Mississippi Coverage Suits Still Brewing

A follow up article on the Mississippi coverage suits which are brewing. 

[Later: Newsday reports that Mr. Scruggs has filed his first lawsuit.  However, F. Gerald Maples, Esq. has already gone into Mississippi federal court to battle insurers. (Comer v. Nationwide Mutual Insurance, et al., No. 05-CV-436 in the U.S. District Court for the Sourthern District of Mississippi.)]

The article reports that Dickie Scruggs himself had flood insurance on his house that sat 150 feet away from the Gulf.  So I guess he himself wasn't misled by his homeowner's insurance policy.

The article also discusses a legislative fix for the homeowners who failed to purchase flood insurance:

The Hurricane Katrina and Hurricane Rita Flood Insurance Buy-In Act would permit property owners who did not live in floodplains but were devastated by the hurricanes to be covered under the National Flood Insurance Program by paying the equivalent of 10 years of premiums, as well as a 5 percent penalty.

U.S. Representative Charles Melancon, the sponsor of the bill, claims that this isn't a give away:

This is not a give-away," he said. "People have to buy in at a fair price and will be required to stay in the program as long as they own the property. It’s a fair deal."

This is clearly incorrect; it is a give-away.  No real insurance program would allow folks who have already suffered total losses of their houses to retroactively buy insurance for those losses in return for a retroactive premium that is only about 2% of the coverage provided.  Despite what Congressman Melancon says, people are not going to be required to buy in "at a fair price." 

It may be excellent national policy for Congress to provide assistance to these hurricane victims in order to make these areas of the country economically productive again, I don't know.  I don't see how it is good policy to sell the program by misleading the public about what is going on; it will only obscure the policy issues at stake.  E.g., maybe everyone in the nation who lives in a flood plain should be required to buy flood insurance, not just the people who are retroactively buying into the program after their houses are destroyed by flood.

(Also, as a nation, why would we want to provide universal flood insurance for beach houses, but not universal health insurance?  Are beach houses more important than people?)

There is more in the Flood Insurance Buy-In Act, as described in the news article linked to above:

The proposed act would limit flood coverage to the amount of wind-insurance coverage the property owner had at the time, with amounts not to exceed the current National Flood Insurance Program ceilings of $250,000 for residential structures and $500,000 for nonresidential structures.

Why would the amount of flood coverage be tied to the amount of wind-insurance coverage the property owner had at the time?   The result would seem to be that a property owner who had $250,000 of wind-insurance coverage or more could get $250,000 of flood insurance, but a property owner who had no wind-insurance would get nothing.  As a matter of public policy, I don't understand this.  Since this is a give-away of public funds, why not help those who were so poor or so improvident that they had no insurance at all?

Lastly, the Flood Insurance Buy-In Act, according to the article, would provide the following:

The bill also protects current National Flood Insurance Program policyholders by specifying that money for claims payments must come from a separate appropriation. The bill further protects current policyholders by prohibiting the National Flood Insurance Program from considering the buy-in claims when setting future premiums.

That there must be a separate appropriation underscores that this is a give-away, pure and simple, and that the people who buy-in are not going to pay a fair premium.  This Buy-In Act will make the NFIP insolvent, which is what the drafters are worried about.

That the bill would prohibit the NFIP from considering the buy-in claims when setting future premiums underscores that we are not dealing with an insurance program here, but with grants of public money.

[Later:  Happened to see Rep. Melancon speak at a science committee hearing on CSPAN.  When he thanked the representatives of the National Weather Service for their work in predicting the track of hurricanes, he became so choked up that he couldn't continue.  At that point I realized I was a little harsh in my review of the proposed buy-in act.  On the other hand, now I'm worried that the legislation is being written and might possibly be passed based more on emotion than on sound public policy.  And also, they need some help from experts to get this right.  Meanwhile, the Washington Post is following the flood insurance issue and giving it the prominence that it deserves.] 

More reading:

Insurance Journal article on the buy-in act

beSpacific has a link to the text of the act.  That was several days ago, though, so by now they are probably already amending it.

After reading the bill, I have to say that to me, it has the same smell as narrowly drawn tax loopholes that are passed to benefit a specific business or industry.  You would not be eligible for this retroactive buy-in unless (1) you didn't live in an area where participation in the NFIP program was mandatory; (2) but you did have wind insurance; (3) and you live in the Hurricane Rita/Katrina disaster area, and (4) you apply for the retroactive insurance within 90 days of passage of the buy-in act.  It sounds like special pleading for a select group of people who have political influence. 

Later:  Here are some comments that were emailed to me by a reader:

I would like to explain the terms of Rep. Taylor flood insurance bill.

The legislation is intended to help the tens of thousands of property owners who acted prudently and bought all the insurance they were advised that they would need to protect their property from storm damage.  People who are inside the 100-year flood zone were notified that they should have flood insurance.

