Not business as usual: faced with a record volume of claims and far from ideal circumstances, insurers have settled most personal lines claims from Hurricane Katrina. Now the industry is taking steps to limit its exposure to the upcoming hurricane season.

Six months after Hurricane Katrina, the largest natural catastrophe ever to strike the United States, insurers had paid most of the record volume of personal lines claims, and many took extraordinary steps to do so.

Now, they're using lessons they learned from Katrina and the other storms of 2004 and 2005 to help them limit their exposure to the next hurricane season, which officially begins June 1.

ISO's Property Claims Services reports that when Hurricane Andrew hit in 1992, the industry was staggered by some 650,000 claims. Compare that with the 2.1 million claims seen from the storms of 2004, followed by 3.2 million claims filed in 2005, according to the Insurance Information Institute.

In paying those claims from 2005, many insurers had to take unusual steps to reach policyholders and aced difficult conditions the likes of which they had never seen before.

It could be years before New Orleans is rebuilt and the population returns to the level it was when Katrina struck. Other parts of Louisiana also were hit hard and a number of homeowners lawsuits challenging whether the damage was caused by wind or flood will take time to sort out. The ultimate outcome of those claims could impact the business interruption claims (see "The Long Tail of Business Interruption" on page 30).

In the meantime, while many carriers continue to write property coverage in Louisiana and other states impacted by Katrina, many have raised rates and are limiting their exposure, either by nonrenewing policies in coastal areas or limiting wind coverage.

The Big, Not-So-Easy

About 90% of homeowners claims have been settled in both Louisiana and Mississippi, said Robert Hartwig, chief economist for the Insurance Information Institute.

After a "normal" catastrophe, such as the four hurricanes of 2004, insurers reached a 90% settlement rate after four months. "This took a little bit longer because of the scale and magnitude and the tact that insurers could not get into some of the most disaster-impacted areas immediately. Logistics were very difficult," Hartwig said.

Traditionally, insurers send adjusters to the worst hit areas first, then work out to areas that weren't as severely impacted. After Katrina, adjusters and others were banned from the heavily damaged areas, such as parts of New Orleans, so they had to start in the outer areas and work their way in, said Gary Kerney, assistant vice president of ISO's Property Claims Services.

A settled claim, however, doesn't mean it's closed. A claim can be open for many months because the homeowner is rebuilding the home, Hartwig explained.

"Insurers don't just write a check for $200,000. They pay it out as the home is rebuilt," Hartwig said. "But the claims have been effectively settled. They've been adjusted, and insurers and policyholders have come to an agreement on the sum."

That doesn't necessarily mean the policyholder is happy, said Finley Harckham, a partner with the law firm Anderson Kill & Olick.

"When they say 90% of the homeowners claims are settled, that includes the claims they have denied. It does not mean 90% of the homeowners are happy with the insurance coverage," Harckham said.

Flood Insurance

In New Orleans, there's the additional problem of many homeowners having some wind damage, but suffering mostly flood damage, and they didn't have adequate, if any, flood insurance.

Louisiana, however, was a more enthusiastic participant in the National Flood Insurance Program than any other state, according to the Times-Picayune of New Orleans. As of Feb. 22, Louisiana had received $12 billion in flood insurance payments for Katrina claims, nearly as much as all the government's flood claims paid since the program was created in 1968.

Of the 113,053 single-family homes in Louisiana that sustained hurricane-related flood damage in 2005, 64.4%--72,787--were covered by flood insurance, according to Donald Powell, President Bush's liaison to the disaster zone. Only 30% of the 28,800 flooded homes in Mississippi had flood insurance.

In the 100 top flood-insurance markets, Jefferson Parish, which wraps around the city of New Orleans, has the highest market-penetration rate in the country, with 84% of single-family homes covered by the National Flood Insurance Program, according to an analysis by the Times-Picayune. On average, just 5.4% of the single-family homes in the nation's top 100 flood insurance markets have coverage, the newspaper found.

Several pending lawsuits want insurers to pay for flood damages caused by Katrina's storm surge despite flood exclusions, including two filed in Mississippi by Mississippi Attorney General Jim Hood and one by prominent plaintiffs' attorney Richard "Dickie" Scruggs.

J. Robert Hunter, director of insurance for the Consumer Federation of America and former Texas insurance commissioner, said he expects more lawsuits to follow "because there's a lot of anger on the wind vs. flood issue."

