Focus in wind vs. flood coverage fight moves to Louisiana

This is a very long, very good story by Rebecca Mowbray of the New Orleans Times-Picayune: a story that presents the arguments of both sides intelligently, and with some great detail about how FEMA, not insurance companies, rammed through flood payments as emergency aid. In a nutshell, the story asks whether flood policies and homeowners policies should be addressed independently of one another, allowing for a double recovery by the policyholder.  In other words, should the policyholder be allowed to recover more than the value of the home because there are two pots of money available to take from? 

The story, although long, is definitely worth the read.  But here’s my take on the issue: first-party insurance like flood or homeowners insurance is referred to as indemnity insurance for a reason — it is designed to make you whole, not twice as whole.  I don’t think there’s any serious debate about this.  A first-party insurance contract gives you the value of what you contracted for, but not more.  If you take out six different homeowners policies on your $500,000 house, you do not get $3 million if it burns down.  Try it, and you’ll see that I’m right.

Some of you who are knowledgeable about Louisiana’s Valued Policy Law may at this point say, what a minute, what about Louisiana’s Valued Policy Law, might that be a basis for this theory of getting more than you paid for.  Answer? No.  Here’s a pdf of a decision in the U.S. District Court for the Western District of Louisiana last year, Turk v. Citizens Property.  The plaintiffs in the case sought a judgment saying the Valued Policy Law required insurers to pay the full face amount of the homeowners policy as long as the covered property was a total loss and any portion of the damage was caused by a covered peril.  The judge said no, the law requires only that the insurer pay for that portion caused by a covered loss.  Here’s a post I wrote last year on the law and the Turk case.  

Now, back to the Rebecca Mowbray story.  One of the cases she wrote about is Wellmeyer v. Allstate, where a summary judgment oral argument is scheduled to be held April 11.  To their credit, attorneys for both sides agreed to talk with Mowbray, and presented their cases well.  The Allstate brief says that the Wellmeyers should be estopped from claiming their house was destroyed by wind, when they accepted flood insurance payments roughly equal to the value of the house.  Alternatively, Allstate argues that the Wellmeyers’ recovery should be limited to the difference between the flood payment and any value of the house above that figure. Here’s a pdf of the brief.  By the way, Judge Senter, of Mississippi Katrina fame, ruled last year in Glover v. Nationwide that double recovery is not possible with a homeowners and flood policy.  Here’s a pdf of his decision.  (He did not grant summary judgment to the insurer, however, because of factual disputes over what is the real value of the home — the amount of the policy or the assessed tax value).  Note, however, that nothing in his opinion says that you can max out two policies, especially when the policies’ coverage is incompatible and damage could be covered by only one of them. 

The Wellmeyers’ brief is more theoretical and policy-based, featuring arguments of this sort: 

  • "The [National Flood Insurance Program] is a subsidized government program designed to ‘alleviate the economic hardships caused by unforeseen flood disasters’."
  • "Providing Plaintiff with a windfall creates no moral hazard in this case.  Providing Defendant with an offset, on the other hand, creates great moral hazard by providing incentives to private insurers to fraudulently shift their liabilities onto the federal government."
  • "But [the Plaintiff’s’ gain] is illusory, as the federal government has the power to reclaim from Plaintiffs the monies it should not have paid."

I would point out that the National Flood Insurance Program is not set up to be a welfare program —  people who pay premiums actually receive insurance policies that are contracts just like any other insurance policy.  I would also point out that the last half of the Mowbray story contains some very detailed descriptions of FEMA’s adjusting of the flood claims, which was done on an expedited basis to get rebuilding under way, and does not involve moral hazard by insurers waiting in the weeds until all the Katrina claims have been paid out.  This suggests that much of the rhetoric about insurance companies rigging the process so they paid out taxpayer money instead of their own is just so much hot air.  Also, I’m not sure "moral hazard" is the appropriate term here, it’s more of an issue of insurance companies allegedly trying to impose their costs on someone else and plaintiffs allegedly engaging in rent seeking.  Doubtless there are Law and Economics folks who read this blog who will correct me if I’m wrong. And lastly, I would point out that the purported possibility the federal government is going to come and take back flood money from Katrina victims, after the countless hours of news coverage about the slowness of the federal response, is between slim and none, and slim just left town. 

Anyway, I’ve said enough, there is sufficient information here for anyone to judge for themselves.  In case you wanted them, here is the pdf of Nationwide’s summary judgment briefing in the Glover case, and here is a pdf of Glover’s response brief.

