September 24, 2005

P.S. on "Unintended Consequences of Flood Exclusion Avoidance Suits"

Last week, I posted preliminary thoughts on the potential damage from the "Robin Hood" lawsuits seeking to avoid the flood exclusions in windstorm insurance. Unintended Consequences: Unintended Consequences of Flood Exclusion Avoidance Suits (September 17, 2005).

A private email from a legislator in the affected region suggested that I'd not made clear the risk of industry abandonment if the confiscatory lawsuits go forward. Below are some additional thoughts that may clarify my theories. Comments and contrary arguments are welcome. Because of the excessive spamming of this site, I have disabled comments and trackbacks. Comments can go by email to: Doug "at"

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Mass withdrawal by insurers from affected states is very much in my mind as a likelihood if these "Robin Hood" suits succeed, or even survive the motion to dismiss / demurrer stage. Perhaps my list was unclear, because I deliberately avoided any implication that insurers would act in concert, but the likelihood of independent withdrawal was implied in my bullet list items:
*** 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;

I have a very clear memory of the struggles in past decades by insurers, including my former employer, to withdraw from states (e.g. Massachusetts and New Jersey) that had imposed oppressive political restrictions on pricing flexibility in auto insurance, and which imposed the deficits from the state plan on all licensed insurers. In one instance, my employer had to endure extended litigation and negotiation and ultimately pay what was clearly a multi-million dollar "ransom" to the state in order to gain approval of the insurance commissioner for the surrender of its license that freed it from the crushing deficit burden from the auto plan.

Apart from the regulatory resistance, withdrawal is politically and legally very difficult, for a number of complex reasons.

One of them is economic. Insurance groups write not only homeowners and commercial windstorm insurance, but also lines that are presently economically viable, such as workers compensation, commercial general liability and other commercial insurance. It is often difficult or impossible to withdraw from homeowners and commercial multi-peril without also abandoning the other commercial lines, because they are often written by the same corporate entities.

Another is regulatory. Many states already have, or can quickly pass, legislation limiting or forbidding cancellation or non-renewal of insurance policies. Another is to impose the losses of "residual market" or "assigned risk" programs such as FAIR and beach plans upon insurers based upon prior years' writings. Such legislation is often a response to an "availability crisis" that can result from an unexpected decision or discovery imposing unexpected potential liability. If an insurer cannot non-renew expiring policies, or remains liable for the losses in a residual market plan despite running off its book, its only option is to surrender its license, which can then become another regulatory nightmare.

Another difficulty is the very real threat of antitrust lawsuits, such as those which followed the industry's adverse reaction to the 1984 ISO forms that did not exclude pollution coverage, leading to the U.S. Supreme Court's 1993 decision in Hartford Fire v. California < > construing the McCarran-Ferguson Act's term "boycott."

Another is the industry's historical dedication to its role of being there in times of trouble, instead of ducking and running. Like any smart soldier or firefighter, smart insurance executives know when "its time to go." Most insurance people are honest, hard-working folks who want to provide solutions, not problems. They know how to absorb loss and abuse, because that is part of their business experience. They will not, however, allow themselves to be abused beyond a certain point, because that will destroy their own companies and their ability to help others.

Doug Simpson
Wethersfield, CT

Doug Simpson retired after 25 years in the law department of a major insurance company and now practices and teaches law in Hartford, Connecticut and serves as an ADR neutral. His research notes and comments are at:

Posted by dougsimpson at September 24, 2005 07:43 AM