Storm brewing over hurricane insurance
Wed September 17, 2008 6:33 pm

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.

* * *

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.

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