Hurricane Katrina's liability implications will be examined in a half-day panel discussion organized by the American Enterprise Institute in Washington D.C. on Monday, October 3, 2005. The Mississippi Attorney General's suit to invalidate the flood exclusion in homeowners policies will be on the agenda. AEI - Events - Katrina's Liability Implications
The panel, moderated by AEI resident fellow and Liability Project director Ted Frank, will include Robert W. Klein, former chief economist for the National Association of Insurance Commissioners and current director of the Center for Risk Management and Insurance Research at Georgia State University; Martin F. Grace, Georgia State University professor and associate director of the university’s Center for Risk Management and Insurance Research; Adam Scales, a Washington and Lee University professor who specializes in tort and insurance law; and Joanne Doroshow, president and executive director of the Center for Justice & Democracy and co-founder of Americans for Insurance Reform.
RiskProf : Ex Post Flood Insurance compares finite insurance to the ex-post flood insurance concept floated in Mississippi. Taylor plans bill to help residents without flood insurance - The Clarion-Ledger (Sep. 27, 2005)
The analogy is tempting, and promotes thoughtful debate, but a few differences occur to me.
Those who sell finite insurance, and finite reinsurance, typically are smarter and bigger than the average bear: Warren Buffet's National Indemnity comes to mind. Not always smarter, though: Warren Buffet's Gen Re comes to mind, too. That means they take so little risk, they sometimes get investigated for participating in a sham transaction. See: Unintended Consequences: Spitzer and SEC investigate "finite insurance" (Nov. 16, 2004)
Although such transactions are usually quiet and private, we know from public disclosures made in connection with Atty. Gen. Spitzer's investigations and SEC filings (as well as some infamous insolvenies such as Reciprocal of America) that they usually involve the up-front transfer from buyer to seller of most or all of the money that the insurer/reinsurer expects to pay out.
The benefit to the assuming company from finite insurance or reinsurance is that they get a nice premium with so little exposure that they sometimes have to scratch and wriggle to find enough insurance or credit risk to persuade their lawyers that it really is insurance, and not a disguised loan.
The benefit to the ceding company is mostly due to the magic of tax accounting and "statutory" accounting. It enables an insurer facing a big income statement hit to disguise or "rationalize" it as a surplus haircut. The potentially material distortion of earnings is what excites some CEOs, the SEC, and the disappointed creditors of the ceding companies that don't survive.
Homeowners and small business owners are not in the same circumstances. They are less worried about tax and statutory accounting and being eyeballed by a suspicious regulator than they are about not having the cash to rebuild and have a place to live. Unlike the cedents in a "finite insurance" transaction, they are not long on assets and short on earnings.
If these homeowners and small business owners don't pay for all of the retroactive insurance up front, the credit risk from this promise to pay flood insurance "forever" sounds like the drowning man's promise to God: "Save me Lord, and I'll go to services forever! I swear!" Some keep it, but a lot don't.
Without some obligation that "runs with the land" and "binds the assignees" (like the proverbial Fee tail), what is to prevent the newly liquid owner of a moldy shell that was once a house from collecting his retro flood coverage, paying off the mortgage, selling his plot to the friendly neighborhood condo/casino developer and then taking the money to a new parcel?
Haven't thought this all through, but I've had enough experience with insurance sold on credit to know that when the bill goes unpaid, there is often a lot of money that is left "Blowin' in the Wind," sometimes leaving the insurer "Waist Deep in the Big Muddy".
And thanks, RiskProf, for the link to Unintended Consequences: "Finite Risk Reinsurance" background online (Nov. 24, 2004). I've "got your six," good buddy.
Doug Simpson is a Connecticut lawyer who spent 25 years with the law department of a major insurance company and who now practices and teaches law and writes occasionally about disruptive technologies, networks, and insurance law in his weblog, Unintended Consequences.
GAO: Providing Oversight of the Nation’s Preparedness, Response, and Recovery Activities - Statement of Norman J. Rabkin, Managing Director, Homeland Security and Justice Issues
(GAO-05-1053T - September 28, 2005)
From the introduction: "What GAO Found: GAO’s past work has noted a host of needed improvements in a variety of government programs related to Hurricane Katrina and other natural disasters. For example, GAO found that there have been a number of challenges in preparing health care providers for catastrophic events.
In addition, GAO’s work on energy issues has noted the interconnectedness of our petroleum markets and revealed the vulnerability of these markets to disruptions, natural or otherwise. GAO’s environmental work has indicated that the loss of wetlands has increased the severity of damage from hurricanes, and that cleanup of contaminated sites takes a tremendous amount of coordination and funding.
Finally, GAO’s work on telecommunications issues has found that interoperable emergency communications are challenged by insufficient collaboration among federal, state, and local governments. In these areas, among others, GAO has made a number of recommendations which are still open."
This 25-page report includes references and links to prior studies relating to the issues reviewed in this testimony before the Subcommittee on Oversight and Investigations, Committee on Energy and Commerce, House of Representatives.
Richard Posner brings the Chicago school of law and economics perspective to the questions of how to respond to the threat of the sorts of catastrophes that threaten the survival of the human race: big asteroid hits, sudden global warming, terrorist-spawned pandemics and the like. Although remote, such events are possible; even a once-in-a-million-years event could happen tomorrow. There are measures that can be taken to prevent or protect against them. In this book, Professor Posner analyzes the cultural, psychological and economic factors that may explain what action is taken (or not taken).
His analysis may also inform those wrestling with policy decisions regarding less devastating events, such as killer hurricanes, floods and earthquakes.
He opens with a chapter describing rare but possible scenarios that have elsewhere been described as "extinction events," including natural occurrences such as meteor strikes, man-made accidents such as sudden global warming, and intentional disasters such as bioterror, that could result in millions dead. Having got the attention of most, he points to the scientific work documenting these risks, before turning to the question of why so little is being done to prevent or prepare for them.
Cultural factors are categorized by Posner starting with "scientific illiteracy," what he describes as "the abysmal state of scientific knowledge among nonscientists." (Posner, op cit., p. 93) He points to the low percentages of Americans who can be regarded as scientifically literate, and attributes this to the quality of instruction in the country's schools and colleges, as well as the sheer difficulty of modern science. He finds this shortcoming particularly acute among the legal profession, and maintains that "If political leaders, lawyers, judges, journalists and other members of the governing class have no interest in and feel for science, they are unlikely to attend closely to either the dangers or the opportunities that modern science creates." (Id. p. 96)
Scientific ignorance plays into an unwarranted "worship of science," which Posner sees as contributing to a tendency to "leave science to the scientists" and to count on science to bail humanity out of its worst problems. Posner warns that even smart people skilled at science are not necessarily well equipped to deal effectively with social problems, for which "verbal and social skills, common sense, worldly experience and the ability to evaluate character and to devine motivation may be more important" (Id. p. 100) than those characteristic of scientists.
Science fiction can provide both warning for some and false hopes for others. Posner shares his admiration for classic novels of apocalyptic times as well as modern works including Margaret Atwood's "Oryx and Crake," and the film "The Matrix." Despite his admiration of the works, he concludes that because science fiction "has to season fact with fantasy," on balance, it "probably impedes rather than advances the recognition of the catastrophic risks that endanger us." (Id.)
He goes on to balance the "scientific doomsters," whose dire warnings have been found wrong often enough to be ignored, with the "optimistic backlash" of those on the other side of the doom-optimism spectrum. He closes with the cultural factor of "limited horizons," by which politicians cut their own throat if they propose to raise taxes today to reduce the possibility of catastrophes in the far distant future.
Psychological factors include the human fallacy of seeing "false positives" in otherwise random sequences of events, leading to many false alarms, to the point that "fear of technological hazards has become associated in the sophisticated public's mind with ignoramuses and trial lawyers," (Id. p. 120) requiring leaders to spend time reassuring a panicky populace.
Another is the "economy of attention," the fact that the human brain can stay focused on only so many things at a time. This may justify disregarding the least likely risks, or the most complicated, as distractions from those more immediate or more understandable that face us daily. Events that occur regularly and famously, such as airline crashes, occupy more space in the public's mind than those more deadly but less frequent. In the latter category, Posner discusses the Tunguska event, in which a relatively modest-sized asteroid or comet levelled a forest in Siberia in 1908 with an airburst equivalent to a 10-15 megaton bomb. That was one of the thousands of Near-Earth Objects (NEOs) cataloged by scientists in the multi-national Spaceguard project.
Economic factors are those for which Posner has the most famous pedigree, as a leader in the study of law and economics and author of the Foreward to the Encyclopedia of Law and Economics. He opens with a look at the economics of innovation, under which many of the costs of invention, the unintended consequences, are external, falling on those other than the inventor. This tends to make inventors irresponsible, asserts Posner. This means, he submits, that "the market cannot be relied upon to generate the optimal rate and direction of inventive activity." (Id. p. 124). The unpredictability of those costs and benefits makes it equally difficult for government to succeed in guiding inventive activity.
"Global decentralization" adds to the challenge. For example, while the wealthy industrialized countries are the biggest contributors to global warming, the poor countries near the equator are likely to be the principal victims. Yet the latter lack the financial ability to compensate the former for the costs of reducing greenhouse gases. That explains the United States' refusal to ratify the Kyoto Protocol, according to Posner. Similar factors make it impossible to prevent free riding on an asteroid defense funded by the industrialized nations. Yet Posner asserts that reluctance to encourage free riding is not the chief obstacle to an asteroid defense; it is that asteroids are not perceived to be a significant enemy.
Another factor is included in the Public Choice Theory, the body of scholarship "that tries to explain public policy as the outcome of rationally self-interested behavior." (Id. p. 133) He points to his own published analyses that view politicians as "sellers" of policies to "consumers" in a market where the currency is votes. See Posner, "Law, Pragmatism and Democracy", Ch. 5 (2003). He briefly analyzes each of the subject catastrophic scenarios in light of the interest groups likely to support or oppose investment in a remedy, finding few likely to see an advantage in stepping up. He repeatedly returns to the reality that "Having a limited time horizon, politicians prefer policies that yield tangible benefits for constituents in the near term." (Posner, Catastrophe, p. 137). To that, he adds the significant public doubt about the global warming threat, and the inertia of public policy, reminding readers: "Think of how, for many years, even slight scientific uncertainty enabled the tobacco industry to issue plausible denials that smoking was hazardous to health." (Id. p. 138).
In his third chapter, Posner engages in an extended discussion of the merits and methods of cost-benefit analyses, using as test subjects his selected possible catastrophes. He weighs the relative merits of R&D investment in technologies to reduce greenhouse gases and stiff taxes upon emissions that would be "technology forcing" while letting the market decide what technologies provide the most efficient reduction in emissions.
He continues with an extended discussion of the difficult and sensitive process of valuing human life for purposes of cost-benefit analysis. In the course of this analysis, he looks at research into how people consistently under-rate risks that have a very low probability, unless they fall into the category of "dreadful," as have the 9/11 terror deaths. This effect has been labelled "probability neglect" by scholars. Posner suggests that the effect may derive from a cognitive difficulty in thinking about very rare occurrences, interacting with difficulty in thinking about things one has never experienced, ("imagination cost") and the "economy of attention" mentioned earlier.
He comments on the difference between risk and uncertainty with a particular reference to the business of insurance. Risk refers to a probability that can be estimated, and uncertainty to a probability that cannot be estimated. He uses the example of the 9/11 attacks, of which the risk was great but not estimable without data that was unobtainable. About insurance he says that the challenge of deciding on action "is acute in some insurance markets. Insurers determine insurance premiums on the basis of either experience rating * * * or exposure risk, which involves estimating risk on the basis of theory or, more commonly, a combination of theory and limited experience * * * . If a risk cannot be determined by either method, there is uncertainty in the risk-versus-uncertainty sense; and only a gambler, treating uncertainty as a situation of extreme and unknowable variance in possible outcomes, will write insurance when a risk cannot be estimated. Or the government, as with the Terrorism Risk Insurance Act of 2002 * * *." (Id. p. 172)
He then goes on to discuss possible ways of making cost-benefit analysis work in the face of "radical, nonquantifiable uncertainty." (Id. p. 175) He acknowledges that such tools are of little or no benefit to the business of insurance, because the events treated in the book are those which are uninsurable, due to their high degree of uncertainty and extreme loss potential.
In his fourth and final chapter, Posner proposes means to reduce catastrophic risks, after suggesting that the law and the social sciences are making little contribution to those methods. He first urges movement toward a scientifically literate legal profession, contrasting the reliance of science on objective experiment with the reliance of law upon the adversarial system of advocacy and "intuitive economics." Part of the challenge Posner sees is the court-centricity of the legal profession, which he attributes in part to the lack of interest in science among law professors. "Phenomena that are not the stuff of litigation rarely engage the professional interest of academic lawyers. Science has great prestige in the larger society, none in the academic legal community." (Id. p. 204)
Among his proposals are a "science court" composed of lawyers with a substantial background in one of the physical sciences, a center for catastrophic-risk assessment and response, new regulatory bodies including an international EPA, an international bioweaponry agency, and a catastrophic-risk review of new projects. Among his more controversial discussions are about proposals to limit science study by foreigners, to intensify police measures, including extreme measures such as collective punishment and torture, when justified by needs to prevent intentional man-made mega-catastrophes.
Besides being a prolific author, Richard Posner is the Chief Judge of the US Court of Appeals for the Seventh Circuit and Senior Lecturer at the University of Chicago Law School. He also coauthors, with Gary Becker, "The Becker-Posner Blog", which has recently addressed such contemporary issues as the appropriate government compensation for victims of Hurricane Katrina.
This Congressional Research Service report introduces its subject: "Some insurance and disaster policy experts suggest the time has come to implement a federal insurance or reinsurance program for earthquakes and other seismic risks. Conversely, other experts question the need for such a program."
* * *
And summarizes its conclusions: "Given that the states have acted to provide catastrophe funding for the small to moderate-sized hurricane and earthquake, Congress might consider a strict economic approach that calls for fairly mild reforms of the insurance industry — that still allows the possibility of people being uninsured (and not getting relief), and thereby uses that outcome to encourage the public to engage in loss-prevention measures. Alternatively, Congress might consider a potentially economically less efficient approach that calls for the creation of a federal disaster insurance system at the higher layers of coverage. Such legislation might, however, result in overinvestment in hazard-prone areas. In pursuing this potentially less efficient solution, the approach might be one of finding the least expensive way of making sure everyone is protected from major economic losses from natural disaster."
