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34–677 PDF 2007

INSURANCE CLAIMS PAYMENT

PROCESS IN THE GULF COAST

AFTER THE 2005 HURRICANES

HEARING

BEFORE THE

SUBCOMMITTEE ON 

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

FEBRUARY 28, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–7

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MARSHA BLACKBURN, Tennessee 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

MELVIN L. WATT, North Carolina, Chairman

LUIS V. GUTIERREZ, Illinois 

MAXINE WATERS, California 

STEPHEN F. LYNCH, Massachusetts 

EMANUEL CLEAVER, Missouri 

NYDIA M. VELA ́ ZQUEZ, New York 

MICHAEL E. CAPUANO, Massachusetts 

CAROLYN MCCARTHY, New York 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

ROBERT WEXLER, Florida 

GARY G. MILLER, California 

PATRICK T. MCHENRY, North Carolina 

EDWARD R. ROYCE, California 

RON PAUL, Texas 

STEVEN C. LATOURETTE, Ohio 

J. GRESHAM BARRETT, South Carolina 

TOM PRICE, Georgia 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

(V)

C O N T E N T S 

Page 

Hearing held on: 

February 28, 2007 ............................................................................................ 1

Appendix: 

February 28, 2007 ............................................................................................ 53

WITNESSES 

WEDNESDAY, FEBRUARY 28, 2007

Hartwig, Robert P., President and Chief Economist, Insurance Information 

Institute ................................................................................................................ 18

Hood, Hon. Jim, Attorney General, State of Mississippi ...................................... 20

Jefferson, Hon. William J., a Representative in Congress from the State 

of Louisiana .......................................................................................................... 9

Jindal, Hon. Bobby, a Representative in Congress from the State of Louisiana ..................................................................................................................... 6

Maurstad, David I., Director and Federal Insurance Administrator, Mitigation 

Division, Federal Emergency Management Agency, U.S. Department of 

Homeland Security ............................................................................................... 16

Taylor, Hon. Gene, a Representative in Congress from the State of Mississippi .................................................................................................................. 12

APPENDIX 

Prepared statements: 

Watt, Hon. Melvin ............................................................................................ 54

Jindal, Hon. Bobby ........................................................................................... 56

Taylor, Hon. Gene ............................................................................................. 61

Hartwig, Robert P. ........................................................................................... 105

Hood, Hon. Jim ................................................................................................. 122

Maurstad, David I. ........................................................................................... 159

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Watt, Hon. Melvin: 

Property/Casualty Insurance in 2007: Overpriced Insurance, Underpaid 

Claims, Declining Losses and Unjustified Profits ...................................... 169

Memo to Great Lakes Zone Employees .......................................................... 198

New York Times article dated February, 24, 2007, ‘‘A Contract Is a 

Contract, Right?’’ ........................................................................................... 200

Statement of the Mortgage Bankers Association ........................................... 204

Statement of the National Association of Realtors ........................................ 260

Statement of Jeffrey H. Rose, from Lakeshore, MS, with attachments ....... 268

CRS Report for Congress—Post-Katrina Insurance Issues Surrounding 

Water Damage Exclusions in Homeowners’ Insurance Policies, dated 

February 27, 2007 ......................................................................................... 278

(1)

INSURANCE CLAIMS PAYMENT 

PROCESS IN THE GULF COAST 

AFTER THE 2005 HURRICANES 

Wednesday, February 28, 2007

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:33 p.m., in room 

2128, Rayburn House Office Building, Hon. Melvin L. Watt [chairman of the subcommittee] presiding. 

Present: Representatives Watt, Waters, Lynch, McCarthy, Klein, 

Mahoney; Miller, McHenry, and Roskam. 

Also present: Representatives Melancon, Jefferson, Taylor, and 

Thompson. 

Chairman WATT. Let me declare this hearing of the Subcommittee on Oversight and Investigations to order. I want to 

thank everybody for being here and apologize to you all that we 

were hung up on the Floor with votes. 

But that’s the bad news; we are starting late. The good news is 

that votes are over for the day and we won’t be interrupted again, 

so we should be able to proceed through all of our testimony and 

questioning without delay again. 

Without objection, all members’ opening statements will be made 

a part of the record, and there are some members who have asked 

to sit on the dias with us and be able to ask questions, so I would 

ask the subcommittee members to consent that the following members be allowed to participate in today’s hearing after all of the sitting subcommittee members: Representative Richard Baker; Representative Ginny Brown-Waite; Representative Bennie Thompson; 

Representative William Jefferson, who will testify and then come 

to sit here; and Representative Charlie Melancon. And if any of the 

other witnesses want to join us, we’ll do a supplemental unanimous 

consent request to make that appropriate. 

Under the rules of the committee and the subcommittee, the subcommittee chairman and the ranking member will be recognized 

for 5 minutes each to make opening statements, and then other 

members who wish to speak, up to a total of 15 minutes per side, 

will be recognized. So I’m going to recognize myself, but before I 

get on the clock, let me just thank the members who are here. I 

had planned, if we had had a full complement of members, to introVerDate 0ct 09 2002 11:36 May 31, 2007 Jkt 035288 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\34677.TXT HFIN PsN: TERRIE
2

duce all of them since this is our first subcommittee hearing since 

the subcommittee has been completed. 

Just for everybody’s information, I won’t go through a full introduction, but Representative Luis Gutierrez is on the subcommittee, 

as well as Representative Maxine Waters, Representative Stephen 

Lynch, Representative Emanuel Cleaver—although I understand 

he’s going off of the subcommittee to do another special project—

Representative Nydia Velazquez, Representative Michael Capuano, 

Representative Carolyn McCarthy, Representative Ron Klein from 

Florida, Representative Mahoney from Florida, and Representative 

Wexler from Florida. And, of course, the chairman of the full committee is an ex officio member of the subcommittee. 

I’ll yield to Mr. Miller to just go through his list of members on 

the Republican side. 

Mr. MILLER. Thank you, very much. We have with us today Patrick McHenry. Ed Royce should be joining us shortly. Ron Paul, 

Steven LaTourette, Gresham Barrett, Tom Price, Michele 

Bachmann, Peter Roskam, and Spencer Bachus, who is the ranking 

member of the full committee, will also be attending today. 

Chairman WATT. Thank you. I’ll now recognize myself for a 5-

minute opening statement, which may go a little bit longer, but I 

hope not. 

Today’s hearing will examine the insurance adjustment process 

in the Gulf Coast area after the 2005 hurricanes. Hurricane 

Katrina was the single most insured disaster in the United States 

with privately insured losses of about $40 billion. It resulted in approximately 1.7 million private insurance claims with the vast majority of those claims coming from Louisiana, Mississippi, and Alabama. Although the insured losses from Hurricane Rita were lower 

than Hurricane Katrina, Hurricane Rita was also expensive, with 

privately insured losses of almost $5 billion from about 381,000 

claims, the seventh most expensive in history. 

After this unprecedented destruction, the National Flood Insur- ance Program (NFIP) paid out more than $18 billion in claims. The 

substantial claims that resulted from Hurricanes Rita and Katrina 

far exceeded the premium income to the Flood Program, and NFIP 

has borrowed most of the $18 billion paid out in claims from the 

U.S. Treasury. 

The Federal taxpayer has a financial interest in how the NFIP 

operates and specifically how the claims payment process works. I 

recognize that insurance matters are generally covered by the 

States, but the Financial Services Committee has jurisdiction over 

the National Flood Insurance Program, and Congress acted three 

times last term to approve additional borrowing authority for the 

National Flood Insurance Program to enable it to pay claims. 

Having given that factual backdrop, let me set some ground 

rules, address some of the questions that have been addressed to 

me by colleagues, interested parties, and the press, and frame the 

issues in the following way: 

First, what is our subcommittee’s role in this process? In this 

hearing, and in every hearing or investigation we conduct this 

year, let’s keep in mind that the Oversight and Investigations Subcommittee is not a legislating committee. Our sole purpose is to get 

the facts and build a factual record. If we do our jobs thoroughly 

3

and fairly, whatever legislation might be appropriate will be based 

on the facts, but it will be done by another subcommittee, the full 

Financial Services Committee, or elsewhere. 

Second, what do we know already? Well, there are a number of 

things that various people will tell you that they know about this 

subject but the only thing I’m prepared to say that we know for 

sure—and this is where I would like all of our subcommittee members to start—is that everybody I’ve talked to in the process is unhappy. 

Our citizens, our constituents, are unhappy. The one thing that 

many of them know is that their claims were not paid in a timely 

fashion, and they blame private insurers, the National Flood Insurance Program, or anybody else that they can find. They know that 

their claims were not timely paid. The Members of Congress from 

the Gulf, our colleagues, are unhappy because their own experience 

and their constituents’ complaints indicate that there was not only 

a breach of the levees that were designed to protect them, but 

there was a breach in the insurance coverage, adjustment, and payment process that was supposed to compensate them. 

Third, private insurers are not happy. They’ll tell you that they 

were just honoring the provisions of their insurance contracts. For 

a better understanding of their position, I commend to the subcommittee members a thoughtful article from the February 24, 

2007, New York Times, which suggests that a confluence of acts of 

God, voters, the press, trial lawyers for classes of civil litigants, the 

threat of criminal action, activist judges, and self-interested politicians at the Attorney General, U.S. House, and Senate levels conspired or at least coalesced to make private insurers the victims. 

Fourth, the National Flood Insurance Program is unhappy. There 

has been some suggestion that they rolled over and paid claims 

that shouldn’t have been paid by the Program or that should have 

been paid by private insurers. Most of the Program’s flood insurance premium dollars are now going to pay interest on the $18 billion that was used to pay claims. 

Finally, taxpayers could end up being very unhappy. If we can’t 

sort through this, and if it’s not fixed, they could be left footing the 

bill and, what’s more, a similar result could occur after future disasters. Everybody is unhappy, and I think that’s the case, and why 

we need to be here today. And everybody is pointing fingers or 

blame at someone else. 

Our job in this subcommittee is to document the facts, and today’s hearing is the start of that process. 

Finally, I’ve been asked, is this the only hearing we will have? 

I think it’s clear that there will be other hearings, and I want to 

make it clear that those hearings, and the whole process, will be 

fair. I don’t start with any preconception of where we’ll get to or 

where we’ll end up. I will tell you that I intend to do as many of 

these hearings as we need to, to get a full record for somebody to 

take action. 

There will be an effort to identify possible solutions, but we need 

to know the facts first. I thank the witnesses for being here to start 

the process. And I now yield 5 minutes to the gentleman, the ranking member, Mr. Miller. 

4

Mr. MILLER. Thank you, Mr. Chairman. I’ll try not to repeat a 

lot of what you discussed because there’s a lot of facts we have in 

this that we will be gleaning through this hearing. But today the 

subcommittee will consider the performance of our insurance system in fulfilling it’s obligation in the aftermath of Hurricanes 

Katrina and Rita in order to provide a factual foundation from 

which to legislate or improve the system. 

In 2005, hurricanes caused an unprecedented amount of damage 

to residential, industrial, and commercial property. It’s important 

to note that while some insurance claims from these storms have 

yet to be resolved, more than 95 percent of the claims have been 

settled. 

For unresolved claims, the recourse of policyholders is either mediation or adjudication. Such processes are in place to ensure that 

every case can be resolved fairly. From the initial approval of the 

insurance policies by the State insurance commissioner, to the 

claims settlement process, one thing is clear. Even during a time 

of tremendous strain, our insurance system operates as it was designed. 

This is not to say that we are satisfied with the design of the system. Rather, the problems we have witnessed indicate that we 

must improve the system. It is not working the way that we would 

want it to work. 

I do not believe that this hearing should be used as a forum to 

blame private insurers. If we don’t agree with the outcome, then 

let’s change the rules and reform the system. If we want to assess 

blame, let’s start by looking at the opportunities that we, as a Congress, have missed in the past to improve our system. 

As many of you know, I have been an advocate for reform of the 

insurance system for many years. The system as we know it is 

plagued with inefficiencies. If there ever was an impetus to reform 

it, it is now, when we have seen the shortfalls of our system exacerbated during a time of great strain. 

I also do not believe that this hearing should be a forum to reject 

the benefits of private insurance in favor of expanded government 

and increased taxpayer exposure. I have, along with other members 

of this committee, participated in efforts to reform the National 

Flood Insurance Program and, importantly, to modernize our National Flood Maps. 

While some might think an expansion of the NFIP would be beneficial in resolving some of the insurance system deficiencies revealed in the aftermath of the 2005 hurricanes, I must also refer 

you back to the last NFIP markup we had in this committee when 

some wanted to mandate the purchase of flood insurance in areas 

of our country where there was no basis to require it in order to 

make the program solvent. 

I am here today, as I was at that markup, to tell you that this 

is the not way to capitalize an insurance fund. A fundamental tenant of an insurance is to spread the risk, but we shouldn’t be 

spreading it to people whose homes will likely never be flooded. 

The NFIP is currently solvent. The program is almost $20 billion 

in debt to U.S. taxpayers. We shouldn’t be mandating that people 

pay for flood insurance when they don’t need it, and we shouldn’t 

5

be asking the taxpayers to foot the bill for a broken program any 

more than they already are. 

As we move forward, I urge my colleagues to remain mindful 

that a vibrant private insurance market will help expedite recovery 

in the Gulf area. Recovery cannot take place if there is no insurance market. We must ensure that we do not inadvertently drive 

liquidity and capital out of these hurricane-prone areas. If we do 

that, we have only succeeded in harming the future of the communities that we aim to help in this hearing. 

Thank you. I yield back. 

Chairman WATT. Are there any other members who would like 

to be recognized for an opening statement for 2 minutes? 

Okay. The gentleman is recognized for 2 minutes. 

Mr. ROSKAM. Thank you, Mr. Chairman. I very much appreciate 

the opportunity to participate in this hearing today, and I particularly appreciate you, Mr. Chairman, for laying out the ground rules 

on what it is that we’re going to be considering: number one, the 

subcommittee’s role; and number two, the notion that everybody is 

unhappy. I accept the premise that everybody is unhappy, but I 

want to urge a little bit of caution. 

I come from Illinois, which is a good State from an insurance perspective. Illinois and the regulators there and the industry is robust, and when insurance companies compete, consumers do very 

well. 

I think the tone and tenor of the hearing is important because 

I think we are in a position where we, in the Congress, need a robust insurance industry in this particular marketplace that has so 

much at risk. We must be careful not to create, either through 

harsh language or overly aggressive regulation, an environment 

where the insurers say, ‘‘Look, we’re going to walk away; we don’t 

need this hassle.’’ We know that capital is fungible, and capital 

goes to where capital can excel, so I think that we need to be very, 

very careful. 

By analogy, we had a situation in Illinois where it became very 

difficult in the practice of medicine in southern Illinois, south of 

Springfield, Illinois, about half of the State, to the point at which 

many physicians said to the plaintiff’s bar, ‘‘You win, we lose, we 

are leaving’’, and it created a great deal of adversity. 

It seems as we move forward we need to put this into context; 

95 percent of these claims have been settled. And really is there 

anybody among us in Congress who can claim that we have that 

95 percent success rate in their own districts? I certainly can’t, and 

I think we need to focus on this 5 percent, or I’ve heard even the 

number as low as 2 percent, of those claims that really need special 

attention. 

So Mr. Chairman, I yield back the balance of my time and very 

much appreciate the tone that you’ve set. 

Chairman WATT. Ms. McCarthy, do you care to be recognized for 

an opening statement? 

Okay. Thank you. Ms. McCarthy has been a long-time opponent 

of opening statements. She probably didn’t even want us to make 

opening statements. 

Let me ask your unanimous consent to submit for the record a 

copy of the February 24, 2007, article from the New York Times 

6

that I referenced in my opening statement. I think the members 

will find it interesting, and it kind of lays out a whole different perspective on this. 

Let me thank our member witnesses for being here and indicate 

that in the interests of their time, and in the interests of preserving the subsequent witnesses’ time, we will have their testimony and not have questions and answers. And then either of you, 

or any of you, who wish to join us up here, we’d be delighted to 

have you. 

So let’s see. Who will be going first? Oh, okay. We’re going from 

the right to the left, okay. Our good friend and colleague, Representative Bobby Jindal from the great State of Louisiana, is recognized for 5 minutes. 

Mr. JINDAL. Thank you very much, Mr. Chairman, Ranking 

Member Miller, and the rest of the committee members. Thank you 

for providing me the opportunity to testify. I would seek unanimous consent to submit my longer written comments for the record. 

Chairman WATT. Without objection, we’re going to give unanimous consent to have all of your written statements made a part 

of the record. 

STATEMENT OF THE HONORABLE BOBBY JINDAL, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF LOUISIANA 

Mr. JINDAL. Thank you, Mr. Chairman. Eighteen months ago, in 

August and September of 2005, Hurricanes Katrina and Rita devastated the Gulf Coast region of the United States, including large 

land areas in my home State of Louisiana. 

In the southern portions of Louisiana, the storm surge swept 

across the coastal areas causing extensive property damage. In my 

district in the City of New Orleans—you’ll hear from my colleague 

as well—levees failed, and flood waters swamped homes and businesses for several weeks before the water was finally pumped back 

into Lake Pontchartrain. 

