Big insurance companies have often been portrayed, sometimes deservedly, as being among the villains of the post-Katrina nightmare on the Gulf Coast. But in a Mississippi case decided last week (certain to be appealed), the insurance companies and all their non-Katrina clients look far more like victims.
The case of Broussard v. State Farm, like probably thousands of similar cases, involves a dispute about whether wind, or only water, was responsible for the damage to a home. According to standard homeowners’ policies, wind damage is covered, but not flood damage. Stories are legion about insurance companies refusing to acknowledge much or even any damage from wind to houses that, according to elementary logic, suffered badly from both scourges.
Yet east of the hurricane eye in Biloxi, Miss., where the wind strength reached only Category 2 velocities but where the storm surge far exceeded 20 feet, water was far the greater menace. In the Broussards’ case, nothing but the slab, just 15 feet above sea level, remained of their home.
The Broussards theorized that a mini-tornado exploded their house, but State Farm’s investigators noted that decorative glass in a Broussard door found nearby remained entirely intact — which, they posited, would not have been the case in a tornadic explosion.
The company at first refused to pay for any damages, and eventually (after the suit was filed) offered $20,000 to cover the likelihood that some roof shingles might have been blown away before Gulf waters took the whole house.
U.S. District Judge L.T. Senter Jr.’s earlier rulings seemed to indicate a balanced approach. In one, he decided in the homeowners’ favor, but only “to the extent plaintiffs can prove” that winds were responsible. Also, he had ruled that insurers’ contractual right not to cover flood damages is “clear and unambiguous.”
State Farm’s brief noted U.S. 5th Circuit precedent that the “basic burden never shifts from the plaintiff” to show that his loss qualifies for insurance payments. Yet here, with only a slab remaining — but with logic pointing to a house washed away by water rather than destroyed by wind — Judge Senter pivoted, putting the burden of proof on the insurance company.
In effect, Senter ruled that if State Farm couldn’t prove the culprit was water, it would be held liable for almost all the Broussard’s losses. Without letting the jury deliberate, he issued a directed verdict in the Broussards’ favor to the tune of $223,000 (in a regional market with far lower prices than in the D.C. area). Senter didn’t stop there. He asked the jury to consider additional “punitive damages” against the company.
This was odd. Under Mississippi law, punitive damages are assessed against insurers only if there is no “arguable” reason for denying the claim and only if (quoting State Farm’s summation of case law) “the insurer committed a willful, intentional or malicious wrong, or acted with gross or reckless disregard for the rights of the insured.”
In this case, where the flood surge was 7 feet to 9 feet above the house’s slab, easily enough to be the sole cause of the home’s destruction, it beggars belief that the insurer could be adjudged to have no arguable reason for denying the wind-loss claim. Even if the company was incorrect, the evidence of “malicious wrong” was dubious at best.
The jury made matters worse. It imposed punitive damages of $2.5 million — more than 11 times the actual or “compensatory” damages the judge awarded the Broussards. That award runs afoul of a 2003 the U.S. Supreme Court ruling in State Farm v. Campbell suggesting (but not mandating) that punitive damage awards should not exceed compensatory awards by a ratio greater than single digits. In earlier cases, the high court had indicated that even a ratio greater than 4-to-1 was excessive.
It is not just the insurance companies which will suffer if this ruling and its punitive award stand. As Robert Hartwig of the Insurance Information Institute told the Chicago Tribune, all other homeowners will suffer from higher rates in the future if “hundreds of millions of losses could be paid by insurers who have collected not a cent for this type of loss.”
Much sympathy rightly accrues to storm victims burdened by the intransigence of some insurance companies. But that doesn’t mean the companies should be liable not just for what their contracts require, and not even for damages arguably excluded by those contracts, but for well over 10 times the original value of the dubious claims.
Examiner columnist Quin Hillyer is a senior editor of The American Spectator.
