Hurricane Katrina: Homeowner's Insurance and Wind vs. Water Damage

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Punitive damages awarded in Katrina case

The Broussards sued State Farm for refusing to pay for any damage to their home, which Katrina reduced to a slab. The couple, who wanted State Farm to pay for the full insured value of their home plus $5 million in punitive damages, claimed that a tornado during the hurricane destroyed their home. State Farm blamed all the damage on Katrina's storm surge.

The article has a picture. That is not a house destroyed by wind, if you'll compare it to the pictures at this website, for instance. Notice how the components are still mostly there, even if they've been turned into matchsticks? here's another. more here. Still more. In every case, the components are still mostly there. In order to get the foundation scrubbed clean like that requires a massive surge of water. It may be possible with sufficiently strong, sufficiently sustained winds, but much more powerful storms than Katrina have failed to produce that sort of result. Katrina wasn't even a particularly powerful hurricane when it hit land - it's just that the levee failed.

As I have said before, Homeowner's Insurance does not cover flood damage. Furthermore:

State Farm and other insurers say their homeowner policies cover damage from wind but not from water, and that the policies exclude damage that could have been caused by a combination of both, even if hurricane-force winds preceded a storm's rising water.

Senter, however, ruled that State Farm couldn't prove that Katrina's storm surge was responsible for all of the damage to the Broussards' home. The judge also said the testimony failed to establish how much damage was caused by wind and how much resulted from storm surge.

This is a standard policy form, and should have been made clear to them at purchase, especially living in a flood zone. If it wasn't, the correct place to file a claim would be with the Errors and Omissions Insurance of the agent who sold them the policy. Of course, that's not "deep pockets", and that agent could be just as sympathetic a figure as the claimants, meaning the jury might not award anything.

The clause on "combined damage with excluded perils" is supposed to prevent wasting money paying lawyers on exactly this sort of charade. The homeowners hypothesize that there was some sort of tornado that did the initial damage, but the fact is that their home would have been destroyed by the storm surge in any case. They needed flood insurance and decided not to purchase it. Sure, the house might have been knocked over first by the wind, but the fact of the storm surge renders that all moot.

Now, I've got loads of sympathy for the folks who lost their homes, but that's no excuse to make insurers liable for things they did not agree to insure when the policy was purchased. Had they known they were insuring that, they would have charged more money for the policies. Had the victims bought a policy of flood insurance, the entire point would be moot.

If you're wondering why homeowner's insurance is so expensive, particularly in areas subject to this sort of concern, court cases like this are exactly why. If you're looking for reasons why insurers cancel policies, refuse coverage, leave the state, or even get out of the business entirely, this sort of case is it. I predict that in a few months, there will be articles all over the place about how hard it is to get homeowner's insurance in the Katrina hit areas, and people whose policy was not renewed, was canceled, or left without coverage when the company stops doing business in the state. Furthermore, no other company will want to step in, and prices of those few who are will be much higher. All of this hurts the people who actually need homeowner's insurance in the area. If you can't get homeowner's insurance on a property, lenders will not lend on it. This impacts property values in a major negative way. It's bad enough for many kinds of construction without this additional hit. If nobody will lend on it, you are limited to loaning the money yourself, or taking whatever cash the buyers have. I don't know what home values are like in the area, although I imagine they're not anywhere like California prices, but whatever they are, I'll bet this is going to cause at least a 50% hit.

I'm certain that this will be a popular decision. "Yeah! Sock it to those (expletive) (expletive) insurance companies!"

It is nonetheless wrong. It will cause major reductions in home values in the area, make homeowner's insurance more difficult to obtain and more costly if it is available, and leave many of those in the area unable to obtain, or unable to afford, homeowner's insurance.

Nor are the insurance companies in any way, shape, or form, the "bad guys" here. That was the Army Corps of Engineers, which failed to do their jobs in properly constructing the levee to withstand things that were within the design specifications. The levee was not over-topped; it crumbled. Nonetheless, from my studies of riparian and littoral rights about ten years ago, my guess is that there is no case against the Army Corps of Engineers or the federal government here.

I hope that the court of appeal has the presence of mind and intestinal fortitude to to overturn both the judge ordered damages and the jury ordered punitive damages. It's a hard case decision to make, but the correct one if they do not want to sabotage the entire system of casualty insurance we have developed in the United States, and along with it, the property values and peace of mind of everybody in the region.

Other information:

According to this place, Allstate already pulled out.


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About this Entry

This page contains a single entry by Dan Melson published on January 11, 2007 8:09 PM.

Buy Now vs. Wait: Some Practical Hypotheticals was the previous entry in this blog.

Deferred Payment Mortgages - Not As Bad As I Expected is the next entry in this blog.

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