Hurricane Katrina was the most significant natural or manmade 

disaster to affect the United States. The effects of the hurricane 

completely destroyed and made uninhabitable an estimated 

300,000 homes. This far surpasses the residential damage of Hurricane Andrew. It surpasses the combined damage of the four major 

2004 hurricanes—Charley, Frances, Ivan, and Jeanne. 

The Federal Government aided businesses and individuals struggling to purchase terrorism insurance after the September 11th terrorism attacks, and we believe the people of Louisiana deserve the 

same help. With more than 53 percent of our country’s population 

living in the 673 coastal counties and parishes, it is critical that 

we provide access to affordable insurance for these areas. 

In many coastal areas, insurance prices are a growing problem 

because of steadily rising rates. For south Louisiana and several of 

our Gulf States, we’re in the midst of an insurance crisis. 

Louisianans are still haggling with their companies over settlements and payments a year-and-a-half after the storms. These 

problems are normally resolved within 3 months after a natural 

disaster. 

7

Even further though, however homeowners and businesses are 

unable to rebuild because of high premiums and difficulty in getting insurance altogether. Since the 2005 hurricanes, many policies 

in the greater New Orleans area have gone up more than 50 percent, and insurance costs have gone up an average of 12 percent 

across our entire State. 

Obtaining insurance is difficult because only a handful of companies are writing property insurance in the State. In fact, 10 of the 

top 25 property insurers do not do business in the State. Those 

companies that remain are striving to eliminate hurricane coverage 

from their portfolio. There are immediate reports that insurance 

companies are attempting to cancel insurance policies of those who 

weren’t even affected by flood or wind damage caused by the 2005 

hurricanes. In short, Louisianans are paying more for less insurance, if they can even get it, which is hampering our recovery from 

the storms. 

A couple of specific examples. State Farm Fire and Casualty 

Company, the largest residential insurer in Louisiana, has 32 percent of the market. It has stated that it will not write new hurricane coverage, also known as wind and hail insurance policies in 

south Louisiana. 

Allstate accounts for 20 percent of all homeowner’s policies and 

has been the State’s second largest provider of insurance. It’s implementing a Statewide 5 percent deductible on hurricane coverage. According to news reports, Allstate does not plan to write 

new hurricane protection policies in much of Louisiana. Currently, 

our State’s commissioner of insurance is investigating allegations 

that the company is arbitrarily canceling homeowner policies in the 

State. 

Louisiana Citizens Property Insurance Corporation is the Staterun insurer of last resort. It’s currently our third largest insurer, 

and it is writing more policies than ever before. They write 1,000 

policies per day, but they expect to write between 60,000 and 

200,000 policies over the next year. But the premiums, by law, are 

costly, are priced above the marketplace. Without competition from 

the private sector, market forces are not working to drive down insurance rates. 

The bottom line is that extraordinarily high insurance premiums 

will put those small mom and pop shops or the young entrepreneur 

permanently out of business. People in south Louisiana will not be 

able to afford to rebuild. 

The insurance crisis is a classic chicken-or-the-egg problem. If 

the property owner rebuilds, in accordance with Federal law, he 

must obtain property insurance before settling on the property with 

a loan from a mortgage company but we, in south Louisiana, are 

having difficulty getting the insurance needed to go to settlement 

because companies are refusing to issue new policies in this area. 

I have several examples in my testimony, so I won’t go through 

all of them. There was a recent example. An insurance saleswoman 

in New Iberia, Louisiana, left, scrambling to find insurance within 

2 weeks of transferring her policy to a house she had just finished 

building. Her wind and hail, hurricane coverage was canceled. The 

mortgage company threatened to make her return the loan money 

unless she got a new policy. 

8

She was an industry insider, so she was familiar with every company that writes insurance. She was rejected by all but Citizens. 

When she finally was lucky enough to get insurance, her premiums 

went from $900 to $3,000 a year for the same coverage she had 

bought simply 2 weeks ago, 2 weeks before then. 

We can go through it again. There are several examples. On the 

commercial side, HRI Management has a portfolio of properties 

worth $200 million. Before Katrina, their coverage cost $500,000, 

including a 1 percent deductible, or roughly $1,000 per property. 

Two days before the policy’s renewal date, the insurance company 

told them the new policy would be $2.5 million, including a 5 percent deductible, and would provide only $50 million in hurricane 

coverage. Without competition, the company has limited choices: either put up with absurd premiums, risk foregoing insurance altogether if they’re not being financed by a bank loan for their properties, or move their business to another location. 

We must ensure that the residents of our State have access to 

reasonably priced insurance and are not forced to live uninsured. 

Unfortunately, for example, tragically, many of the residents in St. 

Martin Parish whose homes were destroyed by a tornado right 

after Valentine’s Day had recently dropped their homeowner’s insurance due to the rising insurance costs after the hurricanes. 

It was reported in one local paper that a 90-year-old widow on 

a fixed income who owned her home outright was faced with that 

dilemma. She could pay for food, medicine, and other needs, or use 

that money to pay for her increasing insurance premiums. She 

chose the former. Now she must rebuild her home after it was destroyed by the tornado without the help of insurance. This is completely unacceptable. Something has to change. 

I’d like to the leave the committee with one last thought. Insurance companies argue that it is too risky to issue policies in south 

Louisiana in coastal areas. But I must point out two things. One, 

if the levees in southeast Louisiana had been built to withstand a 

category three hurricane, as we had been told they were, the area 

would not have had the extensive damage. We would not have 

had—certainly we would have had destruction after Hurricanes 

Katrina and Rita, but it would not have been nearly as extensive 

as what we saw. 

We’re even now having cases of people who didn’t have damage 

from the storms losing their coverage. There’s certainly an understandable concern on the part of insurance companies to manage 

their portfolios. They need to ensure their long-term solvency and 

stability; that is certainly in everybody’s best interests. However, 

in 2006, while insurance companies were defending their decision 

and not issuing new policies in Louisiana because they can’t afford 

to issue this market according to them, they were also delivering 

a record $44.8 billion in profits even after accounting for the claims 

of policyholders wiped out by Hurricanes Katrina and Rita. 

From 1999 through 2005, the industry saw its profits nearly double from $22 billion in 1999 to $43 billion in 2005, while adding 

$100 million to its surplus reserve. It doesn’t seem right that insurance companies are making record profits while Louisiana residents cannot afford their premiums. 

9

Our residents have been through so much. We cannot rebuild our 

State unless our people move back. They cannot do this while insurance remains either too expensive or simply not available. We 

can’t reasonably expect people to return home to rebuild their businesses. 

While we cannot go back in time to fix the present, we can take 

steps to brighten the future. I applaud this committee, Mr. Chairman, the members of this panel for undertaking examination of insurance practices in the Gulf Coast in the aftermath of Hurricanes 

Katrina and Rita. Thank you for your attention to this very serious 

problem which threatens the recovery of my State. 

[The prepared statement of Mr. Jindal can be found on page 56 

of the appendix.] 

Chairman WATT. I thank the gentleman for his testimony. You’ve 

set a precedent of doing 5 minutes in 81⁄2 minutes, but we’re trying 

to be understanding here. 

The gentleman from Louisiana, Mr. Jefferson is recognized for 5 

minutes or 8 minutes, but don’t go overboard, now. 

STATEMENT OF THE HONORABLE WILLIAM J. JEFFERSON, A 

REPRESENTATIVE IN CONGRESS FROM THE STATE OF LOUISIANA 

Mr. JEFFERSON. Thank you, Mr. Chairman. If it had not been 

Bobby Jindal speaking, it would have been 10 minutes to get that 

much material in. 

Good afternoon, Mr. Chairman, and members of the committee. 

I am deeply grateful to you and to the other members here for the 

attention you have given to this matter. 

The matter before us today regarding insurance claims payment 

processes in the Gulf Coast after the 2005 hurricanes obviously has 

a great effect on the rebuilding and renewing of our entire region 

and, of course, the City of New Orleans and its surrounding communities. 

It is necessary that we hold these insurance companies responsible and make them pay for the services that they guarantee their 

customers. Since the great storm that hit New Orleans and the 

Gulf, insurance companies have seemingly done everything in their 

power not to be fair and equitable to the very citizens who need 

them most, the very citizens who for decades have been loyal customers. 

Bobby has gone through a lot of the numbers about the disaster 

costs of the storm: more than half of the New Orleans population 

has yet to return; and there have been more than 200,000 deaths, 

more than 200,000 homes destroyed, and 600,000 jobs disrupted. 

And Mr. Chairman, you’ve also noted that the 1.7 million private 

insurance claims leaves unaccounted 975,000 of them. And you 

cited the categories, commercial losses, $18 billion, homeowner policy claims, $17 billion, and $5 billion auto and other claims. 

Information gathered from the Louisiana Department of Insurance shows that 61 percent of the total insurance claims from 

Katrina came from homeowners. However, of all the money that 

has been paid out thus far, only 39 percent has been to homeowners. 

10

Bobby has already mentioned the $44.8 billion in record profits 

in 2005 even after the storm, an 18.7 percent increase, and in 2006 

the profit margin was even higher, $60 billion. With all of these 

profits, the insurance companies still feel it necessary to deny 

claims of thousands of our people and not to insure old and new 

residents in the region. 

Private insurance companies have not covered many damages 

that they should have and allowed the Federal Government, 

through the National Flood Insurance Program, to handle most of 

the claims. Making a distinction between wind-driven damage and 

damage from flooding, they have shifted financial risks from the 

business community to government and to individual homeowners. 

Courts in Louisiana are flooded with litigation against insurance 

companies because most residents feel it is the only way they can 

recover anything from insurers. In fact, in the eastern district of 

Louisiana, there are 5,175 Katrina-related lawsuits; 95 percent of 

those are homeowners against insurance companies. 

Gene Smith, who is the chief deputy clerk of courts for the eastern district of Louisiana, states that typically the courts have a 

docket of about 3,000 cases for the year. Now there are over 3,900 

pending cases dealing with homeowner’s insurance cases alone. 

This does not include those who filed in State court, nor does this 

number reflect every party in the multiple claim and class action 

suits. 

Many insurance companies in the area have planned to stop 

writing new policies for homeowners and commercial businesses altogether. The Louisiana Insurance Department had to issue emergency rules to suspend insurance companies from canceling or not 

renewing residential policies or commercial policies on commercial 

properties, of course. However the emergency rule expires tomorrow. 

Robin Halverson, a Lott & Bloom real estate agent, was actually 

living in her by-water home by the end of 2005 and had completed 

repairs on her home by December of that same year. She received 

a letter from Allstate stating that her policy was to be canceled because the house was abandoned and in disrepair. 

The Louisiana Department of Insurance has received more than 

100 complaints from customers who are being terminated at the 

end of Emergency Rule 23. The complaints all come from one insurance company and it appears that many other insurance companies 

will follow suit. The department is saying that there is no reason 

for many of these people to be dropped from their insurance company records. 

Higher premiums are a big strain on the real estate market back 

home. Premiums have risen tremendously. Ms. M. Sharpie, a resident of the West Bank area, of Algiers Insurance says her premiums have risen 100 percent. Ms. Sharpie had only minor damage 

on her home in an area of the City that was not as damaged as 

most parts of the City were. Nonetheless, her insurance company 

felt it necessary to double her insurance premiums. 

She is also feeling the strain in her career as a real estate agent. 

Ms. Sharpie feels that many people want to move or come back to 

New Orleans but obtaining insurance makes it unaffordable. Two 

popular areas she knows most people want to move back to are 

11

Gentilly and Lakeview, however the only option potential buyers 

have now is Louisiana Citizens, which is already higher than the 

private market. 

The Louisiana Citizens Property Insurance is the State’s insurer 

of last resort, a non-profit organization that had to be established 

by the legislature because applicants were not able to procure coverage through the market. The rates through this group are typically 10 percent higher than the private market and even this is 

not always available. 

And now it appears that since most insurance companies aren’t 

going to write hurricane policies at all, they’ll all have to be written 

to Louisiana Citizens, which means necessarily they’ll be higher 

than the market there was before. 

Additionally officials of the Louisiana Realtor’s Association, a 

State trade association that assists members with business and 

real estate matters agrees with Ms. Sharpie. They state that insurance premiums have risen anywhere from 30 percent to 400 percent. A resident who purchased a $150,000 home before Katrina 

would pay $1,200 a year typically for insurance. That same resident today could be expected to spend $5,000 per year. 

The high price of these premiums that extend across the State 

looks to cripple the real estate market in the State of Louisiana. 

Since it’s required for one to get insurance with a home purchase, 

and many insurance companies are not writing policies, the insurance industry is making it doubly impossible to rebuild the region. 

Coupled with the increased difficulty obtaining a home mortgage—with not only rising but even the unavailability of insurance 

providers, it makes building our region back a mere impossibility. 

This is not only applicable to the homebuying market but spills 

over into the rental market as well, in the form of higher rent because of the high insurance requirements. 

HRI was mentioned by Representative Jindal a minute ago, but 

I’ll state it a little different way. It’s a New Orleans-based real estate development company and it’s not alone. In building buildings 

back home before the storm, the cost for insurance was $400 per 

unit, more or less, depending on the size of the unit and so on, but 

the same unit today of a certain size that they were referring to 

would cost $1,800 per unit if insurance were available to buy. Additionally, this particular building is not in a flood zone. That’s an 

increase of 450 percent. 

Some of the best-case-scenario estimates did not do much better. 

The increase there would be about 300 percent. However, these 

numbers did not include higher and new deductibles on storms and 

the base deductibles. A representative from HRI also states that 

this story is typical amongst developers. 

There are countless examples of Gulf Coast citizens who were literally and figuratively left in the lurch by their providers. In order 

to rebuild and renew the great City of New Orleans, the Gulf Coast 

region, and most importantly, its people, it is vital that we make 

that transition back to their homes as seamless and as easy as possible. 

I’d like to once again thank Chairman Watt and the members of 

this subcommittee for their continuing efforts and their service. It 

will be necessary for all of us to continue to work together to reVerDate 0ct 09 2002 11:36 May 31, 2007 Jkt 035288 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\34677.TXT HFIN PsN: TERRIE
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quire a better response by the insurance industry and to make our 

people who have faithfully paid their premiums over the years 

whole again. 

The largest impediment to the rebuilding of our region, I will repeat, is not going to be FEMA or any of these other things we’ve 

talked about so much. It is going to be the availability and the high 

price of insurance coverage. 

Thank you, Mr. Chairman. 

Chairman WATT. Thank you for your testimony. Representative 

Gene Taylor from Mississippi is recognized for 5 minutes. 

STATEMENT OF THE HONORABLE GENE TAYLOR, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MISSISSIPPI 

Mr. TAYLOR. Mr. Chairman, I’d like to call you and the committee’s attention to the home of Corky and Molly Hadden. This is 

what it looked like on August 28, 2005. This is what it looked like 

the afternoon of Monday, the day after. Corky and Molly had 

$650,000 worth of homeowner’s insurance on that home, but 17 

months after the event of that storm, they’ve been paid nothing. 

This is the home of Jody and Betty Benvenutti. It is about 180 

years old, and had survived who knows how many hurricanes in 

its life. This is what it looked like the day before the storm. This 

is what it looked like the day after. 

Jody is in the insurance business, so he wisely bought a lot of insurance for that home. He had $586,000, which he thought was 

the full replacement value, but 17 months after the storm, he’s 

been paid nothing. 

What do they have in common with a U.S. Congressman, a 

United States Senator, a Federal judge, and thousands of other 

people, the people who built their houses to spec, who paid their 

Federal flood insurance policy, and had a homeowner’s policy, because in hurricane country you don’t know whether it’s going to be 

the wind or the water that gets you so you hedge your bets with 

both. And like thousands of other people in the weeks after the 

storm, one after another were told by their private insurers, ‘‘We’re 

not going to pay you.’’ 

See, I think that contributed to a massive fraud against folks like 

Corky, against folks like Jody, but against the taxpayers, too, to 

Mr. Miller’s point. See, under the Federal, ‘‘Write Your Own Program’’, we allow the Federal insurance companies to write the policy. That saves the Nation the trouble of having people to write 

that policy. We pay them a premium for that. 

The problem is that we also allow them to adjudicate the claims. 

We let State Farm, Nationwide, USAA, and others go out to a piece 

of property like the Benvenutti’s, and like the Hadden’s, and determine how the house was destroyed. Now in some instances, in very 

limited instances, people stayed behind and actually lived to tell 

about it. And in those limited instances where a person could give 

a sworn testimony that they saw their house blow away before the 

water got here, they were paid, but not very many people lived to 

tell that story; most people got the heck out of there. 

So for the people like Corky, and for the people like Jody, who 

got out of there as they were instructed, they got nothing. The inVerDate 0ct 09 2002 11:36 May 31, 2007 Jkt 035288 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\34677.TXT HFIN PsN: TERRIE
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surance companies conspired to defraud them. They conspired to 

defraud the taxpayer. And let me tell you how. 

Within weeks of the storm, State Farm and others issued memoranda to their claims adjusters that whenever they could see wind 

and water had been there, to blame all of the damage on water. 

That creates two problems. Number one, for those people with 

homeowner’s policies, the wind damage that obviously occurred in 

the 5 hours of hurricane-force winds that hit their houses before 

the storm surge got there is being totally ignored. 

To Mr. Miller’s point, they have a responsibility under the law 

for a fair adjudication of that claim. So when a company issues a 

memorandum to their inspectors to ignore wind damage, and blame 

it all on the water, they are by their own admission sticking the 

taxpayers with bills that State Farm, Allstate, Nationwide, and 

others should have paid. That’s where the fraud against the taxpayers comes in. 

