From Today's Wall Street Journal:
Mississippi Attorney General Jim Hood is considering suing insurers to force them to pay flood damage from Hurricane Katrina that could total billions of dollars, seeking to override decades-old exclusions in standard homeowners' policies, two people familiar with the matter said.
The attorney general's examination of legal moves comes as tens of thousands of Mississippi homeowners are grappling with the cost of rebuilding homes that in many cases were badly damaged by the huge storm surge that accompanied the category-four hurricane's strong winds. Mr. Hood and a spokesman for his office couldn't be reached for comment late yesterday.
Standard homeowners' policies cover wind damage, not flooding. Yet fewer than one in five Mississippi homes and businesses in areas most at risk of flooding hold policies from the National Flood Insurance Program, according to federal figures. While some government grants are available to uninsured flood victims, such homeowners typically rebuild with low-interest federal loans.
Any legal action by Mr, Hood, which could be announced this week, would be expected to meet resistance from the insurance sector. Insurers cannot afford to pay flood damage from Katrina because they "have never collected a cent of premium for flood insurance," said Robert Hartwig, chief economist for Insurance Information Institute, a New York trade group. He said insurers would argue that "the flood exclusion in homeowners' policies is well-established in all states . . . That is why there exists a national flood-insurance program" and many people "have been paying flood premiums [to the government] for decades."
As of last week, estimates of the cost to private-sector insurers had grown to as high as $60 billion. As big a bite as that is, U.S. property-casualty insurers have more than $400 billion in capital. In recent days, a growing chorus of consumer activists and government officials have called on insurers to give Gulf Coast policyholders the benefit of the doubt in any instances where homes suffered both wind and flood damage.
Indeed, plaintiffs' lawyers in Mississippi are forming a network to work free of charge for homeowners seeking payments for flood damage from their insurers, in a potential second legal front against the insurance industry, a person close to the effort said. Lawyers include Richard Scruggs, a class-action attorney who made his name suing the tobacco and asbestos industries, the person said.
One person familiar with Mr. Hood's possible suit said it might argue that insurers are on the hook because Katrina's storm surge and waves were wind-driven events, and thus should be covered as wind damage. Options include seeking a court order to prevent insurers from denying claims based on the flood exclusion.
Some isolated legal efforts to get around the flood exclusion have succeeded over the years, which has prompted insurers to stiffen the policy language or persuade lawmakers to plug legal loopholes. Mr. Hartwig, whose trade group has been anticipating legal action, said, "I haven't read every policy written in the state of Mississippi, and policy terms and conditions will vary. But the definition of a flood" is fairly uniform, including "storm surge and water that rises for any reason off any body of water, whether or not the cause of the rise of the water is associated with wind."