State Farm defends criticism over handling of Katrina claims

Anita Lee, Sun Herald© (Biloxi, MS) via The Herald© (Monterey, CA)

BILOXI, Miss. - The "cacophony" is drowning out what State Farm Fire & Casualty Co. sees as a just, speedy and inexpensive way to resolve Hurricane Katrina claims.

"You kind of step back from it and look over the last month or so and you see, at least I see, examples that sort of strike me as convenient amnesia or schizophrenia, whether we're looking at the political environment, whether we're looking at the legal environment or whether we're looking at the editorial environment," said Michael A. Fernandez, vice president of corporate communications and external relations at State Farm headquarters in Bloomington, Ill.

"Potentially, I see it as destabilizing, to the point that it causes a lot of concern around, what are the business certainties and uncertainties as we go forward? We see all the noise, and we see all the clutter and cacophony of voices and we're kind of saying, `OK, where do we go from here?'"

Fernandez was joined in a meeting Friday with the Biloxi Sun Herald by State Farm agency field executive J.D. Sparks and legislative affairs attorney Steven C. Simkins. They are making the media rounds in advance of a Feb. 28 hearing U.S. District Court Judge L.T. Senter Jr. will hold on the proposed settlement.

State Farm representatives have been taken aback by criticism that accompanied what they consider a compromise with policyholders: An offer to review 35,000 Coast Katrina claims and pay a minimum of 50 percent on structure and contents to policyholders whose homes the hurricane swept away. Settlement details consume 41 pages, plus 10 exhibits.

To date, State Farm says, it has paid an average of $25,030 for structural damage to 794 policyholders left with slabs or pilings. State Farm had been unwilling to release the figure before Friday.

Where wind damage covered by State Farm and water damage covered by federal flood insurance could not be separated, the company denied claims, infuriating policyholders on the waterfront from state line to state line.

As Fernandez pointed out, Senter asked attorneys on both sides of the insurance debate to look for a just, speedy and inexpensive way to resolve 1,000 Katrina insurance cases clogging the federal court, filed by policyholders against the big three insurers - State Farm, Allstate and Nationwide - and other insurance companies.

But Senter has found much to question in the State Farm settlement agreement. His concerns, outlined in a six-page order, will be reviewed at the hearing. The settlement State Farm negotiated with the Scruggs Katrina Group of attorneys is not the only solution being batted about, but it is the one the company is willing to accept.

Fernandez said state officials in Alabama and Louisiana have asked if they, like Mississippi, should start beating up on the company to get results. He failed to mention any specific remedies State Farm might be considering to avoid future post-catastrophe problems, although the issues raised in Mississippi mirror those in a 1999 tornado case from Oklahoma, in which a jury found the company recklessly disregarded policyholders' rights.

He was asked if the company bore any responsibility for what has happened.

"I'm not here to say we're perfect," Fernandez responded. "I'm not here to say there weren't mistakes made."

Taylor taking on insurance. Bill seeks to create all peril policy

February 8, 2007, Anita Lee, Sun-Herald© (Biloxi, MS)

View Sen. Taylor’s Bill (http://www.sunherald.com/multimedia/sunherald/images/0207.taylor.multiperil.bill.pdf)

U.S. representatives from California, New York, Massachusetts, North Carolina and Louisiana have signed on to co-sponsor a bill U.S. Rep. Gene Taylor, D-Miss., plans to introduce in the House today creating a national insurance policy for wind and water damage.

"Multiple peril insurance would meet the increasing demand for disaster insurance in coastal regions," Taylor wrote in a memo to colleagues. "Insurance companies are withdrawing from coastal areas, doubling or tripling premiums and forcing states to take on more disaster risk."

To illustrate his point, Taylor included a list of headlines from newspapers along the coastlines about increasing premiums and shrinking coverage.

The insurance industry, however, is likely to lobby against the bill, which establishes the policy under the auspices of the National Flood Insurance Program as an alternative to a flood policy. Private insurance policies cover wind damage.

"With homeowners' policies and the flood program as it exists, you have those perils covered," said Joseph Annotti, spokesman for the Property Casualty Insurers of America. "We just question a mandate for expanded coverage for risk that is fairly limited geographically.

"It just seems to be a matter of principle. Expanding the government's role where the private market can and should be acting is a little dangerous."

