‘Compassion over Contracts’
Mississippi lawyers lead an all-out assault on the meaning of a contract, and the media bolster their case with storm victims’ perspectives.

By Amy Menefee
October 05, 2005

     Hurricane devastation has left millions trying to rebuild their homes and lives. But flood-damage lawsuits against insurance companies now threaten the industry’s solvency across the country, and the broadcast media are helping make the case against industry.

     According to reporters on CBS and NBC, the fact that some homeowners didn’t have flood insurance is “an ugly surprise” and a “hard lesson” for people “who thought their insurance companies would pay for the wreck they used to call home.”

     Reporters have given the impression that Gulf Coast homeowners didn’t understand their insurance policies and that that might give them the legal standing to demand money they weren’t contracted to receive.

     CBS’s Harry Smith introduced trial lawyer Richard Scruggs, famed for his $250 billion settlement from tobacco companies, on the October 5 “Early Show.” Scruggs has indicated plans to file suit against three private insurers for coastal clients, accusing insurance companies of misleading them and denying coverage for hurricane losses.

     The New York Times reported on October 5 that Scruggs’ first suit, filed on October 4, centers on one Mississippi couple who did not have flood insurance. They say their insurance company misled them into thinking they had protection that they didn’t. Scruggs has said he might file more than 1,000 similar suits, avoiding a class-action suit.

     Smith began the “Early Show” segment saying, “As hurricane victims head home to clean up, many are learning a hard lesson, that damage caused by flooding is not covered under most homeowners’ insurance policies.” Scruggs has admitted he already knew that “lesson,” as he had both homeowner’s and flood insurance on his waterfront Mississippi home.

     The foundation of any insurance policy, and of many industries, is the contract. Both parties enter into it voluntarily, and both sign off stating that they agree to its terms. In an October 3 American Enterprise Institute panel on the issue, Martin Grace lamented what he called “the tortification of contract law.” Grace is the associate director of the Center for Risk Management and Insurance Research at Georgia State University. Tort law is the arena where plaintiffs seek restitution for harm, as in Scruggs’ tobacco suit. But contract law is based on documents that both parties agreed on beforehand. Confusing the two is creating a legal circus.

     “Insurance policy language is a result of litigation and regulatory processes,” Grace said. “It is not a spur of the moment contract.” In Mississippi, where the lawsuits originated, the language of insurance policies must be approved by state regulators.

     But like Smith, many journalists have promoted the idea that homeowners are ignorant of what is in their policies.

     CBS’s Bill Whitaker said on the September 14 “Evening News” that “People on the Gulf Coast are facing an ugly surprise.” He reported about one Biloxi, Miss., family: “when they called to make a claim on the insurance they’d paid diligently for two decades, they found their nightmare just beginning. They were covered for natural disasters, just not flooding.”

     Zeleder Barnes, the homeowner, referred to what was and wasn’t in her insurance contract. But Whitaker still described the contract’s consequences as a “surprise” and added that “The Barnes family calls the insurance industry stance unconscionable.” Barnes said, “Honor the contracts that you have signed with these people, who have paid you for 20 years.” Ironically, that’s exactly what the companies were doing. An insurance representative was allowed to inject just one sentence into Whitaker’s two-minute report, and he said, “We can’t invent coverage where it doesn’t exist …”

     In keeping with Free Market Project findings in a previous study and ongoing analysis of litigation coverage, broadcasters often turned to plaintiffs or those similarly situated for their stories’ perspective, giving the insurance industry little time to address the attacks.

     In a two-and-a-half minute story on the September 16 “World News Tonight,” ABC’s Jim Avila allowed two insurers to speak for a combined 8 seconds. They were pitted against flood plaintiff Paul Leonard and Scruggs, his lawyer. Avila contended that “most homeowners don’t realize” that government-subsidized flood insurance – the only source of flood insurance – has a payout cap of $250,000 for a house. And people are trying to get their private homeowners’ insurance companies to cover damages not specified in their policies.

     “We can’t, unfortunately, confuse compassion with contracts,” said Julie Rochman of the American Insurance Association on “World News Tonight.” But that’s exactly what media reports have done by focusing on the anti-insurer, anti-contract side of the story.

     The September 20 “NBC Nightly News” covered a similar lawsuit brought by Mississippi Attorney General Jim Hood, who is suing private insurers to get money for excluded flood damages. Anne Thompson told the story from the perspective of two hurricane victims whose “lives are at the curb,” and she included a comment from Hood. Again, only one insurer provided just two sentences on the other side.

     Thompson said the insurance industry was blasting the lawsuits as “politics,” but she failed to explain the simple legal argument behind the suit – that private insurers should not be allowed to exclude flood damages in policies. Thompson didn’t point out that such a reversal would mean insurers must pay damages for which they did not collect premiums. Such an argument has massive implications for the industry and for homeowners, but Thompson didn’t explain that. In fact, Grace said that if Hood and Scruggs win, and insurers’ contracts are declared void, “it’ll destroy private insurance markets.”

     About $70 billion of the $170 billion in hurricane damages was insured, according to estimates presented at AEI by Robert Klein, director of Georgia State’s Center for Risk Management and Insurance Research. Of that $70 billion, $10 billion will be owed by the federal flood insurance program and $60 billion falls on private insurers. Of the uninsured losses, The New York Times reported on September 24 that at least $15 billion of that could land on private insurers’ backs if the plaintiffs’ lawsuits are successful.

     Whether insured or uninsured, Americans can count on the fact that they will pay for others’ losses, said law professor Adam Scales, another speaker on the AEI panel. As Congress pours money into the region, insurance rates nationwide will rise to cover the losses.

     “We have a very difficult time in this country making people adhere to their decisions,” said Scales, who teaches law at Washington and Lee University and is also a visiting professor at the University of Connecticut School of Law. He later added that “Historically, we do not let losses come to rest where they initially fall. The question is whether we’re going to pay as taxpayers or as policyholders.”