So, Mr. Chairman, what I’m going to ask your committee to do 

is—there are claims adjusters who walked away from quarter-of-amillion-dollar-a-year jobs, which in south Mississippi is a lot of 

money. 

There are actually two sisters by the name of Rigsby, and they 

walked away from their jobs because they were so disgusted, on a 

day-after-day basis, with having to go tell people that they knew 

had houses that were damaged by wind—they’d blame it all on the 

water so that they only got the flood insurance policy and none of 

the wind policy. They were so disgusted with that action done by 

their employer, E. A. Renfro & Company, which did work for State 

Farm, that they walked away from their jobs and said, ‘‘We’re not 

going to do this anymore.’’ 

I’d like you subpoena the Rigsby sisters. I’d like you to subpoena 

the people from State Farm and Allstate and Nationwide. How can 

they pass out a memorandum? After already promising our Nation 

that they would have a fair adjudication of the claims, how can 

they send out a memorandum to their own employees saying, 

‘‘Blame it all on the water and that way the taxpayer has to pay.’’ 

I’d like you to look into the antitrust. Again, they are exempt 

from the antitrust laws, so is it really fair that State Farm can call 

up Allstate and call up Nationwide and call up USAA and say, 

‘‘You know what, if you don’t pay claims, and you don’t pay claims, 

then I won’t have to pay claims.’’ Under the existing law, that is 

allowed. It’s wrong as all get out, and it should be illegal. 

So Mr. Chairman, lastly I would like our Nation to look into all 

perils insurance. To Mr. Miller’s point, if you’ve checked in California, you’ll notice that 53 percent of all Americans live in coastal 

America. So what happened in Mississippi could happen in Maine, 

has already happened in New York, and has already happened in 

North Carolina. It happened four times in Florida in 2004, so it 

really could come to California one day. And is this how you want 

your constituents to be treated? Is this how you want the taxpayers 

of the whole Nation to be treated? If they’re going to pull out of 

coastal America on a State-by-State basis and say, ‘‘We’re not going 

to protect homeowners anymore from anything other than theft or 

fire’’, then maybe there is a vacuum that our Nation ought to fill, 

just like in the 1960’s when our Nation stepped in to provide FedVerDate 0ct 09 2002 11:36 May 31, 2007 Jkt 035288 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\34677.TXT HFIN PsN: TERRIE
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eral flood insurance because the private sector didn’t want that job 

anymore. Since half of all Americans are affected by this, isn’t it 

time for this Congress to look into it? 

Mr. Jindal and Mr. Jefferson did an excellent job of talking about 

how much the rates have gone up just for people who still want to 

get fire insurance, still for people who want to get theft insurance. 

And think about the irony here. We, as a Nation, tell people you 

have to have insurance if you have a federally backed mortgage, 

and yet we’re saying on the flip side that we, as a Nation, are incapable of regulating insurance, so we’re going to let the States do 

it. Therefore, there are 50 different standards for what’s right and 

wrong, plus when you throw in the territories. 

There’s a lot that needs to be changed with this. I would ask you 

to put yourself in the shoes of these folks who after 17 months 

haven’t gotten a dime, who built their houses the way they should 

have, who paid their premiums, who, when the Nation said, you 

need to get the heck out of here, got out of there, and because they 

weren’t there to witness the destruction of their homes, didn’t get 

a dime. 

Mr. Chairman, I’ve laid a lot on your plate, but I know you’re 

more than capable of making all this happen. Thank you for this 

hearing. 

Chairman WATT. Well, we thank you. We thank all three of you 

for your testimony, and I think we’re more than capable of documenting what has occurred. Then hopefully, we’ll have some ideas 

for the other committees and subcommittees about some responses 

that need to be taken also. And we assure you that we will do our 

best to document and to get all sides of what has occurred. 

So we thank you so much. As indicated earlier, we are not going 

to subject the Congressional Member witnesses to questions and 

answers. We feel like we have access to them on the Floor of the 

House, in the halls, and we can get questions answered from them. 

And so we will use that off-the-record access to them to get them 

to address this. 

Mr. TAYLOR. Mr. Chairman, I do have a more thorough statement that I’d like to include for the record. 

Chairman WATT. Without objection your written statement, all of 

the written statements of all three of the witnesses will be submitted for the record, the full written statements. 

[The prepared statement of Mr. Taylor can be found on page 61 

of the appendix.] 

Chairman WATT. Thank you so much. And we’ll now call up our 

second panel. 

Let me once again thank the member panel for their testimony, 

and thank the second panel for being here with us today. I apologize once again for the late start, but some things we don’t have 

control over. There are a lot of things we don’t have control over, 

and votes are certainly one of those things. 

Allow me now to introduce the second panel, and I will make one 

introduction and ask my colleague, the ranking member, to make 

an introduction, and then allow Mr. Taylor to introduce his Attorney General from Mississippi. 

So our first witness will be David I. Maurstad, am I pronouncing 

that correctly? 

15

Mr. MAURSTAD. Yes, sir. 

Chairman WATT. Maurstad, who was appointed Director of 

FEMA’s Mitigation Division and Federal Insurance Administrator 

in April of 2006, and previously held both positions in an acting 

role beginning in June 2004. In this position, Mr. Maurstad provides leadership for some of the Nation’s leading multi-hazard risk 

reduction programs, which seek to secure the homeland from natural hazards. These areas of oversight include the National Flood 

Insurance Program, the National Earthquake Hazards Reduction 

Program, the National Dam Safety Program, and the National 

Hurricane Program. 

In his position, he has worked closely with public and private 

risk managers as well as leaders in government, industry, research, and academia. Previously, he served as Regional Director 

of FEMA Region Eight beginning in October of 2001, where he coordinated FEMA’s prevention, preparedness, and disaster response 

and recovery activities in Colorado, Montana, North and South Dakota, Utah, and Wyoming. And prior to that he was the lieutenant 

governor of Nebraska, a position in which he was elected in 1998, 

and previously served in the Nebraska unicameral legislature. 

He has nearly 25 years of experience as an insurance agent in 

Nebraska, was mayor of Beatrice, Nebraska, is the first locally 

elected official and insurance agent to head the National Flood Insurance Program, and holds a bachelor of science degree in business administration and an MBA degree from the University of Nebraska in Lincoln, Nebraska. 

I now recognize the ranking member for an introduction of our 

second witness. 

Mr. MILLER. Thank you, Mr. Chairman. I am going to try to 

make a very lengthy bio very short because it is extremely lengthy 

and the man is extremely qualified. 

Robert P. Hartwig is president and chief economist of the Insurance Information Institute. Since joining the III in 1998 as an economist, Dr. Hartwig has focused his work on improving the understanding of key insurance issues across all industry stockholders, 

including media, consumers, insurers, producers, regulators, legislators, and investors. As president of the III, he provides assistance 

to thousands of stories annually and covers all aspects of print, television, radio, and news media, while also responding to thousands 

of requests for III member companies and other constituents. 

The institute is generally recognized to be the most credible and 

frequently used single source of information and referral for the 

widely diverse insurance industry. Its board represents companies 

from all areas of the industry, including life insurers. In addition, 

some 20 other insurance organizations contract with III for media 

services. 

Dr. Hartwig previously served as director of economic research 

and senior economist with the National Council of Compensation 

Insurance, NCCI, in Boca Raton, Florida, where he performed rate 

and return in costs of capital modeling and testified at worker’s 

compensation rates hearings in many States. He also worked as a 

senior economist for the Swiss Reinsurance Group in New York 

and is senior statistician for the United States Consumer Product 

Safety Commission in Washington, D.C. 

16

He is a member of the American Economic Association, the 

American Risk and Insurance Association, and the National Association of Business Economics and CPU Society, and serves on the 

board of directors of the Independent Insurance Agents and Brokers Association of New York. 

In 2005 to 2006, Dr. Hartwig served on the State of Florida’s 

Task Force for Long-Term Homeowner’s Insurance Solutions, and 

that’s about a third of the bio, so I will stop at that for the sake 

of time. 

Chairman WATT. And Mr. Taylor is recognized to introduce the 

Attorney General. 

Mr. TAYLOR. Mr. Chairman, I’d like to introduce our State’s Attorney General, Jim Hood, who, among his many accomplishments 

most recently did, I think, a phenomenal job of looking into the allegations against the insurance industry that I just laid out, the 

fraud against individuals, and the fraud against corporations. 

His work has resulted in at least one of the companies trying to 

reach a settlement with the people who were left with nothing. And 

to give you some idea of how well he did his job, part of that settlement was that the company asked that whatever criminal investigation against that company would have to be dropped as a part 

of that. 

So I very much applaud him for doing what our U.S. attorneys 

should have been doing. I think he’s done an excellent job of protecting the consumer, and protecting the taxpayer, and we’re honored to have him here today. 

Chairman WATT. Without objection, the written statements of all 

three of these witnesses will be made a part of the record. 

And we will recognize Mr. Maurstad for 5 minutes for his testimony. 

STATEMENT OF DAVID I. MAURSTAD, DIRECTOR AND FEDERAL INSURANCE ADMINISTRATOR, MITIGATION DIVISION, 

FEDERAL EMERGENCY MANAGEMENT AGENCY, U.S. DEPARTMENT OF HOMELAND SECURITY 

Mr. MAURSTAD. Good afternoon, Chairman Watts, Ranking Member Miller, and members of the subcommittee. I am David 

Maursted, Mitigation Division Director and Federal Insurance Administrator for the Federal Emergency Management Agency. 

The large number of claims and severity of flood losses from the 

2004 and 2005 hurricane seasons are unprecedented in the history 

of the NFIP. The challenges these storms have presented to the 

Mitigation Division, particularly the 2005 hurricane season’s, have 

never been encountered on this scale before. Today I’ll address the 

NFIP’s financial status, mention some accomplishments, and point 

out some opportunities to strengthen the program. 

The NFIP makes affordable flood insurance available in communities that adopt and enforce measures to reduce their vulnerability to flooding. From 1968 to 2004, the NFIP paid out $15 billion to cover over 1.3 million claims. Hurricane Katrina alone resulted in claims totaling $16.3 billion to date. 

It is likely that the 2005 flood insurance costs will exceed $20 billion, including interest already paid on borrowing from the U.S. 

Treasury. Congress has increased this borrowing authority three 

17

times since Katrina to the present limit of $20.775 billion, allowing 

nearly all of the 2005 flood claims to be paid. 

That’s more than 180,000 Gulf Coast residents on the road to recovery due to our private sector partners, our Write Your Own insurance companies, as well as claims adjusters and agents who fulfilled their responsibility to help NFIP policyholders begin rebuilding their lives. 

With over 5.4 million policies insuring more than $1 trillion in 

assets, the NFIP collects more than $2 billion annually, yet we expect interest on our borrowed funds to reach $720 million this year. 

If future claims meet historical averages, the program will need 

new loans every 6 months just to cover semi-annual interest payments. 

Needless to say, under current loan arrangements, it’s unlikely 

the NFIP will ever be able to retire this debt. Financial matters 

aside, I’m proud of how the NFIP and the insurance industry 

worked together after Katrina, using new information and innovative approaches to help Gulf Coast flood policyholders when they 

needed it most. 

The NFIP Summary of Coverage and the Flood Insurance Claims 

Handbook helped them through the claims process. We quickly resolved Katrina and Rita claims with streamlined adjustment and 

claims processes, but not at the expense of quality control. 

From the beginning, FEMA general adjustors and claims staff 

were in the field conducting random and on-demand reinspection 

of damaged structures. We also reviewed sample sets of claims filed 

to ensure the integrity of the process. This is in addition to the regular adjustor monitoring we perform, to operation reviews, biennial 

audits and audits for cause. 

The GAO and the DHS Inspector General are investigating the 

quality of our flood claims handling, and we are cooperating fully. 

We learned from Katrina and we are sharing this knowledge 

with States as we help them educate and train agents who sell 

flood insurance. 

We’re also working with affected communities to make sure they 

rebuild wisely. For instance, FEMA provided affected areas with 

updated flood hazard data to help guide reconstruction. This guidance must be used for all rebuilding activities involving FEMA hazard mitigation and public assistance grant programs because it 

doesn’t make sense to spend tax dollars to rebuild to outdated 

standards only to face similar damage when the next storm comes 

along. 

And it will come. That’s why we must continue to strengthen the 

program by protecting the program’s integrity, improving citizens’ 

understanding of flood risks, and reducing risks with proven mitigation practices. We should enhance these principles by eliminating 

discounts on pre-furn structures, strengthening mandatory purchase requirements, and improving data on flood maps. 

Levee failure vastly increased New Orleans’ flood claims. Improper flood map depiction of areas behind levees is one of our primary concerns. My written testimony offers recommendations on 

how to improve the program, and I look forward to working with 

this committee and others in this regard. 

18

However there is no quick solution that will allow the program 

to absorb catastrophic loss years like 2005, and we’re concerned 

about more than financial matters. Increasing risk awareness 

among homeowners and consumers with improved, succinct information is one of the NFIP’s basic principles and is an important 

element of the 2004 Flood Insurance Reform Act. 

As citizens learn more about the risks they face, they’ll be more 

likely to reduce their vulnerability, making the Nation’s communities safer places to live, work, and do business. 

I’ll be happy to answer any questions that the committee and 

other members might have, and thank you for the opportunity to 

testify. 

[The prepared statement of Mr. Maurstad can be found on page 

159 of the appendix.] 

Chairman WATT. Thank you for your testimony. Mr. Maurstad 

has set a tough act for you all to follow, having finished right on 

the 5-minute mark, and we appreciate that. 

Dr. Hartwig is recognized for 5 minutes. 

STATEMENT OF ROBERT P. HARTWIG, PRESIDENT AND CHIEF 

ECONOMIST, INSURANCE INFORMATION INSTITUTE 

Dr. HARTWIG. Thank you. Good afternoon, Mr. Chairman, Ranking Member Miller, and members of the committee. Thank you for 

the opportunity to discuss the important and vital role played by 

the insurance industry in the response, rebuilding, and recovery effort following Hurricane Katrina. 

My name is Robert Hartwig, and I’m president and chief economist for the Insurance Information Institute, an insurance trade 

association based in New York City whose primary mission is to 

improve the public’s understanding of insurance, what it does, and 

how it works. 

Hurricane Katrina was the largest and most expensive disaster 

in the history of insurance. Claims payments to restore homes, 

businesses, and vehicle losses totaled $41 billion on some 1.7 million claims filed by policyholders across six States. For all of 2005, 

hurricane losses topped $57 billion on some 3.3 million claims. 

As we know, the devastation wrought by these catastrophic hurricanes was unprecedented and so, too, was the industry’s response. Some 15,000 adjusters were called in from across the country. These men and women worked tirelessly, day and night, for 

months, often in difficult and dangerous conditions. 

For many property owners, insurance adjusters and the checks 

they cut on the spot where the first tangible signs of relief they had 

seen. Millions of American families and businesses devastated by 

the storms of 2004 and 2005 are back on their feet today because 

of the more than $80 billion paid to them by their insurance companies. 

Insurers are justifiably proud of their performance. As of the first 

anniversary of Katrina in August of last year, more than 95 percent of the 1.1 million homeowner’s claims in Mississippi and Louisiana had been settled with fewer than 2 percent of claims in dispute. Approximately half of these entered no-cost mediation programs established by insurance departments in both States where 

some 80 percent of claims are successfully resolved. 

19

Throughout the Gulf, only a tiny fraction, well under 1 percent 

of homeowner’s claims have been litigated. Claims adjustment is a 

highly systematic process. Adjusters work diligently to accurately 

assess the extent and cause of loss associated with each individual 

claim. If some damage is the result of an excluded cause of loss, 

such as flooding, the adjuster will apportion the loss accordingly. 

It is important to recognize, as Mr. Maurstad has already said, 

that FEMA routinely conducts audits of flood claims, including 

claims practices, and has the authority to review any claim at any 

time. Consumers are also protected in every State by unfair claims 

practices statutes that grant State insurance regulators the authority to investigate and penalize insurance companies that refuse to 

pay valid claims. 

The lessons of Katrina and the unparalleled destruction of the 

2004, 2005 hurricane seasons include a very stark reminder that 

living along the hurricane exposed coast line of the United States 

is an increasingly risky proposition. Indeed, 7 of the 10 most expensive hurricanes ever to strike the United States occurred in the 14-

month span from August 2004 through October 2005. 

Risk-related lessons revealed in the aftermath of Katrina include 

the following. Many, if not most, coastal structures in the United 

States today are insufficiently well constructed to withstand the 

forces of a major hurricane. Homes built to stronger, industry supported standards however, have fared much better. 

Flood insurance penetration rates are woefully inadequate. In 

parts of coastal Mississippi, for example, fewer than 20 percent of 

dwellings were insured against flood. The cost associated with offering insurance in hurricane prone areas will continue to escalate 

as coastal populations soar. 

Florida’s population, for example, has increased by 80 percent 

since 1980 with the value of insured coastal property now exceeding $2 trillion. Hurricane Katrina made clear another important 

lesson, that only a financially strong insurance industry can deliver 

the relief necessary to help communities recover from major catastrophic events. 