The key to improving coastal markets, Annotti said, is stronger building codes and mitigation measures in flood-prone areas, allowing property-tax credits and reductions in insurance premiums for property owners who meet the standards.

Taylor's bill includes those controls, too. Property owners could take advantage of national multiple peril insurance only if their communities adopt the program and agree to meet building standards.

Unlike the flood program, premiums would be based on actual risk, meaning homeowners would payer higher rates for the multiple peril insurance.

The bill would limit coverage on residential structures to $500,000, with a $150,000 cap for contents and loss of use. Businesses and churches would be limited to $1 million for structure coverage, and $750,000 for contents and loss of use.

In his memo Taylor also pointed out: "The Multiple Peril Insurance Act would allow homeowners to buy insurance and know that all of their damage from wind and water will be covered. They would not have to hire lawyers, engineers and adjusters to determine what damage was caused by wind and what was caused by flooding."

Sen. Trent Lott, R-Miss., is reviewing Taylor's bill. A spokesman in his office said Wednesday that Lott has co-sponsored a bill in the Senate that would establish a committee to review the issue of disaster insurance.

Concluded Robert Hartwig of the industry-sponsored Insurance Information Institute:

"This is likely to be a divisive issue. I think many insurers will not be thrilled with the notion that, in areas where they have historically provided wind coverage, which by the way is the vast majority of the country, that the NFIP would be allowed to intrude."

Given the problems with flood rates, Hartwig said it's unlikely NFIP could achieve a financially sound multiple peril insurance program.

High yields are driving Wall Street into 'catastrophe' bonds

February 6, 2007, George Stein, Bloomberg© via International Herald Tribune©

NEW YORK – John Brynjolfsson at Pacific Investment Management Co. is one of the biggest buyers of catastrophe bonds, securities whose returns are linked to insurance claims from calamities like hurricanes, earthquakes and disease.

Brynjolfsson enjoys watching documentaries about cataclysmic events and violent storms on television, but the bonds are more than a personal interest. They pay as much as 10 percentage points more than benchmark interest rates, making them some of the highest- yielding investments in fixed income.

Fund managers like Brynjolfsson are increasingly turning insurance into the next frontier for securitization, the technique Wall Street perfected to package everything from credit card bills to mortgages and car loans into tradable bonds. They want high-yielding securities that are not tied to stock or bond markets, and the insurers themselves, still reeling from Hurricane Katrina and under pressure from regulators to conserve capital, are searching for ways to off-load risk.

Swiss Reinsurance, the world's largest reinsurer, estimates that the market for insurance-linked securities, which includes things like "bird flu bonds," will grow to $350 billion in a decade after more than quadrupling to $27 billion in the past five years. With as much as $2 billion in underwriting fees up for grabs, almost every investment bank, from Lehman Brothers Holdings to Deutsche Bank, is building teams to sell and trade insurance.

"You can't match these yields," Brynjolfsson, who holds $1 billion of catastrophe bonds at Pimco, said during an interview last week. "They fully compensate the investor for the risks that are being underwritten and provide an additional premium. I'm making a real strong push with issuers and Wall Street to bring out more of these securities for my investors."

Roger Ferguson, who became Swiss Re's head of financial services last year after quitting as vice chairman of the U.S. Federal Reserve, said in December that insurance-linked securities might offer the growth potential of mortgage bonds, a market that has grown to more than $6 trillion from almost nothing in the late 1970s. Fees in the capital market for insurance also are more lucrative.

Underwriting commissions on catastrophe bonds range from 1 percent to 1.5 percent, according to Dan Ozizmir, head trader of insurance-linked securities at Swiss Re. For "sidecars," vehicles that let investors bet on specific reinsurance risk, arrangers can make 2 percent. That compares with the 0.12 percent average fee bankers earn selling bonds for Fannie Mae or Freddie Mac, the biggest providers of funds for U.S. home loans.

Most insurance bonds function like reinsurance, except that instead of being underwritten by a single company, like Berkshire Hathaway, the risk is borne by multiple investors. Insurers sell catastrophe bonds to cover damage claims from disasters like Hurricane Katrina, which cost the industry more than $40 billion.

"When you put all that together, you have an attractive market with legs," said Nelson Seo, who holds insurance- linked securities at Fermat Capital Management, a hedge fund in Westport, Connecticut.

Buyers of AAA-rated mortgage bonds get yields of 1 percent more than benchmark interest rates for assuming the risk that homeowners will default. The stakes — and potential payoff — on catastrophe bonds are higher.

