Insurance Policies

The tragic circumstances surrounding the appearance of hurricane Katrina some two years ago highlighted a number of problems and issues facing not only the people of New Orleans and environs but all Americans. One such issue is often spotlighted after a disaster of this sort, and that issue is the inadequacy of much of the insurance coverage offered. In addition, as with hurricane Katrina, insurance agencies are accused of defrauding their policyholders by reporting falsified inspections of properties and so depriving those policyholders of rightful payments. Similar concerns are often raised when insurance companies deny medical treatments to sick policyholders. Certainly, many policyholders pay a good deal of money to the insurance company over the years as a way of preparing for a time of emergency. The perception today is that insurance companies area dedicated not to providing assistance in a time of crisis but to assuring that they do not have to pay out to the insured, with a number of excuses used to keep from having to do so. This raises the question of how legal some of these maneuvers may be, whether the system is too weighted in the direction of the insurance companies, and if the actions of those companies is ethical.

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As noted by Robert P. Hartwig, President and Chief Economist for the Insurance

Information Institute, Hurricane Katrina was the largest and most expensive disaster in the history of insurance. In the aftermath, claims payments to restore homes, businesses, and vehicle losses totaled $40.6 billion for some 1.74 million claims filed by policyholders in six states. In 2005, insurance losses from all hurricanes reached $57.1 billion for 3.3 million claims. Hartwig states, “These staggering numbers illustrate the magnitude of the threat posed by hurricanes to people who live in coastal regions and the financial resilience of the insurance industry and the economy of the United States” (Hartwig para. 1).

The industry makes it sound as if all claims were paid, but in fact many policyholders were not paid, or not paid enough, leading to a reaction against the entire industry. In addition to bitterness about not being paid sufficiently or promptly, many saw higher insurance premiums in the future and either reduced or eliminated their coverage, a risky strategy. Such problems affect certain segments of the population disproportionately:

Elderly homeowners – particularly those on fixed incomes and those who have paid off their mortgages – may be the most likely to go uninsured. Most homeowners don’t have that choice, because mortgage companies require borrowers to have insurance. Those whose homes are paid off can drop their policies, unless they are getting government grants or loans that require one. (“Homeowners Drop Insurance after Katrina” para. 8)

Other dissatisfied policyholders have taken legal action. A different sort of case was filed in U.S. District Court against major insurance companies along with the adjusters and engineering firms they employed. These entities are being accused of fraudulently charging the federal government “hundreds of millions of dollars” for Hurricane Katrina claims. According to the lawsuit, these claims should have been paid but were not. The case was filed on behalf of whistleblowers Cori and Kerri Rigsby, who adjusted Katrina claims for State Farm, which along with other insurers has denied any wrongdoing. According to the lawsuit, State Farm and other major insurers “made a corporate decision to misdirect and misallocate claims from those of hurricane coverage (which a company would be required to pay) to flood claims that could be submitted and paid directly from the United States Treasury” (Lee para. 4). The plaintiffs state that insurance companies and engineering firms they hired filed false claims and conspired to defraud the government. The suit seeks three times the overcharges to the National Flood Insurance Program, plus up to $11,000 for each violation of the federal false claims act, and the law would also allow the whistleblowers to collect a percentage of any damages awarded. Defendants named include State Farm, Nationwide, Allstate, and USAA insurance companies, plus engineering firms that examined property damage after Hurricane Katrina.

Another suit in federal court deciding whether thousands of people whose homes were destroyed by Hurricane Katrina can receive payouts for losses their insurance companies claim were caused by flooding. The plaintiffs claim they were misled by their insurance agent and then denied much of their claim without a full review of the facts. The insurance company, Nationwide Mutual Insurance Co., argued that while wind damage is covered by its homeowners’ policies, damage from flooding is excluded, and that this includes Katrina’s wind-driven storm surge.

This trial is the first of hundreds of lawsuits that have been filed by Gulf Coast homeowners challenging insurance companies over the wind-versus-water issue. It was also charged that the insurance agent misled purchasers so that they did not buy flood insurance because he would not make much money if they did (Kunzelman paras. 1-6).

