[House Hearing, 110 Congress]
[From the U.S. Government Printing Office]

                        INSURANCE CLAIMS PAYMENT
                       PROCESS IN THE GULF COAST
                       AFTER THE 2005 HURRICANES



                               BEFORE THE

                            SUBCOMMITTEE ON

                                 OF THE


                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION


                           FEBRUARY 28, 2007


       Printed for the use of the Committee on Financial Services

                            Serial No. 110-7

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                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            RICHARD H. BAKER, Louisiana
LUIS V. GUTIERREZ, Illinois          MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York         PETER T. KING, New York
MELVIN L. WATT, North Carolina       EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York           FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana                RON PAUL, Texas
BRAD SHERMAN, California             PAUL E. GILLMOR, Ohio
DENNIS MOORE, Kansas                 DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts    WALTER B. JONES, Jr., North 
RUBEN HINOJOSA, Texas                    Carolina
WM. LACY CLAY, Missouri              JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York           CHRISTOPHER SHAYS, Connecticut
JOE BACA, California                 GARY G. MILLER, California
BRAD MILLER, North Carolina              Virginia
DAVID SCOTT, Georgia                 TOM FEENEY, Florida
AL GREEN, Texas                      JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri            SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois            GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin,               J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee             RICK RENZI, Arizona
ALBIO SIRES, New Jersey              JIM GERLACH, Pennsylvania
PAUL W. HODES, New Hampshire         STEVAN PEARCE, New Mexico
KEITH ELLISON, Minnesota             RANDY NEUGEBAUER, Texas
RON KLEIN, Florida                   TOM PRICE, Georgia
TIM MAHONEY, Florida                 GEOFF DAVIS, Kentucky
CHARLES A. WILSON, Ohio              PATRICK T. McHENRY, North Carolina
ED PERLMUTTER, Colorado              JOHN CAMPBELL, California
JOE DONNELLY, Indiana                MARSHA BLACKBURN, Tennessee
ROBERT WEXLER, Florida               MICHELE BACHMANN, Minnesota
JIM MARSHALL, Georgia                PETER J. ROSKAM, Illinois
DAN BOREN, Oklahoma

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
              Subcommittee on Oversight and Investigations

                MELVIN L. WATT, North Carolina, Chairman

LUIS V. GUTIERREZ, Illinois          GARY G. MILLER, California
MAXINE WATERS, California            PATRICK T. McHENRY, North Carolina
STEPHEN F. LYNCH, Massachusetts      EDWARD R. ROYCE, California
EMANUEL CLEAVER, Missouri            RON PAUL, Texas
MICHAEL E. CAPUANO, Massachusetts    J. GRESHAM BARRETT, South Carolina
CAROLYN McCARTHY, New York           TOM PRICE, Georgia
RON KLEIN, Florida                   MICHELE BACHMANN, Minnesota
TIM MAHONEY, Florida                 PETER J. ROSKAM, Illinois

                            C O N T E N T S

Hearing held on:
    February 28, 2007............................................     1
    February 28, 2007............................................    53

                      Wednesday, February 28, 2007

Hartwig, Robert P., President and Chief Economist, Insurance 
  Information Institute..........................................    18
Hood, Hon. Jim, Attorney General, State of Mississippi...........    20
Jefferson, Hon. William J., a Representative in Congress from the 
  State of Louisiana.............................................     9
Jindal, Hon. Bobby, a Representative in Congress from the State 
  of Louisiana...................................................     6
Maurstad, David I., Director and Federal Insurance Administrator, 
  Mitigation Division, Federal Emergency Management Agency, U.S. 
  Department of Homeland Security................................    16
Taylor, Hon. Gene, a Representative in Congress from the State of 
  Mississippi....................................................    12


Prepared statements:
    Watt, Hon. Melvin............................................    54
    Jindal, Hon. Bobby...........................................    56
    Taylor, Hon. Gene............................................    61
    Hartwig, Robert P............................................   105
    Hood, Hon. Jim...............................................   122
    Maurstad, David I............................................   159

              Additional Material Submitted for the Record

Watt, Hon. Melvin:
    Property/Casualty Insurance in 2007: Overpriced Insurance, 
      Underpaid Claims, Declining Losses and Unjustified Profits.   169
    Memo to Great Lakes Zone Employees...........................   198
    New York Times article dated February, 24, 2007, ``A Contract 
      Is a Contract, Right?''....................................   200
    Statement of the Mortgage Bankers Association................   204
    Statement of the National Association of Realtors............   260
    Statement of Jeffrey H. Rose, from Lakeshore, MS, with 
      attachments................................................   268
    CRS Report for Congress--Post-Katrina Insurance Issues 
      Surrounding Water Damage Exclusions in Homeowners' 
      Insurance Policies, dated February 27, 2007................   278

                        INSURANCE CLAIMS PAYMENT
                       PROCESS IN THE GULF COAST
                       AFTER THE 2005 HURRICANES


                      Wednesday, February 28, 2007

             U.S. House of Representatives,
                          Subcommittee on Oversight
                                and Investigations,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:33 p.m., in 
room 2128, Rayburn House Office Building, Hon. Melvin L. Watt 
[chairman of the subcommittee] presiding.
    Present: Representatives Watt, Waters, Lynch, McCarthy, 
Klein, Mahoney; Miller, McHenry, and Roskam.
    Also present: Representatives Melancon, Jefferson, Taylor, 
and Thompson.
    Chairman Watt. Let me declare this hearing of the 
Subcommittee on Oversight and Investigations to order. I want 
to thank everybody for being here and apologize to you all that 
we were hung up on the Floor with votes.
    But that's the bad news; we are starting late. The good 
news is that votes are over for the day and we won't be 
interrupted again, so we should be able to proceed through all 
of our testimony and questioning without delay again.
    Without objection, all members' opening statements will be 
made a part of the record, and there are some members who have 
asked to sit on the dias with us and be able to ask questions, 
so I would ask the subcommittee members to consent that the 
following members be allowed to participate in today's hearing 
after all of the sitting subcommittee members: Representative 
Richard Baker; Representative Ginny Brown-Waite; Representative 
Bennie Thompson; Representative William Jefferson, who will 
testify and then come to sit here; and Representative Charlie 
Melancon. And if any of the other witnesses want to join us, 
we'll do a supplemental unanimous consent request to make that 
    Under the rules of the committee and the subcommittee, the 
subcommittee chairman and the ranking member will be recognized 
for 5 minutes each to make opening statements, and then other 
members who wish to speak, up to a total of 15 minutes per 
side, will be recognized. So I'm going to recognize myself, but 
before I get on the clock, let me just thank the members who 
are here. I had planned, if we had had a full complement of 
members, to introduce all of them since this is our first 
subcommittee hearing since the subcommittee has been completed.
    Just for everybody's information, I won't go through a full 
introduction, but Representative Luis Gutierrez is on the 
subcommittee, as well as Representative Maxine Waters, 
Representative Stephen Lynch, Representative Emanuel Cleaver--
although I understand he's going off of the subcommittee to do 
another special project--Representative Nydia Velazquez, 
Representative Michael Capuano, Representative Carolyn 
McCarthy, Representative Ron Klein from Florida, Representative 
Mahoney from Florida, and Representative Wexler from Florida. 
And, of course, the chairman of the full committee is an ex 
officio member of the subcommittee.
    I'll yield to Mr. Miller to just go through his list of 
members on the Republican side.
    Mr. Miller. Thank you, very much. We have with us today 
Patrick McHenry. Ed Royce should be joining us shortly. Ron 
Paul, Steven LaTourette, Gresham Barrett, Tom Price, Michele 
Bachmann, Peter Roskam, and Spencer Bachus, who is the ranking 
member of the full committee, will also be attending today.
    Chairman Watt. Thank you. I'll now recognize myself for a 
5-minute opening statement, which may go a little bit longer, 
but I hope not.
    Today's hearing will examine the insurance adjustment 
process in the Gulf Coast area after the 2005 hurricanes. 
Hurricane Katrina was the single most insured disaster in the 
United States with privately insured losses of about $40 
billion. It resulted in approximately 1.7 million private 
insurance claims with the vast majority of those claims coming 
from Louisiana, Mississippi, and Alabama. Although the insured 
losses from Hurricane Rita were lower than Hurricane Katrina, 
Hurricane Rita was also expensive, with privately insured 
losses of almost $5 billion from about 381,000 claims, the 
seventh most expensive in history.
    After this unprecedented destruction, the National Flood 
Insurance Program (NFIP) paid out more than $18 billion in 
claims. The substantial claims that resulted from Hurricanes 
Rita and Katrina far exceeded the premium income to the Flood 
Program, and NFIP has borrowed most of the $18 billion paid out 
in claims from the U.S. Treasury.
    The Federal taxpayer has a financial interest in how the 
NFIP operates and specifically how the claims payment process 
works. I recognize that insurance matters are generally covered 
by the States, but the Financial Services Committee has 
jurisdiction over the National Flood Insurance Program, and 
Congress acted three times last term to approve additional 
borrowing authority for the National Flood Insurance Program to 
enable it to pay claims.
    Having given that factual backdrop, let me set some ground 
rules, address some of the questions that have been addressed 
to me by colleagues, interested parties, and the press, and 
frame the issues in the following way:
    First, what is our subcommittee's role in this process? In 
this hearing, and in every hearing or investigation we conduct 
this year, let's keep in mind that the Oversight and 
Investigations Subcommittee is not a legislating committee. Our 
sole purpose is to get the facts and build a factual record. If 
we do our jobs thoroughly and fairly, whatever legislation 
might be appropriate will be based on the facts, but it will be 
done by another subcommittee, the full Financial Services 
Committee, or elsewhere.
    Second, what do we know already? Well, there are a number 
of things that various people will tell you that they know 
about this subject but the only thing I'm prepared to say that 
we know for sure--and this is where I would like all of our 
subcommittee members to start--is that everybody I've talked to 
in the process is unhappy.
    Our citizens, our constituents, are unhappy. The one thing 
that many of them know is that their claims were not paid in a 
timely fashion, and they blame private insurers, the National 
Flood Insurance Program, or anybody else that they can find. 
They know that their claims were not timely paid. The Members 
of Congress from the Gulf, our colleagues, are unhappy because 
their own experience and their constituents' complaints 
indicate that there was not only a breach of the levees that 
were designed to protect them, but there was a breach in the 
insurance coverage, adjustment, and payment process that was 
supposed to compensate them.
    Third, private insurers are not happy. They'll tell you 
that they were just honoring the provisions of their insurance 
contracts. For a better understanding of their position, I 
commend to the subcommittee members a thoughtful article from 
the February 24, 2007, New York Times, which suggests that a 
confluence of acts of God, voters, the press, trial lawyers for 
classes of civil litigants, the threat of criminal action, 
activist judges, and self-interested politicians at the 
Attorney General, U.S. House, and Senate levels conspired or at 
least coalesced to make private insurers the victims.
    Fourth, the National Flood Insurance Program is unhappy. 
There has been some suggestion that they rolled over and paid 
claims that shouldn't have been paid by the Program or that 
should have been paid by private insurers. Most of the 
Program's flood insurance premium dollars are now going to pay 
interest on the $18 billion that was used to pay claims.
    Finally, taxpayers could end up being very unhappy. If we 
can't sort through this, and if it's not fixed, they could be 
left footing the bill and, what's more, a similar result could 
occur after future disasters. Everybody is unhappy, and I think 
that's the case, and why we need to be here today. And 
everybody is pointing fingers or blame at someone else.
    Our job in this subcommittee is to document the facts, and 
today's hearing is the start of that process.
    Finally, I've been asked, is this the only hearing we will 
have? I think it's clear that there will be other hearings, and 
I want to make it clear that those hearings, and the whole 
process, will be fair. I don't start with any preconception of 
where we'll get to or where we'll end up. I will tell you that 
I intend to do as many of these hearings as we need to, to get 
a full record for somebody to take action.
    There will be an effort to identify possible solutions, but 
we need to know the facts first. I thank the witnesses for 
being here to start the process. And I now yield 5 minutes to 
the gentleman, the ranking member, Mr. Miller.
    Mr. Miller. Thank you, Mr. Chairman. I'll try not to repeat 
a lot of what you discussed because there's a lot of facts we 
have in this that we will be gleaning through this hearing. But 
today the subcommittee will consider the performance of our 
insurance system in fulfilling it's obligation in the aftermath 
of Hurricanes Katrina and Rita in order to provide a factual 
foundation from which to legislate or improve the system.
    In 2005, hurricanes caused an unprecedented amount of 
damage to residential, industrial, and commercial property. 
It's important to note that while some insurance claims from 
these storms have yet to be resolved, more than 95 percent of 
the claims have been settled.
    For unresolved claims, the recourse of policyholders is 
either mediation or adjudication. Such processes are in place 
to ensure that every case can be resolved fairly. From the 
initial approval of the insurance policies by the State 
insurance commissioner, to the claims settlement process, one 
thing is clear. Even during a time of tremendous strain, our 
insurance system operates as it was designed.
    This is not to say that we are satisfied with the design of 
the system. Rather, the problems we have witnessed indicate 
that we must improve the system. It is not working the way that 
we would want it to work.
    I do not believe that this hearing should be used as a 
forum to blame private insurers. If we don't agree with the 
outcome, then let's change the rules and reform the system. If 
we want to assess blame, let's start by looking at the 
opportunities that we, as a Congress, have missed in the past 
to improve our system.
    As many of you know, I have been an advocate for reform of 
the insurance system for many years. The system as we know it 
is plagued with inefficiencies. If there ever was an impetus to 
reform it, it is now, when we have seen the shortfalls of our 
system exacerbated during a time of great strain.
    I also do not believe that this hearing should be a forum 
to reject the benefits of private insurance in favor of 
expanded government and increased taxpayer exposure. I have, 
along with other members of this committee, participated in 
efforts to reform the National Flood Insurance Program and, 
importantly, to modernize our National Flood Maps.
    While some might think an expansion of the NFIP would be 
beneficial in resolving some of the insurance system 
deficiencies revealed in the aftermath of the 2005 hurricanes, 
I must also refer you back to the last NFIP markup we had in 
this committee when some wanted to mandate the purchase of 
flood insurance in areas of our country where there was no 
basis to require it in order to make the program solvent.
    I am here today, as I was at that markup, to tell you that 
this is the not way to capitalize an insurance fund. A 
fundamental tenant of an insurance is to spread the risk, but 
we shouldn't be spreading it to people whose homes will likely 
never be flooded.
    The NFIP is currently solvent. The program is almost $20 
billion in debt to U.S. taxpayers. We shouldn't be mandating 
that people pay for flood insurance when they don't need it, 
and we shouldn't be asking the taxpayers to foot the bill for a 
broken program any more than they already are.
    As we move forward, I urge my colleagues to remain mindful 
that a vibrant private insurance market will help expedite 
recovery in the Gulf area. Recovery cannot take place if there 
is no insurance market. We must ensure that we do not 
inadvertently drive liquidity and capital out of these 
hurricane-prone areas. If we do that, we have only succeeded in 
harming the future of the communities that we aim to help in 
this hearing.
    Thank you. I yield back.
    Chairman Watt. Are there any other members who would like 
to be recognized for an opening statement for 2 minutes?
    Okay. The gentleman is recognized for 2 minutes.
    Mr. Roskam. Thank you, Mr. Chairman. I very much appreciate 
the opportunity to participate in this hearing today, and I 
particularly appreciate you, Mr. Chairman, for laying out the 
ground rules on what it is that we're going to be considering: 
number one, the subcommittee's role; and number two, the notion 
that everybody is unhappy. I accept the premise that everybody 
is unhappy, but I want to urge a little bit of caution.
    I come from Illinois, which is a good State from an 
insurance perspective. Illinois and the regulators there and 
the industry is robust, and when insurance companies compete, 
consumers do very well.
    I think the tone and tenor of the hearing is important 
because I think we are in a position where we, in the Congress, 
need a robust insurance industry in this particular marketplace 
that has so much at risk. We must be careful not to create, 
either through harsh language or overly aggressive regulation, 
an environment where the insurers say, ``Look, we're going to 
walk away; we don't need this hassle.'' We know that capital is 
fungible, and capital goes to where capital can excel, so I 
think that we need to be very, very careful.
    By analogy, we had a situation in Illinois where it became 
very difficult in the practice of medicine in southern 
Illinois, south of Springfield, Illinois, about half of the 
State, to the point at which many physicians said to the 
plaintiff's bar, ``You win, we lose, we are leaving'', and it 
created a great deal of adversity.
    It seems as we move forward we need to put this into 
context; 95 percent of these claims have been settled. And 
really is there anybody among us in Congress who can claim that 
we have that 95 percent success rate in their own districts? I 
certainly can't, and I think we need to focus on this 5 
percent, or I've heard even the number as low as 2 percent, of 
those claims that really need special attention.
    So Mr. Chairman, I yield back the balance of my time and 
very much appreciate the tone that you've set.
    Chairman Watt. Ms. McCarthy, do you care to be recognized 
for an opening statement?
    Okay. Thank you. Ms. McCarthy has been a long-time opponent 
of opening statements. She probably didn't even want us to make 
opening statements.
    Let me ask your unanimous consent to submit for the record 
a copy of the February 24, 2007, article from the New York 
Times that I referenced in my opening statement. I think the 
members will find it interesting, and it kind of lays out a 
whole different perspective on this.
    Let me thank our member witnesses for being here and 
indicate that in the interests of their time, and in the 
interests of preserving the subsequent witnesses' time, we will 
have their testimony and not have questions and answers. And 
then either of you, or any of you, who wish to join us up here, 
we'd be delighted to have you.
    So let's see. Who will be going first? Oh, okay. We're 
going from the right to the left, okay. Our good friend and 
colleague, Representative Bobby Jindal from the great State of 
Louisiana, is recognized for 5 minutes.
    Mr. Jindal. Thank you very much, Mr. Chairman, Ranking 
Member Miller, and the rest of the committee members. Thank you 
for providing me the opportunity to testify. I would seek 
unanimous consent to submit my longer written comments for the 
    Chairman Watt. Without objection, we're going to give 
unanimous consent to have all of your written statements made a 
part of the record.


    Mr. Jindal. Thank you, Mr. Chairman. Eighteen months ago, 
in August and September of 2005, Hurricanes Katrina and Rita 
devastated the Gulf Coast region of the United States, 
including large land areas in my home State of Louisiana.
    In the southern portions of Louisiana, the storm surge 
swept across the coastal areas causing extensive property 
damage. In my district in the City of New Orleans--you'll hear 
from my colleague as well--levees failed, and flood waters 
swamped homes and businesses for several weeks before the water 
was finally pumped back into Lake Pontchartrain.
    Hurricane Katrina was the most significant natural or 
manmade disaster to affect the United States. The effects of 
the hurricane completely destroyed and made uninhabitable an 
estimated 300,000 homes. This far surpasses the residential 
damage of Hurricane Andrew. It surpasses the combined damage of 
the four major 2004 hurricanes--Charley, Frances, Ivan, and 
    The Federal Government aided businesses and individuals 
struggling to purchase terrorism insurance after the September 
11th terrorism attacks, and we believe the people of Louisiana 
deserve the same help. With more than 53 percent of our 
country's population living in the 673 coastal counties and 
parishes, it is critical that we provide access to affordable 
insurance for these areas.
    In many coastal areas, insurance prices are a growing 
problem because of steadily rising rates. For south Louisiana 
and several of our Gulf States, we're in the midst of an 
insurance crisis. Louisianans are still haggling with their 
companies over settlements and payments a year-and-a-half after 
the storms. These problems are normally resolved within 3 
months after a natural disaster.
    Even further though, however homeowners and businesses are 
unable to rebuild because of high premiums and difficulty in 
getting insurance altogether. Since the 2005 hurricanes, many 
policies in the greater New Orleans area have gone up more than 
50 percent, and insurance costs have gone up an average of 12 
percent across our entire State.
    Obtaining insurance is difficult because only a handful of 
companies are writing property insurance in the State. In fact, 
10 of the top 25 property insurers do not do business in the 
State. Those companies that remain are striving to eliminate 
hurricane coverage from their portfolio. There are immediate 
reports that insurance companies are attempting to cancel 
insurance policies of those who weren't even affected by flood 
or wind damage caused by the 2005 hurricanes. In short, 
Louisianans are paying more for less insurance, if they can 
even get it, which is hampering our recovery from the storms.
    A couple of specific examples. State Farm Fire and Casualty 
Company, the largest residential insurer in Louisiana, has 32 
percent of the market. It has stated that it will not write new 
hurricane coverage, also known as wind and hail insurance 
policies in south Louisiana.
    Allstate accounts for 20 percent of all homeowner's 
policies and has been the State's second largest provider of 
insurance. It's implementing a Statewide 5 percent deductible 
on hurricane coverage. According to news reports, Allstate does 
not plan to write new hurricane protection policies in much of 
Louisiana. Currently, our State's commissioner of insurance is 
investigating allegations that the company is arbitrarily 
canceling homeowner policies in the State.
    Louisiana Citizens Property Insurance Corporation is the 
State-run insurer of last resort. It's currently our third 
largest insurer, and it is writing more policies than ever 
before. They write 1,000 policies per day, but they expect to 
write between 60,000 and 200,000 policies over the next year. 
But the premiums, by law, are costly, are priced above the 
marketplace. Without competition from the private sector, 
market forces are not working to drive down insurance rates.
    The bottom line is that extraordinarily high insurance 
premiums will put those small mom and pop shops or the young 
entrepreneur permanently out of business. People in south 
Louisiana will not be able to afford to rebuild.
    The insurance crisis is a classic chicken-or-the-egg 
problem. If the property owner rebuilds, in accordance with 
Federal law, he must obtain property insurance before settling 
on the property with a loan from a mortgage company but we, in 
south Louisiana, are having difficulty getting the insurance 
needed to go to settlement because companies are refusing to 
issue new policies in this area.
    I have several examples in my testimony, so I won't go 
through all of them. There was a recent example. An insurance 
saleswoman in New Iberia, Louisiana, left, scrambling to find 
insurance within 2 weeks of transferring her policy to a house 
she had just finished building. Her wind and hail, hurricane 
coverage was canceled. The mortgage company threatened to make 
her return the loan money unless she got a new policy.
    She was an industry insider, so she was familiar with every 
company that writes insurance. She was rejected by all but 
Citizens. When she finally was lucky enough to get insurance, 
her premiums went from $900 to $3,000 a year for the same 
coverage she had bought simply 2 weeks ago, 2 weeks before 
    We can go through it again. There are several examples. On 
the commercial side, HRI Management has a portfolio of 
properties worth $200 million. Before Katrina, their coverage 
cost $500,000, including a 1 percent deductible, or roughly 
$1,000 per property. Two days before the policy's renewal date, 
the insurance company told them the new policy would be $2.5 
million, including a 5 percent deductible, and would provide 
only $50 million in hurricane coverage. Without competition, 
the company has limited choices: either put up with absurd 
premiums, risk foregoing insurance altogether if they're not 
being financed by a bank loan for their properties, or move 
their business to another location.
    We must ensure that the residents of our State have access 
to reasonably priced insurance and are not forced to live 
uninsured. Unfortunately, for example, tragically, many of the 
residents in St. Martin Parish whose homes were destroyed by a 
tornado right after Valentine's Day had recently dropped their 
homeowner's insurance due to the rising insurance costs after 
the hurricanes.
    It was reported in one local paper that a 90-year-old widow 
on a fixed income who owned her home outright was faced with 
that dilemma. She could pay for food, medicine, and other 
needs, or use that money to pay for her increasing insurance 
premiums. She chose the former. Now she must rebuild her home 
after it was destroyed by the tornado without the help of 
insurance. This is completely unacceptable. Something has to 
    I'd like to the leave the committee with one last thought. 
Insurance companies argue that it is too risky to issue 
policies in south Louisiana in coastal areas. But I must point 
out two things. One, if the levees in southeast Louisiana had 
been built to withstand a category three hurricane, as we had 
been told they were, the area would not have had the extensive 
damage. We would not have had--certainly we would have had 
destruction after Hurricanes Katrina and Rita, but it would not 
have been nearly as extensive as what we saw.
    We're even now having cases of people who didn't have 
damage from the storms losing their coverage. There's certainly 
an understandable concern on the part of insurance companies to 
manage their portfolios. They need to ensure their long-term 
solvency and stability; that is certainly in everybody's best 
interests. However, in 2006, while insurance companies were 
defending their decision and not issuing new policies in 
Louisiana because they can't afford to issue this market 
according to them, they were also delivering a record $44.8 
billion in profits even after accounting for the claims of 
policyholders wiped out by Hurricanes Katrina and Rita.
    From 1999 through 2005, the industry saw its profits nearly 
double from $22 billion in 1999 to $43 billion in 2005, while 
adding $100 million to its surplus reserve. It doesn't seem 
right that insurance companies are making record profits while 
Louisiana residents cannot afford their premiums.
    Our residents have been through so much. We cannot rebuild 
our State unless our people move back. They cannot do this 
while insurance remains either too expensive or simply not 
available. We can't reasonably expect people to return home to 
rebuild their businesses.
    While we cannot go back in time to fix the present, we can 
take steps to brighten the future. I applaud this committee, 
Mr. Chairman, the members of this panel for undertaking 
examination of insurance practices in the Gulf Coast in the 
aftermath of Hurricanes Katrina and Rita. Thank you for your 
attention to this very serious problem which threatens the 
recovery of my State.
    [The prepared statement of Mr. Jindal can be found on page 
56 of the appendix.]
    Chairman Watt. I thank the gentleman for his testimony. 
You've set a precedent of doing 5 minutes in 8\1/2\ minutes, 
but we're trying to be understanding here.
    The gentleman from Louisiana, Mr. Jefferson is recognized 
for 5 minutes or 8 minutes, but don't go overboard, now.


    Mr. Jefferson. Thank you, Mr. Chairman. If it had not been 
Bobby Jindal speaking, it would have been 10 minutes to get 
that much material in.
    Good afternoon, Mr. Chairman, and members of the committee. 
I am deeply grateful to you and to the other members here for 
the attention you have given to this matter.
    The matter before us today regarding insurance claims 
payment processes in the Gulf Coast after the 2005 hurricanes 
obviously has a great effect on the rebuilding and renewing of 
our entire region and, of course, the City of New Orleans and 
its surrounding communities.
    It is necessary that we hold these insurance companies 
responsible and make them pay for the services that they 
guarantee their customers. Since the great storm that hit New 
Orleans and the Gulf, insurance companies have seemingly done 
everything in their power not to be fair and equitable to the 
very citizens who need them most, the very citizens who for 
decades have been loyal customers.
    Bobby has gone through a lot of the numbers about the 
disaster costs of the storm: more than half of the New Orleans 
population has yet to return; and there have been more than 
200,000 deaths, more than 200,000 homes destroyed, and 600,000 
jobs disrupted. And Mr. Chairman, you've also noted that the 
1.7 million private insurance claims leaves unaccounted 975,000 
of them. And you cited the categories, commercial losses, $18 
billion, homeowner policy claims, $17 billion, and $5 billion 
auto and other claims.
    Information gathered from the Louisiana Department of 
Insurance shows that 61 percent of the total insurance claims 
from Katrina came from homeowners. However, of all the money 
that has been paid out thus far, only 39 percent has been to 
    Bobby has already mentioned the $44.8 billion in record 
profits in 2005 even after the storm, an 18.7 percent increase, 
and in 2006 the profit margin was even higher, $60 billion. 
With all of these profits, the insurance companies still feel 
it necessary to deny claims of thousands of our people and not 
to insure old and new residents in the region.
    Private insurance companies have not covered many damages 
that they should have and allowed the Federal Government, 
through the National Flood Insurance Program, to handle most of 
the claims. Making a distinction between wind-driven damage and 
damage from flooding, they have shifted financial risks from 
the business community to government and to individual 
    Courts in Louisiana are flooded with litigation against 
insurance companies because most residents feel it is the only 
way they can recover anything from insurers. In fact, in the 
eastern district of Louisiana, there are 5,175 Katrina-related 
lawsuits; 95 percent of those are homeowners against insurance 
    Gene Smith, who is the chief deputy clerk of courts for the 
eastern district of Louisiana, states that typically the courts 
have a docket of about 3,000 cases for the year. Now there are 
over 3,900 pending cases dealing with homeowner's insurance 
cases alone. This does not include those who filed in State 
court, nor does this number reflect every party in the multiple 
claim and class action suits.
    Many insurance companies in the area have planned to stop 
writing new policies for homeowners and commercial businesses 
altogether. The Louisiana Insurance Department had to issue 
emergency rules to suspend insurance companies from canceling 
or not renewing residential policies or commercial policies on 
commercial properties, of course. However the emergency rule 
expires tomorrow.
    Robin Halverson, a Lott & Bloom real estate agent, was 
actually living in her by-water home by the end of 2005 and had 
completed repairs on her home by December of that same year. 
She received a letter from Allstate stating that her policy was 
to be canceled because the house was abandoned and in 
    The Louisiana Department of Insurance has received more 
than 100 complaints from customers who are being terminated at 
the end of Emergency Rule 23. The complaints all come from one 
insurance company and it appears that many other insurance 
companies will follow suit. The department is saying that there 
is no reason for many of these people to be dropped from their 
insurance company records.
    Higher premiums are a big strain on the real estate market 
back home. Premiums have risen tremendously. Ms. M. Sharpie, a 
resident of the West Bank area, of Algiers Insurance says her 
premiums have risen 100 percent. Ms. Sharpie had only minor 
damage on her home in an area of the City that was not as 
damaged as most parts of the City were. Nonetheless, her 
insurance company felt it necessary to double her insurance 
    She is also feeling the strain in her career as a real 
estate agent. Ms. Sharpie feels that many people want to move 
or come back to New Orleans but obtaining insurance makes it 
unaffordable. Two popular areas she knows most people want to 
move back to are Gentilly and Lakeview, however the only option 
potential buyers have now is Louisiana Citizens, which is 
already higher than the private market.
    The Louisiana Citizens Property Insurance is the State's 
insurer of last resort, a non-profit organization that had to 
be established by the legislature because applicants were not 
able to procure coverage through the market. The rates through 
this group are typically 10 percent higher than the private 
market and even this is not always available.
    And now it appears that since most insurance companies 
aren't going to write hurricane policies at all, they'll all 
have to be written to Louisiana Citizens, which means 
necessarily they'll be higher than the market there was before.
    Additionally officials of the Louisiana Realtor's 
Association, a State trade association that assists members 
with business and real estate matters agrees with Ms. Sharpie. 
They state that insurance premiums have risen anywhere from 30 
percent to 400 percent. A resident who purchased a $150,000 
home before Katrina would pay $1,200 a year typically for 
insurance. That same resident today could be expected to spend 
$5,000 per year.
    The high price of these premiums that extend across the 
State looks to cripple the real estate market in the State of 
Louisiana. Since it's required for one to get insurance with a 
home purchase, and many insurance companies are not writing 
policies, the insurance industry is making it doubly impossible 
to rebuild the region.
    Coupled with the increased difficulty obtaining a home 
mortgage--with not only rising but even the unavailability of 
insurance providers, it makes building our region back a mere 
impossibility. This is not only applicable to the homebuying 
market but spills over into the rental market as well, in the 
form of higher rent because of the high insurance requirements.
    HRI was mentioned by Representative Jindal a minute ago, 
but I'll state it a little different way. It's a New Orleans-
based real estate development company and it's not alone. In 
building buildings back home before the storm, the cost for 
insurance was $400 per unit, more or less, depending on the 
size of the unit and so on, but the same unit today of a 
certain size that they were referring to would cost $1,800 per 
unit if insurance were available to buy. Additionally, this 
particular building is not in a flood zone. That's an increase 
of 450 percent.
    Some of the best-case-scenario estimates did not do much 
better. The increase there would be about 300 percent. However, 
these numbers did not include higher and new deductibles on 
storms and the base deductibles. A representative from HRI also 
states that this story is typical amongst developers.
    There are countless examples of Gulf Coast citizens who 
were literally and figuratively left in the lurch by their 
providers. In order to rebuild and renew the great City of New 
Orleans, the Gulf Coast region, and most importantly, its 
people, it is vital that we make that transition back to their 
homes as seamless and as easy as possible.
    I'd like to once again thank Chairman Watt and the members 
of this subcommittee for their continuing efforts and their 
service. It will be necessary for all of us to continue to work 
together to require a better response by the insurance industry 
and to make our people who have faithfully paid their premiums 
over the years whole again.
    The largest impediment to the rebuilding of our region, I 
will repeat, is not going to be FEMA or any of these other 
things we've talked about so much. It is going to be the 
availability and the high price of insurance coverage.
    Thank you, Mr. Chairman.
    Chairman Watt. Thank you for your testimony. Representative 
Gene Taylor from Mississippi is recognized for 5 minutes.


    Mr. Taylor. Mr. Chairman, I'd like to call you and the 
committee's attention to the home of Corky and Molly Hadden. 
This is what it looked like on August 28, 2005. This is what it 
looked like the afternoon of Monday, the day after. Corky and 
Molly had $650,000 worth of homeowner's insurance on that home, 
but 17 months after the event of that storm, they've been paid 
    This is the home of Jody and Betty Benvenutti. It is about 
180 years old, and had survived who knows how many hurricanes 
in its life. This is what it looked like the day before the 
storm. This is what it looked like the day after.
    Jody is in the insurance business, so he wisely bought a 
lot of insurance for that home. He had $586,000, which he 
thought was the full replacement value, but 17 months after the 
storm, he's been paid nothing.
    What do they have in common with a U.S. Congressman, a 
United States Senator, a Federal judge, and thousands of other 
people, the people who built their houses to spec, who paid 
their Federal flood insurance policy, and had a homeowner's 
policy, because in hurricane country you don't know whether 
it's going to be the wind or the water that gets you so you 
hedge your bets with both. And like thousands of other people 
in the weeks after the storm, one after another were told by 
their private insurers, ``We're not going to pay you.''
    See, I think that contributed to a massive fraud against 
folks like Corky, against folks like Jody, but against the 
taxpayers, too, to Mr. Miller's point. See, under the Federal, 
``Write Your Own Program'', we allow the Federal insurance 
companies to write the policy. That saves the Nation the 
trouble of having people to write that policy. We pay them a 
premium for that.
    The problem is that we also allow them to adjudicate the 
claims. We let State Farm, Nationwide, USAA, and others go out 
to a piece of property like the Benvenutti's, and like the 
Hadden's, and determine how the house was destroyed. Now in 
some instances, in very limited instances, people stayed behind 
and actually lived to tell about it. And in those limited 
instances where a person could give a sworn testimony that they 
saw their house blow away before the water got here, they were 
paid, but not very many people lived to tell that story; most 
people got the heck out of there.
    So for the people like Corky, and for the people like Jody, 
who got out of there as they were instructed, they got nothing. 
The insurance companies conspired to defraud them. They 
conspired to defraud the taxpayer. And let me tell you how.
    Within weeks of the storm, State Farm and others issued 
memoranda to their claims adjusters that whenever they could 
see wind and water had been there, to blame all of the damage 
on water. That creates two problems. Number one, for those 
people with homeowner's policies, the wind damage that 
obviously occurred in the 5 hours of hurricane-force winds that 
hit their houses before the storm surge got there is being 
totally ignored.
    To Mr. Miller's point, they have a responsibility under the 
law for a fair adjudication of that claim. So when a company 
issues a memorandum to their inspectors to ignore wind damage, 
and blame it all on the water, they are by their own admission 
sticking the taxpayers with bills that State Farm, Allstate, 
Nationwide, and others should have paid. That's where the fraud 
against the taxpayers comes in.
    So, Mr. Chairman, what I'm going to ask your committee to 
do is--there are claims adjusters who walked away from quarter-
of-a-million-dollar-a-year jobs, which in south Mississippi is 
a lot of money.
    There are actually two sisters by the name of Rigsby, and 
they walked away from their jobs because they were so 
disgusted, on a day-after-day basis, with having to go tell 
people that they knew had houses that were damaged by wind--
they'd blame it all on the water so that they only got the 
flood insurance policy and none of the wind policy. They were 
so disgusted with that action done by their employer, E. A. 
Renfro & Company, which did work for State Farm, that they 
walked away from their jobs and said, ``We're not going to do 
this anymore.''
    I'd like you subpoena the Rigsby sisters. I'd like you to 
subpoena the people from State Farm and Allstate and 
Nationwide. How can they pass out a memorandum? After already 
promising our Nation that they would have a fair adjudication 
of the claims, how can they send out a memorandum to their own 
employees saying, ``Blame it all on the water and that way the 
taxpayer has to pay.''
    I'd like you to look into the antitrust. Again, they are 
exempt from the antitrust laws, so is it really fair that State 
Farm can call up Allstate and call up Nationwide and call up 
USAA and say, ``You know what, if you don't pay claims, and you 
don't pay claims, then I won't have to pay claims.'' Under the 
existing law, that is allowed. It's wrong as all get out, and 
it should be illegal.
    So Mr. Chairman, lastly I would like our Nation to look 
into all perils insurance. To Mr. Miller's point, if you've 
checked in California, you'll notice that 53 percent of all 
Americans live in coastal America. So what happened in 
Mississippi could happen in Maine, has already happened in New 
York, and has already happened in North Carolina. It happened 
four times in Florida in 2004, so it really could come to 
California one day. And is this how you want your constituents 
to be treated? Is this how you want the taxpayers of the whole 
Nation to be treated? If they're going to pull out of coastal 
America on a State-by-State basis and say, ``We're not going to 
protect homeowners anymore from anything other than theft or 
fire'', then maybe there is a vacuum that our Nation ought to 
fill, just like in the 1960's when our Nation stepped in to 
provide Federal flood insurance because the private sector 
didn't want that job anymore. Since half of all Americans are 
affected by this, isn't it time for this Congress to look into 
    Mr. Jindal and Mr. Jefferson did an excellent job of 
talking about how much the rates have gone up just for people 
who still want to get fire insurance, still for people who want 
to get theft insurance.
    And think about the irony here. We, as a Nation, tell 
people you have to have insurance if you have a federally 
backed mortgage, and yet we're saying on the flip side that we, 
as a Nation, are incapable of regulating insurance, so we're 
going to let the States do it. Therefore, there are 50 
different standards for what's right and wrong, plus when you 
throw in the territories.
    There's a lot that needs to be changed with this. I would 
ask you to put yourself in the shoes of these folks who after 
17 months haven't gotten a dime, who built their houses the way 
they should have, who paid their premiums, who, when the Nation 
said, you need to get the heck out of here, got out of there, 
and because they weren't there to witness the destruction of 
their homes, didn't get a dime.
    Mr. Chairman, I've laid a lot on your plate, but I know 
you're more than capable of making all this happen. Thank you 
for this hearing.
    Chairman Watt. Well, we thank you. We thank all three of 
you for your testimony, and I think we're more than capable of 
documenting what has occurred. Then hopefully, we'll have some 
ideas for the other committees and subcommittees about some 
responses that need to be taken also. And we assure you that we 
will do our best to document and to get all sides of what has 
    So we thank you so much. As indicated earlier, we are not 
going to subject the Congressional Member witnesses to 
questions and answers. We feel like we have access to them on 
the Floor of the House, in the halls, and we can get questions 
answered from them. And so we will use that off-the-record 
access to them to get them to address this.
    Mr. Taylor. Mr. Chairman, I do have a more thorough 
statement that I'd like to include for the record.
    Chairman Watt. Without objection your written statement, 
all of the written statements of all three of the witnesses 
will be submitted for the record, the full written statements.
    [The prepared statement of Mr. Taylor can be found on page 
61 of the appendix.]
    Chairman Watt. Thank you so much. And we'll now call up our 
second panel.
    Let me once again thank the member panel for their 
testimony, and thank the second panel for being here with us 
today. I apologize once again for the late start, but some 
things we don't have control over. There are a lot of things we 
don't have control over, and votes are certainly one of those 
    Allow me now to introduce the second panel, and I will make 
one introduction and ask my colleague, the ranking member, to 
make an introduction, and then allow Mr. Taylor to introduce 
his Attorney General from Mississippi.
    So our first witness will be David I. Maurstad, am I 
pronouncing that correctly?
    Mr. Maurstad. Yes, sir.
    Chairman Watt. Maurstad, who was appointed Director of 
FEMA's Mitigation Division and Federal Insurance Administrator 
in April of 2006, and previously held both positions in an 
acting role beginning in June 2004. In this position, Mr. 
Maurstad provides leadership for some of the Nation's leading 
multi-hazard risk reduction programs, which seek to secure the 
homeland from natural hazards. These areas of oversight include 
the National Flood Insurance Program, the National Earthquake 
Hazards Reduction Program, the National Dam Safety Program, and 
the National Hurricane Program.
    In his position, he has worked closely with public and 
private risk managers as well as leaders in government, 
industry, research, and academia. Previously, he served as 
Regional Director of FEMA Region Eight beginning in October of 
2001, where he coordinated FEMA's prevention, preparedness, and 
disaster response and recovery activities in Colorado, Montana, 
North and South Dakota, Utah, and Wyoming. And prior to that he 
was the lieutenant governor of Nebraska, a position in which he 
was elected in 1998, and previously served in the Nebraska 
unicameral legislature.
    He has nearly 25 years of experience as an insurance agent 
in Nebraska, was mayor of Beatrice, Nebraska, is the first 
locally elected official and insurance agent to head the 
National Flood Insurance Program, and holds a bachelor of 
science degree in business administration and an MBA degree 
from the University of Nebraska in Lincoln, Nebraska.
    I now recognize the ranking member for an introduction of 
our second witness.
    Mr. Miller. Thank you, Mr. Chairman. I am going to try to 
make a very lengthy bio very short because it is extremely 
lengthy and the man is extremely qualified.
    Robert P. Hartwig is president and chief economist of the 
Insurance Information Institute. Since joining the III in 1998 
as an economist, Dr. Hartwig has focused his work on improving 
the understanding of key insurance issues across all industry 
stockholders, including media, consumers, insurers, producers, 
regulators, legislators, and investors. As president of the 
III, he provides assistance to thousands of stories annually 
and covers all aspects of print, television, radio, and news 
media, while also responding to thousands of requests for III 
member companies and other constituents.
    The institute is generally recognized to be the most 
credible and frequently used single source of information and 
referral for the widely diverse insurance industry. Its board 
represents companies from all areas of the industry, including 
life insurers. In addition, some 20 other insurance 
organizations contract with III for media services.
    Dr. Hartwig previously served as director of economic 
research and senior economist with the National Council of 
Compensation Insurance, NCCI, in Boca Raton, Florida, where he 
performed rate and return in costs of capital modeling and 
testified at worker's compensation rates hearings in many 
States. He also worked as a senior economist for the Swiss 
Reinsurance Group in New York and is senior statistician for 
the United States Consumer Product Safety Commission in 
Washington, D.C.
    He is a member of the American Economic Association, the 
American Risk and Insurance Association, and the National 
Association of Business Economics and CPU Society, and serves 
on the board of directors of the Independent Insurance Agents 
and Brokers Association of New York.
    In 2005 to 2006, Dr. Hartwig served on the State of 
Florida's Task Force for Long-Term Homeowner's Insurance 
Solutions, and that's about a third of the bio, so I will stop 
at that for the sake of time.
    Chairman Watt. And Mr. Taylor is recognized to introduce 
the Attorney General.
    Mr. Taylor. Mr. Chairman, I'd like to introduce our State's 
Attorney General, Jim Hood, who, among his many accomplishments 
most recently did, I think, a phenomenal job of looking into 
the allegations against the insurance industry that I just laid 
out, the fraud against individuals, and the fraud against 
    His work has resulted in at least one of the companies 
trying to reach a settlement with the people who were left with 
nothing. And to give you some idea of how well he did his job, 
part of that settlement was that the company asked that 
whatever criminal investigation against that company would have 
to be dropped as a part of that.
    So I very much applaud him for doing what our U.S. 
attorneys should have been doing. I think he's done an 
excellent job of protecting the consumer, and protecting the 
taxpayer, and we're honored to have him here today.
    Chairman Watt. Without objection, the written statements of 
all three of these witnesses will be made a part of the record.
    And we will recognize Mr. Maurstad for 5 minutes for his 


    Mr. Maurstad. Good afternoon, Chairman Watts, Ranking 
Member Miller, and members of the subcommittee. I am David 
Maursted, Mitigation Division Director and Federal Insurance 
Administrator for the Federal Emergency Management Agency.
    The large number of claims and severity of flood losses 
from the 2004 and 2005 hurricane seasons are unprecedented in 
the history of the NFIP. The challenges these storms have 
presented to the Mitigation Division, particularly the 2005 
hurricane season's, have never been encountered on this scale 
before. Today I'll address the NFIP's financial status, mention 
some accomplishments, and point out some opportunities to 
strengthen the program.
    The NFIP makes affordable flood insurance available in 
communities that adopt and enforce measures to reduce their 
vulnerability to flooding. From 1968 to 2004, the NFIP paid out 
$15 billion to cover over 1.3 million claims. Hurricane Katrina 
alone resulted in claims totaling $16.3 billion to date.
    It is likely that the 2005 flood insurance costs will 
exceed $20 billion, including interest already paid on 
borrowing from the U.S. Treasury. Congress has increased this 
borrowing authority three times since Katrina to the present 
limit of $20.775 billion, allowing nearly all of the 2005 flood 
claims to be paid.
    That's more than 180,000 Gulf Coast residents on the road 
to recovery due to our private sector partners, our Write Your 
Own insurance companies, as well as claims adjusters and agents 
who fulfilled their responsibility to help NFIP policyholders 
begin rebuilding their lives.
    With over 5.4 million policies insuring more than $1 
trillion in assets, the NFIP collects more than $2 billion 
annually, yet we expect interest on our borrowed funds to reach 
$720 million this year. If future claims meet historical 
averages, the program will need new loans every 6 months just 
to cover semi-annual interest payments.
    Needless to say, under current loan arrangements, it's 
unlikely the NFIP will ever be able to retire this debt. 
Financial matters aside, I'm proud of how the NFIP and the 
insurance industry worked together after Katrina, using new 
information and innovative approaches to help Gulf Coast flood 
policyholders when they needed it most.
    The NFIP Summary of Coverage and the Flood Insurance Claims 
Handbook helped them through the claims process. We quickly 
resolved Katrina and Rita claims with streamlined adjustment 
and claims processes, but not at the expense of quality 
    From the beginning, FEMA general adjustors and claims staff 
were in the field conducting random and on-demand reinspection 
of damaged structures. We also reviewed sample sets of claims 
filed to ensure the integrity of the process. This is in 
addition to the regular adjustor monitoring we perform, to 
operation reviews, biennial audits and audits for cause.
    The GAO and the DHS Inspector General are investigating the 
quality of our flood claims handling, and we are cooperating 
    We learned from Katrina and we are sharing this knowledge 
with States as we help them educate and train agents who sell 
flood insurance.
    We're also working with affected communities to make sure 
they rebuild wisely. For instance, FEMA provided affected areas 
with updated flood hazard data to help guide reconstruction. 
This guidance must be used for all rebuilding activities 
involving FEMA hazard mitigation and public assistance grant 
programs because it doesn't make sense to spend tax dollars to 
rebuild to outdated standards only to face similar damage when 
the next storm comes along.
    And it will come. That's why we must continue to strengthen 
the program by protecting the program's integrity, improving 
citizens' understanding of flood risks, and reducing risks with 
proven mitigation practices. We should enhance these principles 
by eliminating discounts on pre-furn structures, strengthening 
mandatory purchase requirements, and improving data on flood 
    Levee failure vastly increased New Orleans' flood claims. 
Improper flood map depiction of areas behind levees is one of 
our primary concerns. My written testimony offers 
recommendations on how to improve the program, and I look 
forward to working with this committee and others in this 
    However there is no quick solution that will allow the 
program to absorb catastrophic loss years like 2005, and we're 
concerned about more than financial matters. Increasing risk 
awareness among homeowners and consumers with improved, 
succinct information is one of the NFIP's basic principles and 
is an important element of the 2004 Flood Insurance Reform Act.
    As citizens learn more about the risks they face, they'll 
be more likely to reduce their vulnerability, making the 
Nation's communities safer places to live, work, and do 
    I'll be happy to answer any questions that the committee 
and other members might have, and thank you for the opportunity 
to testify.
    [The prepared statement of Mr. Maurstad can be found on 
page 159 of the appendix.]
    Chairman Watt. Thank you for your testimony. Mr. Maurstad 
has set a tough act for you all to follow, having finished 
right on the 5-minute mark, and we appreciate that.
    Dr. Hartwig is recognized for 5 minutes.


    Dr. Hartwig. Thank you. Good afternoon, Mr. Chairman, 
Ranking Member Miller, and members of the committee. Thank you 
for the opportunity to discuss the important and vital role 
played by the insurance industry in the response, rebuilding, 
and recovery effort following Hurricane Katrina.
    My name is Robert Hartwig, and I'm president and chief 
economist for the Insurance Information Institute, an insurance 
trade association based in New York City whose primary mission 
is to improve the public's understanding of insurance, what it 
does, and how it works.
    Hurricane Katrina was the largest and most expensive 
disaster in the history of insurance. Claims payments to 
restore homes, businesses, and vehicle losses totaled $41 
billion on some 1.7 million claims filed by policyholders 
across six States. For all of 2005, hurricane losses topped $57 
billion on some 3.3 million claims.
    As we know, the devastation wrought by these catastrophic 
hurricanes was unprecedented and so, too, was the industry's 
response. Some 15,000 adjusters were called in from across the 
country. These men and women worked tirelessly, day and night, 
for months, often in difficult and dangerous conditions.
    For many property owners, insurance adjusters and the 
checks they cut on the spot where the first tangible signs of 
relief they had seen. Millions of American families and 
businesses devastated by the storms of 2004 and 2005 are back 
on their feet today because of the more than $80 billion paid 
to them by their insurance companies.
    Insurers are justifiably proud of their performance. As of 
the first anniversary of Katrina in August of last year, more 
than 95 percent of the 1.1 million homeowner's claims in 
Mississippi and Louisiana had been settled with fewer than 2 
percent of claims in dispute. Approximately half of these 
entered no-cost mediation programs established by insurance 
departments in both States where some 80 percent of claims are 
successfully resolved.
    Throughout the Gulf, only a tiny fraction, well under 1 
percent of homeowner's claims have been litigated. Claims 
adjustment is a highly systematic process. Adjusters work 
diligently to accurately assess the extent and cause of loss 
associated with each individual claim. If some damage is the 
result of an excluded cause of loss, such as flooding, the 
adjuster will apportion the loss accordingly.
    It is important to recognize, as Mr. Maurstad has already 
said, that FEMA routinely conducts audits of flood claims, 
including claims practices, and has the authority to review any 
claim at any time. Consumers are also protected in every State 
by unfair claims practices statutes that grant State insurance 
regulators the authority to investigate and penalize insurance 
companies that refuse to pay valid claims.
    The lessons of Katrina and the unparalleled destruction of 
the 2004, 2005 hurricane seasons include a very stark reminder 
that living along the hurricane exposed coast line of the 
United States is an increasingly risky proposition. Indeed, 7 
of the 10 most expensive hurricanes ever to strike the United 
States occurred in the 14-month span from August 2004 through 
October 2005.
    Risk-related lessons revealed in the aftermath of Katrina 
include the following. Many, if not most, coastal structures in 
the United States today are insufficiently well constructed to 
withstand the forces of a major hurricane. Homes built to 
stronger, industry supported standards however, have fared much 
    Flood insurance penetration rates are woefully inadequate. 
In parts of coastal Mississippi, for example, fewer than 20 
percent of dwellings were insured against flood. The cost 
associated with offering insurance in hurricane prone areas 
will continue to escalate as coastal populations soar.
    Florida's population, for example, has increased by 80 
percent since 1980 with the value of insured coastal property 
now exceeding $2 trillion. Hurricane Katrina made clear another 
important lesson, that only a financially strong insurance 
industry can deliver the relief necessary to help communities 
recover from major catastrophic events.
    Hurricane Katrina and the other storms of 2004 and 2005 
provided insurers with valuable insights into loss reduction 
and catastrophe response. Since Katrina insurers have 
complemented their existing investments in catastrophe response 
with a variety of new and enhanced capabilities that speed 
response times while also partnering with government officials 
to cut bureaucratic red tape that slows those response times.
    Insurance markets in most States are highly resilient and 
competitive. Unfortunately the operating environment that 
allows insurers to pay sudden and extreme losses like Katrina 
is now under siege in several States. Punitive, burdensome 
legislation and regulation accompanied by a surge in litigation 
is driving up costs and reducing consumer choice.
    Insurance rating agency A.M. Best suggested just last week 
that recent legislative changes in Florida could even lead to 
ratings downgrades for some insurers. In Mississippi, a small 
number of lawsuits relative to the total number of claims filed 
is having an inordinate impact on the health of the 
marketplace. The litigation in Mississippi, initiated just 17 
days after Katrina by the Attorney General's office, followed 
by civil actions from trial lawyers, may have accomplished what 
Katrina did not, delivery of a potentially lethal blow of 
uncertainty to the viability of a private homeowner's insurance 
market in the State.
    To summarize, the record $80 billion paid to 5\1/2\ million 
policyholders over the course of the 2004, 2005 hurricane 
seasons is a vivid demonstration of the vital role played by 
insurers in helping families, businesses, and entire 
communities recover from the devastation wrought by major 
    Unfortunately, in some States, misguided legislation and a 
surge of litigation have increased uncertainty to intolerable 
levels, leaving insurers with few options other than to reduce 
their exposures to these States.
    To conclude, the insurance industry is committed to working 
in partnership with public policymakers, consumers, and 
businesses in developing fact-based solutions to the formidable 
challenge posed by Hurricane Katrina and other disasters and 
continuing our tradition of helping families, businesses, and 
communities wherever and whenever disaster strikes.
    Thank you for the opportunity to address the committee 
today, and I'd be happy to answer any questions you may have.
    [The prepared statement of Dr. Hartwig can be found on page 
105 of the appendix.]
    Chairman Watt. Thank you for your testimony. Attorney 
General Hood is recognized for 5 minutes for his testimony.


    Mr. Hood. Thank you, Mr. Chairman. I'm honored to be here 
today representing the State of Mississippi as Attorney 
    I'm here to tell you that there were three storms that have 
occurred as a result of Hurricane Katrina. One was Katrina 
itself. The other was the failure of the insurance industry to 
pay what it owed. And now we're facing incredible escalation in 
cost to reinsure to try to rebuild. This is the third storm 
that we're presently facing.
    There is a great misconception out there that somehow we're 
trying to force insurance companies to pay for something that 
they didn't insure. Their public relations machine has done a 
wonderful job, including the Wall Street Journal, as the 
chairman mentioned.
    We're trying to make them pay for what they did insure. 
They were supposed to insure for wind. As one of my assistants 
pointed out, a saying that came up during the initial Clinton 
Administration's campaign was, ``It's the wind, stupid.''
    They're not even paying for what they insured, and they 
used several methods by which they have accomplished that. Let 
me give you an example. People down the coast--there were about 
140 mile-per-hour winds. My home in Jackson, Mississippi, at 
that capital is about 180 miles north of the coast, and it blew 
the shingles off of my roof.
    State Farm was my insurer. They didn't have the excuse not 
to pay in areas such as where I live. It blew shingles off the 
roof; I had my roof replaced; no problem. That's part of that 
85 percent of those that they say that they have paid the 
claims on. They didn't have the excuse of the anti-concurrent 
cause provision that they have in their insurance policies, nor 
did they have the exclusionary provision.
    Now where the dollars become involved are those people who 
were hit by storm surge, which is a relatively small strip 
along the coastal area of the State of Mississippi. For 
example, State Farm has one-third of the policies along our 
coastal area.
    They had approximately 9,000 homes that they had insured 
that were hit by storm surge. About 1,200 of those 9,000 wound 
up being just what we call slabs, nothing left, so those claims 
have not been settled. And when they use the term that they've 
been settled, that just means that they paid on them. That 
doesn't mean that the homeowner is satisfied with the 
percentage of payment that they may have given them.
    So the misconception that we're trying to rewrite an 
insurance policy--as Attorney General of the State of 
Mississippi, I fired a lawsuit within a couple of weeks because 
I saw where they were abusing their policy provisions, one 
being this anti-concurrent cause provision. What that provision 
provides, and let me point out to you that a very independent 
Federal judge, who is a senior status judge, been on the bench 
for years, from my area of North Mississippi, had no ties to 
the coast, is the only Federal judge on our coast handling 
these cases, a very learned judge, well respected by the Fifth 
    Judge Senter, in handling these cases, struck the anti-
concurrent cause provision. What that provision does is it says 
that, well, during the testimony of the case that was mentioned 
about the punitive damages occurring, what the insurance 
companies did was they used satellite figures and determined 
where the storm surge reached and in essence said that, ``We 
don't know exactly what took your house out, but we do know 
this from our studies, that storm surge would have taken it out 
    So during that trial there wasn't a Mississippi jury that 
decided that part of the case as far as liability. A Federal 
judge took it away from the jury and made a decision that the 
duty of an insurance company is to prove the percentage of the 
damage caused by the excluded peril, meaning the water 
exclusion. So they couldn't even prove what percentage of it 
was done by water through their own studies, much less what the 
wind did, so the Federal judge directed a verdict and put a bad 
faith instruction before the jury, and that's where they came 
down with the punitive damages. Therein lies the problem. 
People on the coast got hit with 140 mile-per-hour winds; you 
know it knocked shingles off their houses, at least, when it 
did 180 miles north at 100 mile-per-hour winds. Yet, when 
people filed the claim, they got zero; they got nothing, as 
Congressman Taylor pointed out, nothing.
    A Federal judge with a $500,000 home gets a letter saying, 
``We owe you nothing.'' That's because of the abuse of that 
anti-concurrent cause provision that the Federal judge struck 
as being, in essence, a bait and switch. You sell someone 
something and then you take it all away because you know water 
will be part of a hurricane.
    That was the reason that we filed that litigation, to get a 
quick answer, so it's not about the water; it's about the wind. 
It's about making them pay what they owe.
    How did they get around paying what they owed? They have 
established a program called ACE. That's a handling program 
adopted by State Farm, and what they did with this program is 
to hide the double engineering reports that they had. One 
person even had three particular reports on one property, 
engineering reports, one saying water, one saying wind and 
water, and another one saying wind.
    So they hid these engineering reports and didn't disclose 
it to the people. They established this wind and water protocol 
September 13, 2005, shortly after the storm, which requires 
that they--the protocol, it's a letter that went out to all 
their claims people. It says that if water got in the way, in 
essence the anti-concurrent cause provision, then you make the 
National Flood Insurance Program pay it off; we don't owe any.
    That's what happened to the taxpayers of America. They got 
dumped on by the insurance companies because their adjusters 
were out there saying, ``We're not paying for any of the wind 
because water was involved.'' And so they didn't even try to 
estimate a percentage that was done by wind that they owed. The 
National Flood Insurance Program is owed money by the private 
insurance industry.
    I'll give you a quick example, and I'm not sure--it shows 
stop, but I think I have 3 more minutes.
    Chairman Watt. You're over, but we're being generous with 
all the witnesses today, so I haven't gavelled you yet. Just 
wrap up as quickly as you feasibly can.
    Mr. Hood. I will finish briefly. In our remarks, we set 
forth some examples of people who had double engineering 
reports and weren't told. Those have been in the news media. I 
have to be careful about giving examples that--none of this 
information came from our grand jury investigation, which is 
still ongoing as far as other companies that are involved. And 
perhaps in this case if the settlement doesn't go through, we 
may be dealing with that in the future.
    One last point I would like to make is how the industry--
and this is why we need Congress to get involved. The industry 
threatens States, particularly one with 2.8 million people like 
the people of the State of Mississippi. State Farm, I reached a 
settlement with them. They indicated they were going to stay in 
Mississippi, that's the whole reason to reach a settlement; if 
I'd indicted them, they'd have left the State completely, every 
office shut down, and one-third of our insurance market gone.
    I settled it to keep them there, but what did they do? They 
turned around later and left the State to threaten a Federal 
judge, intimidate our legislature, and to intimidate the 
justice system in Mississippi. And I suspect that that's what 
they will attempt to do here as well. They've done it in New 
Jersey and other States, threatened to leave. And I think their 
antitrust provisions need to be revoked and some regulatory 
authority placed over them at the Federal level.
    Thank you for indulging me, and I'll try to answer any 
questions I can.
    [The prepared statement of Mr. Hood can be found on page 
122 of the appendix.]
    Chairman Watt. Thank you so much. I thank all three 
witnesses, and we will now recognize Members of Congress, 
subcommittee members first, for 5 minutes of questions each.
    Mr. Maurstad--I recognize myself for 5 minutes--how does 
this adjustment process actually work? If you have a private 
insurance carrier and a flood insurance policy also, who does 
the adjustment? And just talk us through how you work that.
    Mr. Maurstad. If the company is the State wind pool and 
covers the wind, and the flood program covers the flood, then 
we have an agreement with the State of Mississippi, the State 
of Alabama, the State of Florida, and other States, a single-
adjuster program where one adjuster goes out and determines 
what the appropriate responsibility, the appropriate liability 
for both the State interest in the wind pool and the Federal 
interest in the flood pool, and there is an agreement that we 
will recognize that adjuster's work.
    Chairman Watt. To whom does that adjuster report? Who is he 
answerable to?
    Mr. Maurstad. He is answerable to both programs, but I 
would say he is most answerable to the policyholder to make 
sure that the policyholder is treated fairly and promptly.
    Chairman Watt. Well, that would be in an ideal world, but 
who is he answerable to other than the policyholder?
    Mr. Maurstad. There is a preassigned, independent adjuster 
company in Mississippi. I'll just use Mississippi as the 
example. There's a preassigned, independent, adjusting firm 
that the State has acknowledged is going to handle these types 
of cases where it's the State wind pool and the National Flood 
Insurance Program. And so the State reimburses them, we 
reimburse them, but I would say that there would be joint 
responsibility for the actions of the adjuster.
    Chairman Watt. Maybe I should get to the question a little 
bit more directly. Is your testimony that it's your belief that 
the National Flood Insurance Program didn't pay any claims that 
should have been paid by private insurance carriers?
    Mr. Maurstad. I have no knowledge at this point that there 
have been any claims that have been paid by the Flood Insurance 
Program that were wind claims that should have been paid for by 
the private sector, so we have a rigorous program of oversight 
to make sure that the Federal interest doesn't go beyond its 
responsibility to the individual policyholders.
    Chairman Watt. The distinction between this wind pool and 
private companies--
    Mr. Maurstad. Well, there is a distinction.
    Chairman Watt. Okay. Well, tell us what that distinction 
is. We're trying to get to the bottom of this so I can 
understand it.
    Mr. Maurstad. Yes, sir. The wind pool, as was indicated 
before, is the market of last resort. When a homeowner or 
business owner is not able to secure coverage in the private 
market, they go to the State wind pool to get their wind 
coverage, so that's a State-run program.
    You will have other circumstances where you will have a 
policyholder, a homeowner who has a homeowner policy or a wind 
policy with one of the private insurance companies, that 
private insurance company is also a Write Your Own insurance 
company, and the Flood Program.
    Now in our arrangement that we have with the Write Your Own 
companies, they are responsible for going out and adjusting the 
claim with a single adjuster so the consumer doesn't have to 
deal with multiple adjusters. And again that Write Your Own 
insurance company is responsible for making sure that they 
allocate to the Flood Program only damages associated with 
    Chairman Watt. Let me ask the question a slightly different 
way. Are there any of the insurers in this class that the Flood 
Insurance Program paid?
    Mr. Maurstad. Mr. Chairman, I'm not sure if I understand 
your question. Are there any of the Write Your Own companies 
that were part of the class action lawsuit?
    Chairman Watt. No, I'm asking you--there's a group of 
people whose cases were settled--I mean still in process. Did 
any of those people receive flood insurance payments?
    Mr. Maurstad. I think it's very safe to say that certainly 
there were a number of them who had a National Flood Insurance 
policy. Our responsibility--
    Chairman Watt. Did the National Flood Insurance policy pay?
    Mr. Maurstad. Yes.
    Chairman Watt. Okay. That's the question I was asking.
    Mr. Hood, Attorney General, maybe you can talk to us about 
how the actual process works when one has both flood insurance 
and private insurance.
    Mr. Hood. To directly answer your question, about 630 cases 
were actually settled on the part of some private plaintiffs. 
Many of them had slabs on which they got no payment for the 
insurance company for wind--zero. That's some of the people who 
were zeroed out. We know that there was damage from wind. The 
National Flood Insirance Program paid 100 percent, you know, 
$150,000 on the structure, and $100,000 on the contents of 
those homes. So yes, there was damage that was caused by wind 
that was not paid and the percentages, we don't know the 
answers because of that private settlement.
    Chairman Watt. Okay. I'm out of time, but is there a point 
at which--for those individuals where you paid a claim and it 
was subsequently determined either through litigation, 
settlement, or otherwise--the Flood Insurance Program will be 
reimbursed for any part of what it paid?
    Mr. Maurstad. Our obligation under the policies--
    Chairman Watt. I just asked you a simple question--will the 
Flood Insurance Program be reimbursed for any part of what is 
paid in those circumstances?
    Mr. Maurstad. No, I would say no, because again, it's my 
belief that the Flood Insurance Program only paid for the 
damage that was associated by flood or the policy limits.
    Chairman Watt. Notwithstanding a determination by a court 
and/or a settlement, you're saying it's your belief that you 
didn't pay any claims that you shouldn't have paid?
    Mr. Maurstad. None have come to my attention.
    Chairman Watt. All right. Mr. Miller is recognized for 5 
    Mr. Miller. Following up on that question, I guess the 
thing that I'm a little bit confused about is that when you pay 
a claim associated with a flood, and the house is wiped off the 
foundation, you obviously turn policy limits. I'm assuming it's 
how you settle it. Would part of those policy limits include 
something that might have been damaged by wind that you didn't 
know about, like--I mean your policy limit has to include the 
roof, it has to include windows, it has to include siding, and 
it has to include whatever else might normally be damaged 
during a hurricane or a wind storm. How do you differentiate 
what might have been damaged and back that off of your 
settlement versus what was damaged by flood?
    Mr. Maurstad. Mr. Miller, that's a very good question, and 
you're right on target. But I would start out by saying that 
storm surge is a part of the flood, so if the storm surge 
caused damage to the roof for example, that you wouldn't 
normally think--
    Mr. Miller. Well, if the house is wiped out, it did damage 
the roof.
    Mr. Maurstad. That's correct. And that's part of the 
covered responsibility of the flood insurance program. But what 
we did was go through and do a calculation, number one, to make 
sure that the damage to the home in fact didn't exceed the 
policy limits because we're only going to pay what the damage 
was or the policy limits.
    But in most cases with the underwriting information that 
was available, with either physical observation or knowing that 
all that there is is a slab, you can do a calculation and come 
to a good estimate that--
    Mr. Miller. Mr. Taylor's comments were very, very good and 
I appreciated those, when he talked about the roof being blown 
off and that wasn't handled by the casualty company, you know, 
that it was just passed. Was there some deduction made on flood 
because you figured part of it could be attributed to wind 
    Mr. Maurstad. No. Again, in the case of the flood policy, 
we would pay for all damage caused by the storm surge 
regardless--it could be the roof, and we can't differentiate 
that it could be and the policy doesn't differentiate that it 
could be covered elsewhere. The responsibility of the policy is 
to pay for the damage caused by the flooding or the storm 
    Mr. Miller. Thank you for that. And Mr. Hood, Attorney 
General Hood, your comment--and I guess when I made my 
statement, maybe some people misunderstood what I was trying to 
say. I think there are some deficiencies within the insurance 
industry, as far as how the States handle it and how the 
Federal Government looks at it. And there's some crossover, and 
there's something missing because what we had in your case was 
a Federal judge reversing a State approved policy because your 
State approved policy had anti-concurrent clause in it. Is that 
not correct? And that sounded like that was what you said that 
the policy had in it and that's what the insurance industry 
used as a basis for not settling on a claim and passed it on to 
flood. Is that an accurate statement on my part?
    Mr. Hood. Yes, sir. But the policy violated hundred year 
State law on proximate cause.
    Mr. Miller. But did your State insurance commission approve 
insurance policies?
    Mr. Hood. Yes.
    Mr. Miller. That's what I was trying to make a point of in 
my statement, that we have two things occurring here. You have 
a Federal judge ruling that something might not be appropriate 
or was improperly included within a policy, which I'm certain 
you had a reason for doing that. Yet you have a State insurance 
agency saying, yes, that's part of the policy.
    Now whether the insurance industry bases their assessment 
against the homeowner for insurance based on that, I mean I've 
been in the building industry for 35 years, longer than that, 
I'm getting older now that I think about it. But my liability 
policy has all these exclusions, and when an insurance company 
writes me that policy, they base that assessment against me, 
how much I'm going to pay them, based on what they're covering.
    And in California, I'll tell you, if you have a liability 
policy as a builder, they don't cover town homes and 
condominiums and they don't cover hillsides, they don't cover 
subsides. They don't cover all those things. They write me that 
policy knowing that, and I guess my concern, and Mr. Watt, what 
we need to look at--and I've been arguing for 8 years in 
Congress about options that we might have as a Federal 
Government in oversight of the insurance agency considering all 
the different regulations, all the different States have, and 
they're all applied differently, is that we have States writing 
policies that include anti-concurrent clauses, which the 
insurance companies obviously are basing their rates on that 
clause because they're considering what their liability might 
be when this happens with a major hurricane.
    But I'm not saying who's right, I'm not saying who's wrong, 
but it looks like there's a problem and that a Federal judge 
has to overturn a State insurance agency for writing a policy 
that some insurance company based their risk on.
    Now Mr. Hartwig, you said some interesting things, and one 
thing that was brought up was profit by the insurance 
industries, and I don't know what's excessive, and I don't know 
what's not excessive. But I know that States, the way they 
allow their insurance companies to assess premiums to people, 
in California, they're not going to allow the Gulf Coast risks 
to be assessed against California, nor is--I'm assuming 
Mississippi or other States are going to allow an earthquake 
risk, a fire hazard risk in California being assessed against 
them and their policies.
    So I'm just curious how the insurance companies do in the 
States that had the hurricane. I mean was there a profit in 
those States when this thing was said and done?
    Mr. Hartwig. It's a very good question, Mr. Miller. In 
States where hurricane activity occurred in 2004 and 2005, let 
me give an example of the State of Louisiana. In Louisiana, 
Hurricane Katrina wiped out 25 years worth of homeowners 
premium and every dime of profit ever earned in the history of 
the State. In Mississippi, 17 years worth of premium were wiped 
out, along with every dime of premium ever earned in the State.
    By law in all 50 States, and as we've already discussed, 
insurance is regulated at the State level, fundamentally the 
rates in each State must reflect the experience of that State 
and that State only. So as you've rightly pointed out there can 
be no subsidy for homeowners in Mississippi or Louisiana from, 
say, homeowners or drivers or worker's compensation policies in 
the State of California. That would certainly be patently 
unfair. And in the same way, we wouldn't expect in some other 
part of country that there would be a subsidy coming from the 
States of Florida or Louisiana.
    Mr. Miller. I know my time has expired, and I thank you. 
There are so many questions to ask and so little time to do it.
    Chairman Watt. We may do a second round, so we may come 
back to you. The gentlewoman from California is recognized.
    Ms. Waters. Thank you very much, Mr. Chairman. Quickly, Mr. 
Maurstad, I think you made the statement that the Flood 
Insurance Program does not deduct for wind, and I think I heard 
that the private wind insurers deduct for water. What did you 
mean by that? Do you--
    Mr. Maurstad. What I meant--thank you for letting me 
clarify. What I meant to say is our obligation is for the 
damage caused by floods and/or storm surge in the case on the 
Coast. And we can't--so whatever damage was assessed that was 
caused by those two perils, that's what we have to pay, or the 
policy limits. And so we don't really get beyond determining 
what was damaged, other than what was damaged by the flood or 
the storm surge.
    Ms. Waters. Well, I know. That's what I thought you meant. 
If you knew, or if there was some indication that some of that 
damage was caused by wind, you would not be paying that 
    Mr. Maurstad. Well, we couldn't pay for that, because the 
policy doesn't allow for damage caused solely by wind to be 
picked up by the Flood Insurance Program.
    Ms. Waters. But as I understand it, you could have damage 
that occurred by both--some by water and some by wind. Are you 
telling me you do the assessment, you have the information, you 
just pay the water, you don't pay the wind, or you don't take 
any of that into consideration? If you have some coverage 
there, you pay everything?
    Mr. Maurstad. If we--if there is damage that's caused by 
both flood and wind, we are obligated to pay for that damage.
    Ms. Waters. Oh, so they do. Okay. Thank you. That clarifies 
that. Let me just ask Mr. Hartwig, as I understand it, company 
officials talked with each other. There was instruction to 
adjusters, and that basically what the insurance companies did 
is what we don't allow others to do. We normally call that 
collusion. But since the insurance companies are exempted from 
the antitrust laws, they can talk to each other. Are you aware, 
or do you know if it is common practice for insurance companies 
to talk with each other, and particularly in the case of 
Katrina and Rita, was there conversation? Were there any 
meetings? Did people get together? Did they talk about how they 
were going to handle this?
    Mr. Hartwig. Absolutely not.
    Ms. Waters. I didn't hear you.
    Mr. Hartwig. Absolutely not. There is no law in the land 
that allows insurance companies to get together and conspire to 
not pay claims or to fix rates. There's a misconception out 
there about the so-called McCarran Ferguson Act, a 62-year-old 
piece of legislation that provides a very, very narrow 
exemption from antitrust laws. What that Act does is it allows 
insurers to pool historical loss information and then project 
that information for the purposes of setting rates at some 
point in the future.
    The impact of this is basically to allow smaller insurers, 
which on their own don't have the same size database as the big 
national companies in order to develop statistically 
actuarially sound rates. It allows them then to compete with 
the larger companies.
    So, to give you an example, in the State of Mississippi, 
you have, for instance, in the area of auto insurance, I 
believe 46 out of the 47 auto insurers in that State have less 
than a 2 percent market share. It's exactly those types of 
companies that benefit from that very narrow--
    Ms. Waters. All right. I just want to make sure that I 
understand what you're saying, because Representative Taylor 
has taken a very close look at all of this. But if you're 
telling this committee that you are absolutely sure--and you 
said absolutely not, that there was no discussion among 
insurance companies about how they were going to handle these 
claims, that there was no--and I'm not even calling it 
collusion--no discussion, no sharing of information, no coming 
together, no instruction at all by a combination of two or 
more, then I'm going to put that in the record.
    Mr. Hartwig. Ma'am, I am absolutely unaware of any such 
conversations having ever occurred. Insurers do not--
    Ms. Waters. Okay. That's different. You're not aware of it. 
You don't know that it didn't take place?
    Mr. Hartwig. I'm not aware of it.
    Ms. Waters. All right. That's good. What do you think about 
the repeal of the exemptions from--what is it? McCarran 
Ferguson? Senator Lott says that perhaps we should all be 
taking a look at that.
    Mr. Hartwig. Well, as I just mentioned earlier on, McCarran 
Ferguson is a very narrow exemption under the antitrust law, 
which again allows basically one thing to happen and that is 
the pooling of historical information.
    Ms. Waters. So you think that it should not be interfered 
with, it should be left as it is?
    Mr. Hartwig. That's correct.
    Ms. Waters. It should not be repealed?
    Mr. Hartwig. It would have a negative impact on 
    Ms. Waters. Okay. Quickly, on the 92 percent claims that 
have been settled, would you explain to us what ``settled'' 
means? Does that mean that there were some claims that were 
closed that didn't get a dime? Does that mean that there were 
claims that were closed where people are very unhappy? Does 
that mean that everybody got something? What does that 92 
percent settlement that you talked about mean?
    Mr. Hartwig. For the record, as of the first anniversary of 
Katrina, the number is 95 percent.
    Ms. Waters. Oh, excuse me. Ninety-five percent.
    Mr. Hartwig. And I believe the number is even higher now.
    Ms. Waters. All right.
    Mr. Hartwig. But the term ``settlement'' essentially means 
this. That the insurer and the insured, the policyholder, have 
reached an agreement as to what will be paid. A sum has been 
paid. It means that the insurer--
    Ms. Waters. So none of them did not get anything? None of 
them were zero payments?
    Mr. Hartwig. A claim that was completely excluded, for 
example, because it wasn't covered under the policy to begin 
with wouldn't be in these statistics to begin with.
    Ms. Waters. But you talked about the agreement between the 
insurer and the claimant. And you're saying that there was an 
agreement that nothing was owed. Is that right? Zero in some 
    Mr. Hartwig. A claim that is not compensable under the 
policy to begin with never rises to the definition of a claim. 
When a claim is--
    Ms. Waters. But a claim in our--my humble opinion, whether 
we beat the strict definition, if someone said, I've been 
paying my premiums for 10 years. My house was damaged, and I 
think you owe me something. We consider that a claim. Now you 
don't, evidently.
    Mr. Hartwig. We consider it a claim when there is some 
damage that is compensable under the insurance policy.
    Ms. Waters. My time is up.
    Chairman Watt. The gentlelady's time is up, but we'll do a 
second round, so--
    Ms. Waters. Thank you.
    Chairman Watt. Okay. The gentleman from Illinois, Mr. 
    Mr. Roskam. Thank you, Mr. Chairman. I want to just follow 
up briefly on Mr. Miller's point, because I think that really, 
as I'm listening, is sort of the main point. What we have here 
is a disputed insurance contract essentially, and Mr. Hood, I'm 
directing this towards you. So the pending litigation 
essentially is regarding the use of the--what is the term of 
art that we've talked about? The nonexclusionary?
    Mr. Hood. Anti-concurrent clause.
    Mr. Roskam. Anti-concurrent clause. And so, the--Mr. 
Miller's point was that that has been--that was approved by the 
State. It was allowed to be offered, and now you're challenging 
it based on--it's not a fraud theory, is it? What's your 
    Mr. Hood. There are several consumer protection laws 
applicable. All States would apply to this issue as well, I 
would think. Consumer protection, ambiguous provisions, void as 
against public policy, it violates State law.
    Mr. Roskam. Okay. So then as we're moving--and that's 
really an open claim. I mean, the Federal judge is going to 
make a decision, or the circuit court judge--the district court 
judge has made a decision, and I assume it's on appeal?
    Mr. Hood. Yes, sir, that's correct.
    Mr. Roskam. Okay. And then the larger question is, how do 
you create the environment where companies want to come in and 
do business in your State? That's really the rub of it. And 
you're not suggesting that State Farm, for example, has an 
obligation to do business in your State or that they somehow 
violated the settlement agreement, are you?
    Mr. Hood. As far as the settlement agreement in Federal 
district court--
    Mr. Roskam. Well, I assume the settlement agreement that 
you structured?
    Mr. Hood. They entered into a State court order in State 
court agreeing to go establish a class and have it approved by 
the Federal court. There's a hearing going on right now in 
Federal court about that, so it's not--we're unsure at this 
point whether they're going to be able to get it approved on 
their terms.
    But as far as the anti-concurrent clause provision goes, I 
suspect, you know, you only challenge laws when you have such 
catastrophic events as this. The California earthquake, you 
probably wouldn't have an anti-concurrent clause provision 
because you don't have water in that situation.
    But were it to be challenged in other States just simply on 
the consumer protection laws, I suspect in all 50 States it may 
very well fail. Because what you're doing is you're selling 
someone something and you're giving them nothing. Because in a 
hurricane, storm surge causes 85 percent of the damage, and if 
you try to put in the fine print--and nowhere in these 
policies--nowhere--do they ever say the words ``storm surge.''
    If you try to take that away without notifying the consumer 
and take away 85 percent of the damage from a hurricane, it's 
sort of akin to a bait-and-switch, so I suppose that consumer 
protection laws in all States may apply.
    And, Mr. Miller, that goes back to your question of how do 
they assume risk in those States. I think most companies in 
Mississippi other than State Farm didn't abuse that provision. 
They didn't push it. They didn't zero people out. Some paid 
something to stay away from bad faith jury instructions. And so 
others did not necessarily use that, as did State Farm.
    Mr. Roskam. Let's assume for the sake of argument that the 
appellate court upholds the district court ruling, and I assume 
the order reads, you know, essentially void--you know, voids 
the contracts under a public policy argument, which is 
essentially what you're suggesting--then, how do you move 
forward and create an environment where carriers want to come 
in and insure your insureds? See, I don't have this problem.
    And I mentioned this in my opening statement. I come from a 
State where people want to do a lot of business and where 
insurance companies are--they're kept on a short regulatory 
leash, but it's not ridiculous.
    And I've been involved in my previous--before I came here, 
in terms of litigation, and have had some of these battles as 
it relates to, you know, how an insurance policy is 
interpreted, and I've been very aggressive in how those have 
been construed, and you win some and you lose some.
    But it strikes me that what will end up happening here, if 
you're successful all the way up the food chain, is that you're 
going to get to the point where Mr. Miller suggested, okay, 
they just rewrite all the policies. And you win in the short 
run. Claimants win this 5 percent or whatever it is, which is 
your job as the attorney general.
    But you can win the battle and lose the war, right? You can 
get to the point where a large carrier says these people are 
high maintenance and complicated, and we're not going to go 
into jurisdictions where people--and I'm not suggesting any bad 
faith here on the part of the judge or whatever, but, you know, 
it's getting like everybody is a claimant or knows a claimant, 
and so they kind of may feel, how do you get a fair shake in 
this area? We're not going to go into jurisdictions that are 
going to take our insurance contracts and act like they're an 
etch-a-sketch and rewrite them for us?
    And how do you then as the policymaker, or how do you as 
the chief law enforcement officer in your State, create the 
environment where a carrier says that's a place we want to do 
business? Because taxpayers in my area don't want to subsidize 
coastal living in your area.
    Mr. Hood. Yes, sir. There are several answers involved in 
your question as far as--that's why I reached a settlement with 
State Farm, was to keep them in Mississippi. Because, you see, 
after a storm, all the companies want to flee, especially one 
like this. And so our objective was to keep as many there as 
possible, and that's what they had indicated that they would do 
is stay in Mississippi. Because you really--I mean, if you 
don't have insurance, you can't rebuild, even if you get the 
money, you know, you can't rebuild. So we realize that. We want 
to create that market. But as to the issue of what the Federal 
judge did, I suppose there again, these policy provisions are 
not tested. They're approved by an insurance commissioner who's 
not a lawyer, has no idea of what the separate branch of 
government, our courts, have established as proximate cause. 
You can't enter into an illegal provision in a contract. You 
can't contract to kill someone.
    So if this provision violates State law, and I would 
respectfully submit, even in Illinois, where State Farm is 
located, they're probably--their proximate cause law would be 
violated by these anti-concurrent cause provisions. So it's not 
void as against public policy. That was one of the issues you 
asked that I raised in State court. The Federal judge issued it 
as violating a long-standing State proximate cause provisions.
    And so to create an environment to keep them there is what 
we're trying to encourage them to do, and that's why we're 
asking Congress for something, because they can punish 
Mississippi. That's why they pulled out. They pulled out 
because of that judge's decision, but it only affects storm 
surge areas where those provisions apply, just down on our 
    It doesn't affect northern Mississippi where my good 
friends that sell the insurance for them are being punished 
because they can't sell new policies for State Farm. It was 
meant to punish Mississippi and to make an example and to scare 
us into doing things.
    State Farm's 9 months in those six--they made $6.8 billion 
net profit. That's more than the Federal Government gave us, 
and thank goodness for what you all did of sending us money to 
try to help rebuild, but we're just now getting that money on 
the ground.
    And so we settled this to try to complement that, to allow 
people to rebuild. And we want those companies to stay, and 
we're trying to do all we can to encourage them to stay, but be 
punished by them.
    Chairman Watt. The gentleman's time has expired. The 
gentlelady from New York, Mrs. McCarthy, is recognized for 5 
    Mrs. McCarthy. I thank you. Listening to this, I certainly 
hope, Mr. Hood, that when you go back and everything is kind of 
settled down, that you'll start reaching out to other attorneys 
general throughout the State and have them change how the 
language is written. I've been reading since I got here, and 
you'd have to be a genius to figure out what's insured and 
what's not insured. I mean, you really do.
    I know when I came back from New Orleans, I looked at my 
insurance policy. I'm inland, and I had no idea whether I 
needed flood insurance, but I wasn't going to take the chance. 
I found out I actually did need flood insurance, which brings 
me back to FEMA. I was told that FEMA was redoing all the maps 
along the areas. And I was just wondering, has your budget for 
2008 increased differently from 2007 so that you'll have the 
money to bring up the flood maps? Because from what I 
understand, a lot of people didn't know they were in a flood 
    Mr. Maurstad. We are in the midst of, I believe, the third 
year of a 5-year flood map modernization effort. It's a billion 
dollar effort by the Congress. It's $200 million a year, along 
with approximately $50 million from the National Flood 
Insurance Fund to update our maps.
    The Gulf Coast area was in the process of being updated. In 
fact, some parts of the Mississippi coast, and some parts of 
the Louisiana coast were within a couple of months of having 
new preliminary maps provided to the communities to start the 
adoption process.
    Clearly, the hurricanes changed the coastline, changed the 
dynamics, and we are continuing in the process and have the 
funding in place to provide new digital flood maps for the Gulf 
Coast area. We're hopeful to have--
    Mrs. McCarthy. With that, are you working with the right 
government--you know, mortgages. Are you--how are you telling 
people you need to get flood insurance, especially if they have 
a government-backed mortgage?
    Mr. Maurstad. Sure.
    Mrs. McCarthy. Shouldn't that be mandatory, by the way?
    Mr. Maurstad. It is mandatory in the 1 percent annual 
chance high risk area, and it is mandatory for all federally 
backed mortgages. Of course, there are people with other than 
federally backed mortgages, people without mortgages who 
    Mrs. McCarthy. I don't see people along the coast in these 
mega homes having a government mortgage for some reason.
    Mr. Maurstad. Any federally backed mortgage. And so it's 
the responsibility of the lender community to make sure that 
those that are under the mandatory purchase requirements of the 
Federal law, that they in fact, the person receiving the loan 
does have a flood insurance policy. But there are many areas 
that were outside the 1 percent annual chance that were 
affected by this storm, because it was a greater than a 100-
year event.
    To get to your question, what are we doing, we have a 
public education and outreach and awareness program, Flood 
Smart, to try to get people more attuned to what their risk is. 
That's an obligation I mentioned in my testimony of the 
program. And that takes all of the partners; the lenders, the 
real estate, the insurance agents, the insurance industry, and 
local elected officials who adopt flood plain management. It's 
all of our responsibility to make sure that people who are 
supposed to have a flood policy in a high risk area do have 
that policy.
    Mrs. McCarthy. Thank you. Mr. Hood, I'm just wondering, in 
your State, and I don't know how it even works in my State of 
New York, who picks those--we have an insurance commission, and 
they go over, if the insurance company comes in and says all 
right, here's the wording, who picks the the commissioners, and 
who's watching them? And why are they accepting the kind of 
language that even probably a very well educated person 
wouldn't be able to figure out what the heck they're talking 
    Mr. Hood. That's--in Mississippi, it's an elected insurance 
commissioner, and I think in the majority of States, it is an 
elected position, and it's his or her duty to approve those 
contracts as they come in.
    Mrs. McCarthy. Does that mean that person has to run for 
    Mr. Hood. Yes, ma'am.
    Mrs. McCarthy. Does that mean that person has to raise a 
lot of money?
    Mr. Hood. Yes, ma'am.
    Mrs. McCarthy. No, I'm not going to ask that question. I'll 
get in trouble.
    Mr. Hartwig. Ma'am, just for the record, the majority of 
insurance commissioners in the country are appointed. I think 
there are only about 11 or so who are elected.
    Mrs. McCarthy. But that's the point. Because I know in New 
York they're actually appointed. The whole thing comes down to 
I'm actually wondering who is actually protecting the consumer.
    Because again, I've been reading this for probably a couple 
of months since I came back from--and you can't make sense. I 
went to my insurance agent, who I've had since I was 18 years 
old, and I said, all right. Tell me what I have? Because, 
blindly, I thought he was protecting me. And I asked him what I 
had, what am I covered?
    And then I started, to be very honest with you, because 
most people don't go through--you know as well as I do, if you 
take out insurance, this is what you're getting. And the 
further back you go, because I did look at my insurance, the 
smaller the print, and you have to figure out what each word 
means. The average consumer is not going to do that, and they 
will not. So a lot of things are hidden in here. All right. 
Consumer beware. Fine. That means our committee or other 
committees on financial services can certainly try to make that 
a difference on the Federal level.
    But I hope that, Mr. Hood, you do go back and start talking 
to the attorneys general, because to me, as far as I'm 
concerned, I met with our insurance companies back on Long 
Island, and I said, ``Listen, I know that you you're concerned 
about--you know, because we're Long Island. It's water. We had 
heard they were thinking of pulling out, and I met with all of 
them. No, we're not pulling out, you know, we haven't had a 
hurricane. We did a press conference so we could reassure my 
constituents and other constituents in the New York area. In 10 
days they announced that they were--stopped writing, and were 
going to start pulling out. No New York again. They're only 
allowed to pull out 4 percent a year. So every year, they are 
pulling out. And personally, I think it's obscene what they're 
    With that, I yield back the balance of my time.
    Chairman Watt. I thank the gentlewoman. Mr. Mahoney from 
Florida is recognized for 5 minutes.
    Mr. Mahoney. Thank you, very much. I just have a couple of 
questions. I represent a district, Florida 16, which has eight 
counties, and up until that fateful morning in August when 
Katrina slammed into the Gulf Coast, it was the site of the 
single biggest natural disaster in North America. My district 
has been hit no less than 4 times in 2 years, and one of my 
communities, Punta Gorda, is still missing about 70 percent of 
its downtown as a result of a hurricane. So this is something 
near and dear to me. Mr. Hartwig, I believe you were giving 
some statistics about the year that Katrina hit, as far as what 
happened in the States of Mississippi and Louisiana. Could you 
repeat that to me in terms of what the loss was and--
    Mr. Hartwig. In terms of the amount of premium that was 
washed away?
    Mr. Mahoney. Yes.
    Mr. Hartwig. I believe in the State of Louisiana it was 25 
years worth of homeowners' insurance premium and every dime of 
profit ever earned, and in Mississippi it was 17 years.
    Mr. Mahoney. Okay. And that was in 2005?
    Mr. Hartwig. Correct.
    Mr. Mahoney. Okay. In 2005, when the dust was all settled, 
what were the profits to the homeowners insurance industry 
    Mr. Hartwig. Nationwide, including every type of insurance 
sold everywhere in the United States, all 50 States, was $43 
billion approximately that year.
    Mr. Mahoney. And that's homeowners insurance?
    Mr. Hartwig. No. That's every type of insurance.
    Mr. Mahoney. What do you mean by every type?
    Mr. Hartwig. That would include all types of property 
casualty insurance, everything from worker's compensation to 
auto policies to commercial general liability policies.
    Mr. Mahoney. Do you know the answer--let me ask you this 
question--do you have a number on what profits were made on 
homeowners insurance?
    Mr. Hartwig. In which year?
    Mr. Mahoney. In 2005.
    Mr. Hartwig. In 2005 on a national basis, it would have 
been a negative number, but I don't know the figure.
    Mr. Mahoney. Okay. And over 25 years, is it a negative 
    Mr. Hartwig. Over 25 years in terms of underwriting profit, 
yes, it's a large negative number.
    Mr. Mahoney. So--
    Mr. Hartwig. Homeowners business, yes, on a national basis, 
if you went back 25 years, has actually been a money losing 
proposition for property casualty.
    Chairman Watt. Would the gentleman yield for a second?
    Mr. Mahoney. Yes.
    Chairman Watt. Are you saying that insurance companies are 
making their money on investments as opposed to premiums?
    Mr. Hartwig. Insurance companies do make some money on 
investments. However, homeowners insurance has been racked by 
many major catastrophes. If you go back not just to 2004, 2005, 
you can go back to earthquakes in California, you can go back 
to Hurricane Andrew, which at the time was the largest disaster 
in history. And again, it doesn't make a lot of sense to look 
at these numbers on a national basis.
    Chairman Watt. I'll yield back to the gentleman.
    Mr. Mahoney. Yes. Let me ask the question a different way. 
What you're testifying to today is the fact that if you took 
all the premiums and the money that you made investing in this 
premiums versus the losses in homeowners insurance, that it's a 
net negative number for the insurance industry?
    Mr. Hartwig. That's correct, yes.
    Mr. Mahoney. Over the last 25 years?
    Mr. Hartwig. Yes it is, sir.
    Mr. Mahoney. Okay. And so the next question is, is why does 
the industry--why do people stay in the industry of providing 
homeowners insurance if it's a money-losing proposition?
    Mr. Hartwig. In some States, it's not a money-losing 
proposition. I'm giving you the numbers in the aggregate. For 
example, in a State like Illinois, it's a profitable 
proposition. But, particularly in the last 15 to 20 years, it's 
become a very, very difficult situation, particularly in the 
more catastrophe-prone areas of the country, and that has a 
tendency to drive up the overall loss numbers on a national 
    In many States it can be profitable. However, the size of 
the catastrophes are so large, particularly since, really if 
you go back to Hurricane Hugo in 1989, which is now quite some 
time ago, the losses in aggregate exceed the actual premiums 
and investment income.
    Mr. Mahoney. Okay. Let me ask you another question, Mr. 
Hartwig, given the fact, what you're saying now is the fact 
that a handful of storms over the last 25 years has resulted in 
wiping out the profits of the homeowners insurance portion of 
your industry?
    Mr. Hartwig. There were, I think, 29 named storms in 2005. 
I believe there were about 18 or 19 in 2004. There have 
probably been over 100 named storms.
    Mr. Mahoney. But those 29 storms have basically wiped out 
the profits for that portion of your industry?
    Mr. Hartwig. The profitability in the insurance industry is 
going to be something that is both cyclical in nature and 
    Mr. Mahoney. I'm just looking for a yes or no. I mean, you 
said that homeowners insurance in the last 25 years has been a 
money-losing proposition, correct?
    Mr. Hartwig. In the aggregate, yes, on a cumulative basis.
    Mr. Mahoney. Right. And I'm just saying that basically 
these are coming from a relatively small number of storms, 
right? That has wiped out the profit.
    Mr. Hartwig. In relative terms, it seems that the number is 
    Mr. Mahoney. Okay. No, but I'm just--you know, I just want 
to make sure that I understand what we're talking about here. 
So I guess the next question I'm asking you is, is that, well, 
obviously it says that it's very important where you write and 
where you don't write, because if you write in the right 
places, you can make money, and if you write in the wrong 
places, like in my district, you can't make money?
    Mr. Hartwig. Well, actually, the reality is, is that if 
insurers are given the right conditions, they can operate under 
very risky conditions.
    Mr. Mahoney. Okay. So that's my next question, which is, 
given the situation where we need to have an insurance industry 
and people who the average American's investment in their home 
is their single biggest asset, and the fact that the insurance 
industry is, you know, an American industry and we're all 
Americans and we need to make sure that we help people, what 
would you recommend from the insurance industry's perspective 
to be able to provide coverage to people in these higher risk 
    Mr. Hartwig. I'm glad you asked that question, because 
that's a very fundamental question facing the country today, 
not necessarily just in areas prone to hurricanes, but across 
the country.
    What we need to do in this country is redouble our efforts 
to strengthen building codes, for example, and Florida has been 
a leader there, but there's much more that can be done. Places 
like California have also done a lot in terms of retrofitting.
    We need to provide coastal dwellers with incentives to 
retrofit and to mitigate their homes against disasters, and not 
only does that preserve their homes, of course, but it 
preserves lives.
    Better land use policies would be another way to go. We do 
have in this country, despite the fact that we've been raked by 
hurricanes, we have an extraordinary amount of development in 
very, very vulnerable areas. And so, as I mentioned during my 
testimony, there's currently about $2 trillion worth of insured 
coastal exposure in Florida. But despite the insurance issues 
that we've heard about today, that continues to grow at about a 
10 percent annual rate. So, land use policies are very 
important, because otherwise, we're on the steady, upward 
trajectory towards ever greater losses.
    And of course, we need a commitment by legislators, 
regulators, and others to allow risk-based pricing to prevail 
everywhere across the country, including areas prone to mega 
    Mr. Mahoney. Would you yield me 1 more minute?
    Chairman Watt. I ask unanimous consent for 1 additional 
minute for the gentleman.
    Mr. Mahoney. Okay. Really quickly, I'd like to ask the 
Attorney General, Mr. Hood, what do you think, based upon your 
most harrowing experience that you've just gone through? What 
would you recommend that we should do from a consumer 
perspective to make sure that we're providing adequate 
homeowners insurance coverage for people in our States?
    Mr. Hood. I think we either need to have an all-risk policy 
and require the private companies to write it in all areas of 
the Nation in order to be licensed anywhere in the Nation, or 
we do what Congressman Taylor has suggested, having a Federal 
program to pick them both up. Because there is a natural 
conflict of interest when you send out an adjuster who is 
working for both, allegedly, to dump off on the taxpayer.
    So I think we need fundamental reform in that area.
    Mr. Mahoney. Thank you.
    Chairman Watt. Let me, in the interest of fairness, ask 
unanimous consent that a chart--maybe I should just put the 
whole report in, since I don't want to appear to be unfair.
    I ask unanimous consent to submit for the record a document 
prepared, the title of which is ``Property Casualty Insurance 
in 2007: Overpriced Insurance, Underpaid Claims, Declining 
Losses and Unjustified Profits,'' in which there is a chart on 
page 19 that indicates that--that gives the profit and loss 
ratios for the top seven property casualty insurers and 
indicates that the industry net income for 2005 was 48.8 
percent--I'm sorry--$48.8 billion.
    And in the interest of fairness to Mr. Hartwig, I was 
looking at your testimony to see if you had submitted any 
information to justify the numbers that you were giving us, and 
noticed that you did not attach any to your testimony. But in 
the interest of fairness, I would invite you to submit whatever 
report you're working from, and we will enter that into the 
record also.
    I'm only interested in getting a fair picture here, and I'm 
not trying to get into a debate about whether insurance 
companies are making profits or not making profits.
    Mr. Hartwig. And I'll be happy to supply that information, 
which will show insurer profitability over a very long period 
of time, and just for the record, for the 19th consecutive year 
in 2006, the property casualty insurance industry reported a 
lower return on equity in aggregate than did the Fortune 500 
    Chairman Watt. Well, that's fine. The report I'm looking at 
goes back to 1987, and the only negative year for the industry, 
according to this report, was 1992, of $2.7 billion loss for 
the industry.
    Mr. Hartwig. Well--
    Chairman Watt. Every other--no, I'm sorry, 2001 was the 
other negative year, $6.7 billion loss. But the facts will be 
as they are. Both reports, whatever you submit, and this 
report, will be in the record, and it will help us to try to 
get a more balanced perspective on what we have. So we thank 
you for submitting that.
    We have now completed the first round for the committee 
members, and we have already approved a unanimous consent 
request to allow nonmembers of the subcommittee to ask 
questions. And I would now recognize Mr. Melancon for 5 minutes 
for questions.
    Mr. Melancon. Mr. Chairman--and I wasn't in the room when 
we started the initial--this hearing on this committee or this 
panel. As the Oversight Committee, are we doing swearing in of 
witnesses and panel?
    Chairman Watt. We have not.
    Mr. Melancon. We have not? Okay. Mr. Hartwig, I guess let 
me ask you a few questions if I can. Insurance business is risk 
takers and pooling of moneys to share--to cover losses and 
expenses. Is that correct?
    Mr. Hartwig. That's correct.
    Mr. Melancon. Okay. Through the years as you go, and I've 
looked at some of the returns--the statements on companies, 
when in fact you had hard markets, soft markets, profits were 
made either in the insurance business because you raised rates, 
or in the investment side because you had dropped the rates, 
and so you could lose 105 percent as long as you made your 
money on the investment side. And is that not an uncommon 
    Mr. Hartwig. Insurers do earn, attempt to earn money on the 
investment side of the equation. Of course, we have to make it 
through days like yesterday where the stock market drops 400 
percent--400 points. But it's also important, of course, that 
insurers day in and day out do their job in terms of quality 
    Chairman Watt. Just for the gentleman's information, I 
wanted to start the hearing with a moment of silence for the 
stock market yesterday.
    Mr. Melancon. Yes, 2001 wasn't pretty, and if this keeps 
up, it won't be pretty again. So I guess what I'm looking at 
and thoughts that I'm having is this. During those soft 
markets, if homeowners insurance is a loss leader or a problem 
for insurance carriers, why in fact are they discounting their 
rates in competition with each other to go buy more business? 
Because that's what they're doing by lowering their rates.
    And when the market is hard, they're bringing them up, 
they're restrictive on what they want to write. And part of the 
problem, if you're correct in what you say that the losses in 
Louisiana would have been over the last 25 years of premium, is 
that not because the insurance companies are playing games with 
their rates and then doing investment side earnings?
    And had they stayed at actuarially sound rates, which was a 
term that used to be used about 25 years ago, actuarially sound 
rates, and put the reserves away rather than paying dividends 
to the stockholders and bonus packages and severance packages 
to their executives and getting into this reinsurance market 
which allowed them instead of putting a million dollars in 
reserve to put a quarter of a million, and then use the three-
quarters of a million in hopes that they wouldn't have the 
losses, reinsurance would take it, and then they could disburse 
profits again?
    So the question or the point I'm trying to come to, to find 
out is, had they kept actuarially sound rates and not played 
the game of up and down competition based upon what the stock 
market and investments were doing, would those numbers be the 
same in losses in the States of Louisiana and Mississippi?
    Mr. Hartwig. Insurers have made every effort to keep their 
rates actuarially sound. They are regulated in such a way at 
the State level. They have to charge rates that are adequate by 
law. They can't be excessive, but they must also by law be 
adequate. They are also independently reviewed in terms of 
their total financial situation by ratings agencies.
    We are one of the most regulated industries in the country, 
both in terms of rates, but also in terms of solvency. So--but 
occasionally, there are changes in the risk profile of parts of 
the country, such as the Southeast, where we're being told by 
the leading minds in meteorology that the next 15 to 20 years 
are going to be characterized by more frequent and more severe 
    So what that means is insurers are going to have to adjust 
to that higher plateau of risk, and part of that adjustment 
means that rates will need to be commensurate with that risk, 
but it means many other things, many of the things I mentioned 
earlier on in terms of further strengthening of homes and 
encouraging mitigation.
    Mr. Melancon. And that's all well and fine, but agents are 
encouraged by companies to discount and to go find those risks, 
to write the volumes and to produce the volumes so that they 
can have the volumes they need. Now what happens to me in 
Louisiana, and it happens in every other State, is that the 
agents are as threatened by the insurance companies' threats to 
pull out, because that's their livelihood, as Mr. Hood said. 
And so they're out there, and they don't want you to do 
anything to them.
    Now I've always been a State's rights person, but I'm 
starting to wonder whether that's the right position to be in. 
And I've always been against Federal control. But--and I don't 
have a problem with regulations at State level.
    But what I do have a problem with, and I guess the question 
is, is you're taking pooled money. I'm Zurich Insurance, I'm 
Cigna, I'm INA, whatever, you're taking pooled money, not 
necessarily subsidized by any other area of the country, if you 
are doing actuarial rates.
    If you were doing actuarial rates, then your rate structure 
for the Gulf Coast or the coastal areas of this country should 
have been adequate, particularly over the long run, to cover 
the losses. Is that not correct?
    Mr. Hartwig. I think that if insurers had perfect knowledge 
of the future, which they don't, which the greatest minds in 
meteorology don't, which the regulators in the States of 
Mississippi and Louisiana do not, then it is impossible to 
forecast with complete accuracy what expected losses are. 
Effectively what you're saying is how come we didn't foresee 
the day and date and the magnitude of Hurricane Katrina? I 
don't believe that's a reasonable thing to request of insurers. 
But what we can do is gather the evidence, gather the science 
and adjust our rates and our underwriting so that we can 
provide for a better environment in a sound and financially 
secure insurance industry that can operate in these areas.
    Mr. Melancon. Now, Mr. Chairman, if I could then. The 2 
years that you talked about that were statistically losses, if 
we could take a look at what the stock market performance was, 
if you could get the staff to do that, look at that and see 
what the rate structures, if we could get that from the 
insurance companies, the Insurance Institute, and let's see 
were they discounting more, was the market performing higher, 
so were you not taking discounts to buy business? I mean, 
that's--and that's an industry thing. I was on that side at one 
    Mr. Hartwig. First of all, this notion that agents, for 
example, are encouraged to produce nothing but volume is 
completely incorrect.
    Mr. Melancon. I beg to differ.
    Mr. Hartwig. Anybody can produce volume. The question is, 
can you produce volume profitably? In other words, can you 
wisely underwrite your business? No company can survive on a 
volume-based model on its own.
    In terms of the investment income situation, State 
regulators explicitly require insurers to incorporate the 
expected returns on the investment portfolio for the benefit of 
policyholders. I worked for many years in a rating context and 
testified at rate hearings around the country, and that was my 
job to actually estimate what the offset factor was for 
investment income, because by law, it accrues, at least in the 
area of worker's compensation, to the policyholder.
    Chairman Watt. The gentleman's time has expired, and I 
recognize Mr. Taylor for 5 minutes.
    Mr. Taylor. Thank you, Mr. Chairman. Mr. Chairman, I want 
to enter into the record two letters, both claim to be signed 
by the same claims adjuster, that involve a couple standing 
over there, and that would be James and Jo Dell Beckham.
    In the first letter, the agent who is doing the adjusting 
for State Farm says: ``Hurricane Katrina demolished the 
structure, the superstructure of the residence such that only 
the concrete slab of the home was left. High winds and flooding 
forces from Hurricane Katrina were both significant in 
structure to the damage. There was significant physical 
evidence''--``There is insufficient physical evidence to 
determine the proportion of the wind versus water surge.''
    A couple of days later, another form shows up. It's 
allegedly signed by the same person. It says: ``Storm surge 
from Hurricane Katrina destroyed the residential building.'' 
This was signed by Paul Monie.
    Only one problem, Dr. Hartwig, Paul Monie says he never 
signed that second letter, that he had submitted it as a fraud, 
with a fraudulent signature of his, and that fraud went on to 
be quoted by State Farm when they wrote the Beckhams and said, 
``Based upon the results of the discussion, site inspection and 
investigation, it has been determined that damage to your 
property was caused by flooding, rising water, tidal surge.''
    Now that is an agent hired by State Farm, who submits a 
form that says these folks' residence was destroyed by a 
combination of wind and water. The second letter comes out that 
he claims is a forgery, and State Farm denies their claim based 
on this. I'm just curious. As a part of the Insurance 
Information Institute, how would you classify that?
    Mr. Hartwig. Sir, I can't--
    Chairman Watt. And before you respond, let me just do a 
couple of things for the record. Let the record show that the 
people to whom Representative Taylor referred are here with us 
    Mr. Taylor. Would you raise your hands, please, Mr. and 
Mrs. Beckham? Thank you.
    Chairman Watt. And, without objection, we will enter both 