A disaster like a typhoon or pandemic flu can trigger claims that consume a bond's principal. Four months after Swiss Re sold $190 million of "Kamp Re" bonds in July 2005, the company said investors probably would not get their money back because of Katrina's devastation.

Standard & Poor's lowered its credit rating on the bonds to "CC," two steps from a default, in October 2005. Pimco valued its $5 million of Kamp Re bonds at $3,000 in a filing two months ago, down from $2.47 million a year earlier. The bonds mature this year on Dec. 14.

On Lehman's New York trading floor, Brett Houghton watches screens displaying radar readings from the U.S. National Weather Service and seismic data from the U.S. Geological Survey. He trades in catastrophic risk.

"If someone asks us for a quote on a type of bond, we're going to look at hurricanes or earthquakes that happened in the area before we actually set a price," Houghton said.

Lehman has 20 bankers and traders specializing in insurance-linked securities. To bet on the likelihood of a global or regional pandemic, Houghton can buy and sell bird flu bonds. For earthquakes there are catastrophe bonds.

Niraj Patel, a money manager at Genworth Financial, an insurer based in Richmond, Virginia, uses the returns from catastrophe bonds to finance payments that Genworth makes on life insurance claims. "People never thought of insurance as a trading instrument, but that's changing," Patel said.

California building standards commission completes adoptions for new California building standards code

February 5, 2007, dBusiness News© (Sacramento, CA)

SACRAMENTO -- The California Building Standards Commission has completed adoptions of new building standards that will take advantage of the latest technology in construction.

“For the first time in nearly ten years, California will have a complete set of building codes based on the latest national and international model building codes, making use of the most current technologies and methods of construction. This will put California back in the forefront as a leader in the use of the latest technology for building safety, fire prevention, safe construction, and code enforcement,” said Rosario Marin, Secretary of the State and Consumer Services Agency and chair of the Commission.

The Commission’s Executive Director, David Walls, concurred, saying, “We anticipate that the 2007 California Building Standards Code will be published this summer.”

The improved standards will allow California to utilize the latest technological advances in the construction and remodeling of residences, state government buildings, schools, hospitals, and other occupancies regulated by the state.

The California Building Standards Code is comprised of twelve parts that incorporate public health and safety standards used in the design and construction of buildings in California. The codes also include standards for energy efficiency and access compliance for persons with disabilities.

The new regulations include the approval of Chlorinated Polyvinyl Chloride (CPVC) plastic pipe for use in residential water supply piping systems. CPVC has been a nationally accepted material since 1982, however, California has only permitted its use on a limited basis since 2001. The Department of Housing and Community Development prepared and certified an Environmental Impact Report resulting in a recommendation that the Commission adopt and approve the use of CPVC. The Commission’s vote was unanimous and CPVC will be placed in the 2007 California Plumbing Code.

Also, new seismic design standards provide the latest in earthquake safety for the construction of all buildings in California. These standards are especially important in California since this state experiences approximately 75 percent of the nation’s seismic activity. Wildland-urban interface fire protection standards were adopted to provide for better fire protection of structures located in areas prone to wildfires. In addition, changes to building standards for persons with disabilities were adopted to introduce federal Department of Justice (DOJ) certification requirements. California continues to strive for barrier-free design in buildings to ensure they are accessible to, and usable by, everyone.

The recently approved building standards were developed by the Department of Housing and Community Development, Office of the State Fire Marshal, Division of the State Architect, Office of Statewide Health Planning and Development, and the Commission. They will be published in the California Building Code, California Electrical Code, California Mechanical Code, California Plumbing Code, and California Existing Building Code — all parts of the California Building Standards Code.

An up-to-date California Building Standards Code and DOJ certification will help to reduce insurance rates at the local level, positively impacting the cost of housing and businesses in California.

For more information about the California Building Standards Commission and building code issues, please visit us online

Judge cuts State Farm punitive award by $1.5 million

February 2, 2007, Daniel Hays, National Underwriter©

A federal judge who ruled that a jury could impose punitive damages on State Farm for its mishandling of a Hurricane Katrina claim, has decided that the $2.5 million award should be reduced to $1 million.

U.S. District Court Judge L.T. Senter Jr. in Gulfport, Miss., said that even though the company’s conduct was “reprehensible,” a lesser award was more appropriate.