In March, a federal judge ruled that the insurance companies do not have to pay for flood damage caused by the city’s levee breaches, based on the fact that insurers’ property policies “unambiguously” excluded all types of flood damage, including damage from a man-made disaster, such as the failure of the levees. Thousands of homes were submerged after the levees broke, and this ruling could keep thousands of homeowners from pursuing similar claims against insurers in state and federal courts (“Hurricane Katrina Victims Denied Insurance Claims” para. 1).

In January, State Farm agreed to pay thousands of Mississippi policyholders. The company would pay out as much as $500 million, with no cap on the payout. State Farm also agreed to settle more than 600 individual claims for some $80 million. Suits in Louisiana were not affected (Chu paras. 1-7). However, only a few days later, the judge refused to accept the settlement, stating,

In the absence of substantially more information than I now have before me, I am unable to say, even preliminarily, that the proposed settlement establishes a procedure that is fair, just, balanced or reasonable. (“Judge Blocks Katrina Insurance Settlement” para. 2)

The denial of claims after this disaster has tended to be because of the wind-versus-flood debate, though there have also been instances of inexperienced adjustors making faulty decisions on claims, most of the controversy surrounding the rejection of hurricane claims is due to the flood vs. wind debate, referring to the condition in most homeowner insurance policies that floods are not covered, although wind-driven rain may be: “When evaluating a claim, adjusters must determine whether flooding or winds caused damages. This task is made difficult because these two conditions are often interrelated and difficult to distinguish in hindsight” (“Why are Hurricane Claims Being Denied?” para. 2).

Kenneth S. Abraham examines the legal issues raised by insurance in a time of disaster and with the mass torts that often follow, citing what he calls “mass disasters”:

These are natural and man-made disasters whose center of gravity is not tort, and therefore not liability insurance, but personal and property losses. The mass disaster that occurred on 9/11 did spawn a variety of non-liability insurance disputes. But even these disputes mostly involved different forms of corporate insurance, such as commercial property and business interruption coverage claims. (Abraham para. 1)

Daniel Schwarcz analyzes the question of how to shape insurance policies and says that judges have been asked to regulate the substance of insurance policies by refusing to enforce insurance policy terms that are exploitive or otherwise unfair. The usual guide offered is the “reasonable expectations doctrine,” requiring courts to disregard coverage restrictions that go beyond the insureds’ reasonable expectations unless the insurance company specifically informs the insured about the restriction at the time of purchase. Schwarcz suggests that the role of the judge would be better defined in a liability framework:

It proposes that, just as firms that make defective products must pay for the resulting injuries, insurers that issue “defective” insurance policies should have to provide coverage to insureds. The Article argues that the usefulness of the analogy to products liability law goes well beyond understanding the normative basis for the judicial regulation of insurance policies. Products liability law offers important insights into how courts can efficiently correct failures in insurance markets by encouraging effective disclosure to consumers and appropriately setting penalties so that insurers take an optimal amount of care in drafting policy terms. (Schwarcz paa. 1)

Schwarcz uses as an example the policy of Senator Trent Lott, which after the hurricane caused Lott to sue his insurance company. He had purchased a “Hurricane Deductible Endorsement” so he would be covered for hurricane damage, and Lott claimed that this created the expectation that he would have full and comprehensive coverage for any and all hurricane damage, though the company disagreed and pointed to the language of the policy alone. Lott’s suit also suggested that the advertising campaign of the insurer reinforced such expectations on the part of the insured. By the “reasonable man” doctrine, it was stated that most consumers would simply believe that they would be covered for losses caused by flooding in a hurricane.

