Hurricane Katrina Insurance Issues

A few points as to what's likely to happen with this.



Hurricane is not a named peril on most policies.



Fire, Lightning, and removal (i.e. moving stuff to a safer area after a partial destruction) are three named perils that are universally covered under National Association of Insurance Commissioner (NAIC) rules. You can get more inclusive coverage that insures for more perils. Here in California, the policies are standardized and homeowners have several levels of coverage to choose from (HO1, HO2, and HO3 are for single family residences in ascending order of coverages. HO6 is for individual condo owners, and the association is legally required to carry a master policy for the whole complex. There is also an HO 15 endorsement that many single family homeowners might wish to consider). The peril likely to result in valid homeowners claims is wind. I actually imagine that the insurance companies are going to be fair about where there is a credible claim for wind damage. As always, some will be less so, but others will likely actually go somewhat overboard in granting claims, something like AAA did here in San Diego for the wildfires in October 2003 (They paid full amount of damages for people who were underinsured, treating it as a problem they should have caught in underwriting).



From my understanding of the situation, however, the thing that caused most of the damage is flood. This is a specific exclusion from most homeowners policies. The homeowners insurance is not going to pay - you don't have this coverage with them. Flood is a separate insurance policy. Here is the FEMA website on the issue, and here is the explanation page one click away.



So unless people who bought flood insurance as a separate policy, they are likely not to be covered for what happened to their property,



(As a general rule, a lot of water related stuff is a big pain and and its insurance and other issues are a whole separate headache.)



On a meta-level, homeowners insurance is generally underpriced. People will not pay what it really costs, so insurance companies who sell it for some short term cash flow often get burned when there is a major event like this. In the wake of Hurricane Andrew in 1992, some insurance companies paid out what had been fifteen to twenty years worth of their entire national profits on homeowners claims. I remember at least one formerly well capitalized company went bankrupt, and many homeowners insurers left the state. All remaining companies raised their rates within Florida, some nationwide.



Homeowners insurance being underpriced sounds like a good idea, until you think a bit about what happens when you need it. Charges for insurance are supposed to be calculated to pay not only administration, but the costs of all claims as well, and for a little bit of profit even if your insurer is a mutual association like AAA (Pretty much every year, I get a policy rebate). If there's an insufficient reserve for claims, the claims don't get paid, and the insurer goes out of business. Not so great if that was your insurance company (Here in California, insurers are required to pay into an insurer's insurance fund to cover this, but that typically pays only part of a claim). On a not so severe cash shortfall, the claims get paid and the insurance company leaves the homeowner's market. Now you need another insurer, and you may not be able to get one. Without insurance, no lender will finance a property. Even if you buy it free and clear, without insurance, if something else happens you are out of luck. Nor will you be able to sell it for anything resembling a market price.



So maybe underpriced homeowner's insurance isn't such a great idea.



How to Take Steps to get around the problem? Well, there aren't really any indicators which are reliable from a consumer's point of view in this. The various insurance rating agencies can only rate apparent solidity, which is subject to a lot of assumptions that may be unwarranted in this kind of situation. Anywhere your company sits on the axis of insurance providers has its problems. A national multi-lines carrier (i.e. they do all kinds of insurance nationwide) is less likely to be bankrupted by a regional claim, but more likely to withdraw from your market in the aftermath. A regional specialty carrier (they only do one type of insurance, and may only be in one state) is less likely to withdraw afterwards, but more likely to go bankrupt. National specialty carriers and regional multi-line companies fall somewhere in between. As individuals, I'm as lost as anyone.



California has an assigned risk homeowners insurance program, called FAIR. Basically, homeowners who cannot otherwise get homeowners insurance are randomly assigned by market share to one of the insurance companies who does busines in California. That insurance company must take you. The problem is that rates are high and coverage is minimal, and the risk is spread out between all policyholders. Because the assingments are based upon market share, all companies are hit proportional to the business they do. The difficulty, of course, is that people insist upon building in areas with a problem. Well, areas with a problem are cheaper, and where people can more easily afford to live, until the problem manifests.



New Orleans is pretty much a City with a Problem. It's settling 3 feet per 100 years. Most of it is between five and ten feet below sea level. Unless we render it uninhabtable by opening up the levees and causing silt to be deposited, the problem is only going to continue and get worse. Of course, every time we'd open up the levees for silt deposit, the land would flood. This is the Horns of a Dilemma. The only way to escape it is not to rebuild, or only to rebuild where the land is solid and will support it, which isn't very many places.



Let's face it: The Army Corps of Engineers has done wonderful work to keep New Orleans in place and inhabitable for the last seventy years. But now that the hammer has fallen, rebuilding it would be an exercise in futility.