Kevin McCarty: Floridians need “all-risks” homeowners insurance policies

South Florida Sun-Sentinel--July 13, 2008

By Kevin McCarty

This has been a sad few weeks for residents of our nation’s heartland as flooding caused the failure of numerous levees along the Mississippi River, creating untold damage, destruction and loss of life.

Many residents also have received some additional bad news — the destruction of their homes by flooding is not covered by their standard homeowners insurance policy.

It is times like this that thehomeowners insurance policy is becoming an increasingly confusing instrument for many. But there is a solution that could help reduce the confusion consumers face with insurance: Create one standard multi-peril policy that fairly represents all risks.

Initially this “all-risks” policy may cost more, but it could potentially save billions of dollars in federal bail-outs and litigation. It can also save Americans from perhaps the greatest expense — waiting for the insurance companies, government agencies and often time-consuming litigation to be resolved prior to rebuilding their lives.

The national trend has been to separate specific perils (hurricane, flood, earthquake), creating a patchwork of government authorities, policies and coverages in addition to the standard homeowners policy.

Historically, insurance companies do not cover floods, which motivated Congress to create the National Flood Insurance Program in 1968. While people who live in designated flood plains are required to purchase this coverage as a condition of their mortgage, most people do not have this protection.

In Florida, the issue of flood coverage is more complicated. Damage from major storms is often caused by water damage related to hurricane-driven storm surge. The insurance industry has often deemed this to be “flood” damage and, therefore, not covered by a homeowners policy.

Should this really be considered flood damage, or is it actually hurricane damage? Following the 2005 hurricane season, Attorney General Jim Hunt of Mississippi filed a lawsuit against the five largest insurers for denying claims based on the industry’s interpretation. Mississippi is still embroiled in litigation on this seemingly simple question.

The earthquake that recently caused massive devastation in Sichuan, China, illustrates another peril excluded from the majority of policies. Earthquake coverage also must be purchased separately. The New Madrid Fault Line in the Midwest and the San Andreas Fault in California are both active fault lines that are predicted to create massive losses at some point in the future. The majority of those affected will not have private insurance coverage, because many consumers in these recognized danger zones have not purchased earthquake insurance.

While floods, hurricanes and earthquakes are high-profile disasters that draw national attention, Floridians are faced with yet another, separate and unique element of nature that is not covered by the standard homeowners policy — damage from sinkholes.

The Florida Legislature initially required this coverage for all policies, but recently amended the law to require coverage only for catastrophic ground collapse. (Sinkhole coverage can be added separately in some areas.)

Then, as if all of this is not enough, adding to the insurance maze, Florida’s insurance industry separates windstorm coverage from the underlying coverage for homeowners insurance. To enable Floridians to insure for wind damage, the state created the Florida Windstorm Underwriting Association, which later merged with the Florida Property and Casualty Joint Underwriting Association to form Citizens Property Insurance Corp.

It should be readily apparent that catastrophic events are not limited to the Gulf Coast states. Wild fires, tornadoes, flooding and earthquakes do not have the same geographic limits as hurricanes, but can cause similar amounts of damage.

Following a natural disaster that directly impacts uninsured Americans, our leaders often pass legislation in the form of government loans, subsidies and other hastily adopted federal aid, as evidenced by the more than $100 billion that was authorized following Hurricane Katrina in 2005.

Unfortunately, post-event government financing of catastrophic events is not efficient. A better alternative is to transform the role of private insurance in the United States.

An all-perils policy would eliminate the guess work and ensure that homeowners have the peace of mind of knowing that their policy will cover all possible types of natural disasters.

Kevin McCarty is Florida’s insurance commissioner.