Hurricane Katrina and the other storms of 2004 and 2005 provided insurers with valuable insights into loss reduction and catastrophe response. Since Katrina insurers have complemented their 

existing investments in catastrophe response with a variety of new 

and enhanced capabilities that speed response times while also 

partnering with government officials to cut bureaucratic red tape 

that slows those response times. 

Insurance markets in most States are highly resilient and competitive. Unfortunately the operating environment that allows insurers to pay sudden and extreme losses like Katrina is now under 

siege in several States. Punitive, burdensome legislation and regulation accompanied by a surge in litigation is driving up costs and 

reducing consumer choice. 

Insurance rating agency A.M. Best suggested just last week that 

recent legislative changes in Florida could even lead to ratings 

downgrades for some insurers. In Mississippi, a small number of 

lawsuits relative to the total number of claims filed is having an 

inordinate impact on the health of the marketplace. The litigation 

in Mississippi, initiated just 17 days after Katrina by the Attorney 

20

General’s office, followed by civil actions from trial lawyers, may 

have accomplished what Katrina did not, delivery of a potentially 

lethal blow of uncertainty to the viability of a private homeowner’s 

insurance market in the State. 

To summarize, the record $80 billion paid to 51⁄2 million policyholders over the course of the 2004, 2005 hurricane seasons is a 

vivid demonstration of the vital role played by insurers in helping 

families, businesses, and entire communities recover from the devastation wrought by major disasters. 

Unfortunately, in some States, misguided legislation and a surge 

of litigation have increased uncertainty to intolerable levels, leaving insurers with few options other than to reduce their exposures 

to these States. 

To conclude, the insurance industry is committed to working in 

partnership with public policymakers, consumers, and businesses 

in developing fact-based solutions to the formidable challenge posed 

by Hurricane Katrina and other disasters and continuing our tradition of helping families, businesses, and communities wherever and 

whenever disaster strikes. 

Thank you for the opportunity to address the committee today, 

and I’d be happy to answer any questions you may have. 

[The prepared statement of Dr. Hartwig can be found on page 

105 of the appendix.] 

Chairman WATT. Thank you for your testimony. Attorney General Hood is recognized for 5 minutes for his testimony. 

STATEMENT OF THE HONORABLE JIM HOOD, ATTORNEY 

GENERAL, STATE OF MISSISSIPPI 

Mr. HOOD. Thank you, Mr. Chairman. I’m honored to be here 

today representing the State of Mississippi as Attorney General. 

I’m here to tell you that there were three storms that have occurred as a result of Hurricane Katrina. One was Katrina itself. 

The other was the failure of the insurance industry to pay what it 

owed. And now we’re facing incredible escalation in cost to reinsure 

to try to rebuild. This is the third storm that we’re presently facing. 

There is a great misconception out there that somehow we’re trying to force insurance companies to pay for something that they 

didn’t insure. Their public relations machine has done a wonderful 

job, including the Wall Street Journal, as the chairman mentioned. 

We’re trying to make them pay for what they did insure. They 

were supposed to insure for wind. As one of my assistants pointed 

out, a saying that came up during the initial Clinton Administration’s campaign was, ‘‘It’s the wind, stupid.’’ 

They’re not even paying for what they insured, and they used 

several methods by which they have accomplished that. Let me 

give you an example. People down the coast—there were about 140 

mile-per-hour winds. My home in Jackson, Mississippi, at that capital is about 180 miles north of the coast, and it blew the shingles 

off of my roof. 

State Farm was my insurer. They didn’t have the excuse not to 

pay in areas such as where I live. It blew shingles off the roof; I 

had my roof replaced; no problem. That’s part of that 85 percent 

of those that they say that they have paid the claims on. They 

21

didn’t have the excuse of the anti-concurrent cause provision that 

they have in their insurance policies, nor did they have the exclusionary provision. 

Now where the dollars become involved are those people who 

were hit by storm surge, which is a relatively small strip along the 

coastal area of the State of Mississippi. For example, State Farm 

has one-third of the policies along our coastal area. 

They had approximately 9,000 homes that they had insured that 

were hit by storm surge. About 1,200 of those 9,000 wound up 

being just what we call slabs, nothing left, so those claims have not 

been settled. And when they use the term that they’ve been settled, 

that just means that they paid on them. That doesn’t mean that 

the homeowner is satisfied with the percentage of payment that 

they may have given them. 

So the misconception that we’re trying to rewrite an insurance 

policy—as Attorney General of the State of Mississippi, I fired a 

lawsuit within a couple of weeks because I saw where they were 

abusing their policy provisions, one being this anti-concurrent 

cause provision. What that provision provides, and let me point out 

to you that a very independent Federal judge, who is a senior status judge, been on the bench for years, from my area of North Mississippi, had no ties to the coast, is the only Federal judge on our 

coast handling these cases, a very learned judge, well respected by 

the Fifth Circuit. 

Judge Senter, in handling these cases, struck the anti-concurrent 

cause provision. What that provision does is it says that, well, during the testimony of the case that was mentioned about the punitive damages occurring, what the insurance companies did was 

they used satellite figures and determined where the storm surge 

reached and in essence said that, ‘‘We don’t know exactly what took 

your house out, but we do know this from our studies, that storm 

surge would have taken it out anyway.’’ 

So during that trial there wasn’t a Mississippi jury that decided 

that part of the case as far as liability. A Federal judge took it 

away from the jury and made a decision that the duty of an insurance company is to prove the percentage of the damage caused by 

the excluded peril, meaning the water exclusion. So they couldn’t 

even prove what percentage of it was done by water through their 

own studies, much less what the wind did, so the Federal judge directed a verdict and put a bad faith instruction before the jury, and 

that’s where they came down with the punitive damages. Therein 

lies the problem. People on the coast got hit with 140 mile-per-hour 

winds; you know it knocked shingles off their houses, at least, 

when it did 180 miles north at 100 mile-per-hour winds. Yet, when 

people filed the claim, they got zero; they got nothing, as Congressman Taylor pointed out, nothing. 

A Federal judge with a $500,000 home gets a letter saying, ‘‘We 

owe you nothing.’’ That’s because of the abuse of that anti-concurrent cause provision that the Federal judge struck as being, in essence, a bait and switch. You sell someone something and then you 

take it all away because you know water will be part of a hurricane. 

22

That was the reason that we filed that litigation, to get a quick 

answer, so it’s not about the water; it’s about the wind. It’s about 

making them pay what they owe. 

How did they get around paying what they owed? They have established a program called ACE. That’s a handling program adopted by State Farm, and what they did with this program is to hide 

the double engineering reports that they had. One person even had 

three particular reports on one property, engineering reports, one 

saying water, one saying wind and water, and another one saying 

wind. 

So they hid these engineering reports and didn’t disclose it to the 

people. They established this wind and water protocol September 

13, 2005, shortly after the storm, which requires that they—the 

protocol, it’s a letter that went out to all their claims people. It says 

that if water got in the way, in essence the anti-concurrent cause 

provision, then you make the National Flood Insurance Program 

pay it off; we don’t owe any. 

That’s what happened to the taxpayers of America. They got 

dumped on by the insurance companies because their adjusters 

were out there saying, ‘‘We’re not paying for any of the wind because water was involved.’’ And so they didn’t even try to estimate 

a percentage that was done by wind that they owed. The National 

Flood Insurance Program is owed money by the private insurance 

industry. 

I’ll give you a quick example, and I’m not sure—it shows stop, 

but I think I have 3 more minutes. 

Chairman WATT. You’re over, but we’re being generous with all 

the witnesses today, so I haven’t gavelled you yet. Just wrap up as 

quickly as you feasibly can. 

Mr. HOOD. I will finish briefly. In our remarks, we set forth some 

examples of people who had double engineering reports and weren’t 

told. Those have been in the news media. I have to be careful about 

giving examples that—none of this information came from our 

grand jury investigation, which is still ongoing as far as other companies that are involved. And perhaps in this case if the settlement 

doesn’t go through, we may be dealing with that in the future. 

One last point I would like to make is how the industry—and 

this is why we need Congress to get involved. The industry threatens States, particularly one with 2.8 million people like the people 

of the State of Mississippi. State Farm, I reached a settlement with 

them. They indicated they were going to stay in Mississippi, that’s 

the whole reason to reach a settlement; if I’d indicted them, they’d 

have left the State completely, every office shut down, and onethird of our insurance market gone. 

I settled it to keep them there, but what did they do? They 

turned around later and left the State to threaten a Federal judge, 

intimidate our legislature, and to intimidate the justice system in 

Mississippi. And I suspect that that’s what they will attempt to do 

here as well. They’ve done it in New Jersey and other States, 

threatened to leave. And I think their antitrust provisions need to 

be revoked and some regulatory authority placed over them at the 

Federal level. 

Thank you for indulging me, and I’ll try to answer any questions 

I can. 

23

[The prepared statement of Mr. Hood can be found on page 122 

of the appendix.] 

Chairman WATT. Thank you so much. I thank all three witnesses, and we will now recognize Members of Congress, subcommittee members first, for 5 minutes of questions each. 

Mr. Maurstad—I recognize myself for 5 minutes—how does this 

adjustment process actually work? If you have a private insurance 

carrier and a flood insurance policy also, who does the adjustment? 

And just talk us through how you work that. 

Mr. MAURSTAD. If the company is the State wind pool and covers 

the wind, and the flood program covers the flood, then we have an 

agreement with the State of Mississippi, the State of Alabama, the 

State of Florida, and other States, a single-adjuster program where 

one adjuster goes out and determines what the appropriate responsibility, the appropriate liability for both the State interest in the 

wind pool and the Federal interest in the flood pool, and there is 

an agreement that we will recognize that adjuster’s work. 

Chairman WATT. To whom does that adjuster report? Who is he 

answerable to? 

Mr. MAURSTAD. He is answerable to both programs, but I would 

say he is most answerable to the policyholder to make sure that 

the policyholder is treated fairly and promptly. 

Chairman WATT. Well, that would be in an ideal world, but who 

is he answerable to other than the policyholder? 

Mr. MAURSTAD. There is a preassigned, independent adjuster 

company in Mississippi. I’ll just use Mississippi as the example. 

There’s a preassigned, independent, adjusting firm that the State 

has acknowledged is going to handle these types of cases where it’s 

the State wind pool and the National Flood Insurance Program. 

And so the State reimburses them, we reimburse them, but I would 

say that there would be joint responsibility for the actions of the 

adjuster. 

Chairman WATT. Maybe I should get to the question a little bit 

more directly. Is your testimony that it’s your belief that the National Flood Insurance Program didn’t pay any claims that should 

have been paid by private insurance carriers? 

Mr. MAURSTAD. I have no knowledge at this point that there 

have been any claims that have been paid by the Flood Insurance 

Program that were wind claims that should have been paid for by 

the private sector, so we have a rigorous program of oversight to 

make sure that the Federal interest doesn’t go beyond its responsibility to the individual policyholders. 

Chairman WATT. The distinction between this wind pool and private companies— 

Mr. MAURSTAD. Well, there is a distinction. 

Chairman WATT. Okay. Well, tell us what that distinction is. 

We’re trying to get to the bottom of this so I can understand it. 

Mr. MAURSTAD. Yes, sir. The wind pool, as was indicated before, 

is the market of last resort. When a homeowner or business owner 

is not able to secure coverage in the private market, they go to the 

State wind pool to get their wind coverage, so that’s a State-run 

program. 

You will have other circumstances where you will have a policyholder, a homeowner who has a homeowner policy or a wind policy 

24

with one of the private insurance companies, that private insurance company is also a Write Your Own insurance company, and 

the Flood Program. 

Now in our arrangement that we have with the Write Your Own 

companies, they are responsible for going out and adjusting the 

claim with a single adjuster so the consumer doesn’t have to deal 

with multiple adjusters. And again that Write Your Own insurance 

company is responsible for making sure that they allocate to the 

Flood Program only damages associated with flooding. 

Chairman WATT. Let me ask the question a slightly different 

way. Are there any of the insurers in this class that the Flood Insurance Program paid? 

Mr. MAURSTAD. Mr. Chairman, I’m not sure if I understand your 

question. Are there any of the Write Your Own companies that 

were part of the class action lawsuit? 

Chairman WATT. No, I’m asking you—there’s a group of people 

whose cases were settled—I mean still in process. Did any of those 

people receive flood insurance payments? 

Mr. MAURSTAD. I think it’s very safe to say that certainly there 

were a number of them who had a National Flood Insurance policy. 

Our responsibility— 

Chairman WATT. Did the National Flood Insurance policy pay? 

Mr. MAURSTAD. Yes. 

Chairman WATT. Okay. That’s the question I was asking. 

Mr. Hood, Attorney General, maybe you can talk to us about how 

the actual process works when one has both flood insurance and 

private insurance. 

Mr. HOOD. To directly answer your question, about 630 cases 

were actually settled on the part of some private plaintiffs. Many 

of them had slabs on which they got no payment for the insurance 

company for wind—zero. That’s some of the people who were zeroed out. We know that there was damage from wind. The National 

Flood Insirance Program paid 100 percent, you know, $150,000 on 

the structure, and $100,000 on the contents of those homes. So yes, 

there was damage that was caused by wind that was not paid and 

the percentages, we don’t know the answers because of that private 

settlement. 

Chairman WATT. Okay. I’m out of time, but is there a point at 

which—for those individuals where you paid a claim and it was 

subsequently determined either through litigation, settlement, or 

otherwise—the Flood Insurance Program will be reimbursed for 

any part of what it paid? 

Mr. MAURSTAD. Our obligation under the policies— 

Chairman WATT. I just asked you a simple question—will the 

Flood Insurance Program be reimbursed for any part of what is 

paid in those circumstances? 

Mr. MAURSTAD. No, I would say no, because again, it’s my belief 

that the Flood Insurance Program only paid for the damage that 

was associated by flood or the policy limits. 

Chairman WATT. Notwithstanding a determination by a court 

and/or a settlement, you’re saying it’s your belief that you didn’t 

pay any claims that you shouldn’t have paid? 

Mr. MAURSTAD. None have come to my attention. 

25

Chairman WATT. All right. Mr. Miller is recognized for 5 minutes. 

Mr. MILLER. Following up on that question, I guess the thing 

that I’m a little bit confused about is that when you pay a claim 

associated with a flood, and the house is wiped off the foundation, 

you obviously turn policy limits. I’m assuming it’s how you settle 

it. Would part of those policy limits include something that might 

have been damaged by wind that you didn’t know about, like—I 

mean your policy limit has to include the roof, it has to include 

windows, it has to include siding, and it has to include whatever 

else might normally be damaged during a hurricane or a wind 

storm. How do you differentiate what might have been damaged 

and back that off of your settlement versus what was damaged by 

flood? 

Mr. MAURSTAD. Mr. Miller, that’s a very good question, and 

you’re right on target. But I would start out by saying that storm 

surge is a part of the flood, so if the storm surge caused damage 

to the roof for example, that you wouldn’t normally think— 

Mr. MILLER. Well, if the house is wiped out, it did damage the 

roof. 

Mr. MAURSTAD. That’s correct. And that’s part of the covered responsibility of the flood insurance program. But what we did was 

go through and do a calculation, number one, to make sure that the 

damage to the home in fact didn’t exceed the policy limits because 

we’re only going to pay what the damage was or the policy limits. 

But in most cases with the underwriting information that was 

available, with either physical observation or knowing that all that 

there is is a slab, you can do a calculation and come to a good estimate that— 

Mr. MILLER. Mr. Taylor’s comments were very, very good and I 

appreciated those, when he talked about the roof being blown off 

and that wasn’t handled by the casualty company, you know, that 

it was just passed. Was there some deduction made on flood because you figured part of it could be attributed to wind damage? 

Mr. MAURSTAD. No. Again, in the case of the flood policy, we 

would pay for all damage caused by the storm surge regardless—

it could be the roof, and we can’t differentiate that it could be and 

the policy doesn’t differentiate that it could be covered elsewhere. 

The responsibility of the policy is to pay for the damage caused by 

the flooding or the storm surge. 

Mr. MILLER. Thank you for that. And Mr. Hood, Attorney General Hood, your comment—and I guess when I made my statement, 

maybe some people misunderstood what I was trying to say. I 

think there are some deficiencies within the insurance industry, as 

far as how the States handle it and how the Federal Government 

looks at it. And there’s some crossover, and there’s something missing because what we had in your case was a Federal judge reversing a State approved policy because your State approved policy had 

anti-concurrent clause in it. Is that not correct? And that sounded 

like that was what you said that the policy had in it and that’s 

what the insurance industry used as a basis for not settling on a 

claim and passed it on to flood. Is that an accurate statement on 

my part? 

26

Mr. HOOD. Yes, sir. But the policy violated hundred year State 

law on proximate cause. 

Mr. MILLER. But did your State insurance commission approve 

insurance policies? 

Mr. HOOD. Yes. 

Mr. MILLER. That’s what I was trying to make a point of in my 

statement, that we have two things occurring here. You have a 

Federal judge ruling that something might not be appropriate or 

was improperly included within a policy, which I’m certain you had 

a reason for doing that. Yet you have a State insurance agency saying, yes, that’s part of the policy. 

Now whether the insurance industry bases their assessment 

against the homeowner for insurance based on that, I mean I’ve 

been in the building industry for 35 years, longer than that, I’m 

getting older now that I think about it. But my liability policy has 

all these exclusions, and when an insurance company writes me 

that policy, they base that assessment against me, how much I’m 

going to pay them, based on what they’re covering. 

