The folks at the University of Virginia Law Review sent me a link a few weeks back to this short article on Hurricane Katrina insurance issues by Kenneth Abraham, a law professor at Virginia. I think highly of Prof. Abraham’s work, and cited his writing on mandatory rules, default rules and the role of standard form contracts in my upcoming anti-concurrent cause article in Appleman’s. (And yes, it is indeed coming shortly, I got the final proof from the printer yesterday and have made the last corrections, it should be all done shortly and up on this blog).
This Abraham article contains an interesting assertion about actions that were taken by courts and public officials to create an incentive for insurers "to settle Katrina claims rather than to force the courts to confront head-on the legal issues these claims pose." One of the cases cited to support that is Broussard v. State Farm, a case from January where State Farm was assessed punitive damages for failing to pay wind damages when its expert had evidence that some covered wind damage may have occurred to the homeowners’ roof. (The case is on appeal to the Fifth Circuit). The threat of punitive damages, of course, is always an incentive to settle, and there are numerous other incentives for insurers to settle, such as avoiding a jury at all. However, I don’t believe the judge or jury in this case took their actions with the intention of creating an incentive for State Farm to settle other cases — they may or may not have got the law wrong, but I don’t suspect them of finding other than the way they actually saw the law and the facts in this individual case.
You could point to the fact that cases did begin to settle after the Broussard verdict, but in reality, cases would have begun to settle even if the decision went the other way — they merely would have settled for less money, because the valuation of the case would have been different. The effect may have been to create an incentive to settle for more money, but to imply that their actions were intended to create that incentive implies the verdict would have been otherwise had they lacked that macro desire. This I think is an overly simplistic view of jury dynamics and is not an accurate picture of the way judges think either. And so I don’t accept this as evidence of the premise, but as you know, I accept the premise itself that numerous political, legal and public relations maneuvering was obviously designed to create an incentive for insurers to settle for higher value. That is largely what I have been writing about for the past eight months. And that is all Trent Lott’s threat to repeal McCarran-Ferguson, for example, ever was, a threat designed to raise the stakes for insurers — it was more or less an empty threat, because most large insurers wouldn’t care if it was repealed, but it undoubtedly raised concerns about what kind of federal regulatory idiocy might arise from the debate once lawmakers began showing off for the cameras, trying to pretend they know something.
Here is the final paragraph of the Abraham article:
In the field of insurance, legal rescue of this sort is thus a double-edged sword. The price that is paid to ensure that current policyholders have insurance for their losses may be that future policyholders find it difficult or impossible to obtain coverage at current levels or for current premiums. As a result, coverage becomes scarce and premiums skyrocket. This phenomenon occurred in the 1980s in connection with insurance against liability for pollution, and now it is occurring again in the homeowners insurance market. The whole phenomenon poses a public policy dilemma, for it pits the interests of those who have current losses against the interests of those who need coverage in the future. Yet as so often happens in our system, that dilemma is being addressed obliquely, in the language of rules governing the interpretation of insurance policies and by threatening legislation that will address broader or different issues. This is how the seemingly simple question of whether the Katrina losses were caused by wind or flood has been transformed into a far more complex problem.
For the reasons I explained above regarding the Broussard case, I don’t prefer the phrase "legal rescue" to describe the phenomenon of courts and juries finding coverage in instances where insurers insist their policies were drafted with no thoughts of coverage. The implication is that legal decisions would have been different had Katrina involved 170 claims instead of 1.7 million. That I do not believe — almost all law that insurers regard as bad law came not out of mass catastrophes but merely out of isolated cases.
The article linked to above does not include the footnotes, but this pdf of it does. The pdf is in a typeface and style that is harder to read however, so you may want to use it only for checking the footnotes.