State Farm said it would appeal the case in any event.

At issue was a claim brought by Norman Broussard and Genevieve Broussard, whose Biloxi, Miss., home was torn off its foundation slab.

The company, according to the judge, fought the claim on the basis of policy language excluding flood damage, and ignored the probability “that some damage occurred from a cause other than flood.”

Judge Senter, after hearing evidence at trial, had awarded the couple $211,222 in contractual/compensatory damages before sending the case to the jury to set punitive damages.

He said that in his opinion, the damages the panel assessed were almost 12-times the amount of compensatory damages, and a more appropriate assessment was a sum between four- and five-times the compensatory damages.

“The judge's order will not change our intention to appeal the ruling and the jury's punitive damage award,” State Farm said in a statement. “There remain critical legal issues that need to be addressed in the Broussard trial. Those include the location of the trial, which party should have the burden of proof, and the fact that the

jury was not permitted to deliberate the facts of the case.”

Judge Senter, in his latest ruling, said the company had “attempted impermissibly to place the burden of proof on the plaintiffs to establish that their losses were caused by wind…”

A few days after the Broussard verdict, State Farm announced it had reached a proposed class-action settlement to reimburse homeowners in three Mississippi counties with pending or potential claims.

However, Judge Senter has rejected the proposed language as unfair, sending the negotiators back to the drawing board, with representatives for both sides expressing confidence a deal satisfactory to the judge will be worked out.

Insurance execs courted

February 1, 2007, Mark Ballard, The Advocate© (Baton Rouge, LA)

Blanco: La. might take over coverage if no new policies written

Gov. Kathleen Blanco said she told top insurance executives Wednesday that unless they start selling hurricane protection policies in Louisiana, state government may take over property insurance.

“I also mentioned that the ingredients for state takeover are very plain and perhaps were being driven by their actions,” Blanco said in an interview from an airplane waiting to take off from the Palm Springs, Calif., airport for her flight home.

“If they’re abandoning us, we don’t have any choices,” Blanco said.

Blanco gave a speech in nearby La Quinta to the nation’s largest insurance trade group. It was her latest attempt to make homeowners’ property insurance more available and more affordable in post-hurricane Louisiana.

She and Commissioner of Insurance Jim Donelon spent four days this week in California trying to persuade more insurers to write policies in Louisiana.

Blanco said most of her speech reminded the insurance executives of the efforts Louisiana has made to lower the risk of damage from hurricanes.

For instance, Blanco said, she told members of the Property Casualty Insurers Association of America that new flood-protection projects and tougher building codes have made coastal Louisiana better able to withstand hurricanes.

Insurance companies, by and large, have stopped selling policies that pay to repair hurricane damage to homes and buildings in the southern part of the state.

“I told them we want them to come in and fill the voids, or else state government is going to do something like what Florida has done,” Blanco said.

The Florida Legislature last week approved changes to the way property insurance is bought and sold in that state. The new laws lowered premiums for property insurance by, for instance, letting that state’s insurer of last resort compete against private insurance companies.

The insurance industry has loudly criticized the Florida changes.

Blanco said the insurance executives told her that they fear other states might follow Florida’s lead. She responded to them that she prefers state government not get involved in selling insurance, she said.

“The private market is best,” Blanco said.

But property owners are not in the mood for the industry’s proposals that would make it easier for them to sell insurance in Louisiana and other Gulf Coast states, she said.

“If you underpay a claimant who has been paying their premiums for all these many years — if you then, upon renewal, either double or triple their rates or you tell them you’re not going to cover them anymore, then you’ve set up a vacuum,” Blanco said.

“It does not create a friendly environment for the marketplace,” she said.

Commissioner Jim Donelon, on the same returning plane as Blanco, said he and the governor asked insurance executives for a dozen of the companies to come to the state and sell hurricane protection policies.

Officials with five companies have spoken to him about coming to Louisiana to write hurricane insurance.

“No assurances yet, but (there are) positive indications,” said Donelon, who next week travels to London to lobby the sellers of surplus lines that insurance companies buy to protect them from having to pay out too much.

The 1,000 members of the Property Casualty Insurers Association of America are companies that, combined, write about 41 percent of the country’s homeowners’ insurance policies.

Blanco met Monday and Tuesday with executives of the companies that create “modeling” software used by insurance companies to figure out how risky it is to write policies along Louisiana’s coastline.