And in California, I’ll tell you, if you have a liability policy as a 

builder, they don’t cover town homes and condominiums and they 

don’t cover hillsides, they don’t cover subsides. They don’t cover all 

those things. They write me that policy knowing that, and I guess 

my concern, and Mr. Watt, what we need to look at—and I’ve been 

arguing for 8 years in Congress about options that we might have 

as a Federal Government in oversight of the insurance agency considering all the different regulations, all the different States have, 

and they’re all applied differently, is that we have States writing 

policies that include anti-concurrent clauses, which the insurance 

companies obviously are basing their rates on that clause because 

they’re considering what their liability might be when this happens 

with a major hurricane. 

But I’m not saying who’s right, I’m not saying who’s wrong, but 

it looks like there’s a problem and that a Federal judge has to overturn a State insurance agency for writing a policy that some insurance company based their risk on. 

Now Mr. Hartwig, you said some interesting things, and one 

thing that was brought up was profit by the insurance industries, 

and I don’t know what’s excessive, and I don’t know what’s not excessive. But I know that States, the way they allow their insurance 

companies to assess premiums to people, in California, they’re not 

going to allow the Gulf Coast risks to be assessed against California, nor is—I’m assuming Mississippi or other States are going 

to allow an earthquake risk, a fire hazard risk in California being 

assessed against them and their policies. 

So I’m just curious how the insurance companies do in the States 

that had the hurricane. I mean was there a profit in those States 

when this thing was said and done? 

Mr. HARTWIG. It’s a very good question, Mr. Miller. In States 

where hurricane activity occurred in 2004 and 2005, let me give an 

example of the State of Louisiana. In Louisiana, Hurricane Katrina 

wiped out 25 years worth of homeowners premium and every dime 

of profit ever earned in the history of the State. In Mississippi, 17 

years worth of premium were wiped out, along with every dime of 

premium ever earned in the State. 

27

By law in all 50 States, and as we’ve already discussed, insurance is regulated at the State level, fundamentally the rates in 

each State must reflect the experience of that State and that State 

only. So as you’ve rightly pointed out there can be no subsidy for 

homeowners in Mississippi or Louisiana from, say, homeowners or 

drivers or worker’s compensation policies in the State of California. 

That would certainly be patently unfair. And in the same way, we 

wouldn’t expect in some other part of country that there would be 

a subsidy coming from the States of Florida or Louisiana. 

Mr. MILLER. I know my time has expired, and I thank you. There 

are so many questions to ask and so little time to do it. 

Chairman WATT. We may do a second round, so we may come 

back to you. The gentlewoman from California is recognized. 

Ms. WATERS. Thank you very much, Mr. Chairman. Quickly, Mr. 

Maurstad, I think you made the statement that the Flood Insurance Program does not deduct for wind, and I think I heard that 

the private wind insurers deduct for water. What did you mean by 

that? Do you— 

Mr. MAURSTAD. What I meant—thank you for letting me clarify. 

What I meant to say is our obligation is for the damage caused by 

floods and/or storm surge in the case on the Coast. And we can’t—

so whatever damage was assessed that was caused by those two 

perils, that’s what we have to pay, or the policy limits. And so we 

don’t really get beyond determining what was damaged, other than 

what was damaged by the flood or the storm surge. 

Ms. WATERS. Well, I know. That’s what I thought you meant. If 

you knew, or if there was some indication that some of that damage was caused by wind, you would not be paying that portion? 

Mr. MAURSTAD. Well, we couldn’t pay for that, because the policy 

doesn’t allow for damage caused solely by wind to be picked up by 

the Flood Insurance Program. 

Ms. WATERS. But as I understand it, you could have damage that 

occurred by both—some by water and some by wind. Are you telling me you do the assessment, you have the information, you just 

pay the water, you don’t pay the wind, or you don’t take any of that 

into consideration? If you have some coverage there, you pay everything? 

Mr. MAURSTAD. If we—if there is damage that’s caused by both 

flood and wind, we are obligated to pay for that damage. 

Ms. WATERS. Oh, so they do. Okay. Thank you. That clarifies 

that. Let me just ask Mr. Hartwig, as I understand it, company officials talked with each other. There was instruction to adjusters, 

and that basically what the insurance companies did is what we 

don’t allow others to do. We normally call that collusion. But since 

the insurance companies are exempted from the antitrust laws, 

they can talk to each other. Are you aware, or do you know if it 

is common practice for insurance companies to talk with each 

other, and particularly in the case of Katrina and Rita, was there 

conversation? Were there any meetings? Did people get together? 

Did they talk about how they were going to handle this? 

Mr. HARTWIG. Absolutely not. 

Ms. WATERS. I didn’t hear you. 

Mr. HARTWIG. Absolutely not. There is no law in the land that 

allows insurance companies to get together and conspire to not pay 

28

claims or to fix rates. There’s a misconception out there about the 

so-called McCarran Ferguson Act, a 62-year-old piece of legislation 

that provides a very, very narrow exemption from antitrust laws. 

What that Act does is it allows insurers to pool historical loss information and then project that information for the purposes of setting rates at some point in the future. 

The impact of this is basically to allow smaller insurers, which 

on their own don’t have the same size database as the big national 

companies in order to develop statistically actuarially sound rates. 

It allows them then to compete with the larger companies. 

So, to give you an example, in the State of Mississippi, you have, 

for instance, in the area of auto insurance, I believe 46 out of the 

47 auto insurers in that State have less than a 2 percent market 

share. It’s exactly those types of companies that benefit from that 

very narrow— 

Ms. WATERS. All right. I just want to make sure that I understand what you’re saying, because Representative Taylor has taken 

a very close look at all of this. But if you’re telling this committee 

that you are absolutely sure—and you said absolutely not, that 

there was no discussion among insurance companies about how 

they were going to handle these claims, that there was no—and I’m 

not even calling it collusion—no discussion, no sharing of information, no coming together, no instruction at all by a combination of 

two or more, then I’m going to put that in the record. 

Mr. HARTWIG. Ma’am, I am absolutely unaware of any such conversations having ever occurred. Insurers do not— 

Ms. WATERS. Okay. That’s different. You’re not aware of it. You 

don’t know that it didn’t take place? 

Mr. HARTWIG. I’m not aware of it. 

Ms. WATERS. All right. That’s good. What do you think about the 

repeal of the exemptions from—what is it? McCarran Ferguson? 

Senator Lott says that perhaps we should all be taking a look at 

that. 

Mr. HARTWIG. Well, as I just mentioned earlier on, McCarran 

Ferguson is a very narrow exemption under the antitrust law, 

which again allows basically one thing to happen and that is the 

pooling of historical information. 

Ms. WATERS. So you think that it should not be interfered with, 

it should be left as it is? 

Mr. HARTWIG. That’s correct. 

Ms. WATERS. It should not be repealed? 

Mr. HARTWIG. It would have a negative impact on competitive— 

Ms. WATERS. Okay. Quickly, on the 92 percent claims that have 

been settled, would you explain to us what ‘‘settled’’ means? Does 

that mean that there were some claims that were closed that didn’t 

get a dime? Does that mean that there were claims that were 

closed where people are very unhappy? Does that mean that everybody got something? What does that 92 percent settlement that you 

talked about mean? 

Mr. HARTWIG. For the record, as of the first anniversary of 

Katrina, the number is 95 percent. 

Ms. WATERS. Oh, excuse me. Ninety-five percent. 

Mr. HARTWIG. And I believe the number is even higher now. 

Ms. WATERS. All right. 

29

Mr. HARTWIG. But the term ‘‘settlement’’ essentially means this. 

That the insurer and the insured, the policyholder, have reached 

an agreement as to what will be paid. A sum has been paid. It 

means that the insurer— 

Ms. WATERS. So none of them did not get anything? None of 

them were zero payments? 

Mr. HARTWIG. A claim that was completely excluded, for example, because it wasn’t covered under the policy to begin with 

wouldn’t be in these statistics to begin with. 

Ms. WATERS. But you talked about the agreement between the 

insurer and the claimant. And you’re saying that there was an 

agreement that nothing was owed. Is that right? Zero in some 

cases? 

Mr. HARTWIG. A claim that is not compensable under the policy 

to begin with never rises to the definition of a claim. When a claim 

is— 

Ms. WATERS. But a claim in our—my humble opinion, whether 

we beat the strict definition, if someone said, I’ve been paying my 

premiums for 10 years. My house was damaged, and I think you 

owe me something. We consider that a claim. Now you don’t, evidently. 

Mr. HARTWIG. We consider it a claim when there is some damage 

that is compensable under the insurance policy. 

Ms. WATERS. My time is up. 

Chairman WATT. The gentlelady’s time is up, but we’ll do a second round, so— 

Ms. WATERS. Thank you. 

Chairman WATT. Okay. The gentleman from Illinois, Mr. 

Roskam. 

Mr. ROSKAM. Thank you, Mr. Chairman. I want to just follow up 

briefly on Mr. Miller’s point, because I think that really, as I’m listening, is sort of the main point. What we have here is a disputed 

insurance contract essentially, and Mr. Hood, I’m directing this towards you. So the pending litigation essentially is regarding the 

use of the—what is the term of art that we’ve talked about? The 

nonexclusionary? 

Mr. HOOD. Anti-concurrent clause. 

Mr. ROSKAM. Anti-concurrent clause. And so, the—Mr. Miller’s 

point was that that has been—that was approved by the State. It 

was allowed to be offered, and now you’re challenging it based on—

it’s not a fraud theory, is it? What’s your theory? 

Mr. HOOD. There are several consumer protection laws applicable. All States would apply to this issue as well, I would think. 

Consumer protection, ambiguous provisions, void as against public 

policy, it violates State law. 

Mr. ROSKAM. Okay. So then as we’re moving—and that’s really 

an open claim. I mean, the Federal judge is going to make a decision, or the circuit court judge—the district court judge has made 

a decision, and I assume it’s on appeal? 

Mr. HOOD. Yes, sir, that’s correct. 

Mr. ROSKAM. Okay. And then the larger question is, how do you 

create the environment where companies want to come in and do 

business in your State? That’s really the rub of it. And you’re not 

suggesting that State Farm, for example, has an obligation to do 

30

business in your State or that they somehow violated the settlement agreement, are you? 

Mr. HOOD. As far as the settlement agreement in Federal district 

court— 

Mr. ROSKAM. Well, I assume the settlement agreement that you 

structured? 

Mr. HOOD. They entered into a State court order in State court 

agreeing to go establish a class and have it approved by the Federal court. There’s a hearing going on right now in Federal court 

about that, so it’s not—we’re unsure at this point whether they’re 

going to be able to get it approved on their terms. 

But as far as the anti-concurrent clause provision goes, I suspect, 

you know, you only challenge laws when you have such catastrophic events as this. The California earthquake, you probably 

wouldn’t have an anti-concurrent clause provision because you 

don’t have water in that situation. 

But were it to be challenged in other States just simply on the 

consumer protection laws, I suspect in all 50 States it may very 

well fail. Because what you’re doing is you’re selling someone something and you’re giving them nothing. Because in a hurricane, 

storm surge causes 85 percent of the damage, and if you try to put 

in the fine print—and nowhere in these policies—nowhere—do they 

ever say the words ‘‘storm surge.’’ 

If you try to take that away without notifying the consumer and 

take away 85 percent of the damage from a hurricane, it’s sort of 

akin to a bait-and-switch, so I suppose that consumer protection 

laws in all States may apply. 

And, Mr. Miller, that goes back to your question of how do they 

assume risk in those States. I think most companies in Mississippi 

other than State Farm didn’t abuse that provision. They didn’t 

push it. They didn’t zero people out. Some paid something to stay 

away from bad faith jury instructions. And so others did not necessarily use that, as did State Farm. 

Mr. ROSKAM. Let’s assume for the sake of argument that the appellate court upholds the district court ruling, and I assume the 

order reads, you know, essentially void—you know, voids the contracts under a public policy argument, which is essentially what 

you’re suggesting—then, how do you move forward and create an 

environment where carriers want to come in and insure your insureds? See, I don’t have this problem. 

And I mentioned this in my opening statement. I come from a 

State where people want to do a lot of business and where insurance companies are—they’re kept on a short regulatory leash, but 

it’s not ridiculous. 

And I’ve been involved in my previous—before I came here, in 

terms of litigation, and have had some of these battles as it relates 

to, you know, how an insurance policy is interpreted, and I’ve been 

very aggressive in how those have been construed, and you win 

some and you lose some. 

But it strikes me that what will end up happening here, if you’re 

successful all the way up the food chain, is that you’re going to get 

to the point where Mr. Miller suggested, okay, they just rewrite all 

the policies. And you win in the short run. Claimants win this 5 

percent or whatever it is, which is your job as the attorney general. 

31

But you can win the battle and lose the war, right? You can get 

to the point where a large carrier says these people are high maintenance and complicated, and we’re not going to go into jurisdictions where people—and I’m not suggesting any bad faith here on 

the part of the judge or whatever, but, you know, it’s getting like 

everybody is a claimant or knows a claimant, and so they kind of 

may feel, how do you get a fair shake in this area? We’re not going 

to go into jurisdictions that are going to take our insurance contracts and act like they’re an etch-a-sketch and rewrite them for 

us? 

And how do you then as the policymaker, or how do you as the 

chief law enforcement officer in your State, create the environment 

where a carrier says that’s a place we want to do business? Because taxpayers in my area don’t want to subsidize coastal living 

in your area. 

Mr. HOOD. Yes, sir. There are several answers involved in your 

question as far as—that’s why I reached a settlement with State 

Farm, was to keep them in Mississippi. Because, you see, after a 

storm, all the companies want to flee, especially one like this. And 

so our objective was to keep as many there as possible, and that’s 

what they had indicated that they would do is stay in Mississippi. 

Because you really—I mean, if you don’t have insurance, you can’t 

rebuild, even if you get the money, you know, you can’t rebuild. So 

we realize that. We want to create that market. But as to the issue 

of what the Federal judge did, I suppose there again, these policy 

provisions are not tested. They’re approved by an insurance commissioner who’s not a lawyer, has no idea of what the separate 

branch of government, our courts, have established as proximate 

cause. You can’t enter into an illegal provision in a contract. You 

can’t contract to kill someone. 

So if this provision violates State law, and I would respectfully 

submit, even in Illinois, where State Farm is located, they’re probably—their proximate cause law would be violated by these anticoncurrent cause provisions. So it’s not void as against public policy. That was one of the issues you asked that I raised in State 

court. The Federal judge issued it as violating a long-standing 

State proximate cause provisions. 

And so to create an environment to keep them there is what 

we’re trying to encourage them to do, and that’s why we’re asking 

Congress for something, because they can punish Mississippi. 

That’s why they pulled out. They pulled out because of that judge’s 

decision, but it only affects storm surge areas where those provisions apply, just down on our coast. 

It doesn’t affect northern Mississippi where my good friends that 

sell the insurance for them are being punished because they can’t 

sell new policies for State Farm. It was meant to punish Mississippi and to make an example and to scare us into doing things. 

State Farm’s 9 months in those six—they made $6.8 billion net 

profit. That’s more than the Federal Government gave us, and 

thank goodness for what you all did of sending us money to try to 

help rebuild, but we’re just now getting that money on the ground. 

And so we settled this to try to complement that, to allow people 

to rebuild. And we want those companies to stay, and we’re trying 

32

to do all we can to encourage them to stay, but be punished by 

them. 

Chairman WATT. The gentleman’s time has expired. The 

gentlelady from New York, Mrs. McCarthy, is recognized for 5 minutes. 

Mrs. MCCARTHY. I thank you. Listening to this, I certainly hope, 

Mr. Hood, that when you go back and everything is kind of settled 

down, that you’ll start reaching out to other attorneys general 

throughout the State and have them change how the language is 

written. I’ve been reading since I got here, and you’d have to be a 

genius to figure out what’s insured and what’s not insured. I mean, 

you really do. 

I know when I came back from New Orleans, I looked at my insurance policy. I’m inland, and I had no idea whether I needed 

flood insurance, but I wasn’t going to take the chance. I found out 

I actually did need flood insurance, which brings me back to 

FEMA. I was told that FEMA was redoing all the maps along the 

areas. And I was just wondering, has your budget for 2008 increased differently from 2007 so that you’ll have the money to 

bring up the flood maps? Because from what I understand, a lot 

of people didn’t know they were in a flood zone. 

Mr. MAURSTAD. We are in the midst of, I believe, the third year 

of a 5-year flood map modernization effort. It’s a billion dollar effort 

by the Congress. It’s $200 million a year, along with approximately 

$50 million from the National Flood Insurance Fund to update our 

maps. 

The Gulf Coast area was in the process of being updated. In fact, 

some parts of the Mississippi coast, and some parts of the Louisiana coast were within a couple of months of having new preliminary maps provided to the communities to start the adoption process. 

Clearly, the hurricanes changed the coastline, changed the dynamics, and we are continuing in the process and have the funding 

in place to provide new digital flood maps for the Gulf Coast area. 

We’re hopeful to have— 

Mrs. MCCARTHY. With that, are you working with the right government—you know, mortgages. Are you—how are you telling people you need to get flood insurance, especially if they have a government-backed mortgage? 

Mr. MAURSTAD. Sure. 

