RiskProf

Hey, Whaddaya Know?

Normally, we think of tort reform as having effects on damage awards or litigation rates…we don’t often think of the next step—unemployed lawyers. 

via The Legal Reader

General Hood Speaks Out

Mississippi AG James Hood has a NY Times (reg. req’d) op-ed on the Katrina lawsuits.  He states…

It's true that many of these policies exclude specific types of water damage unrelated to hurricane winds, like the damage caused by tidal waves or windblown rain. But to extend such exclusions to the damage caused by a storm surge, which is the direct consequence of hurricane winds, is unconscionable and illegal, at least here in Mississippi.

Unconscionability is bandied about when someone doesn’t like a particular outcome.  It is claimed ex post – after a dispute has arisen as a rationale for changing terms and conditions of a contract.  One would like to see some objective evidence of unconscionability before concluding it exists.  Perhaps excess profits, while not definitive evidence of unconscionability, would at least allow one to ask follow up questions. Thus, one would expect if insurers were acting unconscionable they’d be at least making above normal economic profits on their insurance transactions. 

If we look at the National Ass’n of Insurance Commissioner’s Profitability Report which makes an estimate of insurer's profits by line by state, we see that for the southeastern states, only South Carolina has a positive 10 year average profit rate. The rest are negative with Florida having a bad year in 1992 (Andrew) which overcomes all subsequent profitable years.  In 2003 the industry earned 5.4% on insurance transactions which is approximately what the average South Carolina profit was over the period.

Thus, if there were unconscionable profits, we’d not likely see the numerous yearly losses in Mississippi. We’d see profits instead. If insurers priced a risk and then never covered losses for it, we'd see a profit.  Because there are losses across most of the southeast, it is obvious that this flood risk is not charged for in the homeowner's policy.  Thus, can there be unconscionability if the insurer is not benefiting in any way? 

A second question this lawsuit brings up is whether an insurer can ever absolutely avoid a risk.  The language which purports to do so can always be questioned, but if one looks at the attempt to avoid the risk, it is clear that the insurer is trying to do so. 

Finally,  Mr. Hood states:

Nor will honoring the contracts they've signed with policyholders send insurance companies into bankruptcy, as some companies have misleadingly claimed. Reputable credit and insurance industry analysts have found that the financial stability of these companies is not at risk. One insurance analyst estimated that covering damage from Hurricane Katrina's storm surge would cost insurers an additional $2 billion to $4 billion. To put that in context, consider that the industry's net income for 2004, when Florida suffered extensive damage from four hurricanes, was $38.7 billion.

So, Mr. Hood says the industry should pay just because it has money and will only cost the insurance industry $2–4 billion.  (When was that ever a just basis for liability?)  Further, the industry is made up of thousands of companies and many don’t sell homeowners insurance at all.  If we are going to put profit numbers into our rationale -- why don't we include Google's too?

Presumably shareholders will pay for this in the short run in terms of a loss in shareholder equity, but consumers in Mississippi will pay higher prices in the long run.  Shareholders are not going to put their money in jeopardy a second time.  AM Best and other rating agencies will look carefully at Mississippi exposures and firms with higher exposures will be rated lower.  The lower rating increases the costs of both capital and reinsurance and will lower Mississippi insurance profitability.  Over time firms will leave the market or ask to charge significantly more for their policies.  If regulators won’t allow increased prices for the increased coverage, then the industry will atrophy and end up like the State of Florida with the taxpayers bearing all of the risk and insurers rushing toward the exit.  The bankruptcy risk that Mr. Hood disputes may well be over stated, but the lack of insurers willing to write homeowners risks in Mississippi may not be.

Update:  AM Best (11/22) just reevaluated its rating of the Florida only Nationwide subsidiary.  Even after a contribution of capital by the parent the company is rated a B with a negative outlook.

Dating Advice

Why are you asking me?  Do you think I need some?  I’ve been happily married to the Risque-wife for a good number of years and I married her because the expected search costs were greater than the value of the expected likelihood of finding someone of higher quality.  When you find the best it is hard to do better!  If people would just use a proper search algorithm there would be no need for dating advisors and matching agencies.  However, I just saw this post at Reason’s Hit and Run by Kerry Howley on Internet dating, price caps, and insurance and I couldn't let it go by without a link.  Note given that this is a wholesome family web log (we post pictures of our puppies!), I’ll leave it to you to read the comments at the above link.

Here is the main point…

Civil Court Judge Diane Lebedeff awarded one woman, identified by the pseudonym Jennifer Doe, the $1,000 she had paid for a six-month membership after the woman said she had met no one through the service. The judge awarded the other woman, Debra Roe, the $3,790 she paid for a 54-month deal.

Because Great Expectations' contract guaranteed no specific number of referrals each month, the service could legally charge no more than $25 per member, the judge said.

Evidently, NY also has a dating service law which the judge used to make her decision.

A 54 month deal?  She must have had low search costs, been risk averse, or been a pessimist.

Given Reasons libertarian bent there are many questions in the comments about litigation risk for dates who don’t measure up to standards  expectations (to put it politely), whether these matching services are legalized pimping, and whether the libertarian solution is to have …… (drum roll please) an insurance market to mitigate the risk of mis-performing dates!

Here is the Law.com article and by the way, what kind of state feels it has to pass a Dating Service Law?   Actually, on second thought I like the idea. I think we need to have a state commissioner of dating who has authority to approve dating service contracts and their performance as well as having the authority to punish those parties who breach by failing to show due to bad hair, a car break down, or a head ache.  The law should allow the Commissioner of Dating or a court with appropriate jurisdiction to figure out what the dater’s reasonable expectations were for the date and a reasonable remedy should be to mandate performance if it is the best interest of the dater.   