Those who are outside the 100-year flood zone were advised that they did not need flood insurance by the government, either directly or indirectly through the maps, and by their lenders and insurers, either by omission, never mentioning or suggesting it, or commission, responding to the owners' inquiries with the general guidance that flood insurance was not needed outside the flood hazard areas. 

The flood maps were horribly inadequate for a hurricane surge.  Property owners who acted prudently and trusted the expertise of government flood plain managers, lenders, and insurers are left with no coverage for storm surge flooding. FEMA has admitted the maps were wrong and has recommended raising the 100-year base flood elevations the coastal cities and counties by 3 to 8 feet. 

Many of the people who were told they did not need flood insurance before Katrina may be forced to borrow large sums from SBA or a private lender to rebuild their properties.  If they are lucky enough to scrape together the funds and financing to rebuild, the new maps probably will now require them to purchase flood insurance. 

Congressman Taylor believes it would be only fair to allow people who were misled by the government's flood maps to be able to buy-in to the program, with a penalty so that they would not come out better than those who have been paying premiums.  The bill would require they pay the equivalent of 10 years of premiums plus a 5% penalty and sign an agreement that places a requirement in the deed that the property henceforth carry flood insurance. 

The offer is limited to the amount of wind coverage because (1) anyone in a coastal community without wind coverage did not attempt to cover his/her property from storm damage, and (2) the wind coverage more or less reflects the amount of flood coverage they may have purchased had they been advised to do so.  It would not be fair to let the buy-in claimants take the maximum coverage while many people already in the flood program have coverage below the full value of their properties and would not be able to increase their coverage. 

The bill applies only to Katrina and Rita flooding victims, in large part because Katrina had an unprecedented level of flooding outside the 100-year flood plain.  These homes and businesses did not just get a little water in them. Many were destroyed.  The combination of bad maps and historic surge resulted in a massive failure of the flood insurance program that was designed to prepare for precisely this kind of major flooding disaster. 

Finally, if not this bill, then what?  The ability of home owners to rebuild is the key to the recovery of the Gulf Coast.  No amount of tax incentives or patronage contracts or other business subsidies accomplish nearly as much as making sure that the region's residents, workers, business owners, and consumers are saved from financial ruin.

Brian Martin

Office of Rep. Gene Taylor

He followed up with this P.S.:

I forgot to respond to your commentary on the "separate appropriation."  All we are doing is making sure that the current policyholders are held harmless by the buy-in.  The claims payments do not come out of the current reserves, and do not increase future premiums.  This would not make NFIP insolvent, it would hold it harmless and actually strengthen it by ensuring that these properties paid into the program in the future.  If we wanted a give-away as you suggest, we would ask for that, rather than going to all this trouble to get people into the flood insurance program. 

Also, FYI, FEMA has admitted that its maps of the 100-year flood hazard zones in Mississippi were wrong by as much as 8 feet in elevation.  The NFIP failed at its primary mission.  So the question is whether people who trusted the supposed expertise of the government's flood program, which told them they were not in the 100-year flood hazard area, should expect any relief now that the government has said, "Oops."  Rep. Taylor's bill is a fair way to help those who acted prudently but were let down by the government and by financial advisors who relied on the government's maps. 

Here is a link to an article about the new flood elevations in Mississippi:

http://www.sunherald.com/mld/sunherald/12849514.htm

Brian Martin

Comments

[Dave Stratton]

I have to say that Rep. Taylor is one of the good guys in my opinion, and I admire the work that he is doing for his constituents.

I'm no expert in flood plain maps, but it seems to me that if a flood plain map shows a "100-year" flood line, that is no guarantee that the next flood will not be a 200-year or a 500-year flood. (Was Katrina a "100-year hurricane" or something more?)

The argument that people who live in coastal areas relied to their detriment on the flood maps is questionable in my view, because storms and floods are inherently unpredictable. Plus development in historical wetlands itself changes the flood risk, and the maps become outdated.

The people who live in coastal areas or in proximity to a great river must know this better than anyone.

So even if your location on the flood map is such that you are not required to have flood insurance in order to have a federally insured mortgage, every property owner has to make a judgment about whether to buy flood insurance. Or, to take a calculated risk not to buy it and to spend the premium dollars on something else.

No doubt some of those who were within the 100 year flood plain on the map who didn't have adequate wind or flood insurance, didn't buy it because they decided they couldn't afford it.

Something has to be done, and will be done, to help the victims of these hurricanes. And it would be a good thing if, in the end, more people are signed up for flood insurance. So those goals of the bill have great merit.

In the end, though, only those who have suffered significant losses are going to apply for the retroactive buy-in for flood insurance. An insurance program can't be self-supporting if only those who have losses buy the insurance. Maybe anyone who lives within the 500 year flood plain on the maps should be required to buy flood insurance in order to have a federally insured mortgage.

In any event, there is an element of public relief in the buy-in act. And so I think that there ought to be some sort of means-testing built into this relief, and that eligibility shouldn't depend on whether the property owner was inside or outside the 100-year flood plain on some map or whether the property owner had wind insurance.