He said insurers are wrestling with the issue, "but it's not their fault. It has to do with the flood maps; they are so old. A lot of people who weren't in a flood hazard and didn't have to buy flood insurance [under the old maps] are in the [new] flood plain and should have bought flood insurance."

Still, Hunter said some insurers are slow at resolving disputes, and may try to take advantage of flood as an excuse not to pay legitimate claims.

Both Louisiana and Mississippi have followed in the footsteps of Florida to establish mediation programs, which have resolved many claims without litigation. As of April 14, there were 3,564 mediation conferences scheduled in Louisiana. Of those, 2,976 are pending and 588 cases have been through the mediation process. Of those, 472 were resolved and 116 were not, according to the Louisiana Insurance Department.

Rebuilding

Many people have waited to rebuild until New Orleans finalizes its rebuilding plan, Hartwig said. The U.S. Army Corps of Engineers and FEMA released new flood maps Ihr most of the greater New Orleans area in mid-April. According to those plans, some residents of the lower parts of the city may have to raise their houses three or more feet off the ground to qualify for federal flood insurance.

Another factor is demand surge. The price of construction materials has skyrocketed in areas hit by Katrina, Kerney said. "It's typical after a large event, because manufacturers have to go into overtime to create the necessary materials," he said.

Insurers have pushed for stronger building codes, and Louisiana adopted a statewide code at the end of 2006.

"Wherever we're rebuilding, we're advocating building code improvements, just as we did after Hurricane Andrew," said Peter McMurtrie, vice president of property claims for St. Paul/Travelers. "In our experience, homes built to the codes post-Andrew performed much better than homes not built to those standards."

Tough Job

PCS said the insurance industry unleashed an army of some 15,000 adjusters and support people into areas impacted by Katrina. Living conditions for those adjusters, some of whom also had suffered losses from the storms, were far from ideal.

"I've been doing this for 25 years, and this is the first catastrophe that I can recall such significant stress or pressure on adjusters to handle situations that most, if not all, had never handled before," said Kerney.

For instance, many adjusters are accustomed to seeing devastation. But some encountered dead bodies in the homes they were examining. Others faced angry and outraged homeowners and neighbors, and found themselves in threatening situations.

The sheer magnitude of the devastation also was stressful to deal with, McMurtrie of St. Paul/Travelers said.

"We're a very large organization, so we can transition a large number of people through the area to relieve some of the challenges and hardships of staying there. We had to double-bunk folks. Some had to stay in other areas; they had to bring in their own food and water. Our entire claims office in New Orleans was shut down. We reopened in Houston," McMurtrie said.

The dedication of many employees and independent agents was remarkable, McMurtrie said.

State Farm, the largest P/C insurer in Louisiana, as well as in the country, received more than 650,000 claims worth $6.3 billion from Hurricanes Katrina, Wilma and Rita, said Dick Luedke, a spokesman for the company. As of April 11, $5.4 billion in claims had been paid, State Farm said.

For a period of a week to 10 days, when no hotel rooms were available within a two-and-a-half to three-hour drive from New Orleans, State Farm chartered a plane to take adjusters from Houston to New Orleans.

State Farm also set up a village of mobile homes to house adjusters while they worked the claims.

McMurtrie said St.Paul/Travelers, which had settled 90% of its homeowners claims from Katrina as of April, had to establish a private fuel supply to keep adjusters on the road following a fuel shortage that struck after Katrina.

The 2005 hurricane season "really tested the insurance industry's ability to respond to customers in need," said Kate Hollcraft, a spokeswoman for Allstate. At the height of its claims adjusting, Allstate had deployed 4,000 claims adjusters in the states impacted by Katrina, Rita and Wilma, she said.

As of Feb. 8, 78% of Allstate's property claims and 97% of its auto claims related to Katrina were closed, she said.

Allstate still is writing homeowners coverage in Louisiana, but has placed wind and hail coverage for new Allstate customers with an approved carrier such as the Louisiana Citizens Property Corp., she said. Allstate also has pulled back from other coastal areas, including areas in New York and Texas.

Preparing for the Worst

The Louisiana Farm Bureau Mutual Insurance Co. has paid 99.8% of its claims stemming from Hurricane Katrina, and like other insurers, said it plans to cancel some policies along the coast and rewrite some policies without wind storm and hail coverage, leaving that to be picked up by the state-run insurer of last resort, Louisiana Citizens Property Insurance Corp.

