Insurance Transparency Project

Insureds,

Due to an annoying technical error yesterday, I linked to and commented on an A.P. summary of David Hammer’s original piece on the Louisiana Recovery Authority’s finding that it is being asked to make up for a $3 billion shortfall in private insurers’ wind payments. Here’s David’s story:

Times-Picayune/Hammer $3b shortfall, 5/26/07.

It raises the issues that War Eagle was so frustrated about, namely, why the government isn’t asking insurers to meet their obligations. It’s a strong story. Check this out:

Federal and state documents obtained by The Times-Picayune pin the largest chunk of a multibillion-dollar shortfall on hurricane wind damage that Road Home is paying because insurance companies did not. The two sides are in dispute about who is responsible, a debate that will figure strongly in whether Congress steps in with more money to cover an estimated $3 billion gap.

The state documents contend that a significant part of the Road Home shortfall emerged either because homeowners had insufficient insurance coverage or because insurance companies failed to meet their obligations.

The Bush administration, stunningly, despite everything, gets it wrong, blaming the state for paying wind claims, instead of blaming insurers for NOT paying wind claims.

But the Bush administration foresees the Road Home coming up short by anywhere from $2 billion to $6 billion simply because Louisiana decided — against the federal government’s wishes — to pay for homeowners’ uninsured wind damage instead of limiting grants to flood damage.

According to an analysis by the Bush administration, if the Road Home had paid only for flooded homes and administrative costs, the program would have cost $7.6 billion. As it stands, paying for wind and flood damage will cost the Road Home at least $10.2 billion, by the state’s own analysis.

A source close to Federal Recovery Czar Donald Powell is quoted as saying he’s concerned the state is wasting federal money.

“We see it as our continued role to work with the state, but serious concerns have been raised. That’s why we need to sit down with the governor, and we will ask the governor if she has a backup plan,” the official said Wednesday.

War Eagle says: How about making wind insurers pay for wind damage as a backup plan? Is this complicated?

The story includes data (our favorite thing) from an LRA study, which is posted on ITP’s key documents page and here: Louisiana Recover Authority Insurance Analysis, May 2007, which can also be found on ITP’s key documents page. The report is excellent and is only a couple of pages long.
Among the reports findings:

1. Insurers paid only 61% of total damages, including the flood program, while the state expected 76%.

2. Only 23% of policyholders got 100 cents on the dollar.

3. 37% of policyholders received less than 50 cents on the dollar, including flood.

4. About 8% received less than 10 cents on the dollar.

And here’s the key analysis paragraph; emphasis is mine:

Clearly low insurance levels will have a negative impact on the budget. The big question behind these numbers is “Are Louisiana citizens generally underinsured or do we have insurers who are not fully honoring their obligations?” With further analysis, we could look for trends in terms of which insurers have low payout ratios, but this is dangerous territory especially as we are still relying on the cooperation of insurance companies to continue the program. However, this might be good information to have in our back pockets. If it is the case that we are subsidizing insurance companies at the expense of taxpayers, it is coming at a hefty price. Unfortunately, Road Home applicants have little incentive to pursue insurance claims if Road Home is going to pick up the balance.

It is “dangerous territory” to ask insurers to make good on their contracts.

Hammer includes a couple good anecdotes that illustrate exactly how insurers’ wind denials led directly to the shortfall.

Margaret Badger, a Road Home applicant living in a FEMA trailer in Harvey, said that was apparent to her from the start. In August, with an initial one-year deadline for filing court claims looming, she filed a claim against her insurance company, which she said paid her $9,000 for $128,000 in estimated damage. But she didn’t pursue it vigorously because the Road Home, which was slowly getting under way at that point, promised to make her whole.

“Why pursue the lawsuit if the Road Home is just going to subtract the insurance off of it, especially when I have a limited tolerance for stress and can only deal with the most important crises of each day?” said Badger, 66, who is still waiting for her Road Home grant and says she feels as if the walls of her trailer are closing in on her every day.

The idea of turning to insurers to pay is fully articulated the next day, when Hammer again steps up with a fine piece that says LRA Housing Chairman Walter Leger a tort lawyer made famous in tobacco litigation, says the state should step into the shoes of policyholders whose wind claims the state is paying and pursue the claims against insurers.