H.R. 846, a bill introduced in the House, would provide a federal reinsurance facility to enhance availability of homeowners insurance despite catastrophic loss exposures. Introduced before Hurricane Katrina hit, the bill is now attracting more attention. Bill Summary & Status
According the the summary by the Congressional Research Service, the bill calls for the creation of a Disaster Reinsurance Fund and a National Commission on Catastrophe Risks and Insurance Loss Costs.
The state-managed California Earthquake Authority (CEA) wants to increase the low percentage of homeowners now buying earthquake insurance. Presently, less than 15% obtain the coverage, down about 50% from the year after the Northridge Quake. Before Hurricane Katrina, that quake was the costliest disaster in the U.S., according to "Calif. May Lower Quake Insurance Rates in Wake of Katrina" (Insurance Journal, Sep. 25, 2005).
Under the CEA's propsed rate filing, prices for quake insurance would go down in most places in California, up in a few areas. Commissioner Garamendi argues that lower prices will increase the number of homeowners who buy the coverage. Commercial insurance trade associations argue that the prices are not conservative enough and will imperil the financial health of the CEA, according to the article.
According to the Southern California Earthquake Center (SCEC), a quake in the recently discovered Puente Hills fault under Los Angeles could result in thousands of deaths and $250 billion in damage, although it is an infrequent event. Major Losses of Up to $250 Billion Projected for Earthquakes on Puente Hills Fault Under Los Angeles. SCEC works closely with the CEA and private insurers and provides educational materials discussing issues of earthquake insurance availability, affordability and "take-up" rates. Earthquakes and Insurance, Then and Now
In "Acts of God: The Unnatural History of Natural Disaster in America" (2000), historian Ted Steinberg focuses on the human, social and economic forces that factor into making natural events into disasters. He compiles an historical series of anecdotal evidence supporting the position that natural calamities become disasters because of human choices, such a decisions to allow or subsidize development on flood plains or in active earthquake zones, and to alter the behavior of rivers through dikes and dams.
Steinberg presents the argument that that official response to natural disaster is "profoundly dysfunctional," both increasing death and destruction and contributing to class and race injustices. He explores the history of how official response to disasters in populated areas works hard to characterize them as “Acts of God” for which no person (especially not the government leaders) could be responsible, and afterwards, encourages the public to forget that it happened. Steinberg characterizes this as pandering to interests of developers and other “boosters” of economic growth and those advocating, building or providing cheap housing in high-risk locations.
He characterizes the effects of this behavior as having a disproportionate effect upon the poor and disenfranchised, depicting modern disaster relief as systematically biased in favor of property owners and developers, to the neglect of renters and occupants of public housing.
As one example, he points to the history of earthquakes in San Francisco. After the 1906 San Franciso Earthquake, commercial interests did not want talk of yet another earthquake to discourage investment in the city. The state would not fund publication of a scientific examination of the event, says Steinberg, and the two-volume study was published because of a grant from the Carnegie Institute. See Lawson, A.C., "The California Earthquake of April 18, 1906: Report of the State Earthquake Investigation Commission," Carnegie Institution (1908).
Government and commercial interests pushed to depict the damage as solely a result of the big fire, according to Steinberg. Other than publishers and scientists, only the insurance industry took the earthquake seriously, he writes. Some had earthquake exclusions that they invoked, but that did not protect them from paying for the damage due to the fires that spread from house to house. Williamsburgh City Fire Ins. Co. v. Willard, 164 F.404 (9th Cir. 1908).
In a chapter titled "Body Counting," he includes a note about the city called in 1995 by Weatherwise Magazine "the Death Valley of the Gulf Coast," a populous city surrounded by water, mostly below sea level, vulnerable to storm surge and with few escape routes. This city was narrowly missed by a Category 4 hurricane in 1915 that killed 275. Steinberg anticipated current events when he wrote: "A dreaded direct hit by a storm of comparable magnitude would likely turn New Orleans into a huge lake 20 feet deep, with mass death a very real possibility." Steinberg, "Acts of God," p. 75.
Steinberg has particular scorn to heap on the Corps of Engineers, FEMA and the National Flood Insurance Program, in one chapter describing Uncle Sam as a “floodplain recidivist.” He looks, for example, at St. Charles, Missouri, which experienced 28 floods in 35 years before the big floods of 1986, with flood crests increasing over time as the Corps raised more and more dams and levees, cutting the river off from the flood plains that help absorb flood waters. He describes how local legislatures pressured FEMA to back off of attempts to require more strict limitations on floodplain development, and how that contributed to the even more catastrophic losses during the Mississippi River Flood of 1993.
In another chapter, he looks at the development boom in luxury hotels on Miami Beach, and the fast fortunes made by those who bought dune and marsh land, leveled and filled it and built high-rise hotels and condos right on the beach. He mentions briefly Supreme Court decisions impacting local attempts to limit development in such areas, including Lucas v. South Carolina Coastal Council, 304 S.C. 376, 404 S.E.2d 895 (1991), rev’d 505 U.S. 1003 (1992) and Dolan v. City of Tigard, 317 Ore. 110, 854 P.2d 437 (1993); rev’d 512 U.S. 374 (1994).
Steinberg reports allegations that FEMA was turned into “a dumping ground for political hacks” as early as the Regan and George H.W. Bush administrations, pointing to “Managing the Federal Government: A Decade of Decline,” House Comm. on Government Operations, 102d Cong., 2d sess., 1993, Committee Print, 125. This situation changed, according to the author, when James Lee Witt brought actual disaster management experience to FEMA and shifted it away from protecting the government from nuclear attack and toward protecting the populace from natural disasters.
The effects of Mr. Witt’s subsequent replacement with appointees lacking disaster management experience was highlighted in 2005, as Hurricane Katrina broke through New Orleans’s levees and flash-flooded the homes of masses of New Orleans' most vulnerable citizens.
Although this book may stir the sympathetic reader, his viewpoint is admittedly one-sided, so that adding materials with a more analytical approach would help balance the syllabus for a university course on disaster response and public policy. My next candidate to review will be “Paying the Price: The Status and Role of Insurance Against Natural Disasters in the United States,” H. Kunreuther and R. Roth (1998).
Suggestions and comments are welcome to: Doug “at” DougSimpson.com.
The Texas Department of Insurance and its Commission on Environmental Quality include on their websites warnings about the importance of flood insurance because ordinary insurance does not cover flood. Links to just two follow.
The D.O.I., following Tropical Storm Allison, placed an advisory on its website concerning flood and windstorm damage:
"Two basic principles apply to flood coverage:
* Homeowners and other residential property policies don´t cover flood. National Flood Insurance Program policies, sold by local agents, can fill this gap.
* Automobile policies with "comprehensive" coverage pay for flood damage. Because "mobilowners" policies on manufactured homes technically are auto policies, they, too, generally cover flood damage. However, insurers may exclude flood coverage for manufactured homes in Texas´ 14 coastal counties."
The Texas Commission on Environmental Quality points visitors to its website to "The National Flood Insurance Program: How to Join and How it Works (PDF). From page 5 of this 16-page brochure emphasizing the cost of flooding in Texas and the importance of participation in the NFIP:
"In 1999, the Texas Legislature passed a law that requires the governing bodies of each city and county in Texas to take the necessary action to become eligible for participation in the National Flood Insurance Program by January 1, 2001. Devastating floods in Del Rio, Houston, and South Texas in the fall of 1998 prompted the Legislature to act. These floods caused 41 deaths and $245 million in property damage."
"In the wake of the 1998 floods, many residents in flood-prone areas discovered that they could not obtain federal financial assistance because their communities had not chosen to participate in the National Flood Insurance Program (NFIP). Information about the program in this brochure will help city and county leaders understand the steps they need to take to comply with Texas law and to meet the needs of their residents by participating in the NFIP."
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" DougSimpson.com.
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 < http://laws.findlaw.com/us/509/764.html > 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 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: DougSimpson.com/blog
We are watching cascading failures of crucial infrastructures as a result of Hurricanes Katrina and Rita. These failures result from predictable, recurring natural events impacting population centers developed on low-lying ground in known hurricane zones. More attention to study of complex interactive network science may help in preventing future disasterous failures of human response, as long as we can get our policy makers to listen to science.
Massoud Amin of the Electric Power Research Institute (EPRI) introduces his chapter 4 to his book Automation, Control, and Complexity: New Developments and Directions (1999), on "National Infrastructures as Complex Interactive Networks" as follows:
"The increasing complexity and interconnectedness of energy, telecommunications, transportation, and financial infrastructures pose new challenges for secure, reliable management and operation. No single entity has complete control of these multi-scale, distributed, highly interactive networks, or the ability to evaluate, monitor, and manage in real time. In addition, the conventional mathematical methodologies that underpin today's modeling, simulation, and control paradigm are unable to handle their complexity and interconnectedness. Complex interactive networks are omnipresent and critical to economic and social well-being. Many of our nation’s critical infrastructures are complex networked systems, including:
· Electric power grid
· Oil and gas pipelines
· Telecommunication and satellite systems
· Computer networks such as the Internet
· Transportation networks
· Banking and finance
· State and local services: Water supply and emergency services.
Interactions between networks such as these increase the complexity of operations and control. The networks’ interconnected nature makes them vulnerable to cascading failures with widespread consequences. Secure and reliable operation of these systems is fundamental to our economy, security and quality of life, as was noted in the “Critical Foundations- Protecting America’s Infrastructures”, by the President’s Commission on Critical Infrastructure Protection Report published in October 1997 and the subsequent Presidential Directive 63 on Critical Infrastructure protection, issued on May 22, 1998."
From the conclusion of this chapter:
"The EPRI/DoD Complex Interactive Networks/Systems Initiative, which began in mid 1999, is leading toward a concept of controls that are “self-healing” in the sense that they make the system automatically reconfigurable in the event of material failures, threats or other destabilizing disturbances. In light of this work, the question is raised as to whether there is a unifying paradigm for modeling the simulation and optimization of time-critical operations (both financial transactions and actual physical control) in any multi-scale, multicomponent and distributed system. These are the characteristics of any industry made up of many, geographically dispersed components that can exhibit rapid global change as a result of local actions."
The Ninth Circuit has allowed an insurance policy coverage question action to proceed against the insolvent Reliance Insurance in Liquidation, although brought in California, outside of the company's domiciliary jurisdiction, where Reliance's liquidation is pending. Issues of McCarran-Ferguson, Burford abstention, full faith and credit and construction of the Uniform Insurers Liquidation Act (UILA) were resolved by the Court of Appeals.
Lawyers for Reliance unsuccessfully argued that the liquidation court's pending stay of legal action against Reliance applied to bar the Hawthorne action. Although the plaintiff was allowed to reduce his claim to judgment, execution thereon will continue to be channelled to the liquidation court in Pennsylvania, according to Marc' brief.
Mark Mayerson at Insurance Scrawl provides a background brief on the decision in Hawthorne Savings FSB v. Reliance Ins. Co., (9th Cir. Aug. 24, 2005) Insurance Scrawl: Stay What? Coverage Claims May Proceed Against Insolvent Insurers
For more background links about Reliance, see: Unintended Consequences: Reliance: $85 MM Settlement with Directors
Thanks to Insurance Journal: New GAO Study: U.S. Needs Government Help to Insure for Catastrophes and Terrorism
From the abstract: "Natural catastrophes and terrorist attacks can place enormous financial demands on the insurance industry, result in sharply higher premiums and substantially reduced coverage. As a result, interest has been raised in mechanisms to increase the capacity of the insurance industry to manage these types of events. In this report, GAO (1) provides an overview of the insurance industry's current capacity to cover natural catastrophic risk and discusses the impacts of the 2004 hurricanes; (2) analyzes the potential of catastrophe bonds--a type of security issued by insurers and reinsurers (companies that offer insurance to insurance companies) and sold to institutional investors--and tax-deductible reserves to enhance private-sector capacity; and (3) describes the approaches that six European countries have taken to address natural and terrorist catastrophe risk, including whether these countries permit insurers to use tax-deductible reserves for such events. We provided a draft of this report to the Department of the Treasury and the National Association of Insurance Commissioners. Treasury provided technical comments that were incorporated as appropriate."
(originally posted in Unintended Consequences on March 31, 2005)
Continuation of abstract: "Despite steps that governments and insurers have taken in recent years to strengthen insurer capacity for catastrophic risk, the industry has not been tested by a major catastrophic event or series of events (at least $50 billion or more in insured losses). While insurers suffered losses of over $20 billion in Florida from the 2004 hurricanes, steps such as implementing stronger building codes and stricter underwriting standards may have limited market disruptions as compared with the aftermath of Hurricane Andrew in 1992. For example, in 2004, only 1 Florida insurance company failed in contrast to the 11 that failed after Hurricane Andrew in 1992. However, a more severe catastrophic event or series of events could severely disrupt insurance markets and impose recovery costs on governments, businesses, and individuals. Some insurers and reinsurers benefit from catastrophe bonds because the bonds diversify their funding base for catastrophic risk. However, these bonds currently occupy a small niche in the global catastrophe reinsurance market and many insurers view the costs associated with issuing them as significantly exceeding traditional reinsurance. In addition, industry participants do not consider catastrophe bonds for terrorism risk feasible at this time. Authorizing insurers to establish tax-deductible reserves for potential catastrophic events has been advanced as a means to enhance industry capacity, but according to some industry analysts such reserves would lower federal tax receipts and not necessarily bring about a meaningful increase in capacity because insurers may substitute the reserves for other types of capacity. The six European countries GAO studied use a variety of approaches to address catastrophe risk. Some governments require insurers to provide natural catastrophe insurance and provide financial assistance to insurers in the wake of catastrophic events, while others generally rely on the private market. However, the majority of these governments have established national terrorism insurance programs. Although their approaches vary, insurers in all six countries were allowed to establish tax-deductible reserves for potential catastrophic events as of 2004."
Our friend Bob Sargent reports on the buzz from a recent conference of professional insurance folks about the impact of Hurricane Katrina on prices, surplus, and flood coverage. Specialty Insurance Blog: Katrina Chat
Hurricane Rita can only aggravate the tendencies that Bob's colleagues see. As as happened after past mega-disasters, the weak may fail, the strong will survive, but the public policy debate and insurance marketplace will be altered.
The Dresden University authors of this paper discuss reasons disaster statistics depart from a normal distribution, and network explanations of cascade effects. They look for applications of network theory to assess alternative emergency response methods.
