A two-year surge in the number of hurricanes is renewing debate about how to better protect America's homeowners.
This week, lawsuits in Baton Rouge and beyond are starting to tackle some of hurricane Katrina's toughest questions: How much money will flow to those who lost homes but hadn't bought flood insurance? And who will pay: insurers or the federal government?
Broader problems are also surfacing. Katrina was an extraordinary storm, but it also occurred in what many experts view as an era of heightened risk. More people than ever, they say, live in increasingly costly homes along coasts and other areas where a natural disaster or terrorist attack could produce what some insurance experts call a "megacatastrophe."
At the very least, this storm season may raise prices for insurance and spur new rules to expand flood-insurance coverage. But it may also prompt new national programs for disaster insurance.
"This is an opportunity to rethink the appropriate role of the public and private sectors in dealing with all of these events," says Howard Kunreuther, a risk-management expert at the University of Pennsylvania's Wharton School. "There are definitely increasing risks."
Already, some federal lawmakers, insurance executives, and state regulators are beginning to discuss these issues. Insurance commissioners of several large states plan to convene in November to seek a new system of sharing risks for natural disasters and terrorism, according to a report this week in Insurance Journal.
In the Senate, Banking Committee chairman Richard Shelby (R) of Alabama told Reuters he is open to exploring "options to deal with huge losses."
Such discussions will involve touchy questions such as how to share costs among taxpayers, homeowners, and insurers. But Katrina's toll has dramatized the costs and flaws in current systems:
• Insured losses could top $40 billion, which would make it the world's costliest natural disaster.
• Flooding damaged many homes outside "100-year" flood zones (where flooding is considered a 1 percent probability in any given year).
• Even in those zones, only a minority of homeowners - about 1 in 4 nationwide - have flood insurance.
• Homeowners are wrangling with insurance adjusters to determine whether damage stems from "wind" (covered by homeowner's policies) or "flood" (covered by federal flood insurance, with a maximum payout of $250,000).
It's hardly surprising that a raft of lawsuits has begun. In Baton Rouge, for example, McKernan Law Firm is suing on behalf of all property and homeowners in greater New Orleans to have insurance companies pay for damage from high waters. The law firm argues that the damage was due to broken levees, not a more typical flood.
In Mississippi, Attorney General Jim Hood has sued five insurance companies operating in the state, seeking to prevent what he calls "unconscionable" efforts to avoid paying claims for the hurricane.
Federal agencies often provide grants and low-interest loans to individuals and businesses after disasters. President Bush has also proposed a homesteading initiative that could provide land and homes for several thousand displaced families.
In providing such aid, officials consider the balance between compassion and what's called the "moral hazard." Why buy insurance, the argument goes, if the government will bail you out anyway?
However Katrina's victims fare, the storm could have a wider impact on America's insurance future. For example, insurance experts say, too few people participate in the National Flood Insurance Program, set up in 1968 because insurers viewed floods as too great a risk. Mortgage lenders typically require flood insurance when people buy in high-risk areas. But state or federal officials could tighten rules so more homeowners, even those without mortgages, would buy in..
Other experts say homeowners would be better protected if their standard insurance policy shielded them from all risks.
"Set it up so everything is under one policy," suggests Ron Cuccaro, CEO of Adjusters International in Utica, N.Y., which represents homeowners in cases of loss or damage to properties. It may be complicated, he concedes, with some burden sharing by public and private sectors behind the scenes.
Other reform ideas focus on the financial health of the overall system. A key question: How can coverage be expanded for major threats - earthquake, floods, terrorism - that have proved daunting for private insurance firms?
One solution -urged Monday by a coalition including insurance firms- is "catastrophe funds" such as those now in place in Florida and California. A portion of homeowner premiums goes into the funds, where investment income is tax-exempt. The money is used only to pay claims for disasters that exceed a certain level.
"We need a backstop of a national catastrophe fund," says Edward Collins of Allstate Insurance Company.
Currently, the industry's major cushion comes from reinsurers - firms that offer to insure the insurers. Under a new system, the private sector might be able to play a larger role in flood insurance, says Robert Klein, a risk-management expert at Georgia State University. But government retains a role in managing flood risks through zoning and engineering.
• Ron Scherer contributed to this report.