With federal officials hinting it is unlikely Washington will bail out Louisiana’s Road Home program from a projected $3 billion shortfall, Gov. Kathleen Blanco and a top Louisiana Recovery Authority member are recommending the state seek more money from the group they claim caused about half the deficit — insurers who underpaid homeowners for wind damage….

But, of course!

Governor Blanco, to her credit, says she will ask A.G. Charles Foti to get on it. I know some people are skeptical of Foti, but War Eagle says: Y’all give the feller a chayence.

If the state is paying those claims, that means either people didn’t have enough homeowners’ insurance or the private carriers just didn’t pay. To be sure, as the Lovely Big Easy Stats Mistress reminds us, it is true that many Louisianans owned their homes outright, and didn’t bother with homeowners’ coverage. ITP has less sympathy for this crew.

If you’re wondering, the Insurance Information Institute says insurers paid $10.3 billion in Louisiana Katrina claims, with about 95% of claims closed. Louisiana says they came up $2.7 billion short, about 26%. But think about this: the III figure includes commercial, auto, business interruption and other claims, while the Louisiana number is pure homeowners. I think insurers’ shortfall is going to wind up in the 40 to 50% range.

Remember, this is like a bank giving you 50 cents on the savings you deposited. There is no difference.
I’m going to note a couple things and then move on to my other job, saving the business press from itself.

First, I pass along remarks by Greg LaCost, the bright, young legislative chief for the Louisiana wing of the Property Casualty Insurance Association of America. Greg, whom I met, repeats what I regard as a serious industry miscalculation: in effect threatening to withdraw from the market if the State of Louisiana seeks to enforce its own insurance laws.

“If the insurance companies see the government is stepping in in a negative way against the industry, they’re going to have to look at if this market is good for their business plans,” he said.

Greg, insurer pals: You have a very strong hand, but ITP believes it is possible to overplay it. Providing an essential financial service does not put you above the law. Make good on contracts. You have for decades enjoyed extraordinary tax benefits, captive regulation, government subsidies in the form of backstops, wind pools, the flood program and more, as well as a unique exemption from U.S. anti-trust laws. Don’t push it. Sow the wind and reap the coming political whirlwind. ITP is trying to help you here. Don’t listen to those enablers at Tillinghast. This is for your own good.

Bob Hunter, the head of the Consumer Federation’s insurance section and well-known man about the nation’s capitol, offers some historical perspective:

Hunter said Louisiana is proceeding like Florida did after Hurricane Andrew in 1992, trying to placate insurers to keep them in the market, rather than following Florida’s current policy, hewn from its own 2005 hurricane losses. This year, Florida beefed up its insurance regulations and the ability of its own Citizens Property Insurance program to offer competitive rates. Such reforms already have reduced some private carriers’ rates by more than 10 percent, although studies by the insurance industry predict premiums will shoot up again if another disaster hits.

But leave it to ITP to look at the big picture. I’m an idea guy, is what I am. The preceding paragraph quotes an insurance spokesman cautioning that Florida because of its size has a lot more leverage than Louisiana:

Understanding that, Dean Starkman, who started the Insurance Transparency Project to track how the insurance industry is handling Katrina, said he empathizes with the state’s conundrum.

“To me, Katrina shows it’s almost impossible for a single state, let alone a small state like Louisiana, to regulate insurance carriers and at the same time maintain a market for insurance carriers; you can’t punish and cajole insurance carriers at the same time,” he said.

All that wisdom, and he cooks, too. ITP, the total package. One at a time, ladies. No need to push.

Thanks to the Boulevardier.

ITP Fans, Fellow Mowbraites,
Listen, we are getting pretty close to nut cutting time here, thanks to the indomitable Mowbray, who is bucking for an ITP Silver Eagle Award for excellence with her recent spate of blockbusters, including this one, which ran May 20.

Between her, fellow Times-Pic reporter David “Hammer” Hammer and the indispensable Anita Lee of the Sun Herald, the Gulf really lucked out, newspaper-wise.

This one, however, is enough to show to a grand jury.

The story says Allstate’s is allowing costs 300% higher and more for the same construction materials if damage was attributable to flood versus wind. At a house on Marina Drive, for instance, Allstate paid radically different prices for the same sheetrock:

If Allstate attributed the damage to wind or rain, for example — putting it on the hook for payment under the customer’s homeowner policy — the company priced the cost of removing and replacing the drywall at 76 cents per square foot. But if the damage was blamed on storm surge or flooding, the estimated cost of removing and replacing the drywall more than quadrupled, to $3.31 per square foot.