Mrs. MCCARTHY. Shouldn’t that be mandatory, by the way? 

Mr. MAURSTAD. It is mandatory in the 1 percent annual chance 

high risk area, and it is mandatory for all federally backed mortgages. Of course, there are people with other than federally backed 

mortgages, people without mortgages who aren’t— 

Mrs. MCCARTHY. I don’t see people along the coast in these mega 

homes having a government mortgage for some reason. 

Mr. MAURSTAD. Any federally backed mortgage. And so it’s the 

responsibility of the lender community to make sure that those 

that are under the mandatory purchase requirements of the Federal law, that they in fact, the person receiving the loan does have 

a flood insurance policy. But there are many areas that were outside the 1 percent annual chance that were affected by this storm, 

because it was a greater than a 100-year event. 

33

To get to your question, what are we doing, we have a public 

education and outreach and awareness program, Flood Smart, to 

try to get people more attuned to what their risk is. That’s an obligation I mentioned in my testimony of the program. And that takes 

all of the partners; the lenders, the real estate, the insurance 

agents, the insurance industry, and local elected officials who adopt 

flood plain management. It’s all of our responsibility to make sure 

that people who are supposed to have a flood policy in a high risk 

area do have that policy. 

Mrs. MCCARTHY. Thank you. Mr. Hood, I’m just wondering, in 

your State, and I don’t know how it even works in my State of New 

York, who picks those—we have an insurance commission, and 

they go over, if the insurance company comes in and says all right, 

here’s the wording, who picks the the commissioners, and who’s 

watching them? And why are they accepting the kind of language 

that even probably a very well educated person wouldn’t be able to 

figure out what the heck they’re talking about? 

Mr. HOOD. That’s—in Mississippi, it’s an elected insurance commissioner, and I think in the majority of States, it is an elected position, and it’s his or her duty to approve those contracts as they 

come in. 

Mrs. MCCARTHY. Does that mean that person has to run for office? 

Mr. HOOD. Yes, ma’am. 

Mrs. MCCARTHY. Does that mean that person has to raise a lot 

of money? 

Mr. HOOD. Yes, ma’am. 

Mrs. MCCARTHY. No, I’m not going to ask that question. I’ll get 

in trouble. 

Mr. HARTWIG. Ma’am, just for the record, the majority of insurance commissioners in the country are appointed. I think there are 

only about 11 or so who are elected. 

Mrs. MCCARTHY. But that’s the point. Because I know in New 

York they’re actually appointed. The whole thing comes down to 

I’m actually wondering who is actually protecting the consumer. 

Because again, I’ve been reading this for probably a couple of 

months since I came back from—and you can’t make sense. I went 

to my insurance agent, who I’ve had since I was 18 years old, and 

I said, all right. Tell me what I have? Because, blindly, I thought 

he was protecting me. And I asked him what I had, what am I covered? 

And then I started, to be very honest with you, because most 

people don’t go through—you know as well as I do, if you take out 

insurance, this is what you’re getting. And the further back you go, 

because I did look at my insurance, the smaller the print, and you 

have to figure out what each word means. The average consumer 

is not going to do that, and they will not. So a lot of things are hidden in here. All right. Consumer beware. Fine. That means our 

committee or other committees on financial services can certainly 

try to make that a difference on the Federal level. 

But I hope that, Mr. Hood, you do go back and start talking to 

the attorneys general, because to me, as far as I’m concerned, I met 

with our insurance companies back on Long Island, and I said, 

‘‘Listen, I know that you you’re concerned about—you know, beVerDate 0ct 09 2002 11:36 May 31, 2007 Jkt 035288 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\34677.TXT HFIN PsN: TERRIE
34

cause we’re Long Island. It’s water. We had heard they were thinking of pulling out, and I met with all of them. No, we’re not pulling 

out, you know, we haven’t had a hurricane. We did a press conference so we could reassure my constituents and other constituents in the New York area. In 10 days they announced that they 

were—stopped writing, and were going to start pulling out. No 

New York again. They’re only allowed to pull out 4 percent a year. 

So every year, they are pulling out. And personally, I think it’s obscene what they’re doing. 

With that, I yield back the balance of my time. 

Chairman WATT. I thank the gentlewoman. Mr. Mahoney from 

Florida is recognized for 5 minutes. 

Mr. MAHONEY. Thank you, very much. I just have a couple of 

questions. I represent a district, Florida 16, which has eight counties, and up until that fateful morning in August when Katrina 

slammed into the Gulf Coast, it was the site of the single biggest 

natural disaster in North America. My district has been hit no less 

than 4 times in 2 years, and one of my communities, Punta Gorda, 

is still missing about 70 percent of its downtown as a result of a 

hurricane. So this is something near and dear to me. Mr. Hartwig, 

I believe you were giving some statistics about the year that 

Katrina hit, as far as what happened in the States of Mississippi 

and Louisiana. Could you repeat that to me in terms of what the 

loss was and— 

Mr. HARTWIG. In terms of the amount of premium that was 

washed away? 

Mr. MAHONEY. Yes. 

Mr. HARTWIG. I believe in the State of Louisiana it was 25 years 

worth of homeowners’ insurance premium and every dime of profit 

ever earned, and in Mississippi it was 17 years. 

Mr. MAHONEY. Okay. And that was in 2005? 

Mr. HARTWIG. Correct. 

Mr. MAHONEY. Okay. In 2005, when the dust was all settled, 

what were the profits to the homeowners insurance industry nationwide? 

Mr. HARTWIG. Nationwide, including every type of insurance sold everywhere in the United States, all 50 States, was $43 billion approximately that year. 

Mr. MAHONEY. And that’s homeowners insurance? 

Mr. HARTWIG. No. That’s every type of insurance. 

Mr. MAHONEY. What do you mean by every type? 

Mr. HARTWIG. That would include all types of property casualty 

insurance, everything from worker’s compensation to auto policies 

to commercial general liability policies. 

Mr. MAHONEY. Do you know the answer—let me ask you this 

question—do you have a number on what profits were made on 

homeowners insurance? 

Mr. HARTWIG. In which year? 

Mr. MAHONEY. In 2005. 

Mr. HARTWIG. In 2005 on a national basis, it would have been 

a negative number, but I don’t know the figure. 

Mr. MAHONEY. Okay. And over 25 years, is it a negative number? 

Mr. HARTWIG. Over 25 years in terms of underwriting profit, yes, 

it’s a large negative number. 

35

Mr. MAHONEY. So— 

Mr. HARTWIG. Homeowners business, yes, on a national basis, if 

you went back 25 years, has actually been a money losing proposition for property casualty. 

Chairman WATT. Would the gentleman yield for a second? 

Mr. MAHONEY. Yes. 

Chairman WATT. Are you saying that insurance companies are 

making their money on investments as opposed to premiums? 

Mr. HARTWIG. Insurance companies do make some money on investments. However, homeowners insurance has been racked by 

many major catastrophes. If you go back not just to 2004, 2005, you 

can go back to earthquakes in California, you can go back to Hurricane Andrew, which at the time was the largest disaster in history. 

And again, it doesn’t make a lot of sense to look at these numbers 

on a national basis. 

Chairman WATT. I’ll yield back to the gentleman. 

Mr. MAHONEY. Yes. Let me ask the question a different way. 

What you’re testifying to today is the fact that if you took all the 

premiums and the money that you made investing in this premiums versus the losses in homeowners insurance, that it’s a net 

negative number for the insurance industry? 

Mr. HARTWIG. That’s correct, yes. 

Mr. MAHONEY. Over the last 25 years? 

Mr. HARTWIG. Yes it is, sir. 

Mr. MAHONEY. Okay. And so the next question is, is why does 

the industry—why do people stay in the industry of providing 

homeowners insurance if it’s a money-losing proposition? 

Mr. HARTWIG. In some States, it’s not a money-losing proposition. 

I’m giving you the numbers in the aggregate. For example, in a 

State like Illinois, it’s a profitable proposition. But, particularly in 

the last 15 to 20 years, it’s become a very, very difficult situation, 

particularly in the more catastrophe-prone areas of the country, 

and that has a tendency to drive up the overall loss numbers on 

a national basis. 

In many States it can be profitable. However, the size of the catastrophes are so large, particularly since, really if you go back to 

Hurricane Hugo in 1989, which is now quite some time ago, the 

losses in aggregate exceed the actual premiums and investment income. 

Mr. MAHONEY. Okay. Let me ask you another question, Mr. 

Hartwig, given the fact, what you’re saying now is the fact that a 

handful of storms over the last 25 years has resulted in wiping out 

the profits of the homeowners insurance portion of your industry? 

Mr. HARTWIG. There were, I think, 29 named storms in 2005. I 

believe there were about 18 or 19 in 2004. There have probably 

been over 100 named storms. 

Mr. MAHONEY. But those 29 storms have basically wiped out the 

profits for that portion of your industry? 

Mr. HARTWIG. The profitability in the insurance industry is going 

to be something that is both cyclical in nature and volatile. 

Mr. MAHONEY. I’m just looking for a yes or no. I mean, you said 

that homeowners insurance in the last 25 years has been a moneylosing proposition, correct? 

Mr. HARTWIG. In the aggregate, yes, on a cumulative basis. 

36

Mr. MAHONEY. Right. And I’m just saying that basically these 

are coming from a relatively small number of storms, right? That 

has wiped out the profit. 

Mr. HARTWIG. In relative terms, it seems that the number is 

growing. 

Mr. MAHONEY. Okay. No, but I’m just—you know, I just want to 

make sure that I understand what we’re talking about here. So I 

guess the next question I’m asking you is, is that, well, obviously 

it says that it’s very important where you write and where you 

don’t write, because if you write in the right places, you can make 

money, and if you write in the wrong places, like in my district, 

you can’t make money? 

Mr. HARTWIG. Well, actually, the reality is, is that if insurers are 

given the right conditions, they can operate under very risky conditions. 

Mr. MAHONEY. Okay. So that’s my next question, which is, given 

the situation where we need to have an insurance industry and 

people who the average American’s investment in their home is 

their single biggest asset, and the fact that the insurance industry 

is, you know, an American industry and we’re all Americans and 

we need to make sure that we help people, what would you recommend from the insurance industry’s perspective to be able to 

provide coverage to people in these higher risk areas? 

Mr. HARTWIG. I’m glad you asked that question, because that’s 

a very fundamental question facing the country today, not necessarily just in areas prone to hurricanes, but across the country. 

What we need to do in this country is redouble our efforts to 

strengthen building codes, for example, and Florida has been a 

leader there, but there’s much more that can be done. Places like 

California have also done a lot in terms of retrofitting. 

We need to provide coastal dwellers with incentives to retrofit 

and to mitigate their homes against disasters, and not only does 

that preserve their homes, of course, but it preserves lives. 

Better land use policies would be another way to go. We do have 

in this country, despite the fact that we’ve been raked by hurricanes, we have an extraordinary amount of development in very, 

very vulnerable areas. And so, as I mentioned during my testimony, there’s currently about $2 trillion worth of insured coastal 

exposure in Florida. But despite the insurance issues that we’ve 

heard about today, that continues to grow at about a 10 percent 

annual rate. So, land use policies are very important, because otherwise, we’re on the steady, upward trajectory towards ever greater 

losses. 

And of course, we need a commitment by legislators, regulators, 

and others to allow risk-based pricing to prevail everywhere across 

the country, including areas prone to mega disasters. 

Mr. MAHONEY. Would you yield me 1 more minute? 

Chairman WATT. I ask unanimous consent for 1 additional 

minute for the gentleman. 

Mr. MAHONEY. Okay. Really quickly, I’d like to ask the Attorney 

General, Mr. Hood, what do you think, based upon your most 

harrowing experience that you’ve just gone through? What would 

you recommend that we should do from a consumer perspective to 

37

make sure that we’re providing adequate homeowners insurance 

coverage for people in our States? 

Mr. HOOD. I think we either need to have an all-risk policy and 

require the private companies to write it in all areas of the Nation 

in order to be licensed anywhere in the Nation, or we do what Congressman Taylor has suggested, having a Federal program to pick 

them both up. Because there is a natural conflict of interest when 

you send out an adjuster who is working for both, allegedly, to 

dump off on the taxpayer. 

So I think we need fundamental reform in that area. 

Mr. MAHONEY. Thank you. 

Chairman WATT. Let me, in the interest of fairness, ask unanimous consent that a chart—maybe I should just put the whole report in, since I don’t want to appear to be unfair. 

I ask unanimous consent to submit for the record a document 

prepared, the title of which is ‘‘Property Casualty Insurance in 

2007: Overpriced Insurance, Underpaid Claims, Declining Losses 

and Unjustified Profits,’’ in which there is a chart on page 19 that 

indicates that—that gives the profit and loss ratios for the top 

seven property casualty insurers and indicates that the industry 

net income for 2005 was 48.8 percent—I’m sorry—$48.8 billion. 

And in the interest of fairness to Mr. Hartwig, I was looking at 

your testimony to see if you had submitted any information to justify the numbers that you were giving us, and noticed that you did 

not attach any to your testimony. But in the interest of fairness, 

I would invite you to submit whatever report you’re working from, 

and we will enter that into the record also. 

I’m only interested in getting a fair picture here, and I’m not trying to get into a debate about whether insurance companies are 

making profits or not making profits. 

Mr. HARTWIG. And I’ll be happy to supply that information, 

which will show insurer profitability over a very long period of 

time, and just for the record, for the 19th consecutive year in 2006, 

the property casualty insurance industry reported a lower return 

on equity in aggregate than did the Fortune 500 group. 

Chairman WATT. Well, that’s fine. The report I’m looking at goes 

back to 1987, and the only negative year for the industry, according 

to this report, was 1992, of $2.7 billion loss for the industry. 

Mr. HARTWIG. Well— 

Chairman WATT. Every other—no, I’m sorry, 2001 was the other 

negative year, $6.7 billion loss. But the facts will be as they are. 

Both reports, whatever you submit, and this report, will be in the 

record, and it will help us to try to get a more balanced perspective 

on what we have. So we thank you for submitting that. 

We have now completed the first round for the committee members, and we have already approved a unanimous consent request 

to allow nonmembers of the subcommittee to ask questions. And I 

would now recognize Mr. Melancon for 5 minutes for questions. 

Mr. MELANCON. Mr. Chairman—and I wasn’t in the room when 

we started the initial—this hearing on this committee or this 

panel. As the Oversight Committee, are we doing swearing in of 

witnesses and panel? 

Chairman WATT. We have not. 

38

Mr. MELANCON. We have not? Okay. Mr. Hartwig, I guess let me 

ask you a few questions if I can. Insurance business is risk takers 

and pooling of moneys to share—to cover losses and expenses. Is 

that correct? 

Mr. HARTWIG. That’s correct. 

Mr. MELANCON. Okay. Through the years as you go, and I’ve 

looked at some of the returns—the statements on companies, when 

in fact you had hard markets, soft markets, profits were made either in the insurance business because you raised rates, or in the 

investment side because you had dropped the rates, and so you 

could lose 105 percent as long as you made your money on the investment side. And is that not an uncommon practice? 

Mr. HARTWIG. Insurers do earn, attempt to earn money on the 

investment side of the equation. Of course, we have to make it 

through days like yesterday where the stock market drops 400 percent—400 points. But it’s also important, of course, that insurers 

day in and day out do their job in terms of quality underwriting. 

Chairman WATT. Just for the gentleman’s information, I wanted 

to start the hearing with a moment of silence for the stock market 

yesterday. 

Mr. MELANCON. Yes, 2001 wasn’t pretty, and if this keeps up, it 

won’t be pretty again. So I guess what I’m looking at and thoughts 

that I’m having is this. During those soft markets, if homeowners 

insurance is a loss leader or a problem for insurance carriers, why 

in fact are they discounting their rates in competition with each 

other to go buy more business? Because that’s what they’re doing 

by lowering their rates. 

And when the market is hard, they’re bringing them up, they’re 

restrictive on what they want to write. And part of the problem, 

if you’re correct in what you say that the losses in Louisiana would 

have been over the last 25 years of premium, is that not because 

the insurance companies are playing games with their rates and 

then doing investment side earnings? 

And had they stayed at actuarially sound rates, which was a 

term that used to be used about 25 years ago, actuarially sound 

rates, and put the reserves away rather than paying dividends to 

the stockholders and bonus packages and severance packages to 

their executives and getting into this reinsurance market which allowed them instead of putting a million dollars in reserve to put 

a quarter of a million, and then use the three-quarters of a million 

in hopes that they wouldn’t have the losses, reinsurance would 

take it, and then they could disburse profits again? 

So the question or the point I’m trying to come to, to find out is, 

had they kept actuarially sound rates and not played the game of 

up and down competition based upon what the stock market and 

investments were doing, would those numbers be the same in 

losses in the States of Louisiana and Mississippi? 

Mr. HARTWIG. Insurers have made every effort to keep their 

rates actuarially sound. They are regulated in such a way at the 

State level. They have to charge rates that are adequate by law. 

They can’t be excessive, but they must also by law be adequate. 

They are also independently reviewed in terms of their total financial situation by ratings agencies. 

39

We are one of the most regulated industries in the country, both 

in terms of rates, but also in terms of solvency. So—but occasionally, there are changes in the risk profile of parts of the country, 

such as the Southeast, where we’re being told by the leading minds 

in meteorology that the next 15 to 20 years are going to be characterized by more frequent and more severe storms. 