Among the authors' comments:
"The tendency of globalization of economic and other systems is likely to increase the frequency of large-scale disasters, as it reduces the diversity required to stop certain chain reactions and to adapt to changing economic and enviromental conditions. Another danger is the ever-growing population and the trend to push social, economic, technological, and biological systems to their limits."
They analyze causality networks in earthquakes and resulting fires, power blackouts, storms and floods, terrorist attacks such as that on September 11, and epidemics such as SARS.
They propose some methods of mathematically modelling causality networks of disaster spreading and means of assessing disaster management models. They observe that disasters can often be characterized by power laws, which they attribute to the tendency to drive systems to their critical thresholds for increased efficiency.
They conclude that network theory may contribute further to disaster response management, including analysis of interaction of networks of networks. They suggest looking to the way biological systems have evolved to optimize network interactions and developing new principles of managing disaster respones based on self-organization.
Trafficforum: "Disasters as Extreme Events and the Importance of Networks for Disaster Response Management"
(originally posted February 14, 2005)
A summit meeting of leading states' insurance commissioners will address formation of national responses to mega-catastrophes like Hurricane Katrina. California's John Garamendi told the press: "As insurers begin to sort through a deluge of claims, and as survivors confront the fact that some losses won't be covered, it will become painfully clear that a single, national policy is the only answer." Other big states' insurance regulators made similar statements supporting a national policy for assuring comprehensive insurance coverage for mega-catastrophes. Insurance Commissioners To Form National CAT Insurance Program
At the same time, the Congressional Research Office just released a paper dated 9/15/05 that records discussion in Washington about the need for a federal solution to assure availability of insurance for mega-catastrophes. Congressional Research Service: Hurricane Katrina: Insurance Losses and National Capacities for Financing Disaster Risk
The tension between competing state and federal proposals for an insurance solution to an uninsurable hazard is reminiscent of the tension between state and federal authorities over who will regulate insurance, and to what end. Unintended Consequences: Hearings on "SMART" : Federalizing insurance regulation? (June 23, 2005)
Meanwhile, reports about FEMA indicate that it is living on a hand-to-mouth basis, without significant reserves. This is very comparable to the situation of the principal state wind pools in states ravaged by Hurricane Katrina Unintended Consequences: Impact of Katrina on Gulf states' wind pools (September 17, 2005). According to the Atlanta Journal Constitution, FEMA reports about $100 million on hand, with a routine line of credit from the U.S. Treasury of $1.5 billion, which is being raised by the Congress. An advisor at FEMA estimated about $2 billion in flood claim losses from some 244,000 flood policies, nearly 90% of them in Louisiana. The advisor reminded the Journal Constitution that many of the hardest-hit areas were public housing that municipal housing authorities self-insure.
According to the report, FEMA is statutorily prevented from raising rates more than 10% year-to-year, so its going to be unable to recoup its losses for many years, if ever. In other words, the American taxpayer will be paying for the losses of those that bought NFIP insurance, because the federal government assured that NFIP cannot recoup a mega-loss from its surviving rate base. Katrina: The Aftermath: Flood claims to bring tide of red ink (Atlanta Journal Constitution Sep. 17, 2005) (free registration required).
At that level of analysis, even the existing government "insurance" for disasters looks a lot like "spend and tax," without the rigor of risk evaluation, underwriting judgment, actuarial pricing, rational reserving and conservative financial audits. And we all know now about the management at FEMA.
Is that the sort of solution likely to come out of Washington if left to political forces? One cannot expect rational business people that manage commercial insurers to be able to offer alternatives to "spend and tax" programs. The result may be further government subsidies of development in vulnerable areas, leading to further loss of life and property during the inevitable next "big wind" to hit the affected areas.
And, as Hurricane Rita is now reminding us, sometimes that next "big wind" comes sooner than you think. For latest tropical storm status, see: FEMA: Tropical Storm Watch
Frances Fragos Townsend, career criminal prosecutor and homeland security advisor to President Bush has been named by the White House to head its investigation into accountability for federal response to Hurricane Katrina.
A Wikipedia listing for Frances Townsend is building and needs work.
A concise report issued by the Congressional Research Service on September 15, 2005 provides comparisons of the likely financial impact of Katrina to past disasters, summary data on the financial picture of the insurance industry, and suggests an increased role for the federal governement.
"In the aftermath of Katrina, policy makers, disaster experts, and insurance companies have expressed concerns about the financial costs and challenges of recovering from Hurricane Katrina. Further, they note the potential vulnerability of the insurance industry to a future mega-catastrophic event, and raise questions about what role, if any, the federal government should play in financing catastrophe risks.
* * *
As Members of Congress explore ways to respond to Hurricane Katrina, they may be called upon to consider federal policy alternatives to build national capabilities for disaster risk management. Among measures that might be explored are various legislative proposals to pre-fund the cost of disasters with insurance or capital market instruments (risk securitization)." Congressional Research Service: Hurricane Katrina: Insurance Losses and National
Capacities for Financing Disaster Risk
"Wind pools" or "beach plans" are those programs created by state statutue and regulation intended to provide essential wind, fire and multiperil insurance to owners of properties located in areas at the highest risk of catastrophic windstorm. These are the properties that we see on television now, utterly destroyed by Hurricane Katrina. Without such programs, such properties would be unable to obtain insurance against windstorms, because no rational commercial insurer would write coverage in such areas at a rate acceptable to the public. These programs fall in the more general category of "residual market" or "assigned risk" plans.
A look at rough numbers in the financial statements for the three most affected wind pools indicates some $17,000 million of property value insured by such pools, about 90% of that in Louisiana. Some early estimates are that 50% of those properties have claims, many of them total losses. For the sake of argument, let's think about a 25% loss, or 4,250 million, just for windstorm losses covered by the pools.
Except for approximately $600 million in reinsurance and less than $100 million in cash on hand, virtually all of the money to pay those windstorm claims will come not from the surplus of individual insurers, but from pro-rata assessments spread over the coming decades against all the property insurers in those states. That load will be added to the rate base, so that all the property owners in those states will be paying for the Katrina wind pool losses for decades. In the interim, the necessary cash flow ($4,250 million loss minus $700 million cash and reinsurance equals $3,550 million) will come from municipal bond issuance unless government relief is implemented.
For supporting detail and links, see below.
Beach plans vary on a central theme by which the exposure is taken up and distributed (through reinsurance or a syndicate policy) to all property insurers licensed in that state. In many cases, government stands behind the pool's ability to raise cash in a pinch, by authorizing the issuance of tax-free municipal bonds following a mega-catastrophe. Of course, such bonds, like your home mortgage, must be repaid and the cost of repayment must fall upon someone. Most pools are politically unable to lay aside invested reserves or a "rainy day fund" for future catastrophes that all know are inevitable. Instead, like the federal government, they depend upon their ability to make assessments upon their members for operating losses, assessments that are distributed among members in proportion to their "voluntary" premium written in the state.
Paying those assessments, sometimes for many years after such a disaster, becomes a cost and opportunity of doing business for member insurers. In theory, this spreads the burden of insuring properties near the beach throughout the state's entire rating base. Of course, these assessment costs, like other "board and bureau" costs, become part of the rate base that insurance departments must consider when reviewing and approving premium rate filings for property insurance. So, those costs are paid by the people of the affected state, for years thereafter. In effect, all insurance ratepayers in the state subsidize the insurance costs of their brethren and sistren who build houses, apartments and businesses near the shore, and subsidize their rebuilding on the same locations. See also an Insurance Information Institute (III) backgrounder that includes recent developments in wind pool legislation and policy: III - Residual Markets
Although the hard data is not yet publicly available, insurance pros know, as surely as the Mighty Mississippi flows to the sea, that when a hurricane like Camille, Hugo, Andrew or Katrina comes, the wind pools will take the brunt of the damage. Those wind pools, like other windstorm insurers, have for decades excluded damage due to flood or rising water, whether caused by windstorm or storm-induced levee break or any other direct, indirect, proximate or concurrent cause. (See: Unintended Consequences: Flood Insurance and Exclusions, Proximate and Concurrent Causation)
If the public and private lawsuits aimed at invalidating the long-standing precedents behind those exclusions succeed (See: Unintended Consequences: Mississippi AG's Complaint Seeking to Void Standard Flood Exclusions), the biggest impact is likely to be upon those pools. Accordingly, to understand the implications of those lawsuits requires getting a strong cup of coffee and wading into the deep waters of the law and economics of windstorm pools. This is not stuff that makes for good television, and not the stuff that makes for politicians' sound bites. It is the stuff that rebuilds America after the devastation of natural diaster, and keeps an insurance market alive for the recovery.
Recent rough estimates use figures of $60 billion in insured losses, many more in uninsured losses, such as damage and loss of government infrastructure and costs of fire, police, military and other first responders. Most of that will be in Alabama, Mississippi and Louisiana. When reading the following figures, which are in single and tens of millions, remember that the early estimate is $60,000 million of insured losses. BestWire has provided some information about the status of those states' residual market plans.
Best reported on 9/1/05 that the Alabama Insurance Underwriting Association ("Beach Pool") has $8.6 million in cash on hand and reinsurance of $50 million in excess of a $20 million retention, and insurance regulators expect to make a statutory maximum assessment. AIUA's reinsurance report on their website uses the same figures and shows a $377 million Total Insured Value (TIV). AIUA 2005 Reinsurance Review This TIV is confirmed in 10/04 figures in an AIUA Exposure Table, showing its distribution among seven categories and that 99% of it is in about 3,000 residential policies, the remainder in 44 commercial policies. This suggests an average value per policy of about $125 thousand.
According to the AIUA Plan of Operation effective 2002, the pool will issue a syndicate policy to eligible applicants, on which member insurers will participate on a several and not joint basis. At the Alabama Beach Pool's website, the basic coverage description states: "If the property is located in an area which is classified as Zone "A" or "V" according to the National Flood Insurance Program, a flood insurance policy is required to be in place before an AIUA policy is issued. Flood coverage must be at least equal to or greater than the AIUA amount of coverage." October 31, 2004 financial statements there suggest the Alabama pool then had about $9.0 million in Members' Equity, about $3.5 million in earned premium, and about $1.4 million negative cash flow for the twelve months preceding that date
BestWire also reported that the Mississippi Windstorm Underwriting Association (MWUA) has $2.1 million in cash on hand and reinsurance of $175 million excess of a $10 million retention. A $20 million early assessment of members was expected. KnowledgePlex: Article: GULF HIGH-RISK POOLS MAY ASSESS INSURERS (BestWire Sep. 1, 2005).
On the Association's website is found the MWUA Accounting Report for Year Ended December 31, 2004 which suggests that the MWUA then had negative $2.1 million (a deficit) in Members' Equity, about $11.6 million earned premium and less than one million in cash flow for 2004. Exhibit 5 to that same report shows Insurance In-Force of $1,632 million in 14,796 policies with 90% of values in Hancock, Harrison and Jackson counties. This suggests an average value per policy of about $110 thousand.
The MWUA operates as a reinsurance program using Servicing Carriers, commercial insurers that accept a fee to issue and adjust claims on behalf of the MWUA, to which 100% of the liability is ceded. See: MWUA Rules & Procedures See also: MWUA - Plan of Operation. The underwriting rules include a provision that "Applications for wind and hail coverages for property located on any of the barrier islands must provide evidence of flood coverage if the property is located in an area where flood coverage is available."
Effective Jan. 1, 2004, the Louisiana Joint Reinsurance Plan (FAIR Plan) and the Louisiana Insurance Underwriting Plan (Beach Plan) were combined into Louisiana Citizens Property Insurance Corporation (LCPIC). According to BestWire as of 9/1/05, its executive officer, Terry M. Lisotta, was expecting 60,000 homeowners claims, but adjusting had been delayed by the flood waters. This figure echoes III reports that about half of its 135,000 policyholders are expected to file Katrina claims. III - Residual Markets. According to Best Wire, LCPIC presently has $100 million in cash on hand and reinsurance of $340 million in excess of a $35 million retention. BestWire, 9/1/05, supra.
Year-end 2004 financial statements accessible at the LCPIC's website suggest that the FAIR Plan then had about $5 million in surplus, about $51 million in earned premium and about $62 million in net cash flow for 2004. Invested income was not significant ($141 thousand). The Beach or Coastal Plan reported $772 thousand in surplus, about $4.3 million in earned premium for 2004, and about $4.7 million net cash flow, with negligible investment income. Together, they had about $65 million in cash and investments at that time. Another 9 months of cash flow at $65 million per year would add up to $100 million figure cited by Mr. Lisotta.
I could not find Total insured values (TIV) data on the LCIC website, but if one uses the $110 thousand average value per policy figure calculated above for Mississippi, 135,000 policies would suggest total insured value around $14,850 million.
In September 2004, Louisiana Insurance Commissioner Robert Wooley said that if a major storm like Hurricane Andrew hit his state, "we would have to go to our line of credit because we wouldn't have sufficient reserves to pay all of the losses. We would have to issue tax-free bonds to pay for the losses and we would allow the companies to recoup those losses and pay their portion of the losses over an extended period of time." Ibid "Recoup losses" likely means member insurers would be able to load those losses into the rate base and recover them from policyholders. How "extended" the time would be depends on the ratio of loss to the rate base. Adding unexpected flood losses to the covered windstorm losses would increase the load on the rate base, by an amount to be determined.
According to the Times-Picayune on September 8, 2005, Louisiana homeowners will be hit with a 20% surcharge and continuing surcharges for years to pay for the hit on the LCPIC. The article describes the process by which the fund will get immediate cash and then spread the burden upon ratepayers throughout the state over coming years. This process was necessary because of reluctance of commercial insurers to write coverage in the state without such a protection. The article states that: "The coverage does not include flood damage, which is handled by a federal insurance program.". NOLA.com: Insurance Rates to Rise (Times-Picayune, September 8, 2005).
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" dougsimpson.com.
See also: P.S. on "Unintended Consequences of Flood Exclusion Avoidance Suits" (Sep. 24, 2005)
Mark Mayerson at Insurance Scrawl says what he really thinks about the Mississippi Attorney General's expropriation lawsuit. "[W]hat the state's argument highlights is the failure of its insurance-regulatory scheme. Mississippi should not have permitted insurance policies to be issued in the state with flood exclusions if such exclusions are so violative of public policy. Besides arguing on the merits that the exclusions are proper, insurers will argue that voiding them constitutes a taking of property (meaning that the taxpayers will then fund the losses)." Insurance Scrawl: Tragedy and Failure
Mayerson goes on to argue that the attempted expropriation of insurer capital will not fall onto overseas reinsurers, as plaintiffs bar attorneys have implied, because any ex gratia payments and expropriation losses are outside of the scope of reinsurance coverage.