Mowbray spells out the issue. Allstate makes the government flood program pay three times the price it pays itself for the same thing. Becky, break it down for us:

If Allstate attributed the damage to wind or rain, for example — putting it on the hook for payment under the customer’s homeowner policy — the company priced the cost of removing and replacing the drywall at 76 cents per square foot. But if the damage was blamed on storm surge or flooding, the estimated cost of removing and replacing the drywall more than quadrupled, to $3.31 per square foot.

The tip seems to have come public adjusters, who negotiate on behalf of policyholders. In theory, public adjusters shouldn’t be necessary, as insurers are supposed to pay promptly and fairly. One such adjuster is Chris Karpells:

Karpells said that, in his work as a public adjuster, he has seen the dual pricing on almost every Allstate adjustment that lists the damage line by line. And from his experience, Allstate is the only company that’s doing it, said Karpells, a third-generation carpenter from Massachusetts who moved to Slidell several years before Katrina hit. Karpells said he believes that “someone is saying, ‘On a flood policy, we use this database. On a wind policy, we use this database.’ They’re front-loading all the money on the flood policy.”

Allstate denies it:

“Our firm position is that there are not any discrepancies in the rates charged,” said Mike Trevino, a spokesman for Allstate. “The component prices reflect current market conditions. And they are the same for wind and flood.”

He make a point that can at least be seen a plausible: Repairing flooding costs more. But is that really true, all you home-repair types?

“The cost to repair wet drywall versus dry drywall is different. The cost to repair carpet from one room to carpet of another room may be different because you may have different quality carpet from room to room,” Trevino said. “You can have different methods and approaches regarding paint. In one room, you may have one coat of paint, but in another room, you may need more than one coat of paint depending on the color.”

I tend to agree with Karpells: “It’s apples to apples. The facts speak for themselves.”

It gets worse for our friends from Northbrook. The homebuilders are saying Allstate’s wind price is too low and its water price too high. Implication: underpaying policyholders, gouging the government.

Craig Berthelot, vice president of the Home Builders Association of Greater New Orleans and owner of Berthelot Construction Services, which renovates and repairs storm-damaged homes in the New Orleans area, said that the real price for replacing drywall is between the prices that Allstate calculated.

Without the tear-out portion of the job, it costs about $2 to $2.50 per square foot to replace drywall, he said. The $3.31 billed to the flood program for tearing out and replacing drywall is high but more realistic than Allstate’s 76 cents on the homeowners policy, Berthelot said.

Mowbray provides the context: a Sept. 21, 2005 memo from NFIP head David Maurstad, the former Nebraska insurance agent and lieutenant governor, expediting flood claims:

The memo waived the requirements that customers prove their losses and instructed the insurance companies to pay the flood policy limits if the home was washed off of its foundation or if the home was in “standing water” for “an extended period of time.”

Rep. Gene Taylor, D-Miss., suspects the idea came from the insurance industry, and his policy chief, Brian Martin, says the memo opened the way for abuse:

“They get to go right out there and give them a check. It’s from the federal government,” Martin said. “It gives the homeowner something so that there’s not huge pressure on the insurance company to pay something now.

“The flood insurance program made it easy for a few of the insurance companies to manipulate those claims to put it all on flooding,” Martin said. “The taxpayers pick it all up.

Now even FEMA can’t ignore this:

FEMA also expressed bewilderment over the idea of charging government and private insurers different prices, when told about practices in the New Orleans area.

“I don’t have an explanation for that,” said Tim Johnson, senior insurance examiner on the claims section at FEMA. “If that’s what they say is happening, I would love to see it. The overpayment surely does affect me.”

I-Fans, Katrina and insurance is a big puzzle, but I think the pieces are starting to come together. Stay tuned.

Ida, keep them coming. There’s no ITP without you.

Calling All Perils,

This story has a happy ending, which I’ll get to tomorrow.  But I want to highlight this A.P. stunner, which needs a little decoding but ultimately shows a strange disconnect in the insurance debate, particularly on the part of Donald Powell, president Bush’s Katrina recovery czar, but not him alone.  It is becoming clear the insurance industry has failed to pay at least $2.7 billion in Louisiana wind claims — claims for which it collected premiums.  Not mentioned here at this hearing before a Senate subcommittee:  enforcing insurance law.