7 Comments

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7 Responses to Focus in wind vs. flood coverage fight moves to Louisiana

  1. Layne

    Thanks David, that is a good read.
    I was interested to see the comments at the end of the article regarding the creation of the NFIP. It implies that the NFIP was created in the 1960’s after Hurricane Betsy in order to insure against Hurricane storm surges. I had not known this before, (and I could be reading more into than the author intended). However, if that is the case, it certainly puts a different spin on the argument that storm surge is “wind-driven water” and not a “flood”.
    This would imply that this problem was encountered previously and addressed with the creation of the NFIP, and lends credence to the Insurers arguments that they never intended to cover this type of claim/disaster, or collect premiums in order to do so.

  2. Layne, I think the story points out that this dispute over wind-driven water lay dormant for some time because most massive flooding is caused by rivers. Homeowners policies haven’t covered floods for about a hundred years. I don’t know if one specific motivation for the NFIP can be traced, but what is interesting is that the program was set up to function, except in cases of dire emergency, on an actuarially sound basis. The program was adjusted in 2004 to reduce incentives for those who used the program as a subsidy by refusing to move out of floodplains and by obtaining serial payouts of flood insurance. If you look at the current debate in Congress over NFIP, it somewhat less than persuasive for one to say that NFIP was or is intended to provide windfalls to policyholders.

  3. “The Wellmeyers’ brief is more theoretical and policy-based”
    That was awfully polite of you. I would have phrased it more as “The Wellmeyers’ brief basically stands for the proposition that they should be allowed a double recovery/windfall, whats it to ya?!”
    Very good post you have here!

  4. Major John, haven’t heard from you for a while, welcome back. Yeah, I struggled with that description, I’ll say this much, the argument is impressively bold.

  5. “Providing Plaintiff with a windfall creates no moral hazard in this case. Providing Defendant with an offset, on the other hand, creates great moral hazard by providing incentives to private insurers to fraudulently shift their liabilities onto the federal government.”
    “Moral hazard” might not be the right word for the insurance company’s alleged conduct (or the plaintiff’s for that matter), but I think the Wellmeyers’ argument is pretty clever for a couple of reasons. First, it’s a nice attempt at getting the court to compare the incentives of both parties on an apples-to-apples basis. As you say, Allstate’s single-recovery argument is difficult to meet head on. The plaintiffs counter with some appealing rhetoric, suggesting that a tie should go to the party with the purest motives. But the logic is flawed, because the plaintiffs want the court to compare the their present with Allstate’s future (and that of other insurers). The plaintiffs stress they have no moral hazard in this case, while a single-recovery precedent in favor of insurers will encourage insurer misbehavior in the future. The problem with this argument is that any court gazing into the future will be reluctant to give insureds still more incentive to rebuild in coastal danger zones.
    Even so, the Wellmeyers’ argument is smart for a second reason; they may be exactly right. I agree with you that, post Katrina, insurers probably didn’t “wait in the weeds” until FEMA cut their checks. But the Wellmeyers’ policy argument appears to address future insurer action. And I’m not sure what rational insurer wouldn’t wait and see what FEMA does before completing its own adjustments.
    In another large scale Hurricane disaster, this would be especially true. FEMA says their quick draw tactics were 97% accurate. Given that number and the horrible beating the agency took in the aftermath of Katrina, it’s difficult to believe FEMA when they say, “the Katrina procedures will not become the norm in future disasters.” Of course, insurers are subject to prompt-pay laws and they have their own public relations worries that might limit inaction. But a hurricane like Katrina provides insurers with a legitimate wind-or-water coverage investigation. While Allstate and State Farm are investigating, FEMA’s going to be cutting checks.
    Allstate’s primary argument also seems to point in this direction. Allstate suggests that a total loss payment from FEMA is an “admission that it was covered by flood. It’s either one or the other.” Can that be right? Here, I’m uncertain, but if you can demonstrate your loss was a) caused by both wind/rain & flood and b) was not wholly compensated by FEMA, is your loss cut off because FEMA paid their limits and you accepted the check? What about the second-floor contents the Wellmeyers claim were not covered in the FEMA payment? If Allstate gets their way, they’re off the hook every time FEMA pays a total loss. Allstate’s alternative argument seems more appropriate (“the Wellmeyers’ recovery should be limited to the difference between the flood payment and any value of the house above that figure”).
    Finally, you conclude “the purported possibility the federal government is going to come and take back flood money from Katrina victims, after the countless hours of news coverage about the slowness of the federal response, is between slim and none, and slim just left town.” That’s probably true, but if that’s the case, I don’t understand why any insurer would be in a hurry to pay insureds covered by FEMA. I don’t mean to suggest that the Wellmeyers are entitled to double recovery, but I’m wary of a precedent that says accepting a total loss check from FEMA ends further recovery.
    My apologies for the long post. But it’s for my Insurance Law class at the University of Houston Law Center. Basically, writing this blog comment is a class assignment, so any instruction or criticism you’ve got for me will be humbly and gratefully received.

