Reforming the Insurance Industry to Better Compensate Victims of Catastrophe

Reforming the Insurance Industry to Better Compensate Victims of Catastrophe

A plenary session at the ICLC Annual Meeting on February 28 was entitled “Confronting Catastrophe: Pandemics, Hurricanes, Terrorists – Oh My!” The program noted that “The extreme ruin caused by Hurricane Katrina would pale in comparison to a nationwide calamity, such as a flu pandemic. This audience interactive session will leverage the advice of experts, including professionals who endured Hurricane Katrina and its aftermath, to explore the role of the legal profession in confronting catastrophes.”
 
The panel presenting the program consisted of James M. Davis of Reed Smith LLP (Moderator); Dominica C. Anderson of Duane Morris LLP; Nancy Brechtel of Abbot, Simses & Kuchler, APLC; Sara Lunsford of Continuum Recovery; and Scot W. Ferrell of Marsh Risk & Insurance Services. The program was accompanied by a paper written by James M. Davis and Noel C. Paul, entitled, “Compensating Victims Of Catastrophe: Reforming The Insurance Industry, The Tort System, And Government.”
 
The authors of the paper assert, “After Katrina, the insurance industry refused, often in bad faith, to cover the property losses of thousands of families and businesses who reasonably expected coverage.” They maintain that “the US insurance industry is clearly incapable of providing adequate security to US residents in the event of a catastrophe either because they do not sell the right products, they do not stand behind their products, or people will not buy the products.” They state that to cope with a national catastrophe, several reforms are required.
 
The authors argue for the repeal of the anti-trust exemption essentially granted to the insurance industry by the McCarren-Ferguson Act of 1945. As insurers are able to share data as to claims and losses and join together in underwriting and reinsuring certain risks, there is a “culture of collective action [that] encourages uniform decision-making.” The authors aver that this has led to a collective decision not to underwrite property insurance in the Gulf Coast and that a competitive, diverse marketplace will provide some incentive to insure such risks.   
 
The authors propose that “the federal government should require that insurers no longer deny insurance to homeowners in disaster-prone areas, and courts must see that insurers cease from denying coverage that policyholders reasonably expect to protect them in the event of risk.” As an incentive to insurers, they call for state and federal governments to provide “backstop” reinsurance. They suggest that the federal backstop scheme used in the Terrorism Risk Insurance Act could be used as a model for other catastrophic funding. The authors further urge that a national disaster compensation fund be established for victims of catastrophes.     

Comments

Robert M. Lopatin
  • 04-01-2008

As to accusations of bad faith, I will let the courts sort those out.  But I will note that "bad faith" typically does not involve any culpability on the part of the insurer, but only the taking of a position later deemed unreasonable.  Moreover, human beings are imperfect, so any organization composed of human beings will make mistakes, sometimes big ones.  The opportunity to make mistakes is magnified in a catastrophe the size of Katrina and 9/11.<BR><BR>As to the argument that insurers should cover all catastrophic losses, I would simply say that insurers are businesses, not guardian angels.  Nor do they currently have the backing of the federal Treasury.  They can only write coverage that can be adequately priced and that people are willing to pay for.  That is why, for example, flood insurance is not available in the private market.<BR><BR>If the authors think insurers can profitably write the sort of coverage they demand, they are welcome to seek capital to enter the market.<BR><BR>William T. Barker<BR>Sonnenschein Nath & Rosenthal

Robert M. Lopatin
  • 04-17-2008

Ridiculous proposal --  1Cthe federal government should require that insurers no longer deny insurance to homeowners in disaster-prone areas, and courts must see that insurers cease from denying coverage that policyholders reasonably expect to protect them in the event of risk. 1D <BR><BR>All this propsoal will do is create a large and inefficient government entity taking on risks that an insurer will not take. The homeowner should think about that risk when the property is acquired -- if an insurer doesn''t think there are enough potential insureds to spread the risk -- it is unreasonable to take the risk.  It makes no sense to build on a flood zone, under sea-level in hurricane country, etc. If no one but the homeowner is willing to take the risk then the homeowner is an idiot and the government is not designed to help them.  Show me where it says in the US Constitution that the government can tax all the citizens to indemnify some idiot who builds a house in a flood zone and gets upset when it floods. Next they will want to make a gift to those who build on the side of an active volcano.  This is not insurance it is stupidity.<BR><BR>I can''t think of anything worse than having the people who manage Medicare in charge of catastrophic property losses. Government is, by definition, inefficient and incompetent. Suing the government is hard, if not impossible. <BR><BR>