If Mayerson is correct, many smaller, regional and local insurance companies focused on Mississippi are likely to fail if the Attorney General's suit succeeds. In which case, the claims liability may fall to the Mississippi Insurance Guaranty Association. The National Conference of Insurance Guaranty Funds (NCIGF) offers text and summary of that state's guaranty fund laws at Guaranty Fund State Laws & Summaries.
In 1992, following Hurricane Andrew, the resulting failure of ten insurers due to wind claims exhausted the cash reserves and near-term assessment capacity of the the Florida Insurance Guaranty Associaton (FIGA). $400 to $500 million was required to pay the insolvents' claims. The statutory maximum assessment would raise only $65 million per year.
To provide the necessary cash flow to pay the wind claims against insolvent insurers, special 1992 legislation authorized the ground-zero city of Homestead to issue municipal revenue bonds, loan the resulting $500 million to FIGA at interest, and then collect principal and interest from FIGA for years thereafter. FIGA was allowed an extra assessment against surviving insurer's premiums and had enough funds by 2000 to pay off the Homestead bonds. Senate Staff Analysis and Economic Impact Statement on Florida Bill CS/SB 2184, regarding changes to the law of insurance company insolvencies and obligations of the Florida Insurance Guaranty Association, April 22, 2005, page 4 (PDF)
If the A.G.'s suit succeeds, how many insurers will be thrown into insolvency? How long will the Mississippi Insurance Guaranty Association be in the red and loading the cost into the few remaining voluntary premium dollars? The Department of Insurance's website has some information about the MIGA suggesting that claims the size of the Katrina expropriation bill will be beyond extraordinary: "Founded in 1970, the Mississippi Insurance Guaranty Association has handled 75 insolvencies, paying out nearly $52 million in benefits to policyholders." Mississippi Department of Insurance: Who Insures the Insurance Company
How many of the surviving insurers will be willing to continue writing in Mississippi, knowing that they must provide flood insurance for free, if the "Robin Hood Attorney General" succeeds?
In 2003, the Government Accountability Office testified to the House of Representatives on "Challenges Facing the National Flood Insurance Program". GAO has for years reported on financial issues of the NFIP administered by FEMA.
As the testimony explains: "In 1968, in recognition of the increasing amount of flood damage, the lack of readily available insurance for property owners, and the cost to the taxpayer for flood-related disaster relief, the Congress enacted the National Flood Insurance Act (P.L. 90-448) that created the National Flood Insurance Program. Since its inception, the program has sought to minimize flood-related property losses by making flood insurance available on reasonable terms and encouraging its purchase by people who need flood insurance protection—particularly those living in floodprone areas known as special flood hazard areas."
The report points to several fundamental problems with the NFIP:
... Cash-based budgeting and accounting, instead of accrual accounting that would reflect actuarial realities;
... Subsidies and coverage of "repetitive loss properties" (properties that make claims every 10 years or so because they regularly flood)
... Lack of participation in the program, with less than 50% of eligible properties participating and even "mandatory" purchases may not be happening.
We look at 37 years of legislative and judicial recognition that flood hazards are simply not commercially insurable, and the federal subsidy of affordable flood insurance even for those who insist on living in the most exposed areas.
It is hard to know where to begin to address claims by public officials that the flood exclusions in standard in homeowners policies, as approved by the Insurance Commissioners and repeatedly upheld by the courts, "bear no reasonable relationship to the risks and needs of the business of the Defendant" insurers and are not enforceable. Unintended Consequences: Mississippi AG's Complaint Seeking to Void Standard Flood Exclusions
The Attorney General's action is sure to add false hope and the burden of frivolous litigation to a population already suffering enough. And what will it do to flood insurance sales if the A.G. convinces the citizens that, through some magic of elected politics, they retroactively get flood coverage free in their homeowners policy, despite the clear language of the flood exclusion and the repeated warnings accompanying their policies? Not only is this action unfair to the insurance industry, it is prejudicial to the entire National Flood Insurance Program.
As reported in the Washington Post (Mississippi Sues Insurers Over Flooding Exclusions) and by the Risk Prof blog (RiskProf : Well, It Has Happened!), the Attorney General of Mississippi has sued the state's insurers, alleging that standard flood exclusions in homeowners policies approved by the Mississippi Insurance Commissioner are "void and unenforceable" and seeking an injunction against their enforcement. Attorney General Jim Hood's Press Release.
The causes of action include counts alleging that the standard flood exlusions:
... contravene Mississippi law concerning proximate causation and policyholders' reasonable expectations,
... are too hard to understand and unconscionable, having "no reasonable relationship to the risks and needs of the business of the Defendants",
... are ambiguous and must be construed against the insurers and
... constitute an unfair or deceptive trade practice.
A copy of the A.G.'s Complaint and Motion for TRO is HERE (PDF).
The Insurance Commissioner of the State of Mississippi, George Dale, in his "Insurance Consumer's Hurricane Checklist" on the DOI's website, says:
Check your policy’s coverages. Remember that homeowners’ policies do not cover flood damage caused by rising water. Check the special maps kept by your county that show flood plains. If you live in a flood-prone area, contact your agent about obtaining flood insurance, which is written by the National Flood Insurance Program. Do not procrastinate; there is a 30-day waiting period before the policy goes into effect."
Government Accountability Office GAO-05-536: "RISK RETENTION GROUPS: Common Regulatory Standards and Greater Member Protections Are Needed" (August 2005)
Over two decades ago, Congress passed laws allowing businesses to group together and form their own liability insurance company. The goal was to provide an alternative to commercial insurance in a time of limited availability of affordable insurance. During "hard markets," these Liability Risk Retention Groups (LRRG) have increased in number, offering a useful addition to insurance capacity.
Loose regulations in some states that host LLRGs have also allowed short-sighted, negligent or corrupt managers to abuse the trust of the LLRG members, according to allegations by government regulators. See Unintended Consequences: Buffett Cooperation Illuminates Racketeering Suit and Spitzer Investigations. In recent years, this abuse has led to some troubling insolvencies that have proved costly to LRRG members and their claimants. Many times those claimants are individual consumers of members' services, including hospital patients, doctors and nurses.
Recent LRRG failures include the 2003 collapse of Reciprocal of America (ROA), which left hundreds of doctors and lawyers with no malpractice coverage and many with six-figure unsatisfied judgments. See Unintended Consequences: Impact of Reciprocal of America on Mainstreet Professionals.
Risk Retention Reporter identified $2.2 billion in 2004 premium flowing to LLRGs, up from $1.7 billion in 2003. See Unintended Consequences: RRG premium tops $2 B in wake of hard market. If Hurricane Katrina constricts the capital available for insurance generally (as did the 9/11 disaster), a hard market in liability insurance as well as property insurance may follow, increasing the motivation for businesses to form LLRGs. And increasing the opportunties for entrepreneurs to form LLRGs to meet the increased demand.
The GAO has performed an audit of the LRRG system and made recommendations for changes in the regulatory scheme. They found instances of conflicts of interest between LRRG managers (often entrepreneurs with no financial interest in the solvency of the LRRG) and its members. They also found that some states treat LLRGs as "captive insurers," for which relaxed capitalization standards are appropriate. As a "new item," the 120-page full report is available HERE (PDF).
Among its recommendations is greater and more standardized state regulation of LRRGs.
From the GAO Results in Brief:
In 1981, in response to recurring shortages of liability insurance, Congress passed the Product Risk Retention Liability Act, now known as the Liability Risk Retention Act (LRRA), which authorized the creation of risk retention groups (RRG) to increase the availability and affordability of commercial liability insurance. An RRG is a group of similar businesses with similar risk exposures, such as educational institutions or building contractors, which create their own insurance company to self-insure their risks on a group basis.
RRGs have had a small but important effect in increasing the availability and affordability of commercial liability insurance for certain groups with limited access to insurance. In 2003, according to NAIC estimates, RRGs provided about $1.8 billion or 1.17 percent of all commercial liability insurance. While the overall impact on the liability market has been small, most state regulators we surveyed believed that RRGs have increased the availability and affordability of insurance for groups that have had difficulties obtaining affordable coverage such as healthcare providers, building contractors, and commercial trucking firms.
According to state regulators and RRG industry representatives, members have benefited in several important ways by using RRGs to self-insure their risks. These benefits include controlling their costs by targeting their coverage to the specific needs of members and designing programs to reduce risks. The representatives indicated that RRGs might not always benefit from the lowest insurance prices but could benefit from prices that remained stable over time.
In recent years, a shortage of affordable liability insurance also prompted the creation of many new RRGs. From 2002 through 2004, 117 RRGs were formed, more than the total formed over the previous 15 years. In particular, a shortage of affordable medical malpractice insurance prompted healthcare providers to form about three-quarters of the new RRGs. As a result, more than half of all currently operating RRGs provide insurance in healthcare-related areas.
LRRA’s partial preemption of state insurance laws has resulted in a regulatory environment characterized by widely varying state standards and limited regulator confidence in the system.
The circumstances surrounding more than half of past RRG failures we examined suggest that management companies or managers have promoted their own interests at the expense of the insureds—for example, by charging excessive management fees or promoting transactions unfavorable to the RRG. Regulators knowledgeable about these failures said that the insureds likely were more interested in obtaining affordable insurance than assuming the responsibilities of owning an insurance company. Consequently, even though an insured’s insurance policy may have stated that the RRG lacked guaranty fund coverage, the insureds may not have been fully aware of this restriction or the consequences of lacking such protection.
Further, LRRA does not require RRGs to disclose to prospective claimants, those who submit claims for loss, that the RRGs would not benefit from guaranty fund protection should they fail. This can be of special consequence to certain claimants—consumers who purchase extended service contracts from the insureds of RRGs—because contracts issued by these insureds take on the appearance of insurance when, in most cases, they are not.
This report contains recommendations for the states, as well as matters for congressional consideration that, if implemented, would create a more consistent regulatory framework for overseeing the chartering and management of RRGs, provide more reliable information about the financial condition of RRGs, and provide RRG members needed protections to help ensure that companies managing RRGs operate in the insureds’ best interests. In addition, enhancing the availability and contents of the guaranty fund disclosure would provide RRG insureds, as well as consumers who purchase extended service contracts from RRG insureds, a better understanding of the lack of guaranty fund coverage.
Louisiana's Valued Property Law may afford rich opportunities for litigation over recovery on property losses, when both flood and wind policies covered a risk, Bob Stratton suggests in Insurance Defense Blog: Katrina Losses/Coverage
He points to a thought-provoking article about last year's Florida decision in Mierzwa v. Florida Windstorm Underwriting Association, Case No. 4D02-4996 (Fla. App., 2004) by John V. Garaffa of Butler Pappas: Florida's "Valued Policy" Law - The Eye of the Storm. The decision and the article raise the spectre that owners of properties insured by one policy against wind and against flood by a separate policy may be demanding a double policy limits recovery, even if they choose not to rebuild, if they have a constructive total loss.
Commentators are now discussing the likelihood that Louisiana may adopt a similar interpretation.
Not discussed in what I've scanned so far is the question of subrogation, or the impact of "other insurance" clauses.
I'm making an initial mental list of readings for a proposal for a possible law school seminar at the Insurance Law Center at Univ. of Connecticut School of Law, many of which would be multi-disciplinary.
I'm just finishing Jared Diamond's "Collapse: How Societies Choose to Fail or Succeed."
On my stack are:
..* Richard A. (aka "Judge") Posner, "Catastrophe: Risk and Response"
..* Ted Steinberg, "Acts of God: The Unnatural History of Natural Disasters in America"
..* R.A. Scotti, "Sudden Sea: The Great Hurricane of 1938"
Suggestions are welcome.
A threat similar to Katrina may exist in the Sacramento and San Joaquin river valleys in California, where Prof. Jeffery Mount at U.Cal. Davis says: "Levee failure is not an 'if', it's a 'when'. * * * There seems to be a willingness to tolerate the human suffering and property loss that might come with these events." Underpriced flood insurance, land subsidence and under-investment in levee maintenance, plus thousands in the vulnerable area who have no autos, appear to be an issue there, as in New Orleans. See "Thousands in California at higher flood risk than in New Orleans," Mercury News, September 14, 2005. See also the New York Times, Sunday, September 11, 2005 "Disasters Waiting to Happen" (p. BU 1).
Galveston, Texas was wiped out in a hurricane in1900, and hit hard since then, but in recent years invested a great deal in raising the level of their Gulf Coast island.
For example, I want to find (or build) an objective legislative and policy history of flood insurance in the U.S., which is not that old, dating back to the 1968 National Flood Insurance Act. It's administered by FEMA.
There is a theory that while federally subsidized flood insurance may be good for developers and home builders (e.g. California), those who want cheap nearby housing for minimum-wage labor (e.g. New Orleans), Katrina has shown that encouraging people to build and to live in flood plains inevitably kills some of them and traumatizes many more.
In this country, few of our legislators live in flood plains without cars. In Holland, almost the whole country lives below sea level, and legislators take the situation more seriously because its their mother, spouse or child who could drown. Especially since 2,000 Dutch citizens died in the February 1953 flood caused by bad flood management (another good case study) and have since taken things much more seriously.
The GAO study of "Risk Retention Groups: Common Regulatory Standards and Greater Member Protections Are Needed," just out in August 2005, can provide another case study about groups that federal law encourages to voluntarily self-subsidize their own liability insurance, possibly leading members into economic traps that take years to discover, and only when it is too late. Similar traps have been found in self-insurance pools. See, e.g. Unintended Consequences: AIK Comp Members Liable for $97 MM: Dangers of Forced "Affordability"
Similar circumstances exist in states (like Massachusetts, Maine, Louisiana and others) who for years suppressed residual market prices on workers comp or auto liability insurance, in order to make "essential insurance affordable." Those systems eventually became abused and insolvent and they collapsed, at significant hidden "back-end" costs to taxpayers and ratepayers. They were typically replaced by similar but "new" systems. How many unsafe conditions on our roads and in our workplaces were subsidized by those political decisions, if any? Might make an interesting study.
I fear I reveal a certain bias. Perhaps, by postponing the inevitable reckoning and saving the cost of commercial insurance rates (or the lost opportunity cost of undeveloped flood plains), those politicians and member organizations are making a sound economic decision. Judge Posner addresses some of those issues in his book and weblog. The Becker-Posner Blog: The Tsunami and the Economics of Catastrophic Risk
I'm willing to be persuaded. But those whose loved ones drowned in Katrina, and who may drown in California, should have a representative voice. And the public safety implications for coming and past legislation should be evaluated in light of current awareness.
Do you see the way this seminar might go? Comments or suggestions by email to doug "at" dougsimpson.com. (I've turned off my Trackback and Comments because I grew tired of spending hours deleting porno and pharma spam).
"Levee failure is not an 'if', it's a 'when'," Mount said. "There seems to be a willingness to tolerate the human suffering and property loss that might come with these events."
New Orleans? No.
California. The Sacramento and San Joaquin Rivers. AP Wire | 09/14/2005 | Thousands of Californians at higher flood risk than New Orleans
According to the Mecury News, floodplain deprived of annual renewal has subsided more than in New Orlenas, levees are old, repair monies have been held up and FEMA models underestimate the 100-year flood risk. Add a possible earthquake and some 400,000 people might have to evacuate in a hurry. An estimated 51,000 people in Sacramento alone have no personal auto.
Owners of the many brand-new houses at risk express confidence that the government has protected them. Some are now considering flood insurance.
This article reports that a single levee break in 2004 led to $100 million in damage. Of $90 million authorized for levee improvements, only 1/3 has been appropriated in the 2006 federal budget.
The Washington Post today quoted former New Jersey Governor Thomas H. Kean (R), that Katrina has shown that our nation is still unprepared for terror. "This is not a terrorist incident, but it brings into play all of the same issues and shortcomings," Kean said. "What makes you mad is that it's the same things we saw on 9/11. Whoever is responsible for acting in these places hasn't acted. Are they going to do it now? What else has to happen for people to act?" 9/11 Panel Says U.S. Hasn't Enacted Crucial Reforms (Washington Post, September 14, 2005, p. A03)
After issuing their report in 2004, the ten commissioners of the National Commission on Terrorist Attacks Upon the United States ("9/11 Commission") formed a 501(c)(3) organization - the 9-11 Public Discourse Project - aimed at fulfilling the 9-11 Commission's original mandate of guarding against future terrorist attacks, while adhering strictly to the same bipartisan and independent principles that have guided it over the last twenty months. This organization consists of the same leadership of the 9-11 Commission, including its commissioners, who now serve as the Board of Directors of the 9-11 Public Discourse Project. About the 9/11 Public Discourse Project
On September 14, 2005, the Project will issue a Report Card on Implementation & Press Conference with Former Commissioners in Washington. 9/11 Public Discourse Project: The Unfinished Agenda
In the wake of Hurricane Katrina, journalists, government representatives and "just folks" around the world are raising important questions that must be answered. Not all of the answers will be simple or easy to accept.
For one, folks are now facing the reality that their homeowners insurance does not cover that part of the storm damage caused by flooding, whether the flooding is a direct result of Hurricane Katrina's storm surge or the overtopping and breach of inadequate levees. Those whose homes or businesses were damaged in part by direct action of wind, looting or fire following a flood may find their loss partially covered. But for thousands of people, their homes will be condemned solely because of damage from weeks of soaking in toxic flood waters.
(typo in 9/12 original corrected to replace "RAIN" with "WIND" in Safeco policy quoted in Guyton)
Insurance policies routinely include front page warnings like that on my own policy: "NOTICE! This policy does not cover flood loss or damage. Call your (name of company) representative ... to obtain a flood insurance policy."
For decades, federally subsidized flood insurance has been available, has been widely promoted and sold through local insurance agents by the National Flood Insurance Program (NFIP), a division of FEMA. See Annotation, "Rain, flood, or water damage insurance; National Flood Insurance Act," 43 Am. Jur. 2d Insurance § 486. Every year, a large percentage of those eligible to buy federally subsidized flood insurance do not. Like public officials who knowingly choose to invest only enough money in flood control to survive a Cat III hurricane but not a Cat IV hurricane, homeowners gamble their property on the theory that "flood insurance is too expensive."
After every major disaster involving extensive flooding, we see politicians and class action attorneys taking aim at the flood exclusion in homeowners policies, looking for ways to overcome decades of legal precedent behind that part of the insurance contract. Sometimes they succeed, after which insurance companies examine their policies and make adjustments so that their policies are as clear and unambiguous as possible that damage due to flood is not covered. They then file those policy contract forms with state insurance regulators and negotiate the terms until they can obtain approval from the state and issue them to policyholders.
Some of those encounters with creative policyholder advocates are instructive and involve principles that should be familiar to any seasoned insurance practitioner. General practice lawyers may be hearing more about them in coming months. One of those is the principle of "concurrent causation," another the concept of "efficient proximate cause."
The principle of concurrent causation has been widely recognized for many decades and works in favor of policyholders. To understand it, you have to keep in your head the difference between cause and effect. An insurance policy specifies what causes it covers (usually called "hazards" or “perils”). It also specifies what effects it covers (usually called "loss" or "damage") and which perils and losses are excluded from coverage. Those details are found in various sections of the policy language, such as “Perils Insured Against” and “Exclusions”.
Concurrent causation principles say that if two causes combine to produce loss or damage, and one of the two causes is excluded (e.g. flood) and the other cause is covered (e.g. windstorm), the loss will be covered. Insurance companies have been drafting their policies in light of this basic principle for over a century, tweaking policies from time to time as fine points were re-interpreted, often in response to disasters that revealed unanticipated exposures. Many of those disasters, and the law interpreting the policies, comes out of the state of California and its earthquakes, mudslides, floods and brushfires.
Although Alabama, Louisiana and Mississippi are not California, the latter state has a more substantial body of law interpreting policy provisions in light of many varied circumstances. A look at some of its law illustrates the complexity of the issues faced by insurers following Hurricane Katrina. California's law derives from interpretation of decisions of its Supreme Court, especially Sabella v. Wisler, 59 Cal. 2d 21, 377 P.2d 889 (1963) and State Farm v. Partridge, 10 Cal.3d 94, 514 P.2d 123 (1973).
Sabella established that when more than one cause is sequentially involved in a loss, the court must determine the single cause that set into motion the other causes or chain of events leading to the damage. In that case, a building contractor negligently installed a sewer line to a house it constructed on uncompacted fill. The sewer ruptured and flowed water into the fill, which settled under the house, cracking the foundation. The insurer denied coverage due to an earth movement exclusion. The court found that because the "efficient moving cause" (builder's negligence) was covered, the loss or damage was covered, even though an intervening cause (earth movement) was expressly excluded, because the efficient moving cause set in motion the intervening cause.
Partridge established that a different approach must be used when two entirely independent causes combined to result in loss or damage, but neither set into motion the other. In such a case, "coverage under a ... policy is equally available to an insured whenever an insured risk constitutes simply a concurrent proximate cause of the injuries."
On September 10, 1976, Hurricane Kathleen dropped heavy rains in California, overwhelming the old levees that protected the community of Palm Desert in the Coachella Valley, flooding it. The community had historically been subject to flooding that had been controlled for decades by levees built by government authorities. Insurers denied claims by homeowners for damage due to flooding and a lawsuit followed.
Safeco's policies included industry standard language designed to cover "all risks" not excluded by the contract language. The contracts included, in bold letters:
"THIS POLICY DOES NOT INSURE AGAINST LOSS:
1. CAUSED BY, RESULTING FROM, CONTRIBUTED TO OR AGGRAVATED BY ANY OF THE FOLLOWING:
a. FLOOD, SURFACE WATER, WAVES, TIDAL WATER OR TIDAL WAVE OVERFLOW OF STREAMS OR OTHER BODIES OF WATER, OR SPRAY FROM ANY OF THE FOREGOING, ALL WHETHER DRIVEN BY WIND OR NOT."
In the lawsuit, policyholders pointed out that although the cause or hazard of flooding was excluded by the policy, there was no exclusion for the independent concurrent cause of negligence in design or maintainance of levees. They successfully argued that because the loss resulted from the concurrence of an excluded hazard and a covered hazard, it was covered under California law. Although it ruled that Safeco had to pay the loss, the court did find that Safeco had not acted in bad faith in denying the claims, because the issue had been legally uncertain before its decision. Safeco Ins. Co. v. Guyton, 692 F.2d 551 (9th Cir. 1982).
Following Guyton, the California state courts criticized the federal court decision and further developed the law of concurrent causation in that state. In 1986, applying the Sabella and Partridge cases, a California Court of Appeal decided it was a question of fact whether or not two concurring causes were independent or dependent causes of a homeowner's injury. This left to a jury the decision whether the loss was covered or not. Garvey v. State Farm, 227 Cal.Rptr. 209 (Cal.App. 1986).
Other states reached similar conclusions in similar situations. Legislation was introduced to clarify the law, for example, California Ins. Code §530. "An insurer is liable for a loss of which a peril insured against was the proximate cause, although a peril not contemplated by the contract may have been a remote cause of the loss; but he is not liable for a loss of which the peril insured against was only a remote cause."
At the same time, insurance companies scrambled to draft, file and get state approval of policy language to avoid the unexpected consequences of decisions like Sabella and Partridge. This included language excluding loss due to certain perils (such as flood and earth movement) "whether other causes acted concurrently or in any sequence with the excluded event to produce the loss."
In 1989, a federal court upheld the effectiveness of this "concurrent causation exclusion" in the face of a insured's argument that it violated §530. The United States Court of Appeals said that "an insurance company has the right to limit the coverage of a policy issued by it and when it has done so, the plain language of the limitation must be respected. * * * California Insurance Code §530 provides guidance when a policy is silent on concurrent causation; it does not prohibit inclusion of a provision similar to the concurrent causation provision in the State Farm policy." State Farm v. Martin, 872 F.2d 319 at 321 (9th Cir. 1989).
Similar results have been reached elsewhere in cases involving floods resulting from the failure of dams due to alleged government negligence. On July 15, 1982, the Lawn Lake Dam in Rocky Mountain National Park failed, and the released water destroyed commercial property downstream. The property owners' "all risk" insurance policies included a provision that "The Company shall not be liable for loss * * * caused by, resulting from, contributed to, or aggravated by any of the following: * * * flood, surface water, waves, tidal water or tidal waves, overflow of streams or other bodies of water, or spray from any of the foregoing, all whether driven by wind or not." The Supreme Court of Colorado rejected policyholder's claims that the "efficient moving cause" of the loss was third party negligence leading to the failure of the dam, finding that the rule regarding such causes "must yield to the language of the insurance policy in question." Kane v. Royal Ins. Co. of America, 768 P.2d 678, 78 A.L.R.4th 797 (Colo, 1989).
Mississippi was particularly hard hit by Hurricane Katrina, and has an instructive precedent regarding flood exclusions, resulting from Hurricane Georges in 1998, Eaker v. State Farm, 216 F.Supp.2d 606, 2001 WL 1900617 (S.D. Miss. 2001).
Eaker resolved claims against State Farm by a homeowner whose property was insured under both a National Flood Insurance Program Standard Flood Insurance Policy (SFIP) and under a commercial homeowners policy form HO-3. Both policies were written by State Farm, which wrote the SFIP as a "write your own" (WYO) fiscal agent of the United States government's NFIP. The insured failed to file within 60 days of loss a written, sworn Proof of Loss form as strictly required by the NFIP laws and regulations. In its opinion, the United States District Court for the Southern District of Mississippi discussed at length the purpose, provisions and requirements of the NFIP and the SFIP, and applied Mississippi state law to the following facts.
Following Hurricane Georges, the Eaker's home developed settlement and foundation problems that their expert witness, an architect, estimated would cost almost $90 thousand to fix and which he attributed to flood water from Hurricane Georges. The District Court discussed the National Flood Insurance Program's purpose "to provide previously unavailable flood insurance protection to property owners in flood-prone areas at rates that are at or below actuarial levels." As guarantor of the program, the United States government pays all flood insurance claims and the terms of the SFIP must be strictly complied with, said the court. The WYO insurer, a mere fiscal agent of the government, is powerless to alter, vary or waive any provision of the policy, including the requirement that the policyholder must file a written, sworn Proof of Loss within 60 days after the loss. The United States Supreme Court has affirmed that in such situations, the courts are powerless to uphold assertions that the insurer is estopped from insisting on compliance with the requirement, like those made by the Eakers. OPM v. Richmond, 496 U.S. 414 (1990).
The fact that the Eakers were unaware of the requirement of filing a written, sworn Proof of Loss within 60 days did not make a difference, according to the court, because the requirement was clearly set forth in the words of the policy. As a result, in the absence of compliance with the requirement, "all claims presented under the flood policy are barred." Eaker, 216 F.Supp.2d at 618.
The Eaker court also addressed the policyholder's claim that State Farm wrongly denied coverage under their homeowners policy. "The policy language clearly and unequivocally excludes coverage for the settlement of the foundation, the claim which the Plaintiffs are asserting." Ibid at 621. The court pointed to the "earth movement" exclusion, the "water damage" exclusion and the "settling/cracking exclusion," all of which were set out in detail in the court's opinion. The court also declined to apply the doctrine of "efficient proximate cause" asserted by the Eakers, because "the Mississippi courts have not specifically adopted the efficient proximate cause doctrine." Id. at 623.
There will be many tragic stories coming out of Hurricane Katrina. Many things will be learned, and some of those learnings will result in changed behavior. Let’s hope that some of the learning is about the realities of flood insurance and flood exclusions in homeowners policies.
You can find out about coverage from the National Flood Insurance Program through your local insurance agent or emergency management office. There is normally a 30-day waiting period before a new policy becomes effective.
For more information about protecting your life and property from floods, visit FEMA's "FloodSmart.gov" website.
Julie Fersuson at Workers Comp Insider notes problems of 9/11 rescue workers in collecting benefits for their repiratory and mental health issues traced to their services at Ground Zero. She asks if the Katrina first responders will encounter similar delays and budget holdups for the unknown medical and psychological cost of their service. Workers Comp Insider - Taking care of the unsung heroes
On September 4, Homeland Security Secretary Michael Chertoff told Tim Russert on "Meet the Press" that: "It was on Tuesday that the levee -- may have been overnight Monday to Tuesday -- that the levee started to break."
"Officials with the U.S. Army Corp. of Engineers said last week that one canal breach came to the attention of corps personnel early Monday, Aug. 29 and another by midday. But the "fog of war" and "massive logistical problems with communications in the hours after the storm hit" created some confusion, said John Rickey, a spokesman for the corps."
WSJ.com - Why Levee Breaches In New Orleans Were Late-Breaking News
Like so many in Washington, even on Sunday, six days after the levee break, Secretary Chertoff was still mis-informed about the timing of disaster in New Orleans. Michael Chertoff is a lawyer, a Harvard University and Harvard Law School graduate who was previously a federal prosecutor, practicing attorney and United States Court of Appeals Judge. He has no military experience. He has never before been plunged into the "fog of war."
See: Michael Chertoff - Wikipedia, the free encyclopedia;
and: Secretary of Homeland Security Michael Chertoff;
and also: DHS | Department of Homeland Security | Secretary: Michael Chertoff
Joseph Riley was the Mayor of Charleston, South Carolina when Hurricane Hugo hit in 1989. Until Hurricane Andrew and Hurricane Katrina, Catagory 4 Hurricane Hugo was the storm causing the greatest damage in the United States. Mayor Riley told media this morning that he is very much looking forward to testifying about the response to Katrina because of his similar experiences with FEMA during Hugo.
Mayor Riley tells an anecdote that deserves to be repeated again and again. Hugo's eye passed directly over the command station for Charleston's city government. As it did, Mayor Riley asked FEMA what advice they had to give him at this time. The response, according to Mayor Riley, was: "Be sure to account for all your expenses."
Hugo veteran Riley has repeatedly insisted that in a disaster of this magnitude, one needs a "military response." As he told the Charlotte Observer last year on the 15th anniversary of Hugo: "You ratchet up the energy level, just the same way you would if you knew the enemy was four miles away and they were ready to take over if you let up for one minute." Charlotte Observer | 09/04/2005 | Hurricane Hugo
Last week, the Birmingham News reported on similarities between the response to Hugo and the response to Katrina: "After the storm smashed into Charleston on Sept. 21, 1989, it took the Federal Emergency Management Agency 10 days to open its first disaster application center in the city. There were tens of thousands of claims and too few FEMA workers to handle the crunch. * * * Then-U.S. Sen. Ernest 'Fritz' Hollings, D-S.C., called the agency 'the sorriest bunch of bureaucratic jackasses I've ever worked with.'"
For News, Mayor Riley also contrasted the difference between long-term rebuilding and the immediate response: "It's the every-minute-counts power, water, food, shelter, patrols, security and all that immediate stuff you need like during a war. * * * Only the military can marshal such resources and future disasters will only cost more," he said. Katrina complaints echo those from Hugo (Birmingham News, Sep. 7, 2005).
This is the exact same conclusion reached by the General Accountability Office twelve years ago in GAO/RCED-93-186: DISASTER MANAGEMENT Improving the Nation’s Response to Catastrophic Disasters (July 1993) (PDF)
This GAO report, indicating the essential role of speedy Department of Defense response to a disaster of the scale of Katrina, was published after the outcry about the slow, uncoordinated government response to the Hurricane Andrew catastrophe.
In it, the GAO said:
"For all but the most severe catastrophic disasters, the Red Cross and its large network of volunteers may be well suited to provide mass care and coordinate the efforts of other federal agencies, as was the case with Hurricane Andrew in Louisiana. In South Florida, the Red Cross also responded to the needs of Hurricane Andrew’s victims-sheltering those who evacuated South Florida and providing some mass care after the storm. However, the enormous gap between the immediate need and available private voluntary resources in South Florida was inevitable for a disaster of this magnitude."
... "For such disasters, DOD is the only organization capable of providing, transporting, and distributing sufficient quantities of the items needed"
More of these extraordinary "mega-castrophes" will happen, as sure as the sun rises. Some will be long-predicted and ignored consequences of an inevitable natural event of which the target had several days notice (like Katrina). Others will be total surprises (like the attacks of September 11) and may include biological, radiological or chemical attacks, or conventional weapons attacks on special targets such as natural gas tankers in Boston Harbor.
Judge Posner suggests that declaring martial law may be the proper response in such situations: [J]udging from the New Orleans disaster, [emergency response as counter-terror tool] remains completely inadequate. One possible response would have been for the President to declare martial law and place a general who had combat experience (i.e., someone who knows how to coordinate a large number of people in circumstances of urgency and uncertainty) in command of all federal, state, local, public, private, military and civilian response agencies and personnel. The article in the Washington Post this morning that I mentioned notes the bureaucratic logjams that delayed the response; martial law would have overcome them. My idea about how to respond to such a disaster may be excessively dramatic and quite unsound; I am no expert. But ever since 9/11 it has been known that there could well be a terrorist attack utilizing weapons of mass destruction and that, if so, the correct emergency response might involve the evacuation of a city. It is disheartening to think that after four years there are still no plans, preparations, or command systems for dealing with such an eventuality. The Becker-Posner Blog: Katrina, Cost-Benefit Analysis, and Terrorism--Posner
One way or the other, before the next one happens, we need in place a process to quickly install leadership that has succeeded in the fog of war, that knows the importance of training and drill under stress, that knows the impact of planning, logistics, intelligence and communication, that is accustomed to command and control operations in real time, on the ground, in sight of the enemy and in shouting distance of operating commanders. Someone who has the public presence, trust and charisma to assure the world and America that the person in charge will have frank and open talks with the real people who know the real facts, tell his bosses the real story, with all its problems, and make decisions, issue assignments and move out toward the sound of the battle.
Someone about whom no one will say "He doesn't care about black people and people from poor neighborhoods." Someone who knows what its like to save lives with his own two hands under dangerous conditions. Someone whose background and experience is less about talk and theory and more about getting things done and making things happen.
Someone like Colin Powell.
Colin Powell - Wikipedia, the free encyclopedia
In August 2004, Powell discussed foreign policy and much more with P.J. O'Rourke in an interview published in the Atlantic Magazine. Fascinating article, in which he explained the origins of his thinking about international relations, saying: "I'm not an academic and was not raised to be a foreign policy intellectual. I'm fairly well read, but at the same time I'm not an academic. I'm a practitioner, somebody who was raised to see a problem, analyze it, have views about it, and have passion for a solution. I tend to go with my experience. My experience is in the soldierly things. Also, you know, my educational background is a B.S. in Geology and a Masters in Business Administration, data processing. It's not as if I was at the John F. Kennedy School at Harvard. Most of my foreign policy senior level education came from the National War College. Till then, I was just another infantry officer."
A Conversation With Colin Powell
Someone like Lt. Gen. Russel Honore, who told CNN that he views Katrina as an enemy "that pulled a 'classic military maneuver,' speeding toward land with overwhelming force, surprising and paralyzing the city and countryside and knocking out communications, electricity, water and roads in a 'disaster of biblical proportions.'". CNN.com - 'Ragin Cajun' general becomes icon - Sep 11, 2005
See also: LTG Russel L. Honore (National Veterans Day Birmingham Speakers).
This is not playing "the blame game." Some say there will be time later to find what went wrong and fix it. Well guess what, we did that after Hugo. We did that after Andrew. We did that after 9/11. We found out what went wrong. It is well documented. We did not fix it.
GAO/RCED-93-186: DISASTER MANAGEMENT Improving the Nation’s Response to Catastrophic Disasters (July 1993): from the Executive Summary and body of the study:
"The nation’s management of catastrophic disasters was intensely criticized after Hurricane Andrew leveled much of South Florida and Hurricane Iniki destroyed much of the Hawaiian island of Kauai in 1992. Prior to these storms, other major disasters, such as Hurricane Hugo and the Loma Prieta earthquake in 1989, also generated intense criticism of the federal response effort. The Federal Emergency Management Agency (FEMA), the lead federal agency for disaster management, responds to many smaller natural disasters every year without extensive public scrutiny. Unlike the bulk of the disasters requiring FEMA to respond, however, catastrophic disasters overwhelm the ability of state, local, and voluntary agencies to adequately provide victims with essential services, such as food and water, within 12 to 24 hours. The response to Hurricane Andrew raised doubts about whether FEMA is capable of responding to catastrophic disasters and whether it had learned any lessons from its responses to Hurricane Hugo and the Loma Prieta earthquake.
Congressional requesters asked us to examine the adequacy of the federal strategy for responding to catastrophic disasters and to develop solutions for improving it. Since January of this year, we have presented the results of our work at hearings before five Senate and House Committees and Subcommittees.’ This report summarizes our analyses, conclusions, recommendations, and matters for congressional consideration presented at those hearings."
* * *
"The federal strategy for responding to catastrophic disasters is deficient because it lacks provisions for the federal government to immediately (1) assess in a comprehensive manner the damage and the corresponding needs of disaster victims and (2) provide food, shelter, and other essential services when the needs of disaster victims outstrip the resources of the state, local, and private voluntary community."
* * *
"To improve the federal response, the nation needs presidential involvement and leadership both before and after a catastrophic disaster strikes. To underscore the commitment of the President, responsibility for catastrophic disaster preparedness and response should be placed with a key official in the White House. This would institutionalize the direct presidential involvement that occurred on an ad hoc basis in Hurricane Andrew and other recent major disasters. Furthermore, this organizational arrangement could increase the levels of attention given to emergency management responsibilities throughout the government, not just in times of catastrophic disasters. This responsibility should not be a full-time position that would effectively duplicate the role of the Director of FEMA, but the White House official should be sufficiently knowledgeable about disaster response to guide the federal effort."
* * *
"For all but the most severe catastrophic disasters, the Red Cross and its large network of volunteers may be well suited to provide mass care and coordinate the efforts of other federal agencies, as was the case with Hurricane Andrew in Louisiana. In South Florida, the Red Cross also responded to the needs of Hurricane Andrew’s victims-sheltering those who evacuated South Florida and providing some mass care after the storm. However, the enormous gap between the immediate need and available private voluntary resources in South Florida was inevitable for a disaster of this magnitude."
... "For such disasters, DOD is the only organization capable of providing, transporting, and distributing sufficient quantities of the items needed"
This GAO report, indicating the essential role of speedy Department of Defense response to a disaster of the scale of Katrina, was published twelve years ago, following an outcry about the slow, uncoordinated government response to the Hurricane Andrew disaster.
During Katrina, on Sunday, federal officials were warned the levees would be topped. On Monday morning at 8 AM, Mayor Nagin told the Today Show that the levees had been topped in the early morning hours. The New York Times reported on September 11 that before dawn on Monday, August 29, the state police reported to the Corps. of Engineers that the 17th Street levee had broken, draining Lake Pontchartrain into New Orleans. "Delays Were Deadly After Katrina Struck: Levee Breached at 3 A.M.; Was Reported at 6 P.M." New York Times, September 11, 2005, p. A15. See also: NOLA.com: Hurricane Center.
On September 4, Tim Russert interviewed Chertoff, who said he did not learn of the levee break until midday Tuesday, over 24 hours later: “It was on Tuesday that the levee–may have been overnight Monday to Tuesday–that the levee started to break. And it was midday Tuesday that I became aware of the fact that there was no possibility of plugging the gap and that essentially the lake was going to start to drain into the city.” Transcript for September 4 - Meet the Press, online at MSNBC - MSNBC.com
What was the Secretary of Defense doing while floodwaters inundated the poor and helpless in New Orleans?
Secretary of Defense Donald Rumsfeld enjoys himself while attending the game between the San Diego Padres and Arizona Diamondbacks Monday, Aug. 29, 2005, in San Diego. (AP Photo/Lenny Ignelzi)
Hurricane Katrina revealed that the same problems still exist, with chilling similarity. Hearings and studies will do nothing if we continue failing to execute on their recommendations and making bad choices about public safety.
As Ophelia "eyes" the southeastern United States coastline, present forecasts point to Wilmington, North Carolina as a possible "ground zero." National Hurricane Center / Tropical Prediction Center
" [North Carolina] Gov. Mike Easley declared a state of emergency Saturday evening, activating the state's emergency response center in Raleigh and authorizing the use as needed of the National Guard and all state agencies. * * * The storm wasn't close enough to North Carolina that a decision had to be made on whether to order evacuations, King said. He and other emergency management officials in the region said they were keeping resources at home instead of sending them to the Gulf Coast." StarNewsOnline.com: The Voice of Southeastern North Carolina
From the Hurricane Guide at the StarNewsOnline.com ("The Voice of Southeastern North Carolina"): "Hazel. 1954. $136 million in lost property, with 15,000 structures destroyed. 19 people dead. Diana. 1984. $30 million in damages in New Hanover County, $20 million in Brunswick County. 3 people dead. Hugo. 1989. $70 million in damages. More than 120 homes destroyed on Brunswick beaches. 7 dead. Fran. 1996. $2 billion in damages. 21 dead. Floyd. 1999. $4.5 billion in damages. 52 people dead. What does Mother Nature have in store for us this year?" StarNewsOnline.com: The Voice of Southeastern North Carolina
"In this century, Category IV and V storms caused over 80% of all economic damage and deaths from hurricanes even though they comprised less than 10% of all hurricanes. These major storms cause extensive damage to the infrastructure of the impacted area. The damage from 130 mph sustained and turbulent winds can extend inland far past the area of coastal flooding. Community utility systems, schools, civil law enforcement capability, medical facilities, and the economy in general could be seriously affected or incapacitated. The impact on all people can be devastating and could require major disaster relief." "Since the 1996 hurricane season, Wilmington has been battered by nine hurricanes - Bertha and Fran in 1996, Bonnie in 1998, and Dennis, Floyd and Irene in 1999, Florence in 2000, Gustov and Kylie in 2002."US Coast Guard Commander of the Port of Wilmington Hurricane Port Preparedness & Response Plan (PDF)
University of North Carolina at Wilmington is the only public teaching and research institution located in southeastern North Carolina. Its coastal location enables it to perform as a "global contributor in coastal research. However, its location also places over $15 million in research and the services to nearly 12,000 students at risk to the natural hazards of hurricanes and other coastal storms.* * * UNCW is anxious to share its experiences and techniques in hurricane response with other colleges and universities." University of North Carolina - Hurricane Preparedness (application/pdf Object)
"Storm surge could spell doom for Carolinas' coast" * * *
...In 1999, Hurricane Floyd threatened lives, businesses and homes with massive flooding that caused millions of dollars in damage to the Carolinas. Much of that flooding was exacerbated by rapid growth that created expansive flood zones.
...Since then, growth in the Carolinas has shown no signs of slowing down, especially along the coast. * * *
* * * That means more homes, shopping centers and roads. It means more people living in low-lying areas that could be in the direct line of a storm surge or in an inland area prone to flooding from excessive rain.
...Ultimately, it means more risk because as growth changes the terrain, it also changes the flood plains. Pavement and buildings keep the water, whether from rainfall or storm surge, from draining into the ground.
...Sometimes residents do not realize their homes are in a flood zone. That is in part because growth is outpacing the speed at which states can create new flood maps, which determine flood-insurance rates and tell builders how high off the ground a house must be built. * * *
...The coastal regions of Horry, Georgetown and Brunswick counties are just as vulnerable to damage from storm surges - waves pushed to shore by a hurricane's winds - as Biloxi, Miss., which is 22 feet above sea level. Most of the area's residents live 20 to 30 feet above sea level.
The Sun News | 09/04/2005 | Storm surge could spell doom for Carolinas' coast
Three day cone of probability for Ophelia, from National Hurricane Center, forecasts that eye may be over Charleston about 2 AM Tuesday, 9/13: Tropical Storm OPHELIA (National Hurricane Center -- NOAA).
"Interests from northern Florida through the Carolinas should closely monitor the progress of Ophelia during the next few days. * * * At 5 am EDT...0900z...the center of Tropical Storm Ophelia was located near latitude 31.2 north... longitude 76.8 west or about 220 miles... 350 km... east-southeast of Charleston South Carolina and about 285 miles... 460 km...south-southwest of Cape Hatteras North Carolina." FEMA: Tropical Storm Watch
Charleston Post & Courier: "Ophelia Keeps Us Guessing"
Charleston meteorologist blogger Brian Goode: Brian's Blog: What's She Gonna Do When She Comes For You?
National Weather Service Hurricane education and preparedness guides:
NWS Hurricane Awareness
Lists and tips for preparing for a fire, flood, earthquake or hurricane. A former EMT is quoted: "You can't wait for the government to get there," she said. "You will die before they get there." Includes a printable graphic with a checklist of essentials to survive three days on the run through water or hunkered down in your storm cellar/stairwell. Some Ways to Prepare for the Absolute Worst - New York Times
Reuters reports that Risk Management Solutions, a private risk-modelling vendor, has raised its modeled loss estimate for Hurricane Katrina from $20-$35 billion up to $40-$60 billion, out of a total damage of $125 billion. About half of the total damage will be in the New Orleans flood. RMS Increases Insured Loss Estimate for Hurricane Katrina to $20-$35 Billion
Although flood is not covered by private insurers, it will be problematic to apportion the covered damage from wind versus the excluded damage from flood, especially with regulators, media and policyholder advocates watching closely.
It remains to be seen how much liability the National Flood Insurance Program (NFIP), a division of FEMA (i.e. the U.S. taxpayer) will have due to the flooding. The program sells flood insurance below cost, with flood insurance rates deliberately set below the actuarial level in order to encourage people to build and live on flood plains, but many don't buy it anyway. The magnitude of this disaster and the locus of the flooding in a major industrialized urban region almost assures that extraordinary NFIP deficits will be booked because of Katrina. One wonders how much of the $50 billion just appropriated for FEMA will be consumed by NFIP allocated and unallocated claims expense.
Workers Comp Insider alerts us to a state court decision in Kentucky that members of the failed AIK Comp self-insured workers' compensation fund bear "joint and several" liability for the estimated $97.3 million fund deficit. That deficit estimate has almost doubled from last year when AIK Comp was taken over by the Kentucky Insurance Commissioner. The fund's insolvency resulted from its management undercharging members for coverage, distributing dividends to members and underestimating its liabilities so that deficits were not revealed.
Cases like this illustrate the dangers of efforts to make insurance "affordable" by sacrificing the future ability to pay all claims. In this case, business owners formed their own fund to "self insure" workers comp risks because they found the actuarially sound prices of commercial insurance "unaffordable." They are learning now the full meaning of the phrase "Pay me now, or pay me later."
Similarly, Hurricane Katrina is now showing us the "back end" cost of subsidizing the cost of flood insurance in flood-prone areas, as the federal government has done for years with the National Flood Insurance Program (NFIP), a part of FEMA. By encouraging and making economically possible the building of owner-occupied and tenant-occupied properties in flood prone areas, the flood insurance subsidy may have done more than cost our children the burden of billions of dollars in flood relief. It may have also condemned thousands of the poor, aged and helpless to a gruesome death by drowning in sewer water.
Unintended Consequences: AIK Comp to assess members $97 MM (June 16, 2005)
Unintended Consequences: AIK Comp Paid Discounts (Dec. 15, 2004)
Geology Professor Robert Thorson of the University of Connecticut writes that Hurricane Katrina gave the U.S. the "shock and awe" it needed to realize what does happen in a man-made catastrophe. courant.com | New Orleans Can't Stand In Nature's Way
From his column in the Hartford Courant on September 4:
"The flood surge that swept through New Orleans was created largely by human folly. We let the city sink below sea level (5 to 15 feet). We built dikes higher and higher on foundations resembling brown butter. We developed an evacuation plan that failed miserably, especially for the poor."
"'This was our Atlantis.' That's what I want my great-grandchildren to hear when they ask what happened to New Orleans in 2005."
"I want them to learn about the fatal mix of rising seas, sinking lands, elevating rivers, shoreline erosion and increased storminess that finally caught up with public ignorance and government arrogance."
He briefly describes in layman's terms five geological factors that lead him to a conclusion that rebuilding New Orleans under such circumstances "is not the kind of risk that a prudent insurance company or an overspent federal government should take."
Bob Sargent at Specialty Insurance Blog points to the Mississippi Insurance Department's early guidance on insurance claims for Katrina damage.
Commissioner George Dale's letter (pdf) states that he has been "contacted by Mississipians who advise that their adjusters allegedly denied their homeowner's claims without inspecting the damaged property." Commissioner Dale states that when water and wind combined to produce a loss, "the insurance company must be able to clearly demonstrate the cause of the loss." He expects insurers to resolve doubt in favor of a covered loss. Specialty Insurance Blog: Katrina Coverage: Wind or Water?
As Bob Sargent rightly points out, reinsurers are not likely to be as responsive as locally regulated primary carriers to local insurance regulatory "jawboning." Reinsurers are expected to "follow the fortunes" of the primary carriers. They may (and often do) insist that the primary carriers clearly resolve legal issues before paying claims if they expect reinsurance participation. This may lead to extensive and politically painful litigation with large numbers of Katrina victims unless both the primary and reinsurance market leaders step up to the plate and do their part in relief.
This may prove very difficult, as the insurance industry is a business, not a charity. They have an obligation to their shareholders and other policyholders to construe policies both fairly and consistently in accordance with many decades of precedent and legal principles. This will be difficult times for their decision makers. Some will fare better than others. Adversity brings out both the best and the worst in people and organizations, and the insurance industry is no exception.
On the wall in a conference room of The Hartford hangs an oil painting of a legendary event in the company's history. Following the Great Fire of 1835 in New York City, many insurers failed and closed their doors. Eliphalet Terry, then president of The Hartford reacted differently, in a way reminiscent of "unauthorized" aid we see today. He borrowed cash on his personal credit, loaded it into a horse-drawn sleigh and personally drove it 100 miles through bitter winter weather to the disaster area and began paying claims. Although records of policies had also been destroyed in the great fire, he was able to reconstruct some information and relied a lot on the faith and good will of the people who made claims.
As victims of other insurers received reports that their companies had failed and would be unable to pay a dime, the stand-up insurers began selling policies to those failed by the competition. By the time he and his people finished in New York, Terry had paid the claims and also signed up enough new customers to provide the cash to pay off the temporary loans and establish the reputation of his company as one you could count on.
I retell this story not because The Hartford is alone in such behavior, but because I happen to be familiar with it from several decades working there and looking at that oil painting. Many other stand-up insurers did the right thing in that disaster, and will do the right thing in this disaster. We will learn in the coming months which insurers and reinsurers are able to figure out what is the right thing.
August 29, 2005: WASHINGTON D.C. -- "Michael D. Brown, Under Secretary of Homeland Security for Emergency Preparedness and Response and head of the Federal Emergency Management Agency (FEMA), today urged all fire and emergency services departments not to respond to counties and states affected by Hurricane Katrina without being requested and lawfully dispatched by state and local authorities under mutual aid agreements and the Emergency Management Assistance Compact."
* * *
"The response to Hurricane Katrina must be well coordinated between federal, state and local officials to most effectively protect life and property," Brown said. "We appreciate the willingness and generosity of our Nation's first responders to deploy during disasters. But such efforts must be coordinated so that fire-rescue efforts are the most effective possible."
"It is critical that fire and emergency departments across the country remain in their jurisdictions until such time as the affected states request assistance," said U.S. Fire Administrator R. David Paulison. "State and local mutual aid agreements are in place as is the Emergency Management Assistance Compact and those mechanisms will be used to request and task resources needed in the affected areas."
Thanks to beSpacific. beSpacific: FEMA Document on First Responders
Perhaps this is what one would expect when a horse-show lawyer is put in charge of disaster response.
Nevada Senator Harry Reid, Democratic Party Leader, has published a letter to the Chair of the Committee on Homeland Security and Governmental Affairs, listing 13 questions upon which the joint committee to investigate the response to Katrina should focus. Reid Letter to Chairman Collins on Oversight Hearing
From the preface paragraphs: "Most experts felt a major hurricane in this section of the Gulf Coast was inevitable. Federal officials were apparently well-informed about the consequences of such a storm as well as the measures needed to respond before and after such a storm hit. Despite these facts and several days notice that a major hurricane would strike the Gulf Coast region, the federal response was "unacceptable", as the President has acknowledged. For too many days, residents in New Orleans and much of the Gulf Coast were left to fend for themselves.
Nearly four years after the terrorist attacks of 9/11 sent a clear signal that we needed to be better prepared for major catastrophes on U.S. soil, the American people have a right to expect their government to perform better. It is essential that this body fully exercise our oversight responsibilities to ensure that we understand what happened in this instance and what needs to be done to ensure that the federal government will be better prepared to respond to future emergencies."
Wharton professors assess the impact of what is clearly the costliest natural disaster ever to strike the U.S.
Picking Up the Pieces from Katrina: What Lies Ahead - Knowledge@Wharton
This feature piece at Wharton's free "Knowledge @ Wharton" e-zine compares the impact of Katrina to that from Andrew and other disasters. Its authors suggest a $200 billion damage estimate, with still uncertain impact on the oil and gas industry.
Wharton professor Howard Kunreuther points out that private insurers will not be as hard hit as they were by Andrew. Insurance for flood is borne by the National Flood Insurance Program, which may outstrip its ability to pay until tax money is added. The mix of windstorm and flood damage in many instances will lead to "many lawsuits," according to Kunreuther.
Real estate professor Witold Rybczynski predicted that like most cities, New Orleans will rebuild due to "an inertia built into cities," that makes the investment more than the destruction. He points to the destruction of Warsaw, Poland during World War II and its reconstruction afterwards. Another professor cited the rebuilding of Woodland Hills, California after wildfires in 1991.
The authors also provide a perspective from a Madrid professor who was visiting Guatemala in 1998 when Hurricane Mitch hit Central America. 10,500 died and some 10,000 simply disappeared.
Links to many sources of help and recovery for Katrina victims and supporters. Main Page - Katrina Help Wiki
Like many states, Connecticut is collecting relief supplies for Katrina victims from private and corporate donors. nbc30.com - News - Rell Opens Armories As Hurricane Help Centers
I turned out at the Hartford Armory at 8:15 AM Tuesday, and worked steadily until 5:45 PM. They said over 1000 people volunteered during the day Monday, and it looked like a similar number Tuesday. There was a surplus of volunteers at some times, but they were needed when a Sysco Food Services semitrailer came in, packed to the gills with food, water and clothing collected from private donors in Rocky Hill. It took a bucket brigade of about 40 volunteers a full hour working hard to offload it into the sorting and packing system, as individual carloads continued to arrive. Inside the truck, I was catching 30-bottle flats of water tossed to me by a West Hartford nurse and passing them down the line to a high school student in her white shirt and navy skirt. ctnow.com: State Shines In Relief
The work of building, palletizing and plastic wrapping palletloads of donated supplies was quite different from that for which I trained in 30+ years of law study and practice, but it fit right in with my Army training and recreational gardening and felt good at the end of the day.
I'm going back today. If you come, dress for warm temperatures outside at the loading areas and inside the training shed. Snacks, lunch and water are provided.
HoustonChronicle.com - Most vulnerable would not likely survive (Houston Chronicle, Feb. 19, 2005)
"Some tenants of Galveston's public housing projects are among thousands who could face being stranded on the island and risk losing their lives should a major hurricane strike."
"The tenants are among those identified by local and state officials as the region's most vulnerable residents who could be killed in a hurricane because local evacuation plans virtually ignore those without cars, in group-care homes or with no family to see to their safety."
"Nearly all state, regional and local officials -- including many of those responsible for overseeing evacuations -- acknowledge that their current plans rely so heavily on self-evacuation that the poor, the old and the sick may have little chance of escaping a deadly storm."
Sound familiar? Let no one hear our leadership say "I don't think anybody anticipated these folks being stranded without transportation."
Thanks for this link to: SciGuy: Five things I've learned from Katrina
Some short quotes:
"It's only a matter of time before South Louisiana takes a direct hit from a major hurricane. Billions have been spent to protect us, but we grow more vulnerable every day."
"The city is exposed to as much as four times the risk of hurricane flooding as it is to river flooding . . . that's always been an odd issue to me. Why would the government think that water from the lake is less dangerous than water from the river?" -- Joseph Shuhayda, LSU engineering professor
Perhaps most poignant in this series of text, photos and graphical depictions of the vulnerable levee system is this section, which describes a "worst case scenario" that was realized last week:
Quoting a few parts of this must-read study:
"... A stronger storm [than Georges] on a slightly different course -- such as the path Georges was on just 16 hours before landfall -- could have realized emergency officials' worst-case scenario: hundreds of billions of gallons of lake water pouring over the levees into an area averaging 5 feet below sea level with no natural means of drainage."
"That would turn the city and the east bank of Jefferson Parish into a lake as much as 30 feet deep, fouled with chemicals and waste from ruined septic systems, businesses and homes. Such a flood could trap hundreds of thousands of people in buildings and in vehicles."