However, as Schwarcz notes, the reasonable expectations doctrine fails in practical use for several reasons. Whie th doctrine may have widespread support from insurance law commentators, “Only a handful of state courts follow the rule, and the case law endorsing it is confused and inconsistent. Moreover, contract law scholars have largely debunked the contracts-of-adhesion argument on which the reasonable expectations doctrine was originally justified. They have established that neither consumer assent nor government regulation is necessary to lead firms to design efficient standard forms when market forces work sufficiently well” (Schwarcz para. 5). Because the doctrine has a record of stunted evolution in the courts and because there has been an academic undermining of its core rationale, many view it to be both antiquated and largely irrelevant. Still, the reasonable expectations doctrine has served as the primary theoretical and doctrinal construct for the judicial regulation of insurance over the past forty years, so the demise of the reasonable expectations doctrine has corresponded with the demise of judicial intervention in the content of insurance policies, a move which satisfies only insurance companies.

Schwarcz thus proposes that limited judicial regulation might be in the best interests of insurance consumers and that using product liability as the underlying doctrine may produce better results. Products liability law first clarifies the normative case for why courts should occasionally deviate from insurance policy terms, and it also provides a practical and theoretically sound doctrinal structure for implementing this principle. As Schwarcz notes, products liability law first suggests that informing consumers about product information is not as easy as the reasonable expectations doctrine supposes:

Because consumers can only digest a limited amount of information, requiring firms to perfect consumer information is not sensible. Instead, products liability law requires firms to inform consumers about particularly important safety risks and to provide instructions in an easy-to-read and obviously visible manner. (Schwarcz para. 7)

One major element in the development of insurance policy has been the campaign waged by the insurance industry to keep the courts from making insurance policy or for keeping judges adhering to pro-business policies.

The industry has spent millions on a massive public-relations campaign against “runaway jury awards” and “greedy trial lawyers” as a way of pressuring states to restrict citizens’ rights to sue:

In California, insurance companies spent more than $44 million in 2000 to overturn two-year-old state laws that allowed a person injured in an auto accident to sue the other (at-fault) driver’s insurance company for refusing to settle or lowballing payment on a legitimate claim. Similar campaigns are under way in states like West Virginia, where such laws are still on the books. Meanwhile, the U.S. Chamber of Commerce plans to fork over $40 million this year in lobbying for federal restrictions on citizens’ legal remedies. Much of that money comes from insurance companies. (Mencimer 60)

As Mencimer notes, lawsuits and the threat of high damage awards “are often the only recourse consumers have, not only to learn about insurance companies’ business practices but also to prevent insurance companies from abusing them with abandon” (Mencimer 61).

The various federal and state laws are both confusing and contradictory and largely shaped for the benefit of the insurance companies. Strict contract law is often the base for insurance law, which is why the exact language of policies is scrutinized so closely and why what is in the contract counts for more than what insureds may be told or how the companies may manipulate the consumer to sell policies on the one hand and to avoid paying claims on the other.

Works Cited

Chu, Kathy. “State Farm Agrees to Pay Up for Katrina in Mississippi.” USA Today (23 Jan 2007). August 11, 2007.

Hartwig, Robert P. “Hurricane Katrina Insurance Issues: Robert P. Hartwig.” Congressional Testimony (28 Feb 2007). August 10, 2007.

Homeowners Drop Insurance After Katrina.” Associated Press/AP Online (19 March 2007). August 10, 2007.

Hurricane Katrina Victims Denied Insurance Claims.” Insurance Related News (08 March 2007). August 11, 2007.

Judge Blocks Katrina Insurance Settlement.” On Deadline (26 Jan 2007). August 11, 2007.

Kunzelman, Michael. “Groundbreaking Trial Could Help Decide Katrina Insurance Claims.” (11 July 2006). August 9, 2007.

Lee, Anita. “Sisters Sue Insurance Companies, Claim Fraud.” The Sun Herald. August 10, 2007.

Mencimer, Stephanie.:Insurance Impunity.”

The American Prospect, Volume 14, Issue 7 (July-August 2003),. 60-61.

Schwarcz, Daniel. “A Products Liability Theory for the Judicial Regulation of Insurance Policies.”

William and Mary Law Review, Volume 48, Issue 4 (2007). August 9, 2007.

Why Are Hurricane Claims Being Denied?” Resource 4 (2005). August 11, 2007.