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.
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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.