In the story, Powell criticizes Louisiana officials for allowing the LRA to pay policyholders’ wind claims, thereby running up a shortfall.Powell testified that the federal funds, from the Department of Housing and Urban Development, were intended only for people who didn’t have flood insurance, and should only pay for flood damage. The theory being that the New Orleans levee breach was the government’s fault, making flood claims, and only flood claims, the government’s responsibility.  But as the story says:

However, unlike other states affected by the 2005 storms, Louisiana’s “Road Home” grant program is projected to award about $2.7 billion to more than 43,000 applicants whose homes were damaged by the hurricanes’ wind and didn’t have any flood damage.

As Powell says:

“We were always very clear that the federal government would not fund state housing programs to cover wind damage,” Powell testified before the Disaster Recovery Subcommittee of the Senate Homeland Security and Governmental Affairs Committee.

Of course, he’s right. Why should taxpayers pay for wind damage? That’s what homeowners’ policies are for.

For exercise in frustration, read the whole story because no where does anyone ask:
1. Did the 43,000 have homeowners insurance?
2. What are insurers doing about it?

The answers are:
1. Of course they all did; everyone does.
2. Not paying wind claims.

But Sen. Landrieu, at the hearing, and other officials get into a finger-pointing argument over whether or not the LRA did or did agree to pay wind claims and whether the federal government did or didn’t agree to it.

Even the very effective LRA executive director, Andy Kopplin, completely misses the point:

Kopplin said the Road Home program was designed to aid any resident whose home sustained major damage, whether wind or water was to blame.

“When the president said he would do what it takes and stay as long as it takes, he didn’t say except if you had wind damage,” Kopplin said.

And more:

Kopplin blamed the program’s projected budget shortfall on inaccurate data provided by the Federal Emergency Management Agency. He said FEMA underestimated both the number of homeowners who could be eligible for grants as well as the severity of damage to homes.

War Eagle says: Um, esqueeze me, but what about the insurance compa...

But then Powell says, no, it was for flood only.

In February 2006, he said, federal and state officials “mutually agreed” to fund grants for about 106,000 homeowners who had flood damage. With those homeowners getting an average grant of $72,000, the program was expected to cost a total of $7.6 billion, he added.

War Eagle: Yes, but, the insur…

Then Senator David Vitter, R. La., adds that he’s “stunned” because it seemed clear that the Road Home was only for flood:

“But the state designed the program to cover wind as well as water damage anyway. Did no one in Baton Rouge realize this would result in a huge shortfall?” Vitter asked in a written statement.

War Eagle: Buh, buh….

Then Gov. Blanco said Vitter is making “serious, unfounded charges.”

“Chairman Powell was personally present for all LRA meetings when the program was designed to include wind damage. He heaped praise on our work, not criticism. The White House and Sen. Vitter are now using the same kind of calloused logic that insurance companies used to dodge paying what is necessary to get our people back home. Our people do not deserve the suffering inflicted by sick political games.

War Eagle: Herrow?…

Then, Sen. Landrieu says:

Road Home “has not lived up to its billing,” and Louisiana residents “have moved beyond frustration to cynicism and hopelessness” amid delays in the processing of the grant applications.

War Eagle: AFLAAAAAAAC!!!!!!!!!!!

ITP says: There, there, little buddy. I’m sure some day, someone will ask the sellers of wind policies, issuers of wind contracts and collectors of wind premiums why the state of Louisiana and the U.S. Government have to pay $2.8 billion in wind claims.

I don’t mean to be sarcastic, but GEEZ!

Hey, Non-Profit Prophet: What have I been telling you?

Ida rules. Tomorrow, I’ll get to the happy ending.

Eye Fans:

First, Allstate filed a Form 8-K last week with the Securities Exchange Commission, required to tell shareholders of any significant event affecting a public company, including bankruptcy, merger, or the like.

Allstate says it is the subject of a criminal investigation by U.S. Attorney Dunn Lampton, in the Southern District of Mississippi.
Allstate is the “registrant”:

“The Registrant has received a subpoena from a U.S. Grand Jury sitting in the Southern District of Mississippi. The subpoena is part of an ongoing investigation into the insurance industry’s handling of Hurricane Katrina claims in Mississippi. The Registrant is working with the U.S. Attorney’s office regarding Registrant’s efforts to comply with the subpoena. The Registrant remains confident in its claim settlement practices following Hurricane Katrina and is committed to resolving all claims fairly and appropriately.”

