Close to Home: State vs. Federal Regulation

On Aug. 24, 2002, Hurricane Andrew hit South Florida with a devastating force. That morning my agency at the time, Pennekamp and Soto, received thousands of serious and complicated claims. Among them were 17 insureds who were unfortunate enough to be part of a book of business that a company we represented systematically nonrenewed. About eight months before that August date, we had agreed with this insurance company to move their homeowners insureds to other companies as the policies expired. These 17 were in the untenable position of having their homes severely damaged with no prospect of repairing or rebuilding before the date of nonrenewal.

I made an appeal to the company, asking that the policies for these 17 be renewed until the homes could be repaired. I explained that no other company would take the risk under these circumstances. It turned me down. I made a second appeal, this time to the home office, suggesting that it assign these insureds to another agency, write them as in-house accounts or not pay us for renewing them. It turned me down again.

I called Florida’s then-Insurance Commissioner Tom Gallagher to explain the situation. In 24 hours, he proclaimed emergency rule No. 7, which prohibits insurers from not renewing or canceling insurance policies of affected homeowners until the property is repaired, restored or the contract is paid in full.

It is hard to imagine a federal insurance commissioner having the ability or the inclination to react quickly to the targeted needs of one or a few insureds.

In the mid-1980s, I was part of a small group of insurance types invited to Bethesda, Md., to offer suggestions for improving the National Flood Insurance Program. The group was comprised of a few Write Your Own insurance company executives and two agents. I represented the Big “I.” Over a period of six to eight months, we came to Maryland six times to render advice.

Among our many conclusions was that the federal flood policy was tragically flawed because it did not cover an additional living expense for homeowners and business interruption for commercial accounts. We pointed out to the administrators that many insureds could go bankrupt as a result of a flood, even though they bought the maximum coverage available, because there was no time element protection in the flood policy.

Other important recommendations included increasing the limits of coverage and making the flood policy more uniform to the ISO homeowners policy. It soon became clear to us that making substantive changes to the National Flood Insurance Policy was going to be nearly impossible. The mantra around the room quickly became, “It takes an act of Congress.” The best we could hope for was cosmetic changes to the application form, the declarations page and the rating manual.

Sadly, last year Hurricane Katrina struck the Gulf Coast area and caused massive flooding. Many insureds who had purchased the maximum limits available from the flood program still will be financially devastated because that policy lacks additional living expense or business interruption coverage.

The federal government is neither nimble nor fast enough. The idea that it would do a good job looking out for insureds, agents and our industry is plain wrong. I like my regulation closer to home.

We all agree that our business needs modernization. However, targeted, thoughtful and incremental reform makes more sense. The best role for the federal government is to set minimum standards of behavior and standards of uniformity that the states must comply with.

If all the above does not scare you or worry you, consider this: the Optional Federal Charter proposal navigating through Congress includes forms deregulation. Every insurance company regulated by the feds could manuscript every one of their policies, creating a coverage nightmare for our insureds and an E&O mine field for agents. Thank you, but no thank you.

Alex Soto
President