A Federal judge in the Eastern District of Louisiana held that cases against certain insurers could proceed to trial for whether the plaintiffs' homeowners insurers are responsible for flooding resulting from the New Orleans levee breaches.  A basic issue is what the policies' flood exclusion actually excludes. The court made a distinction between flooding caused by a natural event (hurricane--presumably covered) and one from a man made event (levee breach --not covered). 

David Rossmiller makes interesting points.  In addition to commenting on the length of the 85 page opinion, he notes that

[i]n a reach of logic that is difficult to swallow, the court then categorizes the New Orleans flooding as caused by human negligence -- the collapse of canal and levee walls due to human design or construction faults -- rather than by Hurricane Katrina.  One could also say the flooding was caused by people building a city below sea level, but is that sound logic or mere reductionist technique? 

The opinion also relies more on dictionary definitions than law or common sense.  For example,  no insurer offers flood insurance in anything resembling a standard homeowners policy.  All insurer's attempt to exclude it.  Were consumers really misled given that the Federal Flood Insurance Program has been around since 1968 and there probably hasn’t been a significant private market flood claim payout since 1968?  The court used the so-called reasonable consumer expectations argument to rule that when the term is ambiguous, one should look to cover the loss consistent with the reasonable policyholder’s expectation.  This is the wrong standard when the judge could take notice of the presence of the exclusion in just about every insurance policy written in the last forty years and that the Federal program was deigned to cover these types of risks.

The opinion can be found here.  Rossmiller and Grace have additional commentary. Also see extended commentary in the comments on the the bigger issue of how we pay for these losses at Marginal Revolution.

From today’s Washington Post (reg req).

CIA counterterrorism officers have signed up in growing numbers for a government-reimbursed, private insurance plan that would pay their civil judgments and legal expenses if they are sued or charged with criminal wrongdoing, according to current and former intelligence officials and others with knowledge of the program.

The article goes on to note that CIA officers are not sure how the Department of Justice will defend them in civil suits arising out of alleged prisoner mistreatment.  The President has asked for legislation that would grant officers immunity, but they are opposed by Democrats and "dissident" Republicans.

The insurance referred to in the article is priced at $300 for $200,000 in legal expenses and $1 million in liability coverage.  Just to provide a comparison, a $1 Million liability umbrella coverage from a large nationwide insurer has a price of about $100–150.  Thus, while seemingly inexpensive, this CIA liability coverage is not really “cheap insurance” as the insurer expects the risks to be greater than a typical person’s liability risk. 

Ted has taken a more pessimistic view of the recent Katrina case ruling in Leonard v. Nationwide.  Walter and David Rossmiller both have taken a more optimistic view.  I think there is some room for optimism too.  While the judge threw out the anti-concurrent causation language as being vague, Judge Senter did hold in his rulings of law that ...

Under applicable Mississippi law, in a situation such as this, where the insured property sustains damage from both  wind (a covered loss) and water (an excluded loss), the insured may recover that portion of the loss which he can prove to have been caused by wind. Grace v. Lititz Mutual Insurance Co. 257 So.2d 217 (Miss.1972). Nationwide is not responsible for that portion of the damage it can prove was caused by water. To the extent property is damaged by wind, and is thereafter also damaged by water, the insured can recover that portion of the loss which he can prove to have been caused by wind, but the insurer is not responsible for any additional loss it can prove to have been later caused by water. Lititz Mutual Insurance Co. v. Boatner, 254 So.2d 765 (Miss.1971).

Thus, if the insurer or the insured can make a case for coverage based on evidence of the source of loss, I don’t think one has to worry about the concurrent causation issue as much.  Under Mierzwa (a recent Florida case) which said that if two causes were established (wind and flood) and one was excluded (flood), the insurer was responsible for the policy limits even if flood was the major cause of the homes destruction.  Judge Senter doesn’t come out and reject this, but he does assert that Mississippi law does not require the payment of the value of the policy in a case where there are two causes and the major amount of damage was caused by an excluded loss. 

It doesn’t appear that this valued policy issue was brought before the court. However, it seems like a reasonable conclusion from the opinion the valued policy notion is not as broad as Florida’s as each party must prove its version of the loss based on what caused the damage and whether the cause was covered by the policy.

The consumer disadvocates are taking it on the chin.  Last week Ted Frank and I finished an AEI Liability Outlook critiquing studies put out by various consumer advocates.  Also late last week Rob Hoyt and Lars Powell took on the Foundation for Taxpayer & Consumer Rights (FTCR).  This is a group that advocates getting rid of zip code restrictions on insurance pricing in California.  This would be a good thing for low risk drivers in California and is often fought by other consumer disadvocates. However, the FTCR has a split personality.

The FTCR issued a report last winter which claimed med mal insurers were intentionally over reserving to create a crisis so that they could raise med mal rates.  In addition to the previous canards often repeated, yet easily discredited, such as the claim that the insurance industry lost money due to poor investments choices, the FTCR looked at a given set of years’ reserves and then extrapolated forward claiming that the med mal industry will have over charged doctors some $15 billion. 

