Southern surprise?

There was an important court ruling in Mississippi earlier this month that had the whole industry, not just Mississippians, watching closely. The insurance industry, or at least State Farm, was surprised when the insurer lost a case involving wind and water damage from Hurricane Katrina. “We did not expect this decision,” said Kim Brunner, general counsel for State Farm.

State Farm may have been surprised because it really believed its own evidence and testimony. However, the decision should not have been a total surprise to the industry in light of Senter’s previous rulings in similar cases involving wind and water claims and given state regulations on these type of claims.

In previous cases on Katrina claims, Senter has followed the reasoning that the burden is on the insurer to prove the cause of damage.

Mississippi Insurance Commissioner George Dale noted that the decision tracks with his department’s guidelines that “instructed all companies to be able to clearly demonstrate the cause of loss. If there was any doubt the doubt should be resolved in favor of finding coverage on behalf of the insured.”

In the case, U.S. District Court Judge L.T. Senter in Broussard v. State Farm ruled that State Farm did not provide sufficient evidence to support its refusal to pay a Mississippi couple for Hurricane Katrina-related damage to their home. State Farm argued that all of the damage was caused by water and none by wind and thus it owed the couple nothing in keeping with the standard flood exclusion in the homeowners’ policy. But Senter pointed to testimony of one of State Farm’s own witnesses who acknowledged that the Broussards’ dwelling sustained at least some wind damage to its roof before the storm surge arrived.

Except for a few trade group spokespersons sounding the alarm, the industry appears to be taking the decision in stride. The case appears to be more about how one insurer handled a particular claim and not a ruling with widespread impact on the industry. Insurers that quickly settled Katrina claims will probably escape unscathed by the Broussard decision and future rulings like it. Insurers that held firm against paying for damages where flood was involved, or insurers that were erratic in their claims handling, could be the ones facing additional payouts and perhaps damages.

Industry analysts must have already figured on some increased payouts due to all of the Katrina lawsuits, although it’s not clear which individual insurers will be responsible for them at this point.

As Fitch Ratings explained, the longer it takes to settle claims, the worse for the industry:

“First, insurance claims do not age well and tend to grow when not settled promptly. Second, Fitch believes the risk of adverse development is very high. Third, Katrina may generate material casualty claims (liability for water contamination, D&O for failure to purchase adequate insurance, etc.), which is unusual for a natural catastrophe.”

The best effect of the Broussard ruling would be the settlement of many of the pending lawsuits so residents and insurers can move on.