State Farm Insurance Co. and Allstate Corp. are facing more
than ever-rising damage estimates for Hurricane Katrina. Once
the waters recede, the two local insurance giants will have to
face lawsuits that will try to make them responsible for
paying damages due to flooding, which homeowners policies
routinely don’t cover.
Leaving flood damage aside, both Bloomington-based State
Farm and Northbrook-based Allstate are expected to have to pay
billions in claims. Flood damage is insured by a
federal-government product that homeowners must buy separately
from ordinary homeowners insurance. Allstate and State Farm’s
homeowners polities routinely exclude flood damage.
But a recent court decision in Florida, which required
insurers in that state to cover flooding from last year’s
spate of hurricanes, has insurance lawyers predicting there
will be similar court cases in Louisiana and Mississippi. If
those lawsuits are successful, the price tag for Allstate and
State Farm would rise substantially since so much of Katrina’s
damage is related to flooding.
The reason the insurance industry is concerned is that
Louisiana and Mississippi have a similar statute to the one in
Florida that plaintiffs successfully used last year to force
insurers to pay for flood damage to homes. That statutes,
called Valued Policy Laws, say that insurers must reimburse
their customers for the total value of a destroyed home if the
insurers’ premiums were calculated based on that total value.
For years, insurers have interpreted these laws to mean
they’re responsible only for the amount of damage caused by
something their policies covered. So, for example, if wind is
half-responsible for destroying a home and flooding caused the
rest of the damage, then insurers pay claims for just half the
value of the home.
That changed suddenly in Florida last year after a state
Appeals Court affirmed a lower-court decision in the so-called
“Mierzwa case,” ruling that insurers in such situations have
to reimburse for the total loss. Stunned insurers successfully
lobbied the state legislature to pass a law several months ago
overturning the ruling, but the statute applies only to future
events, not last year’s hurricanes.
Now, insurers are bracing for a similar battle in Louisiana
and Mississippi.
“We expect the lawyers who dealt with this in Florida to
try that,” says Don Griffin, vice-president of personal lines
for the Property Casualty Insurers Assn. of America, based in
Des Plaines. “We don’t know if it will hold up.”
Baton Rouge, La., insurance attorney Shelby McKenzie says
Louisiana’s Valued Policy Law applies only if insurers haven’t
set forth a specific method for calculating losses in their
policies,
Mr. McKenzie, who has taught law at Louisiana State
University and defends insurance companies, said he was
doubtful that Louisiana courts would take the position
Florida’s did. “People understand you have to buy flood
insurance” to get coverage for flooding, he said.
An Allstate spokeswoman says the company’s position is that
it isn’t responsible for flood damages. She had no comment on
the potential of facing lawsuits over the issue.
Says a State Farm spokesman: "We're going to handle each
claim on an independent basis and beyond that I'm not going to
speculate."
In general, "Flood is not covered (by homeowners
insurance). That's why there's flood insurance," he said.
So far State Farm has gotten 75,000 claims related to
Katrina
Estimates of Katrina’s cost to insurance companies were
running as high as $35 billion on Friday. Total losses from
the storm could be as high as $100 billion, according to Risk
Management Solutions Inc., a California-based
insurance-industry consultancy.
Together, State Farm and Allstate have about half the
homeowners-insurance market in Louisiana, and slightly less
than that in Mississippi. A Banc of America Securities analyst
wrote in a report last week that Allstate could face pre-tax
losses as high as $2.5 billion. Last year’s Florida hurricanes
cost Allstate just over $1 billion on an after-tax basis.
The Allstate spokeswoman said the company has no estimate
yet of its exposure.
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