How to Destroy the Insurance Industry in the Gulf States

One easy way is get rid of insurers is to require the insurance industry to pay school teachers' salaries.  Another is to make the industry pay for the states’ roads and bridges. Just because these items were are not part of the homeowners insurance contract is immaterial as it is in the public interest that someone pay for these items.  Everyone knows insurance companies are rich scalliwags and so they should pay for these expenses.

This is the argument certain people are using to require insurers to pay for flood damage when the damage was specifically excluded from the home owners contract. (See here, here and Walter Olson for a comprehensive set of links).  Just to show the extent insures go to exclude this cover I went to my homeowners policy to see if I could make my insurer pay for a future flood of my house.

 Here is the typical language for the flood exclusion from a standard HO-3 policy used in Georgia:

 “Section 1.  Losses Not Insured

1. We [the insurance company] do not insure under any coverage for any loss which would not have occurred in the absence of one or more of the following excluded events.  We do not insure for such loss regardless of: (a) the cause of the excluded event; or (b) other causes of the loss; or (c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss; or (d) whether the event occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these:

    …

c. Water Damage, meaning:

(1) flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, all whether driven by wind or not;

(2) water from outside the plumbing system that enters through sewers or drains, or water which enters into and overflows from within a sump pump, sump pump well or any other system designed to remove subsurface water which is drained from the foundation area; or

(3) natural water below the surface of the ground, including water which exerts pressure on, or seeps or leaks through a building, sidewalk, driveway, foundation, swimming pool or other structure.

However, we do insure for any direct loss by fire, explosion or theft resulting from water damage, provided the resulting loss is itself a Loss Insured."

This pretty much excludes flooding no matter how it occurs.  To overlook the plain meaning of the contract and the fact that no private insurer has provided flood cover since the introduction of the National Flood Insurance program is ridiculous.  The Government’s own consumer publications state that private homeowners insurance does not cover flood.  If everyone knows that flood isn’t covered, it makes as much sense to make insurers cover flood damage as it does to cover teachers salaries or road construction costs.

Now let’s suppose the states required insurers to cover flood when they, never charged for flood coverage. Insurers will most likely pull out of the state creating an insurance crisis that will make one’s head spin.  Florida’s current homeowners problems will look simple in comparison.  Those that stay in the state will charge up the proverbial whazoo to compensate for their risk and those that leave will leave a broken market.  In addition, if insurers are held liable for flood damage, this will likely bankrupt a number of companies.  This is a non-trivial issue as S&P placed some of the best known national insurer’s on credit watch today.  We’ll likely see local companies ratings get addressed soon too.  If the insurers’ go bankrupt the the remaining insurers will be assess the any shortfall from the failed companies and this shortfall is then passed onto the customers of the remaining companies.  Thus, the local policy owner will pay his higher premium plus a surcharge to cover the default costs of the weaker companies.  Everyone will absolutely love this outcome.

Comments

[Kevin O'Reilly]

Proverbial whazoo!

[DougSimpson]

Your readers may find of interest a short discussion of flood insurance coverage, exclusions and the developed law of proximate and concurrent cause. Unintended Consequences: Flood Insurance and Exclusions, Proximate and Concurrent Causation

[panasianbiz]

I stumbled across your blog while I was doing some online research. People rely on insurance to help them rebuild their lives after disaster strikes, but we do need to keep in mind that the insurance industry has to be kept viable and profitable at the same time.