In the immediate aftermath of the 2005 hurricane season—the year of Katrina, Rita, and Wilma—visitors to the Mississippi Gulf Coast saw something more resembling a barren moonscape than a developed beachfront. After the high winds and storm surges, little more than foundation slabs remained of structures ranging from shotgun shacks to million-dollar mansions. That presented a big problem because, in all too many cases, people who had purchased insurance found they weren’t nearly as well covered as they had thought.
Those coverage shortages stemmed from a major problem the insurance industry calls “concurrent causation” and other people know as “the wind/water divide.” After years of wrangling, one Mississippi lawmaker, Sen. Roger Wicker (R), has come up with an inexpensive and effective solution to the problem.
The wind/water divide exists because private companies or the state-mandated Mississippi Windstorm Underwriting Association (better known as the “wind pool”) cover wind damage while the federally run National Flood Insurance Program picks up the cost for flood damage. Thus when a hurricane delivers high winds, storm surge, and torrential rains simultaneously, the responsibility for damage coverage has to be divided between the flood and wind insurers.
When a damaged structure remains basically intact, this isn’t a huge problem; insurance claims adjusters can use flood lines to figure which damage was caused by water, and then attribute the rest to wind.
But when little besides a foundation slab remains in place, insurance adjusters may have no hard evidence of what caused the damage. Since lenders don’t typically require flood insurance in most areas and requirements are unevenly enforced even where they do, many people neglect to buy flood policies. Thus a fair number of people who shelled out property insurance premium payments for years ended up in long-running, expensive disputes with insurers that left both sides with high legal bills and little to show for it.
These delays also hurt the pace of rebuilding and damaged the economy. One major insurer wrangled over Mississippi claims in court for 18 months.
Sen. Wicker’s proposed solution is both simple and workable: Instead of trying to a make separate determination for each structure, insurers, the Wind Pool, and the National Flood Insurance Program would agree to a formula for allocating claims payments following every storm. Professional weather forecasters at the National Oceanic and Atmospheric Administration—people with no stake in the insurance business—would use data collected from satellites, sensor buoys, wind gauges, and other scientific instruments to determine the likely impacts of water and wind on each area. Officials would then plug the data into a formula that would determine what percentage of claims would be picked up by wind and water insurers, respectively.
Claims could be paid within days of the storm, and in almost all cases, insurers and insurance consumers would be able to stay out of court. Even people who didn’t purchase flood insurance (now sometimes denied claims payments altogether) would likely get something because the damage coverage would be shared by the wind insurer.
All of this would have almost no marginal cost to taxpayers. The necessary data already get collected everywhere on the Gulf Coast, and forecasters have nearly a decade of experience in developing the formulas. Wicker also proposes making the whole system optional (his bill is called the “Consumer Option for a Standardized System for Allocating Losses”), so anyone who dislikes it could simply opt out.
Wicker’s proposal isn’t really revolutionary—the idea has been floating around for years, and former South Carolina Insurance Commissioner Scott Richardson has done much work to help refine it—but advances in meteorology and computing technology have made it practicable only in the past few years.
On balance, Sen. Wicker’s COASTAL proposal offers a smart, economical, common-sense solution to a problem that confronts just about everyone living along the Mississippi coast.
Eli Lehrer ([email protected]) is vice president of Washington, DC operations for The Heartland Institute and national director of its Center on Finance, Insurance, and Real Estate.