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The unprecedented
devastation along the Mississippi Gulf Coast wrought by
Hurricane Katrina has prompted an outpouring of public and
private resources to communities and individuals who have lost
everything.
In the days
immediately after the storm, as disaster assistance began to
trickle into the hardest hit areas and insurance adjusters began
meeting with policyholders to assess the damage to homes and
businesses, the scope of the tragedy for many citizens became
clear: much of the damage from Hurricane Katrina was caused by
flooding, not by wind, and estimates are that only a third of
Mississippi residents had bought flood insurance from the
National Flood Insurance Program (NFIP). Unfortunately, this
tragedy has now been compounded by the activist impulse of a
state attorney general to litigate long-settled insurance
contract law.
Large-scale disasters
put public officials in the spotlight along with their
communities. While the vast majority use their official powers
responsibly to bring order out of chaos, the opposite does
occur. In Mississippi, Attorney General Jim Hood filed a lawsuit
in state court just a little over two weeks after Hurricane
Katrina’s August 29 landfall. While the named target is the
insurance industry, the real victims are the citizens of
Mississippi who have been given false hope that homes and
businesses destroyed by flooding will be rebuilt with insurance
proceeds.
Attorney General
Hood’s lawsuit clearly threatens the ability of Gulf Coast
communities to rebuild after Hurricane Katrina. His attempt to
rewrite long-settled insurance contract law regarding flood
coverage imperils the stability of the state’s insurance market.
The litigation also puts at risk the positive impact of 2004's
comprehensive tort reform law. Gov. Haley Barbour's goal of
linking economic development to a fair and balanced liability
system is even more critical now, when Mississippi needs to
attract businesses willing to invest in the state's future.
Hood charges that
insurers should pay claims for flood damage – a peril that is
clearly not covered under most policies. The relationship
between an insurer and its policyholders is determined by their
contract, and it is wrong to ask an insurer to pay claims for
losses that are beyond the scope of that contract. Any type of
post-loss contract rewriting would be extremely unfair to the
millions of Gulf state policyholders who did buy coverage
through the NFIP.
Hood conveniently
ignores what millions know and what has been national public
policy for decades – private insurance covers wind damage from
hurricanes, but not the damage from the tidal surges that a
hurricane can cause. This type of water damage is what the NFIP
is all about: for more than 35 years, flood insurance
principally has been the responsibility of the federal
government under the NFIP. This program has been available to
Mississippi homeowners and businesses in flood-prone areas. The
fact that Hood inexplicably ignores this division of
responsibilities doesn't make it any less true.
What the attorney
general’s lawsuit attempts to do is retroactively rewrite
private insurance contracts for those individuals and businesses
that chose not to buy flood insurance from the federal
government’s flood insurance program. This would inject
tremendous uncertainty into the insurance system, which relies
on predictability and certainty in order to function for the
benefit of policyholders.
If insurance
contracts can be retroactively rewritten, all other contracts
would be exposed to such amendment. All businesses, and the
investors who fund them, need to be able to rely on their
contracts as a fundamental principle.
Economic recovery
following a catastrophic loss requires a stable insurance
market. Insurers underwrite and make possible the many types of
business investments that must occur for effective recovery to
take place. If the insurance market is destabilized by the type
of revisionist history that Hood would like to impose on
insurance contracts, the economic recovery of the entire Gulf
Coast area would be thrown into question. If that happens, we
need look no further than the Mississippi Attorney General’s
office to assess responsibility.
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