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.