While Insurance Companies Targeted, Taxpayers Soaked

     Paul Leonard did not buy flood insurance, but through his attorney, Dickie Scruggs, filed a lawsuit arguing that Nationwide Insurance should cover his losses from Hurricane Katrina regardless of what his insurance contract said.

     Here is the clause in the Leonards’ contract:

“We do not cover loss to any property resulting directly or indirectly from … flood, surface water, waves, tidal waves, overflow of a body of water, spray from these, whether or not driven by wind.”

     Nevertheless, the lawsuit had support from Mississippi Attorney General Jim Hood, who, for the last year, has been shamelessly demonizing insurance companies over standard exclusions in home insurance for flooding and wind-driven water. Such demagoguery is disappointing enough in an elected official, but it is especially appalling in major media organizations that should know better.

     But as the Media Research Center’s Business & Media Institute has noted, TV news has been quick to overlook that. Someone listening to CBS News over the course of the last month’s coverage of Leonard’s lawsuit would never know there was a clause in his insurance contract that excluded wind-driven water, or that Leonard had read his insurance contract and decided not to spend less than $400 a year for $250,000 in flood insurance provided by the federal government.

     Rather, on July 19, CBS ran a clip that showed, in succession, Leonard and his wife bemoaning the natural disaster and the small payment they got from the insurance they did have; Scruggs, their attorney, making the baseless argument that the exclusion in their insurance contract did not include “storm surge”; and Hood fulminating against insurance companies. While one insurance representative was quoted for ostensible balance, his comments were bracketed by criticisms he was never given a chance to answer on the air: “Critics of the insurance industry say this debate over wind vs. water is actually just a delay tactic, designed to drag out the claims process until either the homeowner gives up, or the federal government steps in,” said CBS’s Jim Acosta.

     NBC was little better; on July 10, Mark Potter characterized the lawsuit entirely in Paul Leonard’s words as his attempt to get the insurance company to “play fair.” The message from the networks is clear: insurance companies are doing their customers wrong, making illegitimate arguments for “delay,” seeking to soak taxpayers, and not “playing fair.”

     But what is fair about asking insurance companies to cover risk they did not agree to cover? The networks mentioned skeptically the insurance industry’s argument that lawsuits like these raise prices to consumers, but that is the real scandal here. Insurance prices reflect the cost of the risk that insurance companies assume. If that includes the risk that courts will not enforce the contracts as written, insurance companies will have to raise prices inordinately. Premiums will have to provide for the contingency that the insurance will end up covering much more than what was agreed upon – as well as the risk of expensive litigation brought by trial attorneys and irresponsible public officials.

     Meanwhile, other businesses might ask: do we really want to have offices and factories in a state where the chief legal officer argues for ignoring the rule of law when it comes to contracts that are politically unpopular after the fact?

     Taxpayers may be “soaked” by the eventual government costs of flood insurance, but that is because their elected officials have made the decision to provide the giveaway of subsidized insurance at a cost far below the risks the government assumes in offering it. That same giveaway means that private insurance companies cannot afford even to offer flood insurance, because they will be undersold by the government if they try; the flood exclusion is a creation of this government policy.

     Worse, because federally-subsidized flood insurance does not give consumers the price signal that reflects the true expense of living in flood-prone areas, consumers are more likely to live in areas where the government will pay out flood insurance, soaking taxpayers all the more. These are the real problems, and network news does their viewers no favor when they ignore this issue to instead scapegoat insurance companies on behalf of trial attorneys.

Ted Frank is a resident fellow at the American Enterprise Institute for Public Policy Research and director of the AEI Liability Project.