In the wake of Hurricane Katrina, a major storm is brewing over the denial of many homeowners' insurance claims. Battered by consumer attorneys on one side, major insurers are watching their credit ratings being downgraded because of what's likely to be the largest insured loss in U.S. history.
Insurance adjusters are out in force, using rented SUVs and wading boots and working 16-hour days. But the verdicts they deliver are often not much more welcome than Katrina herself was.
Adjusters are denying many homeowners' claims, saying the damage was caused by flooding, an "Act of God" that is not covered by homeowners policies. Many homeowners are outraged and several prominent lawyers are right behind the adjusters.
Dean Barras of Marrero, La., said State Farm denied coverage on much of the damage to his home, claiming that the "chimney was not built properly." In a complaint to ConsumerAffairs.com, Barras complained that much of the damage occurred during the two weeks his home was exposed to the elements, without electricity or air conditioning.
Among the damage State Farm refused to cover was: a double-pane window with water in it, warped door frames, wooden musical instruments ruined by humidity, furniture and cabinetry swollen by humidity, roof damage from wind-driven debris, a batting cage with a tree on top of it and a houseful of appliances damaged by an apparent electrical surge.
"Imagine your entire house a steam bath with blown-open doors and exposed to the elements for two weeks," Barras said. "I paid insurance premiums for 9 yrs. faithfully on this dwelling. Thanks for your ears -- I'm tired."
Enter Richard "Dickie" Scruggs, a Mississippi lawyer who has won billions in suits against tobacco and asbestos companies. He is suing several major insurance companies, including State Farm, Allstate and Nationwide. Scruggs said that although most of the hurricane damage was caused by "a combination of wind and storm surge," insurance adjusters are claiming that the losses are due solely to flooding, which is not covered by homeowners insurance.
Scruggs said he expects to file "tens of thousands of lawsuits" for homeowners along the Gulf Coast. Rather than a class-action suit, he said, the suits would be consolidated into "common issue" legal actions in which juries will render verdicts, and in which insurance companies could be ordered to pay the amount required under each individual policy. Scruggs is the brother-in-law of Sen. Trent Lott, R-Miss.
Mississippi Attorney General Jim Hood has also sued property insurers, trying to force them to pay for more of the damage.
Louisiana Suit Blames the Levees
In Louisiana, plaintiff attorneys with the McKernan Law Firm have filed suit on behalf of homeowners in the Greater New Orleans area claiming that the high water in Orleans and Jefferson Parishes was caused by a man-made neglect of levees protecting the area and wind damage rather than rising water caused by natural elements, normally exempted under the "Act of God" clause.
The lawyers argued that it was breeches in the levees, not a storm surge, that caused most of the damage in the New Orleans area. Water did not come over the levee but flooded the areas in question only after the breeches occurred, their lawsuits will argue.
The insurance industry is adamant that the losses are caused by flooding, which is not covered by the typical homeowner casualty policy.
"The flood loss exclusion in homeowner policies is clearly worded, has existed for decades and has withstood previous legal and political challenges," said Ernie Csiszar, president and CEO of the Property Casualty Insurers Association of America. "We're outraged by this attempt to retroactively rewrite policies so that every risk will be covered, regardless of the cost to millions of American consumers."
Flood losses have been covered separately by the National Flood Insurance Program since 1968, Csiszar said. Many lenders require home buyers in risky areas to purchase this federally guaranteed protection in order to qualify for mortgages. However, it is not mandatory for all homeowners.
Csiszar said private insurers have historically excluded flood damage from most standard homeowner's policies because of the potential for catastrophic, widespread, and repeated losses.
Standard & Poor's has placed major U.S. insurers including State Farm, Allstate, Allmerica and United Fire Group on its CreditWatch list because of their "exposure to the catastrophic and unparalleled losses stemming from Hurricane Katrina."
International companies placed on the list are: Ace Group, Lloyd's, Oil Casualty, Montpelier Re, PXRE and Swiss Re.
Fitch Ratings also put five North American insurers on its Rating Watch Negative list. The affected companies include: The Allstate Corporation, Horace Mann Educators Corp., Montpelier Re Holdings Ltd., PXRE Group Ltd., and State Farm Mutual Automobile Insurance Co.
Fitch said it believes that Hurricane Katrina will represent the largest insured loss in U.S. history, surpassing the Sept. 11, 2001 terrorist attack and Hurricane Andrew in 1992.