Batten Down the Insurance

Jan. 30, 2006 issue - How "sure," exactly, is your homeowner's insurance? You buy policies that you believe will pay if you're burned out, or flooded out as Katrina's victims were. But in the face of a total loss, you might learn that your coverage isn't as good as you thought. Thousands of claims are being denied in the stricken gulf states, and lawsuits are raining down.

You need to know what you're covered for. To get storm damage reimbursed—after hurricanes, cyclones and nor'easters, too—your policy has to cover both water and wind.Wind damage comes under standard homeowner's insurance; it includes water damage that occurs because wind hit you first (for example, rain in your house after the roof blows off). But the policies don't cover floods. For that, you need federal flood insurance.

You might think that damage from floods and tides during hurricanes would be counted as losses arising from wind. But that's not how insurance companies see it. For houses still standing near the gulf, they're paying only for wind damage visible above the water line. On vanished houses, they're assigning the loss entirely to water. In such cases, only homeowners with flood insurance will get checks.

Large numbers of people skipped flood insurance, assuming their homeowner's policies would pay. That includes Mississippi Sen. Trent Lott, whose coastal home in Pascagoula washed away. He's insured by State Farm and sued to collect. His court filings say he was led to believe that he had full coverage against storms. Says State Farm, "no way"—water damage is out.

Another State Farm client, Judy Guice of Biloxi, Miss., is taking a different tack. She says that, under the language of her "all risks" contract, wind-related water damage is indeed insured. Her attorney, Richard Phillips of Batesville, Miss., is pursuing a class action, which he thinks could include 17,000 homeowners. State Farm says it will reply in court.

Mississippi's attorney general, James Hood, is also raising Cain. He's suing all the insurers, claiming that, by state law, policies have to pay for losses arising from wind-driven water. The Insurance Information Institute thinks the suit will die.

Without insurance, it will be tough for gulf neighborhoods to rebuild. On the other hand, successful lawsuits could add flood coverage to policies that hadn't charged for it. Rates would soar, insurers would back away and more homeowners would be dumped into the state's high-risk pool. (Rates will soar anyway, as insurers adjust to the gulf's new risks.)

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