So what that means is insurers are going to have to adjust to 

that higher plateau of risk, and part of that adjustment means that 

rates will need to be commensurate with that risk, but it means 

many other things, many of the things I mentioned earlier on in 

terms of further strengthening of homes and encouraging mitigation. 

Mr. MELANCON. And that’s all well and fine, but agents are encouraged by companies to discount and to go find those risks, to 

write the volumes and to produce the volumes so that they can 

have the volumes they need. Now what happens to me in Louisiana, and it happens in every other State, is that the agents are 

as threatened by the insurance companies’ threats to pull out, because that’s their livelihood, as Mr. Hood said. And so they’re out 

there, and they don’t want you to do anything to them. 

Now I’ve always been a State’s rights person, but I’m starting to 

wonder whether that’s the right position to be in. And I’ve always 

been against Federal control. But—and I don’t have a problem with 

regulations at State level. 

But what I do have a problem with, and I guess the question is, 

is you’re taking pooled money. I’m Zurich Insurance, I’m Cigna, I’m 

INA, whatever, you’re taking pooled money, not necessarily subsidized by any other area of the country, if you are doing actuarial 

rates. 

If you were doing actuarial rates, then your rate structure for the 

Gulf Coast or the coastal areas of this country should have been 

adequate, particularly over the long run, to cover the losses. Is that 

not correct? 

Mr. HARTWIG. I think that if insurers had perfect knowledge of 

the future, which they don’t, which the greatest minds in meteorology don’t, which the regulators in the States of Mississippi and 

Louisiana do not, then it is impossible to forecast with complete accuracy what expected losses are. Effectively what you’re saying is 

how come we didn’t foresee the day and date and the magnitude 

of Hurricane Katrina? I don’t believe that’s a reasonable thing to 

request of insurers. But what we can do is gather the evidence, 

gather the science and adjust our rates and our underwriting so 

that we can provide for a better environment in a sound and financially secure insurance industry that can operate in these areas. 

Mr. MELANCON. Now, Mr. Chairman, if I could then. The 2 years 

that you talked about that were statistically losses, if we could take 

a look at what the stock market performance was, if you could get 

the staff to do that, look at that and see what the rate structures, 

if we could get that from the insurance companies, the Insurance 

Institute, and let’s see were they discounting more, was the market 

performing higher, so were you not taking discounts to buy business? I mean, that’s—and that’s an industry thing. I was on that 

side at one time. 

40

Mr. HARTWIG. First of all, this notion that agents, for example, 

are encouraged to produce nothing but volume is completely incorrect. 

Mr. MELANCON. I beg to differ. 

Mr. HARTWIG. Anybody can produce volume. The question is, can 

you produce volume profitably? In other words, can you wisely underwrite your business? No company can survive on a volumebased model on its own. 

In terms of the investment income situation, State regulators explicitly require insurers to incorporate the expected returns on the 

investment portfolio for the benefit of policyholders. I worked for 

many years in a rating context and testified at rate hearings 

around the country, and that was my job to actually estimate what 

the offset factor was for investment income, because by law, it accrues, at least in the area of worker’s compensation, to the policyholder. 

Chairman WATT. The gentleman’s time has expired, and I recognize Mr. Taylor for 5 minutes. 

Mr. TAYLOR. Thank you, Mr. Chairman. Mr. Chairman, I want 

to enter into the record two letters, both claim to be signed by the 

same claims adjuster, that involve a couple standing over there, 

and that would be James and Jo Dell Beckham. 

In the first letter, the agent who is doing the adjusting for State 

Farm says: ‘‘Hurricane Katrina demolished the structure, the superstructure of the residence such that only the concrete slab of the 

home was left. High winds and flooding forces from Hurricane 

Katrina were both significant in structure to the damage. There 

was significant physical evidence’’—‘‘There is insufficient physical 

evidence to determine the proportion of the wind versus water 

surge.’’ 

A couple of days later, another form shows up. It’s allegedly 

signed by the same person. It says: ‘‘Storm surge from Hurricane 

Katrina destroyed the residential building.’’ This was signed by 

Paul Monie. 

Only one problem, Dr. Hartwig, Paul Monie says he never signed 

that second letter, that he had submitted it as a fraud, with a 

fraudulent signature of his, and that fraud went on to be quoted 

by State Farm when they wrote the Beckhams and said, ‘‘Based 

upon the results of the discussion, site inspection and investigation, 

it has been determined that damage to your property was caused 

by flooding, rising water, tidal surge.’’ 

Now that is an agent hired by State Farm, who submits a form 

that says these folks’ residence was destroyed by a combination of 

wind and water. The second letter comes out that he claims is a 

forgery, and State Farm denies their claim based on this. I’m just 

curious. As a part of the Insurance Information Institute, how 

would you classify that? 

Mr. HARTWIG. Sir, I can’t— 

Chairman WATT. And before you respond, let me just do a couple 

of things for the record. Let the record show that the people to 

whom Representative Taylor referred are here with us today. 

Mr. TAYLOR. Would you raise your hands, please, Mr. and Mrs. 

Beckham? Thank you. 

41

Chairman WATT. And, without objection, we will enter both of 

those things into the record. 

Now, Dr. Hartwig? 

Mr. HARTWIG. Thank you. Obviously, I have not seen these letters, and I cannot comment on any specific claim involving any specific company. 

Mr. TAYLOR. Okay. If I may. I did pass to you a copy of a memorandum that State Farm sent out to their employees shortly after 

the hurricane, and I’m quoting: ‘‘Damage to property caused by 

flood waters with available flood policy. Where wind acts concurrently with flooding to cause damage to the insured’s property, coverage for the loss exists only under flood coverage.’’ 

Now that is instruction from headquarters Illinois to claims 

agents down in south Mississippi. It’s really a question for both you 

and the head of the Flood Insurance Program. I’m curious when 

you said on behalf of the Flood Insurance Program that there was 

wind and water, and you’re going to pay. Because I’m wondering 

what’s your legal authority to make that statement? 

And let me walk back. The director from the Insurance Institute 

says that, you know, claims were paid expeditiously. In many instances, claims were paid that day. You know, it’s kind of funny, 

because I remember when the two ladies from State Farm came to 

my property, and I walked them about 300 yards from where my 

house used to be, and showed them pieces of my roof then asked 

them to count the steps back to my house. 

And I said, okay—and I purposely asked them not to say a thing. 

And then we got back to my house. I said, okay, ladies, what did 

you see? After showing them my tin roof about 300 yards from 

where my house used to be, the first words out of their mouth 

were, ‘‘We see no evidence of wind damage.’’ To which I asked 

them, what were the floating characteristics of tin? And I offered 

to walk them over to the bay, throw a piece of tin in there and 

show that it didn’t float. Which tells me that in one instance, State 

Farm had already told those ladies, blame it all on the water. 

And we have a Federal agency that’s supposed to be responsible 

for looking out for the taxpayer saying, yes, let them stick it to the 

taxpayers. I mean, I shouldn’t be surprised. After all, this is an 

agency that paid $16,000 per trailer to haul a travel trailer from 

Purvis, Mississippi, down to the coast, about 60 miles, plug it in, 

hook it up to a water hose and hook it up to a sewer tap. I mean, 

it’s not like you guys have distinguished yourselves as good stewards of the Federal dollar. 

But on the flip side, in this instance, you are literally the puppets of the insurance industry. You have a responsibility to the 

Federal taxpayer—and I have to admit I have mixed feelings on 

this. I think it’s great that people got their flood policies. They 

needed that. In fact, National was the only insurance agency that 

was really fair with people down there. 

The flip side is, I think the taxpayers got stuck with bills that 

State Farm, Nationwide, USAA, and others should have paid. And 

I’m appalled that no one in your agency was looking for things like 

this gentleman’s forged engineering reports. Can you think of any 

other Federal agency where someone can send the Nation a bill for 

42

$100,000, $150,000, or $250,000 and nobody ever looks to see if we 

really have to pay it? But that’s what you did. 

Well, you said you didn’t find any discrepancies, to which I want 

to ask, how many times did you look? And did you look very hard? 

And did you bother to look into this instance? And I’d like both of 

you to answer those questions. 

Mr. MAURSTAD. Well, let me start, sir, I mean, we take very seriously our responsibility to only pay what the program is responsible and obligated to pay for the damages caused by flooding 

under the flooding policy. We take it very seriously. We have a very 

rigorous program of oversight in place. 

We—and so I don’t— 

Mr. TAYLOR. Would you walk us through that policy? Because I 

didn’t—as a citizen, I saw zero evidence of that oversight. 

Mr. MAURSTAD. Well, there are a number of ways that we did it. 

I included it in my testimony, my written testimony, and alluded 

to it in my oral testimony. We have—assignment of the liability of 

the policies is a part of the responsibility of the random selections 

that are done to oversight the policies by general adjusters representing the program. We do random audits. 

We do—whenever requested by either the policyholders, but the 

insurance companies sometimes go out and review to make sure 

that the amounts are being appropriately paid. It’s handled in audits of the company’s performance. So there are a number of ways, 

and I will provide you with the detailed oversight that we have in 

place to make sure that what you’re talking about does not occur. 

It would be a violation of the arrangement between the write your 

own companies and the National Flood Insurance Program. 

It’s also a very—from the company’s point of view, even though 

this was a large disaster, still a very small part of their overall operations. And they have told me on many occasions, they’re not 

going to risk their reputation and their brand on small items such 

as we’re talking about here— 

Mr. TAYLOR. Mr. Maurstad, if I may. 

Mr. MAURSTAD.—notwithstanding your individual claim, the circumstances are that there are processes in place, and there’s no incentive for the companies to get caught with their hand in the 

cookie jar. 

Mr. TAYLOR. Well, to that point, Mr. Maurstad, and I’m going to 

go back to my individual circumstance. Those ladies were prepared 

to give me, and did give me a check that day. Can you think of any 

other Federal agency that allows a private company to write a 

$200,000 check that day without anyone looking over their shoulder? 

Chairman WATT. The gentleman’s time has expired, so I’m not 

going to let him ask another question, but I’m going to let these 

two gentlemen respond. 

Mr. MAURSTAD. There might not have been anyone looking over 

their shoulder that day, but that file would be reviewed, and it 

would be made certain that they didn’t pay for more than what you 

should have been paid under your National Flood Insurance policy. 

Mr. TAYLOR. But you accepted their statement that— 

Chairman WATT. The gentleman’s time has expired. I’m sorry. 

43

Mr. MAURSTAD. Let me—if I could just conclude, because I gave 

a slightly insufficient answer. If I could elaborate just a bit. 

Chairman WATT. Well, I don’t want to cut you off, Mr. Maurstad, 

but what you are saying now seems to be inconsistent with what 

you said before. Because I gave you the opportunity to tell me 

whether The National Flood Insurance Program had overpaid any 

claims. You say that you’re not looking at it on a daily basis, but 

that you’re reviewing later, and you determined that none of these 

claims were overpaid. So it seems to me that you are already on 

the record on this question. 

Dr. Hartwig, there was another question that I can’t remember 

what it was that you’ve been called on to respond to. If you remember the question, we’ll get your response. 

Mr. HARTWIG. I don’t remember what it was either. 

Chairman WATT. But we need it quickly. 

Mr. HARTWIG. Well, let me just respond this way, that insurers 

make every effort to pay every amount that is due under the terms 

of the insurance contract for the types of coverage for which people 

purchased that policy. And so insurers and adjusters work diligently to make sure that occurs. 

And getting back to the numbers, again, $41 billion, the lion’s 

share of that being in the homeowners area, is really a demonstration of the fact that our insurers are doing that. And let me just 

put things in proportion. Even in the cases of slab claims, for instance, in the majority of those cases, to my knowledge, insurers 

were paying money as well. So, this notion that there was some 

sort of blanket denial of various types of claims is untrue. 

Chairman WATT. Thank you. The gentleman from Mississippi, 

Mr. Thompson is recognized for questions for 5 minutes. 

Mr. THOMPSON. Thank you very much, Mr. Chairman. Attorney 

General Hood, as you know, I represent a portion of the district 

that received some damage from Katrina, and I know that you 

have been investigating a number of claims with respect to Hurricane Katrina. And you know that there are several Congressional 

committees who are looking at many of the issues. Have you 

shared with the local U.S. Attorney’s Office in Mississippi your 

work? 

Mr. HOOD. Yes, Mr. Chairman, we have tried to work with them. 

The example that Congressman Taylor just gave about the forgery, 

the forged engineering report, one said it was wind, the next one 

says it was water. If I’m correct about that case, that’s a situation 

where I think the forgery actually occurred in another State. We 

needed the Federal Government engaged and involved in working 

on these type of cases, as well as the National Flood Insurance program issue, as to whether or not we taxpayers had to shoulder 

costs that should rightfully have been paid by the insurance industry. 

And part of the numbers that we’ve been talking about, the profits, and why they’ve increased and actuary tables, one of the things 

that the companies have adopted is this ACE program State Farm 

was sold by McKenzie Consulting out of New York. 

What it’s done is—State Farm is just an example. Allstate purchased it and others have done it as well. In 2002, State Farm returned 70.6 percent of the premiums to their policyholders. After 

44

implementing some of this ACE program, it went in 2005, they 

were only returning 51.6 percent, the most catastrophic year in history. 

What they’re doing is, they’re using these engineers, these socalled independent engineers, and what those are doing at this program is they jettisoned all their adjusters, their engineers, and 

they were able to use someone who is supposedly independent 

when they do 85 percent of their business just for State Farm. 

Mr. THOMPSON. Would you be willing to share your work with 

this committee and other Congressional committees as we go forward in looking at this? 

Mr. HOOD. Yes, sir. And there were examples I had that I was 

unable to disclose because of grand jury secrecy. We have those 

documents and would be happy to share them with the committees. 

Mr. THOMPSON. Mr. Chairman, if I might add, would it be in 

order for a request to go to the Attorney General to ask him for 

the benefit of his investigative material? 

Chairman WATT. We plan to leave the record open from this 

hearing for 30 days to submit additional questions, and we will 

consider any question that is submitted to us for submission to the 

witnesses. I won’t necessarily commit to ask it, but we’ll certainly 

consider it. 

Mr. THOMPSON. Thank you, very much. General Hood, State 

Farm and other insurance companies have portrayed themselves as 

being besieged by Katrina victims who did not buy flood coverage 

and now want someone to pay for their flood damage. Isn’t it true 

that State Farm and other insurance companies are using any and 

all means to refuse to pay claims made under wind policies for 

wind damage? 

Mr. HOOD. Yes, sir, Mr. Chairman. That’s exactly what our point 

is. It’s a misconception that we’re trying to change the policy somehow. We’re just trying to make them pay for what they owe under 

the wind policies. 

Mr. THOMPSON. Mr. Hartwig, in your testimony, you state that 

an adjuster should apportion the loss if some damage was a result 

of an excluded loss such as flooding. 

Mr. HARTWIG. Correct. 

Mr. THOMPSON. Sir, if I take—so if I take that you would not disagree with the practice of denying the coverage for wind damage 

completely just because a portion of the damage was caused by 

water? 

Mr. HARTWIG. If I understand your question correctly, I think 

you’re asking if the insurer would deny the claim completely just 

because of some presence of water. The answer to that would be 

no. That would not be practice in the industry. 

Mr. THOMPSON. And to your knowledge, there’s no such practice? 

Mr. HARTWIG. I am not aware of such a practice. 

Mr. THOMPSON. With respect—have we put this in the record 

yet? Mr. Chairman, just, again, Mr. Taylor has just reminded me 

that this memorandum that the industry uses says just the opposite. 

Chairman WATT. Without objection, we’ll submit that for the 

record. You need to give me a copy of it so that we can get it to 

the clerk. 

45

Mr. THOMPSON. And I’ll yield the balance of my time to Mr. Taylor for further follow-up. 

Chairman WATT. I’m afraid your time has expired, but with 

unanimous consent, we’ll give Mr. Taylor 2 additional minutes. By 

unanimous consent, Mr. Taylor is recognized on Mr. Thompson’s 

time for 2 additional minutes. 

Mr. TAYLOR. Mr. Maurstad, I really would like to get back to this 

because as someone who knows a heck of a lot of people who fall 

into this category, again, I want to, on behalf of all of them, express 

our thanks that the only agency that was fair with people was the 

National Flood Insurance Program. I did not receive a single complaint from a single south Mississippian that their flood insurance 

wasn’t paid. 

What troubles me is the apparent and total lack of oversight on 

the part of your agency as to whether or not the taxpayers had to 

pay claims that should have been paid by the private industry. I 

have shown you a memo where a claims adjuster says his name 

was forged on a fraudulent document. I can get all of that as a 

Member of Congress. I have to believe that your agency could have 

found that, looked into that instance and determined whether or 

not the taxpayers were stuck with a bill, in the case of this company, that State Farm should have paid. 

I don’t recall a single—south Mississippi is a community. We all 

know each other. Not much happens that people don’t tell me 

about. I can’t think of a single constituent of mine who said, you 

know, the folks from the National Flood Insurance Program came 

by my property today to see if there was a fair adjudication of their 

claim, whether it was wind or water. Not one. 

Now again, so when you’re telling me you’re looking to see if we 

were treated fairly, I see no evidence of that. And that troubles me, 

because the same year that those guys made $44 billion in profit, 

our Nation lost $20 billion in flood insurance. I don’t think it’s a 

coincidence. 

