What do you do if Mr. Scruggs is insured by your Insurer?

Get a new one, quick?

One of my colleagues sent me this NY Times article where Mr. Scruggs reveals his insurer is USAA.  As a  fellow USAA policy holder that fact makes me nervous given his statement  in Bestweek last week …

 “I’d rather see an insurance company go broke than the tens of thousands of my friends and neighbors in Mississippi, Alabama, and Louisiana go bankrupt.”

The uncertainty regarding the outcome of his potential lawsuits made me think, at first, that everyone will pay more in insurance.  there will be price increases, but they will not be spread evenly across the set of policy owners.  However, if we think about this extra risk like a tax it is interesting to think who might actually bear it. 

Economics teaches that those who have the least ability to avoid the tax, will bear the burden of the tax.  Who is least likely to bear the tax in this case?  Well, owners of assets stuck in Mississippi are at the top of the list.  Thus property values will take a hit as those landowners will pay much higher insurance premiums.  This litigation reaction could cause serious dislocations and reductions in Mississippi specific asset values.

 

 

Comments

[DougSimpson]

This question is particularly interesting since USAA is a reciprocal insurance association. It does not have shareholders. Unlike a stock company, it has the ability to assess all of its members (if memory serves) to pay losses. It may be that if it becomes insolvent, and the guaranty fund picks up the claims, the fund (or the receiver) may go after the members to recoup what it paid.

This horseback analysis (contrary views welcome) is that if Scruggs forces USAA to pay more than it owes, he is merely penalizing his fellow policyholder/members. In fact, his suit would force USAA members to bear the cost of paying Missippi members for flood damage because "they need it."

Less, of course, Scruggs' firm's contingent fee for arranging this transfer payment to those who thought flood insurance "too expensive."

Anyone see a flaw in this?

DKS

[Martin]

Doug, you are correct. USAA is a recip and each member has an equity account of about $5,000 which is available in the event of a catastrophic claim against the company. However, I don't think USAA can compel further capital contributions. I think limited laibility protects the members up to that $5000 limit or how much they have in their equity account.