Hurricane Katrina: After the Water Leaves

Insurance companies are always seeking to limit or avert risk. Whether it's with disability or home owner's insurance, medical or commercial liability, the story is always familiar. They use every trick in the book and some that aren't even in a book. Ambiguous coverage provisions, confusing exclusions, delaying tactics, excessive receipt and documentation demands, biased software appraisal programs, in-house estimators, the subtle threat of the expense of litigation, black hole phone mail hell, the use of inexperienced, intentionally overburdened, adjusters . . . They control the system; they wrote the policies; they hold the money; they have the lawyers.

Although we haven't seen it yet with Katrina, with estimates of damages in the billions of dollars you can bet that all the major insurers will be doing the same thing they did with the Northridge Earthquake, and with Hurricane Andrew and with the Oakland Firestorm and with Hurricane Camille. And where bad faith laws are weak - as they are in many states where the insurance lobbyists have done their job well - or where liability for emotional distress, consequential loss and punitive damages are limited, capped or nonexistent - there is little incentive for insurers to give policyholders the coverage they paid for.

The methodologies differ depending on the line of insurance involved. With disability insurance a company may pay most claims but then target for termination a small portion of the largest claims. With disaster coverage a company may instead short-change a large number of claimants by a smaller amount each (often 20-40%).

The bottom line is this. As explained in Insult to Injury you can't examine the issue of how insurance companies operate without scratching your head and wondering where we are and where we're headed. Unfortunately, although they will be hearing a lot of insurance company PR in the coming days and months, Katrina's victims had better hold on. As sad as it is to say this, a second Hurricane may be just around the corner. Its name is Hurricane Bad Faith.

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