* * *
"The scene has been played out for years in computer models and emergency-operations simulations. Officials at the local, state and national level are convinced the risk is genuine and are devising plans for alleviating the aftermath of a disaster that could leave the city uninhabitable for six months or more."
* * *
" With computer modeling of hurricanes and storm surges, disaster experts have developed a detailed picture of how a storm could push Lake Pontchartrain over the levees and into the city."
* * *
"Another scenario is that some part of the levee would fail," Suhayda said. "It's not something that's expected. But erosion occurs, and as levees broke, the break will get wider and wider. The water will flow through the city and stop only when it reaches the next higher thing. The most continuous barrier is the south levee, along the river. That's 25 feet high, so you'll see the water pile up on the river levee."
"Washing Away," New Orleans Times-Picayune Five-Part Series published June 23-27, 2002.
This is one of the many directly relevant studies that the President of the United States denied that "anyone" knew about.
Unintended Consequences: Reuters: POTUS Denies Anyone Knew, Despite Times-Picayune Published Studies that Levees Vulnerable
Reuters:"In comments on Thursday, President George W. Bush said, "I don't think anybody anticipated the breach of the levees."
Ignorance or denial?
Either is disgraceful.
On Sunday, September 4, the Los Angeles Times addressed this topic:
"What a powerful hurricane could do to New Orleans and the area's critical transportation, energy and petrochemical facilities had been well understood. So now, nearly a week into the devastation caused by Hurricane Katrina, hard questions are being raised about Washington officials who crossed their fingers and counted on luck once too often. The reasons the city's defenses were not strengthened enough to handle such a storm are deeply rooted in the politics and bureaucracy of Washington."
The Times assesses the consistency of political leaders to sacrifice long-term needs to short-term political goals.
Attorney and pioneer legal weblogger Ernie ("the Attorney") Svenson fled New Orleans and has returned, posting his personal observations and some of the messages flooding to him from his readership and friends. He compares the Katrina Flood of 2005 to the Mississippi River Flood of 1927, which altered America in ways we are still comprehending. Ernie The Attorney: Coming to grips with the catastrophe
He recommends John M. Barry's book "Rising Tide: The Great Mississippi Flood of 1927 and How It Changed America (1998). From Library Journal, as found on the Amazon page for the book:
"In the spring of 1927, America witnessed perhaps its greatest natural disaster: a flood that profoundly changed race relations, government, and society in the Mississippi River valley region. Barry (The Transformed Cell, LJ 9/1/92) presents here a fascinating social history of the effects of the massive flood. More than 30 feet of water stood over land inhabited by nearly one million people. Almost 300,000 African Americans were forced to live in refugee camps for months. Many people, both black and white, left the land and never returned. Using an impressive array of primary and secondary sources, Barry clearly traces and analyzes how the changes produced by the flood in the lower South came into conflict and ultimately destroyed the old planter aristocracy, accelerated black migration to the North, and foreshadowed federal government intervention in the region's social and economic life during the New Deal."
Joe Coppleman at Workers Comp Insider is aggregating info resources from the perspective of workers compensation and workers saftey in the face of the Katrina Disaster. He points out the challenges of those injured at work to process claims, let alone get medical attention. The hospital, hotel and emergency service workers trapped in the cesspool of New Orleans come to mind. He addresses some of the safety and compensation issues of those now employed or retasked as emergency workers. He closes with a personal plea for a dose of much-needed humility before the forces of nature and our own revealed limitations:
"It is eerie to watch these third world images of despair and dysfunction rolling out in our own country. It's something we are used to seeing in remote corners of the world, not on our own shores. But this is all too real: the total disintegration of civil society, the uselessness of the usual management "best practices." This is a crisis where the most rudimentary needs -- food, clothing, water and shelter -- cannot be provided. Between the Christmas tsunami and Katrina, two things have become all too clear: when confronted with the full brunt of nature's power, we are defenseless against the blow and pitifully ineffective in response. Let's keep that in mind when we position our species -- and our country -- in the forefront of all things civilized."
Like many other states, Connecticut is deploying National Guard units to assist in Katrina relief efforts. Governor Rell: Governor Rell Announces Connecticut National Guard Sending Troops to Assist Gulf States; Thanks People of State for Enormous First-Day Outpouring of Relief Aid
Having a decentralized, distributed capacity with local control that can respond fast to disaster is of vital importance. The federal government is too big, slow and clueless about local needs to fit the bill, as its slow motion bureaucratic response to Katrina has demonstrated. Unintended Consequences: Reuters: POTUS Denies Anyone Knew, Despite Times-Picayune Published Studies that Levees Vulnerable
This is another reason to halt federal attempts to arrogate to itself state power over National Guard units. Connecticut Sues to Block Loss of National Guard Jets - New York Times
Risk Management Solutions estimates over $100 billion in economic loss from Katrina, according to Insurance Journal, which said: "Hurricanes of category 4 or 5 strength are well-understood to occur in this region of the country, yet the levee system in New Orleans was designed only to protect against a category 3 strength storm. The insufficient level of flood protection offered by the city's levees has been exacerbated by shortcomings in preparedness."
One insurance question is how many events are involved in this disaster. Is the levee break part of the same event or occurrence as the windstorm? Following 9/11, the extent of property insurance coverage on the World Trade Center itself depended on the interpretation of policy language that determined the number of occurrences. The decision went to the Court of Appeals and took years to resolve.
In the end, some policies were interpreted to cover each of the two airstrikes as a separate occurrence, with a separate amount of coverage for each. Other policies with slightly different language were interpreted so that the coordinated attack on two towers was one occurrence. The decision had a $2.2 billion impact on the insurers that used the different language. See: Unintended Consequences: WTC Coverage Dispute - Phase Two (November 30, 2004) and Unintended Consequences: "Occurrence" under WTC v. HFIC (December 13, 2004) and WTC v. Hartford Fire, 345 F.3d 154 (2d Cir. 2003).
Insurers, reinsurers and courts will be examining the commercial property policies of businesses, apartments, hotels and public buildings for a long time, resolving these issues.
Fitch ratings points to multiple factors that may combine to make Katrina the worst insured loss in history. The levee break, business interruption controversies, looting impact, delays in adjusting losses due to extended flooding, coverage disputes and political sensitivity of denying claims under flood exclusions, the complication of interpreting environmental loss exclusions, all add to the likelihood that reserves will be underestimated initially and "develop" in subsequent years.
As Fitch points out, reinsurers are less regulated, so can increase prices faster than heavily regulated property insurers. Overall, the impact on insurance pricing is likely to be significant, long-term and unevenly distributed.
Thanks for this link to our friends at Specialty Insurance Blog: Katrina & Insurance Prices
Meanwhile, we are not yet past the midpoint of the Atlantic hurricane season. As Floridians can attest, the first hurricane to hit you may not be the last.
Colorado State University hurricane researcher William Gray predicts above-average activity for the coming two months. According to Reuters on September 2, "Gray and his colleagues calculated there was a 43 percent chance another major hurricane with top winds over 110 mph (177 kph) would strike somewhere along the U.S. coast in September." Strong chance another big hurricane will hit US - Yahoo! News
The rising outrage at the unfunded mandate for New Orleans' poor and infirm to evacuate the city must cause changes in the federal and state response to real homeland security needs. If this had been a terrorist bio-warfare attack, or a "dirty bomb" set off in a major city, would the homeland security response have been different?
Responsible government requires more than telling several hundred thousand people with no autos, no savings and no credit cards, with sick and infirm elders and babies to "Evacuate to somewhere else! You figure out where to go, how to get there and where you'll sleep and get food, shelter and medicine when you find it."
The exodus of Oklahomans during the Dust Bowl was the source of untold human misery and human nobility as those with nothing struggled to find a place that would accept a huge influx of refugees. They were met with resistance, sometimes armed and organized by the local government who didn't want "those Okies" in their community. John Steinbeck immortalized the human response to such conditions in "The Grapes of Wrath."
We look to the words he put in the mouth of Tom Joad, pushed to the limit of human endurance by a combination of natural disaster and social failure:
“Whenever they’s a fight so hungry people can eat, I’ll be there. Whenever they’s a cop beatin’ up a guy, I’ll be there . . . . I’ll be in the way guys yell when they’re mad an’—I’ll be in the way kids laugh when they’re hungry an’ they know supper’s ready. An’ when our folks eat the stuff they raise an’ live in the houses they build—why, I’ll be there.”
We're seeing Tom Joads emerge in the chaos of New Orleans. We need many more, and we need to get more of them in the government, because there are not enough in evidence there now.
Reuters:"In comments on Thursday, President George W. Bush said, "I don't think anybody anticipated the breach of the levees."
But Louisiana State University engineer Joseph Suhayda and others have warned for years that defenses could fail. In 2002, the New Orleans Times Picayune published a five-part series on "The Big One" examining what might happen if they did."
MNGO.com's blog from inside New Orleans reports fires, low morale among law enforcement, and still no sign of real troops as of Friday AM:
The City is ON FIRE
Teams Alpha and Bravo finished the medium range recon and there are 3 separate locations on fire. We have pictures coming shortly.
During the recon, I spoke to some Federal Marshalls and NOPD. Morale is LOW. Very low. They're not seeing the military presence they say they were promised. I told those guys they can't possibly imagine how much we (the world) appreciate their dedication. I asked what civil rights the citizens have and the US Marshalls looked at me like I just fell off the turnip truck and chuckled. I asked if citizens can have guns for protection and he said if someone thinks he needs a gun, he should have already evacuated. He also said they are setting the city on fire.
The NOPD wants to know where "the two active duty brigades" were that he says they were told were supposed to arrive today. When I asked him what he would want to tell the world, he said Everyone keeps talking about the military presence in the city, and then asked me," Do you see any military around here" in dusgust.
We reconned our roof also, to get a better view of the city and took... I hesitate to call them "amazing" pictures. My city... it has been punched in the face and is on the canvas being counted out.
And yes, that's smoke you see out of the windows. The city is under a haze from the fires. Smoke and ash are floating miles away from the fires."
"THE BOXES are stacked eight feet high and line the walls of the large, windowless room. Inside them are new body bags, 10,000 in all. If a big, slow-moving hurricane crossed the Gulf of Mexico on the right track, it would drive a sea surge that would drown New Orleans under 20 feet of water. "As the water recedes," says Walter Maestri, a local emergency management director, "we expect to find a lot of dead bodies."
New Orleans is a disaster waiting to happen. The city lies below sea level, in a bowl bordered by levees that fend off Lake Pontchartrain to the north and the Mississippi River to the south and west. And because of a damning confluence of factors, the city is sinking further, putting it at increasing flood risk after even minor storms. The low-lying Mississippi Delta, which buffers the city from the gulf, is also rapidly disappearing. A year from now another 25 to 30 square miles of delta marsh-an area the size of Manhattan-will have vanished. An acre disappears every 24 minutes. Each loss gives a storm surge a clearer path to wash over the delta and pour into the bowl, trapping one million people inside and another million in surrounding communities. Extensive evacuation would be impossible because the surging water would cut off the few escape routes. Scientists at Louisiana State University (L.S.U.), who have modeled hundreds of possible storm tracks on advanced computers, predict that more than 100,000 people could die. The body bags wouldn't go very far."
-- from the online abstract of Mark Fischetti's October 2001 article in Scientific American, "Drowning New Orleans."
"Thus, in true American fashion, we ignored an inevitable problem until disaster focused our attention. Fortunately, as we rebuild New Orleans, we can protect it - by engineering solutions that work with nature, not against it.
The conceit that we can control the natural world is what made New Orleans vulnerable. For more than a century the Army Corps, with Congress's blessing, leveed the Mississippi River to prevent its annual floods, so that farms and industries could expand along its banks. * * * Stopping the Mississippi's floods starved the wetlands and the islands; both are rapidly disintegrating, leaving the city naked against the sea."
"One lasting lesson that has to be drawn from the Gulf Coast's misery is that from now on, the National Guard must be treated as America's most essential homeland security force, not as some kind of military piggy bank for the Pentagon to raid for long-term overseas missions. America clearly needs a larger active-duty Army. It just as clearly needs a homeland-based National Guard that's fully prepared and ready for any domestic emergency."
The Man-Made Disaster - New York Times
RiskProf notes that Katrina will have impacts on insurance prices, though they will be more subtle than the recent sudden spikes in gasoline prices seen across the country. Katrina will take a significant amount of capital out of the whole insurance system. Most of it will initially come from reinsurers, but reinsurers always operate on a long-term relationship with the companies they reinsure. They pay you this year, and recoup the losses next year, and the year after, and the year after that.
Property loss reserves in the whole system will be immediately increased, immediately wiping out taxable income for the quarter (and the year for insurers concentrated in Gulf windstorm exposures). This is a big hit, but it is one that is in the range of forseeable 100 - 250 year windstorm losses. Insurers and reinsurers know that the "reversion to the mean" allows the survivors to earn back their losses in future years.
Katrina will "thin the herd" of insurers that were insufficiently capitalized or reinsured, and those who took a risk on under-insurance. Those who passed on flood insurance will suffer. Those owning property in the heavily impacted area will have to think long and hard whether or not they want to reinvest what insurance proceeds they get in the below-sea-level bowl that man created by "flood management" in the New Orleans metro area. Vindicated will be those engineers and other experts who long warned that New Orleans could not survive a storm like this. See Business Week Special Report Let Katrina Be a Warning (September 1, 2005) and Budget cuts delayed New Orleans flood control work - Yahoo! News
Reinsurers will increase their rates, some marginal insurers may fail and their capacity exit the market, some insurers that were "on the fence" about windstorm exposures on the beach will retire from the market. Residential flood losses will be absorbed into the federal tax and deficit base through the flood insurance program, but commercial property writers may be hit on flood losses to apartments, offices and industrial property. Many windstorm losses will be spread through "wind pools" and government subsidized pools whose solvency will be tested and financing re-evaluated. Commercial writers that got aggressive in the energy markets may find themselves paying disproportionate losses. All these market forces combine and point to an inevitable hardening of the market in property insurance, particularly in the Gulf and Florida.
The effects on insurance prices are subtle and complex. Count on politicians to make them seem simple and controllable with hasty legislation that will have unintended consequences.
The greater effects will be on those losses not covered by any insurance, such as the immense human suffering of those trapped in the chaos of New Orleans.