Storm brewing over hurricane insurance
Texas Watch today wrote coastal and Harris County legislators and members of the appropriate legislative committees asking lawmakers to consider a proposal by state Senator Rodney Ellis to “explicitly direct insurers to cover storm surge losses.” This came after the Texas Windstorm Insurance Association (TWIA) annnounced earlier today that it would not pay claims for damages resulting from storm surge. Calling this position “ludicrous,” Texas Watch makes the point that “storm surge is a phenomenon peculiar to windstorms.”
Being from Galveston, I am sympathetic with this argument. Storm surge is indeed the result of strong winds that pile up water in the right-front quadrant of a hurricane. Nevertheless, TWIA’s decision not to pay for storm surge damage is far from ludicrous; it is, in fact, long-settled practice. The insurance industry distinguishes windstorm damage from flood damage. Windstorm policies typically exclude losses incurred from rising water. They cover damage caused by wind and by wind-driven rain. A homeowner who wants to protect his property against flooding can purchase federal flood insurance. Indeed, without such insurance, no substantial development could take place on the Texas coast. One can reasonably ask whether the federal government ought to be subsidizing development in hurricane-prone areas that suffer devastating losses from storm surges, something that is sure to happen over and over again — each time requiring taxpayers to pay for damages for the next generation of condos and expensive residences. Windstorm coverage can also have an impact on the budget. As I have pointed out in a previous post, if the coast is hit by a big storm that requires large payouts from insurers, the companies can take a credit against their payment of insurance premium taxes. This comes straight out of general revenue.
In the aftermath of Hurricane Katrina, the Broussard family, which lost their home in Mississippi, filed a claim with their insurer, State Farm. State Farm claimed that flooding, which was explicitly excluded from the company’s policies, had caused the damage. An expert witness provided testimony to support the company. The Broussards blamed the collapse on wind damage. Faced with an entirely destroyed house, the Broussards filed a claim. State Farm said that flooding–explicitly excluded from its policies–had caused the damage and provided expert testimony in court to back this up. The Broussards claimed their home collapsed because of wind damage that State Farm should have covered. The case was tried in federal court, and the judge held State Farm liable as a matter of law under the well established principle that courts should resolve insurance-contract ambiguities in favor of the insured. The award was for $223,000 and
punitive damages of $2.5 million (reduced by the court to $1 million).
This was the high-water mark, so to speak, for the position urged by Texas Watch. On appeal, the Fifth Circuit reversed the case and sent it back for a new trial on the grounds that there was a triable fact issue about whether the house was destroyed by wind or water. The appellate court further tossed out the punitive damages award.
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Will there be further litigation of this sort after Broussard? I suspect so, because the ultimate cause of catastrophic property damage will often be elusive. High winds can propel heavy objects like tree limbs into a house, opening a gaping hole through which water can enter to do its destructive work. If the house is reduced to rubble, which is then dispersed by rising water, determining the cause will be almost impossible. Perhaps Texas Watch is right that protection should extend to all types of damage, but the cost to consumers (or taxpayers) will be very high, and insurers will surely resist any change from current law.
texun says:
Why should homeowners and taxpayers over the whole state pay to compensate homeowners on the Gulf for bad decisions they made when they built on highly exposed property?
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paulburka says:
To Texun:
Houston is an economic powerhouse. That “highly exposed property” includes the land for one of the nation’s largest ports. It is an immense economic engine. They don’t build ports in Lubbock, you may have noticed. I haven’t seen miles and miles of petrochemical plants and oil refineries in Amarillo. Yes, once every ten years or so, the area will get hit by a tropical storm and there will be flooding. In the meantime, Houston’s contribution to the state’s economy dwarfs the cost of recovery from the occasional big storm. Ike was the first hurricane to cause widespread damage in the Galveston Bay area in 47 years, since Carla in 1961. (Alicia in 1983 was a much smaller storm.) State leaders ought to be looking for a way to provide more protection to people and businesses that have been investing in Houston, rather than listening to texun and other whiners.
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texun says:
Sorry Paul, but I’m not a whiner, though you seem to like the Republican put-down. Bailing out bad decisions seems to be the bandaid of the moment and you subscribe to it. You also resort to the classic debate fallacy, the straw man. You have me opposing support for the Ship Channel complex, while I mentioned only homes. Nice try, but it proves that you can’t debate this one squarely. Sarcasm doesn’t become you either: ports in Lubbock, etc. If you’re too stressed to carry out reasoned discourse, you should hang it up.
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anonymous1 says:
People everywhere should watch this discussion for the obvious reasons but also because it is instructive about insurance in other areas.
Txun asks a good question, and the easy, admittedly flip, answer to it is, why not? We already do it in several other areas of life. Rephrasing his question may illustrate this:
Why should consumers and taxpayers over the whole state pay to compensate people for bad lifestyle decisions (tobacco use, poor nutrition, and lack of physical activity) which account for roughly 75% of all health care costs for the resulting disease, disability and death? (Testimony by CDC official before the Senate Committee on Appropriations, Subcommittee on Labor, HHS, Education and Related Agencies, Jan. 17, 2003)
Accordingly, why shouldn’t homeowners on the Gulf Coast enjoy the same entitlement of their property losses being subsidized by the rest of us?
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Eric R says:
I worked Hurricane Rita with my father-in-law as a catastrophic adjuster in Louisiana. This very question was raised then, and Texas law makers are only asking about it now? Just shows that politicians can’t see past the end of their nose and have no real vision for us and the way government helps to protect it’s citizens. Typical knee-jerk reaction.
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anonymous1 says:
it may seem like a knee jerk reaction on many legislators’ parts but that’s not the case with chairman smithee and reps. eiland and taylor and other members from coastal areas who have been working on the question for several years. they’ve worked to advance serious solutions but those ideas always seemed to have gotten bogged down by … guess what? … politics.
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Eric R says:
So where was their concerns when they established the Texas Wind Pool? They knew conventional insurance would no longer cover things like hurricane damage along the coast. But like all politicians, getting your panties in a wad over issues such as this polls well. I’m skeptical towards all politicians…perhaps I’m wrong here and there is genuine concern and effort on behalf of the people. And no, I’m not a liberal or conservative but a highly suspicious independent, does that make me a libertarian? I digress….
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