  6. Marshall,first bit of advice, never ask a lawyer’s opinion because you will not be able to get them to shut up because they are used to billing by the hour. No easier way to earn your pay than by talking all day long. Second, never let on that someone is making you do something, you will find being a lawyer involves doing an enormous number of tasks that you would not do except under compulsion, but you have to develop acting ability and make it appear you are totally in control and going on your way joyfully.
    As far as your comment, I don’t mind length, especially for thoughtful comments such as this. Tell Prof. Chandler I took time from writing an amicus brief to respond, so I did like your comment.
    Here’s what I have to say: I don’t see a huge freerider problem with insurers and the NFIP. Remember, this has been around for about 40 years, and the tendency of insurers to rip off the feds would have been noticed by now and dealt with. A far bigger concern than insurers freeriding on the taxpayer is taxpayers freeriding on the taxpayer. As recently as 2004, Congress altered the NFIP to supposedly reduce incentives for people who treated the program as a subsidy for their waste by failing repeatedly to mitigate flood damage by moving or by improving their property.
    As for what’s been said by Rep. Gene Taylor and AG Hood about insurers stealing Uncle Sam blind, Mowbray’s story contains details that suggest the scenario they present is far-fetched if not impossible. Granted, just because FEMA says it would do things 97 percent that doesn’t mean what FEMA says is true, but it is an indication that FEMA believes it is true that 97 percent of the payouts were correct. Also, the state of mind of someone accepting a flood payment is at issue: flood and wind are two different risks, the feds don’t get subrogation rights against Allstate for payments to policyholders for flood when Allstate covers wind but not flood.
    So what the Wellmeyers’ lawyer is doing is trying to exploit that point. My example in the post is somewhat different, because the hypothetical six policies all covered the same risk. However, ultimately that argument doesn’t quite get you home because a house isn’t like a company that may be more valuable if you sell one piece of it to one buyer, and another piece to another enterprise. It’s got a certain value, and that’s what you’re insuring. It’s not life insurance.
    This argument about the insuring of different risks is not all that sophisticated. The real heavy lifting on insurable risk is done in arguments over time on the risk, continuous trigger, other insurance clauses and so forth. These are where people build up their intellectual six-pack abs, not on arguments over how much insurable interest is in a house.
    So, that is my way of leading up to say I don’t see Allstate as getting totally off the hook here. They paid, what, $10,000 or so, and if the feds owed the flood money and the people accepted it, that is a pretty good indication they believed that much damage was caused by flood and not wind.
    People who had total losses not completely covered by flood insurance still can make a credible argument there was uncovered wind damage, because they accepted payment at less than the value of their home. Remember, no one is claiming that folks aren’t entitled to wind damage money as distinct from flood damage money, but you can only take from the two sources up to the value of the damage.
    Lastly, there are statutes and administrative rules that require insurers to respond to claims within a certain time, so that is another reason I don’t see the FEMA card as producing big externalities from the insurance company side.
    Thanks for the comment, now I have to get back to my amicus brief.

  7. The concept for an NFIP was born as the Federal Flood Insurance Act of 1956 (70 Stat. 1084). In 1965, the Secretary of Housing and Urban Development was directed under the Southeastern Hurricane Disaster Relief Act to review the feasibility of a Federal Flood Insurance program. The NFIP act passed both the House and Senate in 1967 but remained in conference until the session ended. In 1968, similar legislation was enacted by Congress resulting of passage of Title XIII of the Housing and Urban Development Act of 1968 and the establishment of the national Flood insurance Program.
    The goal of the NFIP was to provide previously unavailable flood insurance at affordable premium rates in flood-prone communities that adopt floodplain management measures. The primary objective was to indemnify victims of disaster in lieu of disaster assistance, which was denied in communities where insurance was available.
    And while the NFIP is most certainly a byproduct of the massive flooding caused by Hurricane Betsy in 1965, the NFIP was not intended to cover damage caused by coastal storm surge. This came later.
    One additional thing – questions regarding the relationship between the NFIP and hurricane-related flooding have been around long before the 2004-05 hurricane season.