The Magazine

Reaping the Whirlwind

Mississippi's insurance problem is everybody's.

Mar 26, 2007, Vol. 12, No. 27 • By ELI LEHRER
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More than 18 months after Hurricane Katrina devastated the Gulf Coast, the state of Mississippi finds itself in a legal battle over homeowners' insurance that may take longer to clean up than the hurricane debris. Thousands of Mississippians have seen their houses reduced to concrete slabs and want somebody to pay. Both government-subsidized and private insurance programs have failed to adequately fund rebuilding. Legislative proposals and lawsuits have poured out, and the state Democratic party has begun running television commercials blaming Republican governor Haley Barbour for the scores of Mississippians "still living in trailers."

In this uncertain environment, the state's largest insurer, State Farm, has stopped issuing new homeowners' policies, and its second largest, Allstate, has cut back. All others have stopped writing new wind insurance policies along the Gulf Coast. Because they expose a key inconsistency in America's mixed private-government insurance system for coastal areas, these events herald a stark choice for the whole country: Either homeowners will take responsibility for their own homes or taxpayers will become the nation's major source of homeowners' insurance.

Mississippi's Democratic attorney general, Jim Hood, a bête noire to much of the insurance industry, told me that he sees a simple bottom line: "The current system is a giant conflict of interest. It can't last. In the long term, I believe that the market should be able to solve the problem and that we should do away with the federal flood [insurance] program altogether."

Throughout the country, conventional homeowners' policies don't cover flooding. Along the Gulf Coast, private coverage for wind damage often proves unaffordable. In addition to private homeowners' policies, most people in hurricane zones can therefore avail themselves of both federally-backed flood insurance and state-sponsored wind insurance.

On paper, this public-private system looks sensible; subsidized wind and flood insurance both arose in situations of clear need. When the state created the Mississippi Windstorm Underwriting Association (popularly, the "wind pool") in 1987, some Gulf Coast homeowners paid as much for wind insurance as for mortgages. Before Congress created the National Flood Insurance Program in 1969, likewise, virtually no conventional private insurance companies wrote flood policies, because only people with severe flood risks would have purchased them. Today, to ensure the federal program spreads risks broadly, most flood-plain homeowners with mortgages face a mandate to purchase flood insurance. In theory, both the federal flood program and state wind program must charge premiums high enough to support themselves without taxpayer infusions.

It doesn't work that way in practice. Both the federal flood insurance program and the Mississippi wind pool regularly raid their respective treasuries. Stabilizing Mississippi's wind pool in the wake of Katrina required Gov. Barbour to divert $50 million in federal grants while the state legislature debated a bill to provide even more money and new rules. The wind pool itself proposed a 400 percent hike in homeowners' premiums. The federal flood insurance program faces similar problems: Although almost everyone who has bought a flood-prone home in the last 30 years has had to purchase flood insurance at some point, not everyone kept their policies current. Coastal Mississippi had the lowest participation rate on the Gulf. The area had avoided flooding in previous storms, and many erroneously believed that their homeowners' policies would cover flood damage.

But Katrina wreaked havoc throughout the state. Even 18 months after the storm, pockets of devastation remain. "Within a quarter mile of the coast, it's still utter desolation," says Billy Hewes, a Mississippi Republican state senator and insurance agent who represents hard-hit Harrison County.

Angry homeowners have turned to the courts after insurance companies denied claims. One lawsuit from two Biloxi homeowners had particularly sweeping consequences: In January, federal judge L.T. Senter Jr. ordered State Farm to pay a $223,292 claim and $2.5 million in punitive damages to Norman and Genevieve Broussard. The case and a cascade of similar claims contributed to State Farm's decision to stop writing new policies in Mississippi.