September 17, 2005

Unintended Consequences of Flood Exclusion Avoidance Suits

Within 3 weeks of Hurricane Katrina, private and public lawsuits have sought to make private insurers pay for flood claims despite policy exclusions and decades of availability of subsidized flood insurance from the National Flood Insurance Program (NFIP). (Unintended Consequences: Mississippi AG's Complaint Seeking to Void Standard Flood Exclusions)

If they are successful in their actions, the unintended consequences for society are likely to be signficant. Societal impacts may include:
*** Exacerbation of already heavy underwriting losses by private and public insurers with Gulf Coast exposures;
*** Impairment of insurance industry capital available for coverage during recovery;
*** Possible destruction of the marketability of federal flood insurance;
*** Increased insolvency of insurers with Gulf Coast property exposure concentrations;
*** Cash flow or solvency crises in the affected states' Insurance Guaranty Associations, windpools and FAIR plans;
*** Declination by primary and reinsurance companies to write coverage in the affected states on reconstruction contractors, homeowners, apartment owners and business owners;
*** "Lock-in" legislation by affected states attempting to mandate availability and forbid withdrawal;
*** Creation of new state-run insurance availability plans operated by political appointees without insurance experience.

The uncertainty surrounding these ill-considered lawsuits are likely to have some immediate impacts, as year-end renewal cycles approach. Responsible insurers may begin issuing protective non-renewal notices as soon as any "lock-in" moratoria expire, in order to preserve their contractual rights. Reinsurers and "surplus lines" carriers, being largely outside of the reach of local regulation, may take action despite attempted "lock-ins" seen in past insurance crises.

Later consequences may include:
*** Expensive antitrust actions, based on Hartford Fire Ins. Co. v. California, 509 U.S. 764 (1993), to discourage insurers from withdrawing;
*** Federal mandates of purchase of flood insurance, just as it requires contributions to Social Security;
*** Federal reform of the flood insurance scheme to include "channelling" protection for the enforceability of policy exclusions, along the lines of the Price-Anderson Act or the Terrorism Risk Insurance Act (TRIA).

Watch for emerging research and analysis relating to the above hypotheses as we study these effects. Suggestions and links are welcome, by email to: doug "at"

See also: P.S. on "Unintended Consequences of Flood Exclusion Avoidance Suits" (Sep. 24, 2005)

Posted by dougsimpson at September 17, 2005 11:01 AM
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