When Hurricane Katrina struck, some feared (and others hoped) that modern America’s worst natural disaster would give our ever-busy lawsuit industry a way to expropriate the worldwide insurance business. A year later, the results of the first coverage trial are now in and those in the insurance business can exhale a bit.
Last week, a federal court in Mississippi ruled on the first lawsuit brought by victims of the hurricane against their insurer. Paul and Julie Leonard sued Nationwide Mutual Insurance in October last year, claiming they were fully covered for the estimated $158,000 (£83,114) wind and water damage to their home, despite the insurance company's contention that their policy excluded damage caused by flooding. The judge dismissed the claim for water damage and awarded $1,228 (£645) for wind damage. Both sides claimed victory.
It is clear that insurers are legitimately on the hook for tens of billions of dollars in Katrina havoc. Equally clear (you’d think) is that the storm’s ruinous flooding was not their responsibility, since the exclusion of flood damage is a long-established aspect of homeowners’ coverage.
The hurricane waters had scarcely receded when two of the best-known figures in the Mississippi legal establishment — Jim Hood, the state’s elected Attorney-General, and his ally Dickie Scruggs, who has grown rich in tobacco and asbestos — appeared before TV cameras to announce they were suing to get the exclusions voided. Never mind that insurers were at pains to avoid underwriting the risks of water, never collected premiums for them and never set aside reserves against them. Flooded-out homeowners were in luck after all. As Thomas Knapp, the writer, observed at the time, finger-pointing had given way naturally to pocket-picking.
Wouldn't rewriting of policies after the fact bust some otherwise solvent insurers? Mr Scruggs — a key political figure in his state — shed no tears, saying in one interview he would "rather see an insurance company go broke” than his friends and neighbors. In another, he noted the role of international reinsurance and suggested that his legal actions would provide a way to fob off the cost of Gulf rebuilding on "Swiss gentlemen". (Veterans of the Lloyd’s near-wreck, following liberal insurance coverage rulings in US asbestos litigation, are right to detect an echo.)
By conventional insurance-law standards, the Hood-Scruggs theories were lame in the extreme. The exclusion has withstood earlier court challenges, prevails in all 50 states and was approved by Mississippi’s own regulators. It is also well known to consumers. (Federally sponsored flood insurance is sold under a separate program; most homeowners in Mississippi and elsewhere had not elected to buy it.)
Crucial to the two men’s strategy, as Mr Hood acknowledged, was to steer the coverage wrangle into the courts of state-level judges — judges elected by hometown voters (“Judge Fleecem: fighting on your side” might be a typical campaign slogan) and who commonly rely for re-election funds on lawyers like Mr Scruggs who practice in their courts. Well aware of these dangers, insurer-defendants won a key victory by instead getting the cases into federal court. Federal judges are appointed not elected, and tend to keep a firmer hold on their courtrooms.
So while Mr Scruggs and Mr Hood were reveling in uncritical coverage in the national press, their actual chances of success were ebbing. Senior District Judge L.T. Senter, Jr., repeatedly ruled the flood exclusion "valid and enforceable". In the Leonard trial, the judge also ruled that it made no difference whether or not an insurance agent had advised a policyholder (whose home was in a seemingly low-risk area) against buying the separate flood insurance. Mr Scruggs claimed partial victory because Judge Senter ruled ambiguous (and to be construed against the insurer) some language limiting coverage of damage done by wind and water in combination. But the upshot was that he awarded the Leonard's only $1,228 of the $158,000 sought.
Major coverage issues remain to be resolved (and appealed), but at least we can take note at this point that America is not Zimbabwe or Bolivia. As Dickie Scruggs said before the Leonard ruling, "If you win it, it's a huge win. If you lose it, you spin it the best way you can."
Original Source: http://www.timesonline.co.uk/tol/comment/article622518.ece