Chairman WATT. The gentleman’s time has expired, so ask a 

question and Mr. Maurstad can respond. 

Mr. MAURSTAD. Well, Mr. Taylor, I mean, the program is designed as a public-private partnership. There is a legal between the 

write your own companies and the program that if breached we 

would seek every remedy available to us to make sure it was right. 

But the situation, and what is key is whether or not in your situation—you indicated, I believe that you said they wrote you a 

check, the Flood Insurance program wrote you a check for 

$200,000. That $200,000 represents the damage that was caused by 

flooding, that the policy that you purchased is obligated to pay you 

for. And that’s what the program did throughout the Gulf Coast, 

a hundred and eighty-some thousand times. 

We do have a rigorous program for oversight to make sure that 

there are not common practices of the write your own companies 

discharging their responsibility on the Flood Program. We take 

that very seriously. That would be an egregious act for the Flood 

Program to do that. And again, it’s not to my knowledge that it did 

happen. What did happen is in situations like you indicated, and 

which I’m glad, quite frankly, did occur, because we wanted policyholders to receive what they were obligated by the Federal GovernVerDate 0ct 09 2002 11:36 May 31, 2007 Jkt 035288 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 K:\DOCS\34677.TXT HFIN PsN: TERRIE
46

ment as quickly and as fairly as possible, and that’s what the focus 

is on, notwithstanding what the insurance wind companies are obligated for under their policies. We focus on the National Flood Insurance policy, making sure that the damages from flood are paid 

to policyholders. 

Mr. TAYLOR. Mr. Chairman, I’d like to ask unanimous consent for 

1 more minute. 

Chairman WATT. Do I hear any objection? Is this your last question? 

Mr. TAYLOR. Absolutely. 

Chairman WATT. The gentleman is recognized for 1 additional 

minute. 

Mr. TAYLOR. Mr. Director, you made the statement that where 

wind and water exist, the law says that the flood policy will pay. 

I would like to see where that is in the code, and if it is indeed 

the case, then I think you need to be spreading that message to 

people in coastal America, because they may not need to go 

through the heartache of having a State Farm or an Allstate or a 

Nationwide tell them no. They may not need to pay a policy if 

you’re going to do that, but there definitely needs to be a clarification. I’m not so sure you’re talking within the bounds of the law, 

but if you are, I would like to have that publicized well so that people in coastal America can make that choice for themselves. 

Mr. MAURSTAD. And I will get that for you, but as a point of clarification, I’m going to use the example of a roof. If that roof is damaged by both storm surge and flood and wind, the policy is obligated to pay for the damage associated by the storm surge and the 

flood. 

Chairman WATT. Okay. Without objection, we’re going to go an 

additional round for subcommittee members only and restrict the 

time on this round to 3 minutes for each subcommittee member. 

And I recognize the ranking member for 3 minutes. 

Mr. MILLER. Thank you. If any egregious act occurred on any 

part of an insurer, they need to be held accountable. I think there’s 

no doubt about that. Mr. Hood, there’s been talk of collusion. Did 

each of these insurance companies handle the claims in the same 

identical way where you think they went out and talked and just 

came out and this is how we’re going to do it? Is there any evidence 

of that at all? 

I mean, I know you’re unhappy with some—the way it was done, 

but is there—I mean, is it like a bunch of little Xerox copies, they 

all met behind a room and everybody went out and did the same 

thing? 

Mr. HOOD. Our investigation, and I can’t really talk about other 

targets other than those that have been publicly disclosed, being 

State Farm, but most didn’t zero people out with that anti-concurrent cost provision. 

Mr. MILLER. Okay. So they were different. Mr. Hartwig, how 

many claims do you think go through the State-run mediation satisfactorily, and is the State system working in this regard and the 

proper market conduct exams being conducted? And, you know, if 

not, do we need more criminal prosecutions and lawsuits because 

they’re not being handled properly? 

47

Mr. HARTWIG. Well, with respect to mediation, thousands of 

claims are being run through those systems in both Louisiana and 

Mississippi, and if I go back to Florida in 2004 with those storms, 

I believe a total of about 12,000 claims went through that particular system. 

Now, mind you, while 12,000 may sound like a large number, 

that compares to about 2.3 million claims in that State that year, 

so it’s a very small number, and about 90 percent of those were resolved successfully. In Louisiana and Mississippi in 2005, that 

number is about 80 percent. So it’s a good system. It’s a system 

that works. 

Mr. MILLER. It does work. 

Mr. HARTWIG. It’s a system that’s much more certain than litigation. It’s one that brings about resolution and closure much more 

expeditiously and with much less cost. For instance, a trial lawyer 

typically takes a third of the typical award. 

In terms of oversight, there is a tremendous amount of oversight 

in the system, again, consumers are protected at every level 

through various Unfair Claims Practices Acts and other acts that 

apply to the transaction of insurance. 

Mr. MILLER. Mr. Hood, you talked about basically vague, ambiguous language within policies and such that were difficult to enforce. Was that a correct statement I heard from you? 

Mr. HOOD. I don’t recall— 

Mr. MILLER. You talked about some—I wrote down ambiguous 

provisions within the policies that were hard to enforce. And I 

noted that, because that was really problematic to me, because the 

problem I’ve had and I’ve been stating all along is, you have basic 

insurance commissioners or the Office of Insurance Commissioners 

have to approve all of these. 

And I’m just a poor builder, but I know any contract I ever do, 

if it’s vague and ambiguous, it’s not enforceable. And surely some 

insurance commissioner in Mississippi has got an attorney. And if 

they’re passing out and stamping insurance policies that are vague 

and ambiguous, shame on them. If they’re stamping insurance policies that Federal judges have to remove clauses from, shame on 

them. 

And I feel sorry for Mr. Taylor and others who have lost their 

home and such, but maybe we need to start looking in several directions instead of just looking in one direction for fault here, that 

if insurance commissioners, and that’s the problem I’ve had with 

as many agencies we have throughout this Nation to determine 

policies and regulations they’re going to place on the business sector that they have to comply with and people spend more time 

often and money in compliance than they do trying to do their job. 

But you need to look maybe internally, and I—you know, you 

need to represent the people of your State. I’m not criticizing you 

for that at all. But maybe you need to look back internally. And 

if your insurance commissioner or their agencies are approving polices that are not enforceable or vague and ambiguous, maybe you 

as the attorney general need to look back on Mississippi and correct that in the future. I mean, that’s where I’d go. 

But, I mean, we can’t just blame one side in this. 

48

Mr. HOOD. These policies are pretty much standard in California 

or all— 

Mr. MILLER. Yes, but you approve them within your State. You 

don’t approve California’s. You approve Mississippi’s. 

Mr. HOOD. That’s correct. But there again, you can’t put a provision in a contract that’s illegal. You can’t make a contract— 

Mr. MILLER. But I can put a provision in that is not ambiguous. 

Mr. HOOD. That’s correct. 

Mr. MILLER. And you used the word ‘‘ambiguous’’ when it came 

to settling a claim, because I wrote it down, because that really 

bothered me. And when I talked to the chairman before, I was concerned about the regulations we have that are not working 

throughout this country and it’s been demonstrated in the Gulf 

States that there’s a problem. 

Mr. HOOD. We submitted a bill in our State legislature shortly 

after Katrina went through. It was a consumers insurance bill of 

rights that required standard language, and maybe the ambiguity 

came when I was discussing their failure to place in their water exclusion the words ‘‘storm surge.’’ And under law— 

Mr. MILLER. Additional 30 seconds? 

Chairman WATT. Without objection. 

Mr. MILLER. My concern is that it’s like you’ve been in a bar 

fight. Well, we do things when we’re in a bar fight we might not 

otherwise do because we’re angry. There are a lot of people in your 

State who have been hurt because of a major disaster, and there 

are a lot of insurance companies that lost a lot of money, and, you 

know, they’re trying to turn a profit, too. 

People on both sides are looking at this thing trying to determine 

how to come out. I just pray that what you do in your State doesn’t 

create this exodus of the private sector. Because if you do that, you 

can put all the language you want to into law that says we’re going 

to protect the people. But if they can’t get anybody to write a policy 

on it afterwards, then you’re not protecting your people. 

And Mr. Chairman, I thank you for the additional time. I yield 

back. 

Mr. HOOD. California— 

Chairman WATT. I think he was just lecturing you rather than— 

Mr. MILLER. I was lecturing. 

Chairman WATT. He never asked a question, so I’m not going to 

allow you to answer the nonquestion. Mr. Mahoney is recognized 

for 3 minutes. 

Mr. MAHONEY. Thank you, Mr. Chairman. This has been very enlightening for me today because I didn’t realize for the last 25 

years that the property and casualty industry has been a losing 

money proposition. So I appreciate, Mr. Hartwig, of you telling me 

that the insurance industry has been doing this as a public service 

for the American people. 

And as such, it makes me ask the question, which is, in the State 

of Florida, you know, one of the things our insurance commissioners are trying to do is they’re trying to figure out how to incent 

the insurance industry to stay in and to provide services, their 

services to the people of the State. 

And one of the things that happened in the State of Florida as 

an incentive was the idea that we should provide insurance compaVerDate 0ct 09 2002 11:36 May 31, 2007 Jkt 035288 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 K:\DOCS\34677.TXT HFIN PsN: TERRIE
49

nies the ability to operate ‘‘pup’’ companies or subsidiary companies 

in order to operate in the State. And my question, Mr. Hartwig, to 

you is, if it’s already a money-losing proposition, why would there 

be a need for an insurance company to operate a subsidiary in a 

State? 

Because in my simple way of looking at insurance is that the bigger the pool, the more people that are, you know, contributing to 

it, the safer it is for both the insurance company and the person 

receiving the insurance in terms of making sure that the claims are 

being able to be paid. Why would these insurance companies in the 

State of Florida and other States operate in subsidiaries as opposed 

to operating just as a nationwide company? 

Mr. HARTWIG. A couple of things. First, your first comment, the 

industry operating as a public service entity, that’s not been the 

case. When I talked about the fact that there’s been consistent 

losses for 25 years in the aggregate, I was referring specifically to 

homeowners insurance. 

But in terms of ‘‘pup’’ companies— 

Mr. MAHONEY. So homeowners insurance has been a loss leader 

or a public service? 

Mr. HARTWIG. Not a loss leader. It’s been a money loser. 

Mr. MAHONEY. Okay. And why would the industry continue to 

operate if it loses money? 

Mr. HARTWIG. Again, as I said earlier on questioning, that in aggregate, that has been the case, but not in every State. And in 

some States like Florida, they’ve had a disproportionate impact. 

Mr. MAHONEY. Okay. Thank you. 

Mr. HARTWIG. In terms of ‘‘pup’’ companies, if people aren’t 

aware of what ‘‘pup’’ companies are, effectively, they are subsidiaries of insurance companies that operate in a single State typically. And the question is, is why would an insurer do such a 

thing? 

There are a variety of reasons they might do it, in part because 

usually these operations are set up in States where the risk characteristics of operating there are significantly different from the overall business. So, Florida homeowners insurance would be a good example of that. You might have a separately capitalized company. 

It has its own set of rates and underwriting guidelines, and you 

run that company differently than you would operate a homeowners insurer, say, in Indiana, Illinois, or Ohio. 

So the difference in the business is sufficiently great that it 

needs to be handled differently, and that is basically tied to the 

risk associated with operating in that State. 

Mr. MAHONEY. But that being the case, isn’t one of the benefits 

of having a subsidiary company to be able to protect the parent in 

the particular case of a catastrophic loss business event that would 

threaten the welfare of the parent company? I mean, isn’t that one 

of the benefits of subsidiary companies? 

Mr. HARTWIG. The benefit and the rationale is to isolate the risk. 

And it is very important that insurers keep in mind their obligations to their millions and millions of policyholders across the country. It is the case that no insurer can afford to be brought down 

by its experience in a given State. And I think it’s extremely important. I mean, one thing we’ve talked about here a lot about is inVerDate 0ct 09 2002 11:36 May 31, 2007 Jkt 035288 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 K:\DOCS\34677.TXT HFIN PsN: TERRIE
50

surer profits. And there seems to be, I don’t know, a need or desire 

to drag these profits as close to zero, if not a negative number, as 

is humanly possible. 

The reality of it— 

Mr. MAHONEY. So you are agreeing that one of the things is to 

protect the insurance company from being brought down, as you 

said? 

Mr. HARTWIG. Part of the rationale for a ‘‘pup’’ company is to isolate that risk. 

Mr. MAHONEY. Okay. That’s my understanding. 

Chairman WATT. The gentleman’s time has expired. I’m being 

stricter with the time, because we must clear this room for another 

meeting. 

Mr. MAHONEY. I appreciate it, Mr. Chairman. 

Chairman WATT. I recognize myself for 3 minutes, just to ask a 

couple of questions to clarify. 

Mr. Maurstad, Dr. Hartwig said that one potential solution to 

some of this might be encouraging mediation of claims. I have a 

memo that the National Flood Insurance Program apparently sent 

out which basically prohibits Write Your Own principal coordinators or participants from allowing mediation. 

It says that your office apparently thinks that allowing any State 

entity to engage in this process would subject all of you to State 

regulation. Is that your position? 

Mr. MAURSTAD. Yes. We do believe that there are constitutional— 

Chairman WATT. Okay. If it were clarified in legislation, would 

that be helpful, in your opinion? 

Mr. MAURSTAD. Well, that would reduce one of the objections to 

it. I mean, part of it is that 99 percent of our claims are handled 

without any legal recourse at all, and it’s a resource issue as to 

whether or not that’s the only way that a claim can be handled. 

The Reform Act of 2004 required and we’ve put in place the appeals process for policyholders. So, in this case— 

Chairman WATT. In other words, you have other objections other 

than the fact that it was subject you to State regulation? 

Mr. MAURSTAD. Yes. 

Chairman WATT. Why don’t you submit whatever other objections you have so that we have that information and can make it 

a part of the record so that when people look at it and other subcommittees consider possible solutions to what we are trying to do 

here, we have a balanced approach on that? 

Now I’m going to ask one more question of Mr. Hartwig, because 

I’m a little concerned that this hearing has maybe been misrepresented, and I just want to use this to send a strong message to 

those out there who may be inclined to misrepresent what we’re 

trying to do here. 

The ranking member told us, Dr. Hartwig, that you were invited 

because you were an expert in insurance, and then I get a memo 

that was sent out by representatives of State Farm saying that you 

are here testifying on behalf of the insurance industry. My question 

to you is, are you here testifying on behalf of the insurance industry? 

51

Mr. HARTWIG. I’m here to testify on—as an expert within the insurance industry. 

Chairman WATT. All right. That’s— 

Mr. MILLER. May I make one quick point? 

Chairman WATT. Sure. 

Mr. MILLER. I selected him because I looked at his resume as 

chief economist of the Insurance Information Institute. Our side believed he was most qualified and knew more about insurance than 

anybody we could bring before this committee who was not working 

for any insurance company. 

Chairman WATT. And I absolutely respect that. The point I want 

to make here is that I don’t think anybody who’s been here the 

course of this hearing today would suggest that I, as the Chair, 

have not framed the issue in the most balanced way that it could 

possibly be framed. 

And I’m going to submit for the record, by unanimous consent, 

this memorandum to the Great Lake Zone employees from some 

senior vice president who first of all says that—undermines Mr. 

Hartwig’s testimony by saying that he’s here representing the insurance industry, and then undermines the impartiality that we 

have tried to proceed under by representing that no one from State 

Farm nor any other insurance carrier has been invited to testify. 

We’re going to get to that. 

But if you all would tell the folks at State Farm, I see some of 

their representatives in the audience, that if they’re expecting to 

get a fair hearing, they don’t get it by trying to sabotage the hearing process that we have. We can’t do everything in one day, but 

I guarantee you, by the time we get to the end of this process, we 

will have heard from everybody in this process who wants to be 

heard. 

And just to prove that, I’m going to ask unanimous consent to 

submit for the record statements that today were submitted by the 

National Association of Realtors, a statement of Gilbert Randolph 

LLP on behalf of the Mississippi Center for Justice and William 

Quigley, Professor of Law and Director of the Loyola Law Clinic, 

and Gillis Long, Poverty Center, Loyola University, New Orleans 

College of Law, a statement of the Mortgage Bankers Association, 

a statement of Jeffrey Rose from Lake Shore, Mississippi. 

I just want to close this by making it clear that we are going to 

continue to try to build a factual record in this subcommittee, and 

anybody who goes out of here and suggests that somehow we’re on 

a witch hunt or they haven’t been asked to testify or won’t be allowed to testify, please ask them to call me before they send out 

these memoranda to their employees, because I don’t appreciate it. 

Now the Chair notes that some members may have additional 

questions for the panel, including the members who do not serve 

on the committee but who participated in the hearing today. Without objection, the hearing record will remain open for 30 days for 

members to submit written questions to these witnesses and to 

place their responses in the record. 

Without objection. 

This hearing is adjourned, and we want to thank the witnesses 

for appearing and testifying, and I’ve been asked to request that 

52

you all kindly exit as quickly as possible to accommodate the next 

meeting that’s taking place in the room. 

Thank you so much. 

[Whereupon, at 5:25 p.m., the hearing was adjourned.] 

(53)

A P P E N D I X

February 28, 2007

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