"We worked through issues of wind vs. water one claim at a time," said Bob Warner, claims manager of Louisiana Farm Bureau Mutual Insurance Co.

The mutual company had to turn to forensic engineering at times to reconstruct what had caused the damage to homes. In some cases, the home itself was gone, so the company reviewed its underwriting files to adjust the loss, in addition to forensic engineering.

"We'll go out and evaluate a structure, but if the structure is gone, we'll pull the underwriting file. That could include photos, and descriptions of the property. We'll create an estimate based on what information we have there," Warner said.

Surprisingly, it was Rita, not Katrina, that completely leveled a number of homes. Warner estimated that 200 to 300 buildings were wiped out by both storms, but a majority of them were destroyed by Rita.

The insurer does a repair estimate on a damaged home, and if it's a total amount, it pays the entire amount. Often, the mortgage holder has cosigned the insurance policy so any claim check also would have the mortgage holder's name on it. The mortgage company usually takes the payment and then sends a portion of the money to the insured to begin repairs, sending additional money as repairs are done.

"Once we pay the damage to the insureds, it's their decision on whether to tear down or move. We make a promise to pay the damages owed, then it's their decision what to do," Warner said.

Out of 18,036 claims from Katrina, only 13 are outstanding as of April, Warner said. About 3,047 of the claims were in the New Orleans area.

"It took a lot of work and a lot of people, but we take a lot of pride in trying to get our losses handled as expeditiously as possible. We've worked very hard to get to this point," Warner said. "We're ready to handle another one, but we sure don't want to."

Key Points

* 90% of all homeowners claims stemming from Katrina are settled.

* Insurers received 3.2 million claims in 2005, the second consecutive year with record claims.

* 64.4% of New Orleans homes damaged by Hurricane Katrina had some flood insurance.

Learn More

Allstate Insurance Group

A.M. Best Company # 00008

Distribution: Exclusive agencies

Louisiana Farm Bureau Mutual Insurance Co,

A.M. Best Company # 00561

Distribution: Captive agents

St. Paul Cos.

(Member of St. Paul/Travelers Cos.)

A.M. Best Company # 00080

Distribution: Independent agencies

State Farm Group

A.M. Best Company # 00088

Distribution: Exclusive agencies

For ratings and other financial strength information about these companies, visit www.ambest.com.

RELATED ARTICLE: Homestead: Andrew recovery took 10 years.

Hurricane Andrew wreaked heavy damage in August 1992 in Homestead, Fla., which has an area of about 16 square miles. City Manager Curt Ivy said recovery from the storm took about 10 years. Below is his synopsis of how the working parts of the city rebounded.

Population: About 25,000 before Andrew. Dropped to range of 16,000 to 18,000. Is currently rebounding.

Residential Housing: Before Andrew, had about 11,000 residential units, including apartments. Estimates that 16,000 homes will be built from 2002 to 2010 on newly developed land.

Property Values: Sank in wake of the storm. Most properties became piles of rubble on vacant lots. Property values have shot up recently, to the point people are complaining there's not much affordable housing.

Commercial Properties: Had only two big shopping centers before Andrew, anchored by Winn Dixie, Publix and Sears. Not indoor malls. Currently, two million square feet of new commercial development is slated for construction.

Electricity: Lost it completely, including utility poles and wires. Restored to most properties within two months.

Roads: Little damage except for debris. A large bulldozer made roads passable. Traffic signs and lights were destroyed. Intersections became four-way stops.

Schools: Most opened in September or October. Many middle-class families sold their properties, took their insurance money and moved elsewhere. Many students never returned.

Hospitals: The only one in town fared well in the storm, had its own generator. First building to have electricity restored. Baptist Health Systems is now planning to upgrade and run the hospital.

Homestead Air Force Base: Andrew ripped up hangars and living quarters. Base closed overnight. Federal government did not restore it as a full-service base. Was a big economic loss to the city. It is now an air reserve base. Part of property turned over to the county. No development there by the county except for a homeless shelter and a Job Corps group.

Insurance Claims: Insurers poured into the city after Andrew. Portions of many claims were paid on the scene. Vast majority of claims now settled.

