm surge. The Broussards' case is only the second to be tried since the August 2005 storm destroyed or severely damaged tens of thousands of homes.

According to the article, a second trial is scheduled for later in the month.

Meanwhile, State Farm is reportedly close to settling thousands of other lawsuits in Mississippi:

State Farm lawyers met with Mississippi Attorney General Jim Hood as recently as Friday to discuss a possible settlement, which would resolve a civil lawsuit Hood filed against the company for refusing to cover damage from Katrina's storm surge almost 16 months ago.

A mass settlement would be the first of its kind to follow the wave of litigation spawned by Katrina. The Mississippi settlement would not involve any cases filed by State Farm policyholders in Louisiana or Alabama.

It probably helps that Sen. Trent Lott (R-MS) is one of the original plaintiffs. A settlement could benefit thousands of policyholders not a party to the lawsuits:

A "class action resolution" component of the proposed deal calls for the company to review the claims filed by roughly 35,000 policyholders who live in Mississippi's three coastal counties but didn't file lawsuits against State Farm for refusing to cover storm damage.

After reviewing those claims, the company would be required to make new offers and any disputes would be heard by an arbitrator whose decision would be binding.

State Farm would pay a minimum of $50 million to these policyholders after their claims are reviewed, but the company could end up paying hundreds of millions of dollars more than that because there wouldn't be a cap on the amount, the people with knowledge of the talks said.

A deal would not only settle Hood's lawsuit against State Farm, but it also would resolve his criminal probe into whether State Farm fraudulently denied policyholders' claims.

According to the article, attorney General Hood's lawsuit also targets Allstate, Mississippi Farm Bureau Insurance Co., USAA and Nationwide.

According to the Jackson Free Press, AG Hood is quite outspoken about the lawsuits, accusing the insurance companies of running a "bait and switch" operation:

"Our consumer-protection statutes prohibit a bait-and-switch plan. You sell a person a policy and say it covers hurricanes and then when you read the fine print it takes out 85 percent of the damage caused by hurricanes: storm surge. That's a classic bait and switch," Hood said.

Hood says the response from the insurance companies has been to "delay, delay, delay and hope they go away" but that he is willing to settle if they will quit stalling. As for insurance companies being forced out of business if they are forced to pay billions in claims, the article quotes Hood:

"Insurance companies made $46 billion last year," Hood said. "They made an 18 percent increase in their profit over the most catastrophic year heretofore in history in 2004 with four hurricanes in Florida. That industry is making a tremendous amount of money. Now they'll take one little company, a mutual company, for example-owned by the policy-holders-and it might go belly up, so that they can say 'Oh, we'll go broke,' but when they're making that kind of profit it just doesn't stand. It's not true. Insurance companies have $427 billion in reserves that they never even touched. They could pay for the Iraq war, and they never touched those reserves, even after Hurricane Katrina."

According to the same article, insurance industry analysts say that requiring insurance companies to cover storm surge damage could force them out of business in coastal states:

"The most significant repercussion if the companies lose this case would be that the courts in the state of Mississippi are not willing to uphold the terms of a contract that has been approved by the regulator," said Robert Hartwig, chief economist at the Insurance Information Institute in New York. "That means that insurers will be faced with an unpriceable risk in the state and a hostile business environment. The business environment for them will become untenable in that area."

Rep. Gene Talyor (D-MS) has called for a Congressional probe:

In a Jan. 5 letter to Rep. Barney Frank, D-Mass., chairman of the House Committee on Financial Services, Taylor asked for hearings on "the denial of thousands of Katrina wind claims wherever insurers could blame flooding" and "excessive premium increases, market withdrawals, and other actions to force states to make concessions or to assume more coastal risks."

Rep. Taylor, another outspoken critic of the insurance industry, says he believes there was collusion:

"I have long suspected that State Farm, Allstate, Nationwide and a few other insurers agreed to aggressively deny Katrina wind claims as they had never done before," Taylor wrote. "One company would not have been able to get away with blanket denials if the others had been paying claims."

According to the article, Rep. Taylor has a proposed solution for the problem:

Taylor wants a national all-perils insurance policy, federal oversight of the property insurance industry and repeal of its exemption from antitrust laws, which he said allowed the companies to consult each other when determining how they would handle Katrina claims.

In related news, the New Orleans Times Picayune reports that a study by the Consumer Federation of America shows insurance companies are racking up record profits at the expense of policyholders:

Record profits for the insurance industry one year after Hurricane Katrina are a result of excessive premiums, reduction of coverage in coastal areas like Louisiana and underpaying claims, according to a study by the Consumer Federation of America.

Insurance industry representatives disputed the report Monday, saying relatively high profits in 2006 reflect a relatively quite hurricane season that was desperately needed after record payouts from hurricane claims in 2004 and 2005.

In its report, the Consumer Federation said states should step in by imposing tougher regulations. It also recommends that coastal states like Louisiana consider filling the void left by companies dropping coverage in hurricane-prone communities by working with nearby states to create a wind-risk pool. Such a system would spread risks, and give consumers more bang for the buck, the report said.

According to the article, insurance companies paid out 75% of premiums in benefits in the late 1980s, and only 60% in 2005.