With insurance losses in the range of $25 billion, the sensitive subject of what claims insurers will pay in the wake of Hurricane Katrina has become a political hot potato that already has generated its share of demagoguery and will make sure almost nobody will feel treated fairly by whatever policy emerges.
The crux of the debate turns upon who must absorb what losses. With up to 50 percent of southeastern Louisianan homeowners not having flood insurance, many will have had their homes wiped out without enough monetary resources to rebuild. Unfortunately, it seems this kind of insurance, not the standard homeowners’ kind, applies even if a hurricane pushes water around.
Normally, this would be viewed as unfortunate. But these are not normal times when potentially hundreds of thousands of homes fall into this situation, and it has loosed populists with destructive agendas. Mississippi’s attorney general already has taken this course against the advice of Gov. Haley Barbour; some displaced Louisiana residents also have sued insurers with the unpaid assistance of ex-Insurance Commissioner Prisoner #03312-095.
Known outside the big house as Jim Brown, the convicted perjurer is better known as Robin Hood in this scenario from his economically-ignorant assessment that insurance companies should pay for policies they didn’t write nor were paid for because they enough money. Note the havoc that would get wreaked under Brown’s philosophy. If the courts bought this, insurance premiums for everybody would go sky high in Louisiana since it would be established law that insurers would be on the hook for anything as long as they made decent profits. That is, if any company could be gotten to write a homeowner’s policy in the state.
In a perfect world of responsible people, almost everybody in the affected area would have had the good sense to buy flood insurance. Common sense would tell you that on the Orleans East Bank, or Jefferson’s, where you live below sea level, no matter how many miles of levees so many feet high were there, you should buy flood insurance.
(And you don’t even need that many clues. Nearly 40 years ago my father stunned a local insurance agent by asking to buy flood insurance. The agent replied there never had been any flooding and he’d hardly ever written any such policies, but my father pointed out that we lived on the edge of a bayou in a city smack in the middle of the Texas Gulf Coast runoff plain, and insisted. A few years later, the city flooded, putting several inches of water in our house. After that, everybody got flood insurance, which was good because 7 years later we got two feet of water in our house. For a short while, I was a teenage displaced person.)
But we don’t live in a perfect world of responsible people; instead, we live in a world of voters so it’s becoming regrettably clear that if we are not going to rob insurers, we’ll rob taxpayers instead. Assuming another $25 billion is uninsured homeowner losses, no doubt Louisiana federal elected officials will convince Congress that the federal government should pick up the tab given how broke the state was before and especially after Katrina. If so, that’s over $84 out of the pocket of every person in the country – except it’s taxpayers who will get hit up for it, so for them it’s closer to $200 a head.
(One could very successfully argue that government – because of a number of negligent actions taken by officials for local governments, the state, even the national government – allowed a condition to develop where flooding and the inability to control of it was more likely. But it’s not like we can garnish their wages or wealth, considerable as they may be, and come close to paying the claims. Even if government bears more responsibility than individuals in this matter, in the end, the taxpayer is going to be the one who takes the hit. And then there’s the question of the government’s culpability in its lack of enthusiasm to suppress looting, but that’s another story.)
Then again, we could argue whether it should be the American taxpayer’s responsibility to insure the uninsured in this way; however, in some ways, there’s little choice because the economic hole created by so many people unable to rebuild around New Orleans would leave an untenable void in the nation’s commerce. Yet, in a sense, this cheats the responsible folks who did have flood insurance. Many will have paid yet will find others who never paid for it will get the essentially the same benefits.
And observe how this sets us up for failure again. By the government stepping in and providing a good portion of compensation, it only encourages people to behave the same, thinking they don’t need insurance because the government will bail them out. And the area will get socked again, too many people will be unprepared in terms of insurance, and productive people nationwide again will have to pay up. (This is probably what U.S. House Speaker Denny Hastert meant by his controversial comments.)
(If Louisiana had any good sense, it would mandate flood insurance over much of the southern part of the state, with its extra cost potentially discouraging riskier-located or cheaper, less-sturdy buildings. However, this state’s policy makers in the past repeatedly have demonstrated an aversion to good sense.)
So even if you live in Alaska, American Samoa, or the U.S. Virgin Islands as far away as you can get from southeastern Louisiana, even if you owned property in the area that miraculously escaped destruction, even if you had insurance to cover all of your losses, even if you are a recipient of federal government aid because it's doubtful it would cover all losses, the solution to the Katrina insurance question probably will make you unhappy, again and again.
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