Insurance Environment: Premiums and deductibles are now much higher. In subsequent hurricanes, claims payments did not flow as freely. Many companies have backed away from covering windstorm damages. After Andrew, state created an insurer of last resort.

Building Codes: More strict today. Inspections before Andrew may have been lax. Overall, in better shape now than before Andrew.

Recovery Factors: A lot has to do with economic engines upon which a city depends. New Orleans has the port and refineries, but a lot of bulldozing and rebuilding needed. Many people won't return due to trauma.

--Ron Panko

The Long Tail of Business Interruption

While most homeowners claims stemming from Hurricane Katrina have been resolved, commercial claims, especially for business interruption, may remain open for some time.

"It will be long after the next hurricane season has come and gone before some of these adjustments are completed, and the litigation will last for years after that," said Finley Harckham, a partner with the law firm Anderson Kill & Olick.

"The claims settlement rate is lower for commercial insurance because the claims are more complex," said Robert Hartwig, chief economist at the Insurance Information Institute. "Many will run until they reach the policy's limit. Insurers will pay as long as the cover lasts, but in New Orleans, that will be some time. Most businesses won't have business insurance that will carry them more than a year past the event."

Peter McMurtrie, vice president of property claims for St. Paul/Travelers, estimated about 60% of the company's commercial claims are closed, compared with more than 90% of its personal lines claims related to Katrina.

"Business interruption continues until the buildings are fully restored,' McMurtrie said.

The situation in New Orleans is unusual, McMurtrie said, because of the length of time it will take to rebuild the city. "In a normal catastrophe, we would see a certain amount of business interruption claims continue. New Orleans is unique because of the longer period of restoration due to the supply and demand issues," McMurtrie said.

Harckham said he expects to see more lawsuits filed related to commercial claims from Katrina.

The biggest issue facing commercial claims is the same one facing personal lines claims: wind vs. flood damage.

Often, if a business experienced damage that isn't covered by their property insurance, then the resulting business interruption claim would not be covered either, Harckham said.

Another issue is a coverage known as contingent business interruption, which covers a company if its customer base or suppliers are damaged. "It's based on damage to suppliers or customers, but if the damage is caused by flood, and you don't have flood coverage, then you may not have any contingent business interruption coverage," Harckham said.

This can impact companies that weren't directly impacted by Katrina.

"We have lots of clients not even based in the Gulf Region, but they sell into the Gull Region or were dependent on petrochemicals products from the region, and it's having a very big impact on their profits," Harckham said. "At this point, we're still in the negotiation phase for most businesses. We're entering the critical phase right now to see if they can be resolved, if not, we're going to start to see a lot of litigation soon."

By the Numbers: 2005's Hurricanes

15,000

Number of insurance adjusters and staff estimated to have worked the areas impacted by hurricanes Katrina, Wilma and Rita.

3,564

Number of cases going through mediation in Louisiana on hurricane claims disputes as of April 14, 2006.

113,053

Number of single-family homes in Louisiana that sustained hurricane-related flood damage in 2005.

64.4%

Percentage of damaged homes in Louisiana that had flood insurance.

5%

Percentage of homeowners nationwide who buy flood insurance.

67%

Percentage of New Orleans' residents who had flood insurance.

Sources: ISO's Property Claims Services; Louisiana Insurance Department; Times-Picayune.

Andrew's Aftermath in Florida

* SEVEN SMALL INSURERS became insolvent in early 1993 as a result of hurricane losses.

* 34 INSURERS announced their plans to withdraw from doing business in Florida.

* ANOTHER 29 INSURERS detailed plans to restrict writings or withdraw from writing certain types of insurance. These insurers represented about 30% of the homeowners market and 10% of the commercial market.

* 371 INSURERS reported losses from Hurricane Andrew.

* THE FLORIDA Residential Property and Casualty Joint Underwriting Association began operations in early 1993 to provide coverage to homeowners unable to buy in the regular market.

* THE INSURANCE OFFICE CALLED for establishment of a federal catastrophe-protection fund, a state and regional catastrophe-protection fund, and enhancements of private-market mechanisms for catastrophe protection.

Source: Florida Office of Insurance Regulation

Katrina's Impact on
Louisiana

                    Number          Average
Type of claim    of claims    cost of claim

Personal           695,000          $15,647
Commercial          80,000         $150,000
Auto               200,000           $7,000

Source: ISO's Property Claims Services