Editor’s Note: Katrina Brought Out the Good, Bad

National and state insurance associations are to be congratulated for contributing funds, supplies and manpower to thwart the after-effects of Hurricane Katrina; while Mississippi politicians, including Attorney General Jim Hood, who suggest insurance companies should pay flood damages, even though their policyholders did not pay for such coverage, should be reprimanded for short-sightedness.

National and state insurance agents’ urged members to donate to help victims. State associations also helped fellow members in nearby states. Associations instantly sprung into action on a state level, donating funds, manpower and even office space to assist agents in with businesses halted by Katrina.

At the same time, Hood was filing suit to require insurance companies to ignore the provisions in homeowners policies and pay for flood damages, which were specifically excluded.

Mississippi Insurance Commissioner George Dale, to his credit, attempted to explain that an insurance policy is a contract, and if the fine print does not state that flood damage IS covered, then the insurance carrier is ONLY responsible for wind damage.

Dale called for caution in litigating against insurers. “We need to be aware that if we make insurance companies pay claims for which they did not collect any premiums, it could lead to the bankruptcy of several insurance companies,” he said.

Because insurers make financial calculations for catastrophes based on what’s covered by the companies, a successful Mississippi lawsuit would mean a dramatic escalation in losses, Merrill Lynch insurance industry analyst Jay Cohen wrote in a research note. A win by the state could mean insurance companies would start charging higher premiums in flood-prone areas in case lawsuits force them to pay for such water damage.

If carriers lose the battle and must pay for flood damage, it could be a two-pronged loss. First, because policyholders did not pay for flood insurance, the carriers do not have funds available to pay for such losses-it could force them into bankruptcy, and they would also probably decide to leave the state.

Even if carriers can pay policyholders for flood losses, their only response can be to increase rates, not only to policyholders in Mississippi, but nationwide. This could affect customers across the U.S., and would also cause other carriers who don’t even write wind insurance in Mississippi to increase their rates in anticipation of future court cases in states where they do offer such insurance.

Thus politically motivated lawsuits could put insurance companies at odds with policyholders, many of whom are already complaining about high rates-which would be forced higher, simply due to politicians trying to forward their own careers.

What the involved politicians fail to realize, of course, is that such rate hikes would reflect directly on them, causing a backlash in which they would lose their coveted election.