A Nation of Policyholders: Governmental and Market Failure in Flood Insurance
Mississippi College Law Review, Vol. 26, No. 3, 2006
45 Pages Posted: 18 Apr 2007
Unfortunately, Attorney General Hood's colorful observation has proven untrue. Hurricane Katrina's direct physical toll has been estimated to exceed $200 billion, only a fraction of which is recoverable under existing insurance law. As many policyholders and citizens have realized, insurance is something we tend to think about only after a disaster. Indeed, this oversight is a central explanation for why the system for allocating flood losses in the United States has failed.
Now that Katrina's waters have receded, it is time to reconcile insurance law and policy to reality: Catastrophic losses create interdependencies among public and private actors that must be managed rather than avoided. Our current systems for preventing, mitigating, and allocating these losses are fractured, diffuse, and maddeningly counterproductive. No single actor is vested with both the incentive and the power to manage this risk effectively.
As with healthcare, the system for allocating catastrophic loss is characterized primarily by the evasion of responsibility at all levels: private, commercial, and governmental. The result (as in healthcare) has been dysfunction. Before Katrina's seemingly indelible memories recede - as they are destined to - it is time to recalibrate the relationship between government and the private market.
This Article focuses on the two insurance systems that inadequately govern the distribution of flood risk: The National Flood Insurance Program (NFIP) and the private market for property insurance. There have been a number of studies detailing the structure and limits of these systems. However, scant attention has been directed toward the role that insurance law plays in driving the systems toward failure. What follows is a synthesis of insurance law, economics, and regulatory criticism, leading to the ineluctable conclusion that these two systems rest on a foundation of sand.
I propose a market-based alternative that draws on the comparative advantages each system offers. To the information-generating of the marketplace, we may add a more precisely targeted governmental role in subsidizing some policyholders and reinsuring others. There are inevitable tradeoffs, and my proposal has a number of drawbacks - only some of which can be guessed at here. But the alternative is a system that has proven itself unable to cope adequately with the predictable losses of a bad year, let alone the greatest natural disaster in American history.
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