Insurers face ire of Katrina victims

By Jeremy Alford and Joseph B. Treaster
The New York Times
September 21, 2005

PASCAGOULA, Mississippi Richard Scruggs picked his way through the ruins of his once-elegant four-bedroom home no more than 50 yards from the edge of the Gulf of Mexico.

A wall of water flung by Hurricane Katrina tore through the home a little more than three weeks ago, blowing out the sides of the house and leaving only a pair of brick chimneys and exposed studs tenuously holding up the upper floor.

To the left of Scruggs's home lies a bare concrete slab where another home stood until Katrina's assault on New Orleans and the coasts of Louisiana, Mississippi and Alabama. To the right, a peaked roof sits at a twisted angle on a waterlogged lawn, all that remains of another big house.

"The whole street is torn up," Scruggs said. "Very few houses are even standing."

Scruggs, a wealthy plaintiffs' lawyer who played a leading role in winning a $250 billion settlement from the tobacco industry a few years back, is furious about the hurricane - not simply that it happened but that insurance companies might escape what he sees as their responsibility for a huge portion of the losses from the storm, those resulting from flooding.

The insurers say homeowners' policies cover wind and rain damage but do not cover flood damage caused by hurricanes or anything else. A federal program provides as much as $250,000 in flood insurance, but most people do not have that coverage.

"I'm not going to sit still for this," said Scruggs, who grew up in Pascagoula and has practiced law here for decades. "I'm going to bring every organizational and legal skill I possess to make these guys do the right thing under their policies."

Potentially at stake is around $15 billion of insurance payments. That explains why the insurance companies, which have never been successfully challenged on the "wind vs. water" issue, are equally adamant.

They have contract law in their favor, they say. Their longstanding practice of not covering flood losses years ago resulted in a federal program being specifically created to provide such coverage. Still, they worry about going to court in Mississippi, which has a reputation for being tough on corporate defendants despite recent changes in its legal system.

Scruggs contends that the extent of coverage is ambiguous, and courts have ruled that it is the responsibility of the insurance company to make the provisions clear.

Scruggs said much of the damage came from storm surge, which he described as gulf waters driven inland by the winds of the hurricane. If the insurers had wanted to exclude coverage for storm surge, "they certainly know how to do it," he said. "And that term does not appear."

Fred Levin, a lawyer in Pensacola, Florida, specializing in suing insurance companies, said his first reaction was that Scruggs had no chance of winning.

But Levin said policies on the Gulf Coast, unlike those in Florida, did not appear to include large bold-print warnings that flood damage was not covered. He added that any lawsuit by Scruggs could hinge on whether insurance agents had fully explained to homeowners that their hurricane coverage applied only to wind and rain.

"You go to the agent and tell him you want full coverage," Levin said, "and he tells you, 'Yes, you've got full coverage.' I think that's the best claim they've got."

There is no disputing that Hurricane Katrina caused enormous damage, much of it from flooding. Robert Hartwig, the chief economist of the Insurance Information Institute, a trade group based in New York, estimates that 200,000 homes were destroyed or damaged beyond repair in Louisiana, Mississippi and Alabama. Estimates of the insured losses run as high as $60 billion, nearly twice as much in today's dollars as the losses in the attacks of Sept. 11, 2001, and nearly three times the insurers' costs from Hurricane Andrew, the worst previous storm, in 1992.

Most people, even in low-lying areas, do not buy federal flood insurance. But even fewer bought flood insurance on the Mississippi coast than in New Orleans and nearby areas. In New Orleans, Hartwig said, 40 percent bought it. Nearly 60 percent did so in the two flanking parishes. But in the three Mississippi counties facing the Gulf of Mexico, 23.4 percent bought it in Hancock County, 11.7 percent in Harrison County and 10.4 percent in Jackson County.

Jim Hood, the attorney general of Mississippi, fired the first shot in the coverage dispute last Thursday, filing a civil lawsuit in a state court to force the insurers to pay for storm surge losses.

"I'm not going to allow insurance companies to bankrupt the entire Gulf Coast by using the fine print and saying that people should have known that they didn't have coverage for water damage," Hood said.

Scruggs said he and his neighbors, like thousands of other owners of homes and small businesses along the coast, had bought hurricane insurance for which they paid an extra premium and agreed to accept a higher-than-usual deductible.

He said he had bought the maximum of $250,000 in federal flood insurance for his $800,000 home because it sat on the waterfront.

"Everyone knows, as does the insurance industry, that the major risk to life and property from a hurricane is storm surge," he said. "So having a hurricane policy that excluded storm surge is preposterous. No one believed that. When you pay an additional premium for a hurricane endorsement you would naturally think, 'O.K., I've got that covered."'

AIG adds up Katrina costs

American International Group, the world's largest insurer, said it expected $1.1 billion in third-quarter costs associated with Hurricane Katrina, The Associated Press reported from New York.

AIG said on Tuesday that the after-loss in its insurance operations for the July-September period would be about $900 million.

Copyright 2005 the International Herald Tribune

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