Nationwide made a similar announcement.

The significance is hard to overstate. This shows that the federal criminal investigation into post-Katrina claims handling has spread from Lampton’s subpoena of records from a bad-faith finding against State Farm following a 1999 Oklahoma tornado, to target Allstate and Nationwide specifically. We don’t know if State Farm, which is not a public company, has gotten a subpoena.
The reason this is more important than Attorney General Jim Hood’s criminal probe is that, unlike a state official, a federal prosecutor isn’t required to worry about the state of Mississippi’s insurance markets, whether insurers will write new policies, and has no incentive to accept a civil settlement of criminal charges.

Much as insurers would like to close the books on 2005, I really don’t see this going away.

Ok, this excellent story from NBC’s Mobile outlet provides more support, if any were needed, that wind indeed did damage to houses on the Gulf Coast. The story reports that a University of South Alabama associate meteorology professor who cames up with an answer to a puzzling question: If Hurricane Katrina was basically a Category 3 hurricane on a scale of 5, how could it do some much damage?

The answer, according to some new data presented by Prof. Keith Blackwell, is that the storm had two eyewalls, an outer one and an inner one, a fairly rare event apparently for hurricanes hitting land.

“Dr. Blackwell says the double eye wall explains the size, destruction, and power of Hurricane Katrina. From Louisiana to the Mississippi-Alabama state line, residents in those three states were hit twice by the storm’s powerful winds and waves.

“By the time the storm was making landfall in Louisiana and the eye was near the mouth of the Mississippi River, the outer eye wall was well developed and already affecting the coast of Mississippi.”

Actually, this doesn’t strike me as exactly new. The two-wall theory has been bouncing around the coast for some time. Anyone out there with data on this, please forward to ITP.

Prof. Blackwell says, however, that most meteorologists missed the outer wall because they used “older technology,” according to the story.
“It couldn’t penetrate the outer cloudy layer, but microwave satellite imagery can. This newer technology allows you to see into the storm, and it was this technology that revealed Hurricane Katrina had a double eye wall. “

Thanks again to Ida.

Eye-Fans,

Mowbray, at it again, reports that the Weiss family of Slidell, who won the recent $2.8 million bad-faith verdict against Allstate, turned up paperwork during their trial showing the insurer took the Weiss’s contents claim of $38,848 and somehow managed to add $100,000 to it before submitting it to the National Flood Insurance Program.

Oops. That means, Allstate, which denied the Weiss’s wind claim, improperly, a federal New Orleans jury has found, was able to give the Weiss’s the maximum $100,000 available under their flood policy.

The “claim,” which the Weisses say they never saw, includes items the Weisses never owned, including “jewelry, furs, memorabilia, DVDs,” etc.

As Merryl Weiss said in a deposition:

” ‘I never even claimed that we had any of this stuff. I did not write this, and I did not write this,’ she said, pointing to items on the list”

They mostly made claims for some expensive fishing equipment made by Robert Weiss, a retired doctor.

No one at Allstate knows how the furs and jewels made their way onto the flood claim.

“Not Mike Wells, the outside adjuster employed by Allstate to handle the claim. He testified that he had given the Weisses’ handwritten list of fishing equipment to Allstate. Not Mung Hatter, who worked for four months processing Allstate claims before landing her current job at Beau Rivage casino on the Mississippi coast. Hatter testified that she simply put the finishing touches on the claim using the numbers the company gave her before supervisors signed off on the settlement and it was mailed to the flood program for payment.”

Then came testimony at the Weiss’s trial:

“On the fourth day of the trial at the federal courthouse on Camp Street, Paul Tracey, field operation’s manager for Allstate’s catastrophe unit, was asked point blank by Weiss attorney Richard Trahant how the contents figures grew.

‘Do you have any idea how those numbers increased from $38,000 to $139,000?’ Trahant asked.”

Good question; here’s the answer:

” ‘We . . . have quality control measures under our policy, under our process, to ensure that the evaluations are being done correctly and accurately. The federal government also reinspects our work for the National Flood Insurance Program,’ Tracey said.”

But as Mowbray points out:

…That didn’t explain the inflated and imaginative contents list.”

Allstate’s lawyer Judy Barrasso tries to help out her witness on cross, but it doesn’t go very well: