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Insuring the Worst

In the nearly six months since Hurricane Katrina destroyed half of New Orleans, many storm victims’ expectations of help have been dashed, creating a legacy of bitterness. That legacy may be all the more painful when we consider that many homeowners suffered unnecessarily devastating losses because of their lack of insurance or their underinsurance, often owing to the belief that they could not afford the right coverage.

Future catastrophes – storms, earthquakes, tsunamis, volcano eruptions, forest fires, agricultural or other environmental crises, disease epidemics, or terrorist attacks – are likely to result in the same kinds of problems. So it is important to consider the causes of underinsurance and whether our insurance institutions are adequate to the risks that we face.

According to a report from the Insurance Information Institute, nearly 70% of homeowners’ claims in Louisiana were settled by the end of January, for a total of $7.5 billion dollars. Sounds good, but there were roughly 200,000 homes that were either severely damaged or destroyed, so the total amounts to less than $40,000 per home – far below what was needed.

Indeed, a large share of New Orleans homeowners – 60% in Orleans Parish – were completely uninsured against floods. Many of those who were insured discovered that clauses in their policies barred them from collecting full benefits.