Hoyt and Powell look at more recent data which suggests something completely different.  First, they tackle the issue of the "poor" investment choices of med mal insurers to show that, the investments are mostly in bonds, and the portfolios are more conservative, on average, than the insurance industry as a whole.  Second, they show insurers have not over reserved as evidenced by relatively small downward reserve revisions.  Further, Hoyt and Powell point to evidence consistent with an industry without profits: Insurer exit and state assistance plans for physicians seeking coverage.  This is not the sign of a healthy market and truly inconsistent with the high profits alleged by the FTCR. 

The consumer advocates really need to understand this market and insurance markets in particular.  They do not comprehend insurance pricing, competition, market structure or the incentive structure of the industry.  According to the PIAA, an industry association of physician owned insurance companies, some 60 percent of the US market is covered by these member-owned medical malpractice insurers.  What possible incentive do these insurers have to over-charge their customers just so that they can turn around and give those same customers a dividend?

Last week Americans for Insurance Reform (AIR) released a "study" claiming the med mal crisis is over. AIR examined the number of rate increase requests for a small number of states with damage cap limitations and a small number of states without damage cap limitations and concluded that tort reform was a waste because neither group of states saw any recent increases in premiums. This conclusion is as faulty as if a physician told a patient to take two aspirins for a headache — which later turned out to be something more serious.

An insurer develops an innovative technique to separate good risks from bad.  Consumer groups become outraged, race gets mentioned, lawsuits commence and legislators start threatening to change the law -- and in some cases they do. This is the pattern behind the insurance industry's attempt to use the insurance credit score to discriminate between high and low risk drivers.  It is also the pattern behind the uproar in California as the industry uses zip codes to distinguish between drivers who live in high and low risk areas.  Now, GEICO has entered the New Jersey market with another rating innovation--educational attainment. (AP 2/27) Better educated people seem to have lower risk of accidents and GEICO wants to pass this savings along to the good drivers.  A lawyer, under the GEICO plan, would pay about $1,000 less than a janitor would presumably because the lawyer is a lower risk given a similar car and driving record.

Consumer advocates seem to miss the point about risk based pricing arguing that if it is not related to driving, then it should not be employed as a rating factor.  However, if education is correlated with a person’s ability or incentive to take care, why not use this information?  The correct answer for the consumer advocate is never because one should pay more for one’s poor driving habits or for one’s costly choice of locale.  The consumer advocates seem to always put what they consider fairness, but is really simple minded egalitarianism, ahead of efficiency.  How is this "fair" if good drivers pay more than they should?

Trent Lott is suing State Farm in Federal District Court in Mississippi for his Katrina losses. (Biloxi Sun Herald). He is arguing that wind was the proximate cause of the storm surge and invokes Mississippi�s valued policy provision which may suggest that the insurer must pay even if a contractually excluded event (storm surge) destroyed his house.

While the PIAA  and the HCLA have gone after the easily disputable report by Mr. Angoff (see here and here), the American Academy of Actuaries  which normally stays above the fray has also put in their two cents.

Historically, the subcommittee has not commented on individual medical liability studies. However, the July 2005 study by Jay Angoff commissioned by the Center for Justice & Democracy entitled Falling Claims and Rising Premiums in the Medical Malpractice Insurance Industry is an exception because of the public attention it has received, the apparent credibility ascribed to its conclusions and, in our view, the poor quality of the analysis.   …

In our opinion, the report is incomplete, actuarially unsound, and misleading. The report uses improper data comparisons, incomplete information and appears to misuse certain insurance industry benchmarks. Besides reviewing the report, we have reviewed studies commenting on the report and concur with various points made in these studies. Key among these are that the report: contains misleading and inappropriate comparisons of financial data presented in insurance company Annual Financial Statements; does not include all costs associated with providing the insurance product (e.g., costs of defending claims, administrative expenses, etc.); does not adjust for growth in insureds over time; misrepresents and misuses Risk Based Capital (RBC); in addition to other mischaracterizations and misinterpretations.

From the Times Picayune  (10/19):

Sen. Trent Lott, R-Miss., said he was "a little apprehensive" about Taylor's insurance buy-in bill.[*]  Lott said he supported setting up a disaster fund to cover uninsured damage in future disasters, an idea that insurance companies have pushed for years. But Lott said that the industry should bear a financial burden for residents who thought their homeowners' policies covered hurricane flood damage.

If insurance companies don't do it willingly, Lott predicted, the lawsuit filed by Scruggs, his brother-in-law, could force them to.”

 * A bill that would allow those not on flood maps and who had flood damage to obtain retroactive insurance for a hefty fee and a promise to stay in the flood program.  (See previous discussion here.)

Apparently the case between Mississippi's Attorney General Hood and the insurance industry has been removed to Federal Court. (Clarion Ledger 10/14)  (See here, here and here and here for other discussion of this lawsuit.) Not being an expert in the intricacies of the federal removal statute, it nonetheless seems wrong to remove this dispute to Federal Court as the state has to waive its sovereign immunity in some way under the 11th Amendment . While the lawsuit's basis is suspect, the Mr. Hood is attempting to enforce Mississippi law and as an agent of the state it would seem like the state court is the proper forum under principles of federalism for this dispute.