Date: 2006-09-21
Speaker: EDWARD B. RUST (democrat)
Chamber: H

CEO. State Farm Insurance Companies. Bloomington. IL. DEAR MR. RUST: I am writing to make you fully aware of the consequences of the bad faith actions and policies that State Farm has carried out against the people of South Mississippi since Hurricane Katrina. First. allow me to establish a few basic facts about Katrinas damage in Mississippi. There is no property in Missilsippi that was damaged solely by flooding. More than 300.000 properties. including many that were hundreds of miles inland. sustained wind damages but no flooding. Properties nearest the coastline were damaged or destroyed by some combination of hurricane winds and storm surge. State Farms assertion that hundreds of coastal homes were destroyed without suffering any wind damage has been easily and overwhelmingly refuted by every meteorologist. engineer. eyewitness. or investigator who is not on the payroll of an insurance company or an insurance companys contractor. Every community on the Mississippi Coast suffered four or five hours of high hurricane winds and powerful gusts before the surge. High winds -continued to cause additional damage during the surge. and the wind and water in combination caused the. worst destruction. State Farm recently reported that it has handled more than 84.700 property claims in Mississippi. yet requested engineering reports for only 1.100 of the claims. Since engineering reports are needed for the purpose of determining whether damage was caused by wind or by water. State Farm must have acknowledged that other 83.600 properties were damaged by winds alone. In other words. State Farm has paid claims for wind damage far inland where you could not blame flooding. while denying wind claims on the coast where the winds were much stronger. but where you could blame flooding. Many homeowners near the coastline had flood insurance. but not for the full value of their properties. Hundreds of homeowners who bought every property insurance policy that was available to themhomeowners. windstorm. and floodare nevertheless left with huge uncovered losses because State Farm and other insurers have decided that only the federal flood insurance program. and federal taxpayers. should pay on homes that were destroyed by the combination of wind and water. State Farms twisted legal argument that the anticoncurrent causation language in your policies allows you to deny wind claims. even where you acknowledge that wind was a cause of the damage. is an especially cynical and despicable act. Your companys betrayal of its policyholders has had horrible financial consequences for families and communities at their time of greatest need. Some policyholders will file bankruptcy and default on their mortgages. The lucky ones will recover only after depleting their savings and retirement accounts and assuming large new debts. Worst of all. I fear that your actions will result in unnecessary deaths in future disasters. If you succeed in establishing that. the burden of proof is on policyholders to prove that wind and wind alone caused damage. I am convinced that some people who should evacuate will stay behind next time to record the damage. State Farm and other insurers have contracts with the National Flood Insurance Program that permit you to sell flood policies and adjust flood claims that are backed by federal taxpayers. When your adjusters assigned all damage to flooding. I believe you committed fraud against the United. States government. State Farms contract with NFIP obligates your company to apply the same standards to flood claims as you apply to your own claims. The federal regulations do not empower you to assume flood danage anywhere it is possible. while denying wind claims unless no other cause is possible. I believe that State Farm and other companies violated the False Claims Act by manipulating damage assessments to bill the federal government instead of the companies. I have written the Justice Department to recommend that the Katrina Fraud Task Force investigate whether insurance companies defrauded federal taxpayers by assigning damages to the federal flood program that should have paid by the insurers wind policies. In late June. the House approved my amendment to the Flood Insurance Reform and Modernization Act to instruct the Inspector General of the Department of Homeland Security to investigate the Katrina claims practices of the insurance companies that adjusted flood claims. Sen. Trent Lott added a similar provision to the Homeland Security Appropriations Act. Even before Katrina. I was an original cosponsor of legislation introduced by Rep. Peter DeFazio to repeal the antitrust exemption that was granted to the business of insurance by the McCarran Ferguson Act. After Katrina. this issue will be much higher on my agenda. It is obvious that the large insurance companies conspired together to manipulate the claims process. It also is clear that state resources were inadequate to protect consumers from underhanded insurance practices on such a large scale. In the decades since enactment of McCarran Ferguson. the federal government has assumed responsibility for insuring some risks that the insurance industry refuses to cover. Medicare and Flood Insurance are obvious examples. The federal government also provides disaster assistance and loans to individuals. businesses. and communities to help offset their uninsured losses. It does not make sense for the federal government to fill in the gaps left behind by the insurance industry and yet have very little role in regulating and investigating insurance companies and their practices. In the next session of Congress. I plan to press for a vote on legislation to have the federal government take responsibility for regulation of insurance. It is ridiculous for the industry to claim that insurance is not "interstate commerce" rightfully under federal jurisdiction when companies stop issuing policies in New York and Florida because of claims in Mississippi and Louisiana. Congress and federal regulators should have clear responsibility for oversight of the insurance industry. I also pledge to work tirelessly to enact a natural disaster insurance program that provides for allperils insurance coverage. There is no reasonable way to distinguish the wind damage from the water damage from a major hurricane. The worst destruction almost always results from the combination of the two. The division of wind and flood coverage guarantees that legal disputes will consume millions and millions of dollars for engineering reports and legal fees instead of going to pay damage claims. I cannot support plans to provide federal reinsurance for the current system that allows insurance companies to shift their liabilities to taxpayers and property owners. Any effort to provide a federal reinsurance backstop for insurance losses must insist on elimination of the exclusions and gaps in property coverage. Homeowners need to be able to purchase insurance and know that disaster damage will be covered. Finally. I will continue to urge the leadership and my colleagues in Congress to undertake detailed hearings and investigations of insurance industry practices. Please know that the actions of your company have helped.make the case that Congress and the federal government must move to regulate and investigate your industry in order to protect consumers and taxpayers. Sincerely.