I've got a "Rule of Law" guest column in Saturday's Wall Street Journal (subscriber-only link) on the lawsuits by Mississippi attorney general Jim Hood and his ally Dickie Scruggs attempting to overturn the clear and unambiguous exclusion of flood coverage from homeowners' insurance policies in the wake of Hurricane Katrina. As readers of this site know, I'm appalled by the idea:
Sometimes it takes a good lawyer to get an insurance company to pay up on the promises it made. But if you want insurers to pay billions on promises they never made -- risks they were at pains to avoid underwriting, never collected premiums for, and never set aside reserves against -- then a pair of very special lawyers, Jim Hood and Dickie Scruggs, are at your service.
In case you're arriving late, insurance pros worldwide stood transfixed last week at the news that Mr. Hood, the elected attorney general of Mississippi, and his ally Mr. Scruggs, the Pascagoula wheeler-dealer known for his role in the $246 billion tobacco litigation, were suing to invalidate -- as "unconscionable" and contrary to public policy -- the standard flood exclusion in every Magnolia State homeowner's contract. Assuming ordinary readings of policy language, the early estimates have insurers on the hook for a record $40-$60 billion in Katrina payouts. Knock out the flood exclusions and that exposure will increase by many billions more -- scores of billions if the principle gets applied in Louisiana.
I get into the Constitutional issues a little bit, and some of the practical consequences:
So, can't State Farm, Allstate and others cite Article I, Section 10 of the U.S. Constitution, which provides that "No state shall. . . pass any. . . law impairing the obligation of contracts"? Unfortunately, the Supreme Court in Blaisdell, a 1934 New Deal case, gave states free rein to nullify contracts so long as "the legislation is addressed to a legitimate end and the measures taken are reasonable and appropriate to that end." If you think that guts the originally intended protection, maybe you're part of that "Constitution in exile" movement we keep being warned about.
Should the Hood-Scruggs theory be taken seriously, the bankrupting of some insurers and the diversion of money from insureds in other states will only be the start. The wider problem would be that both reinsurers and primary insurers are likely to head for the hills rather than underwrite future conventional policies in Mississippi, or indeed any jurisdiction judged capable of electing a Hood to high office. At a minimum, they're likely to demand a steep premium to compensate for legal risk.
More: Thomas Knapp notes that "It was only a matter of time before the Gulf Coast disaster moved from the finger-pointing stage to the pocket-picking phase." (via Henley). And: Infamy or Praise (Sept. 19), Ribstein, Kirkendall, D.C. Examiner.