Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Katrina Winds Still Blowin'

Insurance companies are easy to bash. That may be a reason a federal jury awarded Biloxi, Miss., residents Norman and Genevieve Broussard $2.5 million in punitive damages from State Farm Insurance. The insurer contended that the damage to the Broussards' home was due to storm surge from water, not wind damage from Hurricane Katrina.. Even though Judge L.T. Senter Jr. reduced the amount to $1 million, it's likely that many people believe justice was served. It's just a greedy insurance company getting what it deserves.

Well, not so fast.

State Farm recently announced that it is suspending sales of all new commercial and homeowner policies in the state of Mississippi. The company cited the "current legal and political environment" and that it is "not in a position to accept any additional risk". Furthermore, officials left the door open for non-renewal of current policies. Newton's Third Law of Motion states that for every action, there is an equal and opposite reaction. Homeowner insurance policies did not exist in Newton's time, but he could have forecasted the "opposite reaction" by State Farm.

The Mississippi Gulf Coast is just starting to rebuild from Hurricane Katrina, and the suspension of new policies by State Farm could throttle the budding recovery. After all, State Farm is the largest homeowner insurer in Mississippi, with more than 30% of the market. All State Farm policyholders can expect higher premiums.

The effect of this could ripple across the nation as insurers will be forced to pay higher premiums for catastrophe coverage. For example, this will have implications for the reinsurance market, which includes the likes of Berkshire Hathaway (NYSE: BRK-A  ) . All insurers buy reinsurance, so regardless of where you live, you may face higher insurance costs.

Defending an insurance company is like defending Saddam Hussein, but State Farm did have a contract excluding what it considered storm surge. If that contract can be called into question, the company has to re-examine whether it should bear that risk.

The costs of Katrina continue to mount, and the band plays on.

For related coverage:

Buz Livingston, CFP, welcomes your comments. He would rather take his chances with hurricanes than snow. He owns shares of Berkshire Hathaway. The Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 522007, ~/Articles/ArticleHandler.aspx, 10/27/2016 5:05:15 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,169.68 -29.65 -0.16%
S&P 500 2,133.04 -6.39 -0.30%
NASD 5,215.97 -34.29 -0.65%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes