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Friday, December 8, 2023

In You Insure It, They Will Pay

Hurricane Katrina is virtually certain to become the most costly natural disaster in U.S. history, but the companies that insure the homes, businesses and automobiles say they are not worried.

Hurricane Katrina is virtually certain to become the most costly natural disaster in U.S. history, but the companies that insure the homes, businesses and automobiles say they are not worried.

“We’re certainly prepared to handle this,” said Dick Luedke, spokesman for State Farm, the largest insurer in Katrina’s wasteland.

Insurance carriers face up to $35 billion in preliminary damage estimates, according to California-based Risk Management Solutions.

But that’s only a fraction of the damage tab, the company said. It figures the total economic loss from the hurricane and what it is calling the Great New Orleans Flood will top $100 billion.

The only thing comparable, RMS said, was a 1953 wind-driven storm that flooded a sub-sea-level area in the Netherlands, killing 1,800 and inundating 47,000 properties. It took six months to pump out the floodwaters there, the company said.

Katrina’s damage is likely to surpass the $21 billion cost of Hurricane Andrew, which hit Florida in 1992 and resulted in a blizzard of claims that caused 12 insurance carriers to go under.

But insurance industry representatives said this week that the companies that hold policies in Katrina’s path are prepared to shoulder the burden.

“While this event may have come as a surprise to the Federal Emergency Management Agency, it certainly didn’t come as a surprise to us,” said Robert Hartwig, senior vice president and chief economist for the Insurance Information Center.

“Events of this magnitude are well within what we plan for,” he said. “The industry is fully capable of paying these claims, and there’s no threat of insolvency.”

That might not be true for tens of thousands of homeowners, however.

Homeowners insurance will cover the cost of household damage caused by Katrina’s high winds and any related water damage as a result of the winds. But for homeowners whose loss is from flooding caused by levee breaches, they’re covered only if they bought national flood insurance.

Hartwig said that in New Orleans, only about one in four homeowners had national flood insurance, coverage offered only by FEMA through policy riders sold by all insurance agents.

While national flood insurance is required in flood-prone areas and is a prerequisite for obtaining a mortgage, many homeowners let their policies lapse and, according to industry sources, the banks poorly monitor compliance.

“I think it is safe to say that a large majority do not have it,” said Tiffany O’Shea, spokeswoman for the American Insurance Association.

That means tens of billions of dollars in Katrina damage is not covered by insurance. And while the federal government typically steps forward in such situations with low-interest loans to cover uninsured damage, that only adds to the debt burden of homeowners who may be left with virtually nothing but the land when New Orleans finally dries out.

“If people walk away from those properties, banks may end up holding mortgages that are of little or no value,” Hartwig said.

If the experience from Hurricane Andrew holds true in Louisiana, Mississippi and Alabama, where Katrina struck hard, home insurance rates next year will soar.

The American Insurance Association’s Julie Pulliam in Florida said rates in that state doubled statewide, and went up 200 percent in the areas where Andrew’s damage was worst. Since then, Florida enacted a reinsurance program designed to help indemnify insurance carriers in high-cost storms, and it remains the only state with such a program on the books.

After four hurricanes hit Florida last year, causing collective damage of about $23 billion, rates this year have gone up between 15 percent and 20 percent, the American Insurance Association said.

While the impact on the insurance industry is sustainable this time, industry sources said, what worries them most are the storms yet to come. The 2005 hurricane season is barely half over and some meteorologists are predicting an escalation in the number and severity of hurricanes in coming years.

State Farm, which issues nearly 35 percent of all home and auto insurance sold in Louisiana and similarly high percentages in Mississippi and Alabama, has dispatched 2,600 specialists in catastrophic claims to the region, equipped with checkbooks.

“We’ve received about 200,000 claims so far,” Luedke said, adding that many hurricane victims have been given advances to cover their out-of-pocket expenses while displaced.

“Those who had to evacuate their homes are issued advances of $2,500 to cover hotels, meals and that sort of thing for the first two weeks,” Luedke said. “Those who have received such checks number in the tens of thousands.”