Sixty-Eight Percent: Causation Run Amok

Last week a New York jury held that the World Trade Center’s land lord (the NY&NJ Port Authority) was partially responsible (68 percent) for the 1993 bombing by the convicted bomber Ramiza Yousef.  I posted in the past about this particular problem of terror torts and the spread to property owners or other businesses, but once again it seems to be center stage.

The Port Authority in 1985 commissioned a study which said, in part, that the WTC should eliminate public parking for security reasons.  According to news reports of the trial (NY Times 10/28) the Port Authority did a cost benefit analysis and decided to keep public parking open.  Ex post this was a mistake, but the law is not supposed to cure all wrongs —only those wrongs caused by an unreasonable behavior.  The question that should be addressed is at the time the decision was made was it a reasonable decision.  For example, was a terrorist attack a reasonable expectation in the U.S?  Or wouldn’t committed terrorists have just taken some other route? 

A professor of law from NYU likened the case to a land lord who fails to light a dark elevator and that leads to a tenant's assault.  That’s a bit different from the WTC case.  The WTC case would be more like the first time someone is attacked in a building in a good neighborhood with no previous criminal activity.  Foreseeability does not mean that someone could conceive of it, it means that it is likely to happen.  It is not a Monday Morning quarterback approach to the law, but one based on what people knew at the time about the likelihood of a problem.

I don’t normally criticize jury verdicts (because I don’t get to see the same evidence they do and in the same ways they do), but it is strange that the jury could find that the Port Authority was 68 percent responsible for the damaged caused by a criminal act.

If tort law is based on compensation then the true wrong doer should be paying damages.  This is not happening in this case because the true wrong doer is likely judgment proof.  It tort law is based on deterrence, then what will a future land lord do?  Make sure it has no record of determining how safe a particular building is?  This type of action seems to punish the land lords who are more responsible.  This result reminds me of a paper Kip Viscusi did on cost benefit analysis (Corporate Risk Analysis: A Reckless Act?, 52 Stanford Law Review (Feb 2000)).  He did an experiment which showed that potential jurors were harsher on corporations which did cost benefit analysis and that the degree of punishment went up the higher the defendant valued a lost human life.  Thus, more conservative cost/benefit analysis (which would generate higher levels of safety) were punished more.  This seems to be consistent with the Port Authority case. 

Finally, it seems that this case is solely about finding a deep pocket; as reported by the NY Times the trial judge did not permit a discussion of the terrorists motivations or their effectiveness.   This would definitely be important information about foreseeability and causation, but it goes to show that tort law is not about deterrence. Tort law is just about compensating injuries and we no longer care who does the compensation.

Hey Kids!

I just received this in the e-mail. Be the first on your block to participate in Senator John Cornyn's web chat on law suit abuse. Check it out at 2:15 today at www.sickoflawsuits.org.  (Apparently, you can submit also your questions early.)   Tell ‘em ya like the snazzy name.

A New Katrina Class Action

Did you know that your homeowners insurance doesn’t cover anything but the structure and other itemized pieces of property (pool, garage etc)? 

Does it cover damaged trees?  Nope, but that’s not stopping a Louisiana law firm from trying to get a class action certified to challenge the terms of the insurance contract.

I have always wondered why insurers were so persnickety (sp?) about trees.  Insurance companies will pay for damage to covered structures caused by a tree, but they won’t pay for preventative removal of damaged, injured, or dying trees.  It may be that it is cheaper to pay after the fact than investigate every potentially damaged tree before the fact.  Even if one were to get a note from the arborist we may still have incentives for collusion among the insured and un-ethical chiropractors tree doctors.

Last year at Chez-Risque we had a hurricane-tree-pool-incident.  So I am up on tree damage coverage!

The Other Shoe Drops

Business Week and Mr. Scruggs himself have announced the filing of a lawsuit against Nationwide.  I can’t find the complaint yet, but here is a summary from the Scruggs press release…

A lawsuit was filed today by active Police Lieutenant Paul Leonard and his wife Julie, Pascagoula residents whose home was severely damaged by Hurricane Katrina, in Mississippi Chancery Court against certain insurance companies who have marketed their policies to Gulf Coast families and reinsurance entities in Europe and the U.S. (collectively, "Worldwide Insurers and their U.S. Affiliates").  The litigation, led by attorney Richard F. Scruggs, seeks to compel the companies to honor their contractual obligations under the homeowner policies they issued that provide comprehensive coverage for hurricane damage.  The Worldwide Insurers and their U.S. Affiliates are seeking to reduce or eliminate coverage by intentionally misclassifying Hurricane Katrina's destruction as mere flooding.     The lawsuit includes charges of unjust enrichment, fraud, and indemnity. The case will set the precedent for potentially thousands of similar lawsuits that will be filed in a coordinated legal action involving families in Mississippi, Louisiana, and Alabama.

Road Trip

Ted Frank is hosting a a Katrina Liability Seminar at the AEI next Monday Morning.  If you are in the neighborhood you can drop in a see my colleague Bob Klein from GSU, Adam Scales from Washington & Lee Law School, Joanne Doroshow from the Center for Justice & Democracy as well as yours truly.

Is the MS AG Getting Nervous?

This article from Consumer Affairs.com suggests that Mississippi’s AG Hood is trying a new strategy.  He is asking the President to authorize flood insurance “payments” to those who did not have flood cover prior to Katrina. 

Everyone wants to help the disaster victims, but we need to consider the effect of ex post payments on the Federal Flood Insurance program.  A bail out will kill the program as people will wait for the federal intervention and never purchase flood insurance.  Congress will never be able to make a credible commitment to not assist with disaster relief. This is exactly the worst possible signal to send to homeowners in higher risk areas.  Don’t prepare for the future: We’ll subsidize your risk taking!

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.