of those things into the record.
    Now, Dr. Hartwig?
    Mr. Hartwig. Thank you. Obviously, I have not seen these 
letters, and I cannot comment on any specific claim involving 
any specific company.
    Mr. Taylor. Okay. If I may. I did pass to you a copy of a 
memorandum that State Farm sent out to their employees shortly 
after the hurricane, and I'm quoting: ``Damage to property 
caused by flood waters with available flood policy. Where wind 
acts concurrently with flooding to cause damage to the 
insured's property, coverage for the loss exists only under 
flood coverage.''
    Now that is instruction from headquarters Illinois to 
claims agents down in south Mississippi. It's really a question 
for both you and the head of the Flood Insurance Program. I'm 
curious when you said on behalf of the Flood Insurance Program 
that there was wind and water, and you're going to pay. Because 
I'm wondering what's your legal authority to make that 
    And let me walk back. The director from the Insurance 
Institute says that, you know, claims were paid expeditiously. 
In many instances, claims were paid that day. You know, it's 
kind of funny, because I remember when the two ladies from 
State Farm came to my property, and I walked them about 300 
yards from where my house used to be, and showed them pieces of 
my roof then asked them to count the steps back to my house.
    And I said, okay--and I purposely asked them not to say a 
thing. And then we got back to my house. I said, okay, ladies, 
what did you see? After showing them my tin roof about 300 
yards from where my house used to be, the first words out of 
their mouth were, ``We see no evidence of wind damage.'' To 
which I asked them, what were the floating characteristics of 
tin? And I offered to walk them over to the bay, throw a piece 
of tin in there and show that it didn't float. Which tells me 
that in one instance, State Farm had already told those ladies, 
blame it all on the water.
    And we have a Federal agency that's supposed to be 
responsible for looking out for the taxpayer saying, yes, let 
them stick it to the taxpayers. I mean, I shouldn't be 
surprised. After all, this is an agency that paid $16,000 per 
trailer to haul a travel trailer from Purvis, Mississippi, down 
to the coast, about 60 miles, plug it in, hook it up to a water 
hose and hook it up to a sewer tap. I mean, it's not like you 
guys have distinguished yourselves as good stewards of the 
Federal dollar.
    But on the flip side, in this instance, you are literally 
the puppets of the insurance industry. You have a 
responsibility to the Federal taxpayer--and I have to admit I 
have mixed feelings on this. I think it's great that people got 
their flood policies. They needed that. In fact, National was 
the only insurance agency that was really fair with people down 
    The flip side is, I think the taxpayers got stuck with 
bills that State Farm, Nationwide, USAA, and others should have 
paid. And I'm appalled that no one in your agency was looking 
for things like this gentleman's forged engineering reports. 
Can you think of any other Federal agency where someone can 
send the Nation a bill for $100,000, $150,000, or $250,000 and 
nobody ever looks to see if we really have to pay it? But 
that's what you did.
    Well, you said you didn't find any discrepancies, to which 
I want to ask, how many times did you look? And did you look 
very hard? And did you bother to look into this instance? And 
I'd like both of you to answer those questions.
    Mr. Maurstad. Well, let me start, sir, I mean, we take very 
seriously our responsibility to only pay what the program is 
responsible and obligated to pay for the damages caused by 
flooding under the flooding policy. We take it very seriously. 
We have a very rigorous program of oversight in place.
    We--and so I don't--
    Mr. Taylor. Would you walk us through that policy? Because 
I didn't--as a citizen, I saw zero evidence of that oversight.
    Mr. Maurstad. Well, there are a number of ways that we did 
it. I included it in my testimony, my written testimony, and 
alluded to it in my oral testimony. We have--assignment of the 
liability of the policies is a part of the responsibility of 
the random selections that are done to oversight the policies 
by general adjusters representing the program. We do random 
    We do--whenever requested by either the policyholders, but 
the insurance companies sometimes go out and review to make 
sure that the amounts are being appropriately paid. It's 
handled in audits of the company's performance. So there are a 
number of ways, and I will provide you with the detailed 
oversight that we have in place to make sure that what you're 
talking about does not occur. It would be a violation of the 
arrangement between the write your own companies and the 
National Flood Insurance Program.
    It's also a very--from the company's point of view, even 
though this was a large disaster, still a very small part of 
their overall operations. And they have told me on many 
occasions, they're not going to risk their reputation and their 
brand on small items such as we're talking about here--
    Mr. Taylor. Mr. Maurstad, if I may.
    Mr. Maurstad.--notwithstanding your individual claim, the 
circumstances are that there are processes in place, and 
there's no incentive for the companies to get caught with their 
hand in the cookie jar.
    Mr. Taylor. Well, to that point, Mr. Maurstad, and I'm 
going to go back to my individual circumstance. Those ladies 
were prepared to give me, and did give me a check that day. Can 
you think of any other Federal agency that allows a private 
company to write a $200,000 check that day without anyone 
looking over their shoulder?
    Chairman Watt. The gentleman's time has expired, so I'm not 
going to let him ask another question, but I'm going to let 
these two gentlemen respond.
    Mr. Maurstad. There might not have been anyone looking over 
their shoulder that day, but that file would be reviewed, and 
it would be made certain that they didn't pay for more than 
what you should have been paid under your National Flood 
Insurance policy.
    Mr. Taylor. But you accepted their statement that--
    Chairman Watt. The gentleman's time has expired. I'm sorry.
    Mr. Maurstad. Let me--if I could just conclude, because I 
gave a slightly insufficient answer. If I could elaborate just 
a bit.
    Chairman Watt. Well, I don't want to cut you off, Mr. 
Maurstad, but what you are saying now seems to be inconsistent 
with what you said before. Because I gave you the opportunity 
to tell me whether The National Flood Insurance Program had 
overpaid any claims. You say that you're not looking at it on a 
daily basis, but that you're reviewing later, and you 
determined that none of these claims were overpaid. So it seems 
to me that you are already on the record on this question.
    Dr. Hartwig, there was another question that I can't 
remember what it was that you've been called on to respond to. 
If you remember the question, we'll get your response.
    Mr. Hartwig. I don't remember what it was either.
    Chairman Watt. But we need it quickly.
    Mr. Hartwig. Well, let me just respond this way, that 
insurers make every effort to pay every amount that is due 
under the terms of the insurance contract for the types of 
coverage for which people purchased that policy. And so 
insurers and adjusters work diligently to make sure that 
    And getting back to the numbers, again, $41 billion, the 
lion's share of that being in the homeowners area, is really a 
demonstration of the fact that our insurers are doing that. And 
let me just put things in proportion. Even in the cases of slab 
claims, for instance, in the majority of those cases, to my 
knowledge, insurers were paying money as well. So, this notion 
that there was some sort of blanket denial of various types of 
claims is untrue.
    Chairman Watt. Thank you. The gentleman from Mississippi, 
Mr. Thompson is recognized for questions for 5 minutes.
    Mr. Thompson. Thank you very much, Mr. Chairman. Attorney 
General Hood, as you know, I represent a portion of the 
district that received some damage from Katrina, and I know 
that you have been investigating a number of claims with 
respect to Hurricane Katrina. And you know that there are 
several Congressional committees who are looking at many of the 
issues. Have you shared with the local U.S. Attorney's Office 
in Mississippi your work?
    Mr. Hood. Yes, Mr. Chairman, we have tried to work with 
them. The example that Congressman Taylor just gave about the 
forgery, the forged engineering report, one said it was wind, 
the next one says it was water. If I'm correct about that case, 
that's a situation where I think the forgery actually occurred 
in another State. We needed the Federal Government engaged and 
involved in working on these type of cases, as well as the 
National Flood Insurance program issue, as to whether or not we 
taxpayers had to shoulder costs that should rightfully have 
been paid by the insurance industry.
    And part of the numbers that we've been talking about, the 
profits, and why they've increased and actuary tables, one of 
the things that the companies have adopted is this ACE program 
State Farm was sold by McKenzie Consulting out of New York.
    What it's done is--State Farm is just an example. Allstate 
purchased it and others have done it as well. In 2002, State 
Farm returned 70.6 percent of the premiums to their 
policyholders. After implementing some of this ACE program, it 
went in 2005, they were only returning 51.6 percent, the most 
catastrophic year in history.
    What they're doing is, they're using these engineers, these 
so-called independent engineers, and what those are doing at 
this program is they jettisoned all their adjusters, their 
engineers, and they were able to use someone who is supposedly 
independent when they do 85 percent of their business just for 
State Farm.
    Mr. Thompson. Would you be willing to share your work with 
this committee and other Congressional committees as we go 
forward in looking at this?
    Mr. Hood. Yes, sir. And there were examples I had that I 
was unable to disclose because of grand jury secrecy. We have 
those documents and would be happy to share them with the 
    Mr. Thompson. Mr. Chairman, if I might add, would it be in 
order for a request to go to the Attorney General to ask him 
for the benefit of his investigative material?
    Chairman Watt. We plan to leave the record open from this 
hearing for 30 days to submit additional questions, and we will 
consider any question that is submitted to us for submission to 
the witnesses. I won't necessarily commit to ask it, but we'll 
certainly consider it.
    Mr. Thompson. Thank you, very much. General Hood, State 
Farm and other insurance companies have portrayed themselves as 
being besieged by Katrina victims who did not buy flood 
coverage and now want someone to pay for their flood damage. 
Isn't it true that State Farm and other insurance companies are 
using any and all means to refuse to pay claims made under wind 
policies for wind damage?
    Mr. Hood. Yes, sir, Mr. Chairman. That's exactly what our 
point is. It's a misconception that we're trying to change the 
policy somehow. We're just trying to make them pay for what 
they owe under the wind policies.
    Mr. Thompson. Mr. Hartwig, in your testimony, you state 
that an adjuster should apportion the loss if some damage was a 
result of an excluded loss such as flooding.
    Mr. Hartwig. Correct.
    Mr. Thompson. Sir, if I take--so if I take that you would 
not disagree with the practice of denying the coverage for wind 
damage completely just because a portion of the damage was 
caused by water?
    Mr. Hartwig. If I understand your question correctly, I 
think you're asking if the insurer would deny the claim 
completely just because of some presence of water. The answer 
to that would be no. That would not be practice in the 
    Mr. Thompson. And to your knowledge, there's no such 
    Mr. Hartwig. I am not aware of such a practice.
    Mr. Thompson. With respect--have we put this in the record 
yet? Mr. Chairman, just, again, Mr. Taylor has just reminded me 
that this memorandum that the industry uses says just the 
    Chairman Watt. Without objection, we'll submit that for the 
record. You need to give me a copy of it so that we can get it 
to the clerk.
    Mr. Thompson. And I'll yield the balance of my time to Mr. 
Taylor for further follow-up.
    Chairman Watt. I'm afraid your time has expired, but with 
unanimous consent, we'll give Mr. Taylor 2 additional minutes. 
By unanimous consent, Mr. Taylor is recognized on Mr. 
Thompson's time for 2 additional minutes.
    Mr. Taylor. Mr. Maurstad, I really would like to get back 
to this because as someone who knows a heck of a lot of people 
who fall into this category, again, I want to, on behalf of all 
of them, express our thanks that the only agency that was fair 
with people was the National Flood Insurance Program. I did not 
receive a single complaint from a single south Mississippian 
that their flood insurance wasn't paid.
    What troubles me is the apparent and total lack of 
oversight on the part of your agency as to whether or not the 
taxpayers had to pay claims that should have been paid by the 
private industry. I have shown you a memo where a claims 
adjuster says his name was forged on a fraudulent document. I 
can get all of that as a Member of Congress. I have to believe 
that your agency could have found that, looked into that 
instance and determined whether or not the taxpayers were stuck 
with a bill, in the case of this company, that State Farm 
should have paid.
    I don't recall a single--south Mississippi is a community. 
We all know each other. Not much happens that people don't tell 
me about. I can't think of a single constituent of mine who 
said, you know, the folks from the National Flood Insurance 
Program came by my property today to see if there was a fair 
adjudication of their claim, whether it was wind or water. Not 
    Now again, so when you're telling me you're looking to see 
if we were treated fairly, I see no evidence of that. And that 
troubles me, because the same year that those guys made $44 
billion in profit, our Nation lost $20 billion in flood 
insurance. I don't think it's a coincidence.
    Chairman Watt. The gentleman's time has expired, so ask a 
question and Mr. Maurstad can respond.
    Mr. Maurstad. Well, Mr. Taylor, I mean, the program is 
designed as a public-private partnership. There is a legal 
between the write your own companies and the program that if 
breached we would seek every remedy available to us to make 
sure it was right.
    But the situation, and what is key is whether or not in 
your situation--you indicated, I believe that you said they 
wrote you a check, the Flood Insurance program wrote you a 
check for $200,000. That $200,000 represents the damage that 
was caused by flooding, that the policy that you purchased is 
obligated to pay you for. And that's what the program did 
throughout the Gulf Coast, a hundred and eighty-some thousand 
    We do have a rigorous program for oversight to make sure 
that there are not common practices of the write your own 
companies discharging their responsibility on the Flood 
Program. We take that very seriously. That would be an 
egregious act for the Flood Program to do that. And again, it's 
not to my knowledge that it did happen. What did happen is in 
situations like you indicated, and which I'm glad, quite 
frankly, did occur, because we wanted policyholders to receive 
what they were obligated by the Federal Government as quickly 
and as fairly as possible, and that's what the focus is on, 
notwithstanding what the insurance wind companies are obligated 
for under their policies. We focus on the National Flood 
Insurance policy, making sure that the damages from flood are 
paid to policyholders.
    Mr. Taylor. Mr. Chairman, I'd like to ask unanimous consent 
for 1 more minute.
    Chairman Watt. Do I hear any objection? Is this your last 
    Mr. Taylor. Absolutely.
    Chairman Watt. The gentleman is recognized for 1 additional 
    Mr. Taylor. Mr. Director, you made the statement that where 
wind and water exist, the law says that the flood policy will 
pay. I would like to see where that is in the code, and if it 
is indeed the case, then I think you need to be spreading that 
message to people in coastal America, because they may not need 
to go through the heartache of having a State Farm or an 
Allstate or a Nationwide tell them no. They may not need to pay 
a policy if you're going to do that, but there definitely needs 
to be a clarification. I'm not so sure you're talking within 
the bounds of the law, but if you are, I would like to have 
that publicized well so that people in coastal America can make 
that choice for themselves.
    Mr. Maurstad. And I will get that for you, but as a point 
of clarification, I'm going to use the example of a roof. If 
that roof is damaged by both storm surge and flood and wind, 
the policy is obligated to pay for the damage associated by the 
storm surge and the flood.
    Chairman Watt. Okay. Without objection, we're going to go 
an additional round for subcommittee members only and restrict 
the time on this round to 3 minutes for each subcommittee 
member. And I recognize the ranking member for 3 minutes.
    Mr. Miller. Thank you. If any egregious act occurred on any 
part of an insurer, they need to be held accountable. I think 
there's no doubt about that. Mr. Hood, there's been talk of 
collusion. Did each of these insurance companies handle the 
claims in the same identical way where you think they went out 
and talked and just came out and this is how we're going to do 
it? Is there any evidence of that at all?
    I mean, I know you're unhappy with some--the way it was 
done, but is there--I mean, is it like a bunch of little Xerox 
copies, they all met behind a room and everybody went out and 
did the same thing?
    Mr. Hood. Our investigation, and I can't really talk about 
other targets other than those that have been publicly 
disclosed, being State Farm, but most didn't zero people out 
with that anti-concurrent cost provision.
    Mr. Miller. Okay. So they were different. Mr. Hartwig, how 
many claims do you think go through the State-run mediation 
satisfactorily, and is the State system working in this regard 
and the proper market conduct exams being conducted? And, you 
know, if not, do we need more criminal prosecutions and 
lawsuits because they're not being handled properly?
    Mr. Hartwig. Well, with respect to mediation, thousands of 
claims are being run through those systems in both Louisiana 
and Mississippi, and if I go back to Florida in 2004 with those 
storms, I believe a total of about 12,000 claims went through 
that particular system.
    Now, mind you, while 12,000 may sound like a large number, 
that compares to about 2.3 million claims in that State that 
year, so it's a very small number, and about 90 percent of 
those were resolved successfully. In Louisiana and Mississippi 
in 2005, that number is about 80 percent. So it's a good 
system. It's a system that works.
    Mr. Miller. It does work.
    Mr. Hartwig. It's a system that's much more certain than 
litigation. It's one that brings about resolution and closure 
much more expeditiously and with much less cost. For instance, 
a trial lawyer typically takes a third of the typical award.
    In terms of oversight, there is a tremendous amount of 
oversight in the system, again, consumers are protected at 
every level through various Unfair Claims Practices Acts and 
other acts that apply to the transaction of insurance.
    Mr. Miller. Mr. Hood, you talked about basically vague, 
ambiguous language within policies and such that were difficult 
to enforce. Was that a correct statement I heard from you?
    Mr. Hood. I don't recall--
    Mr. Miller. You talked about some--I wrote down ambiguous 
provisions within the policies that were hard to enforce. And I 
noted that, because that was really problematic to me, because 
the problem I've had and I've been stating all along is, you 
have basic insurance commissioners or the Office of Insurance 
Commissioners have to approve all of these.
    And I'm just a poor builder, but I know any contract I ever 
do, if it's vague and ambiguous, it's not enforceable. And 
surely some insurance commissioner in Mississippi has got an 
attorney. And if they're passing out and stamping insurance 
policies that are vague and ambiguous, shame on them. If 
they're stamping insurance policies that Federal judges have to 
remove clauses from, shame on them.
    And I feel sorry for Mr. Taylor and others who have lost 
their home and such, but maybe we need to start looking in 
several directions instead of just looking in one direction for 
fault here, that if insurance commissioners, and that's the 
problem I've had with as many agencies we have throughout this 
Nation to determine policies and regulations they're going to 
place on the business sector that they have to comply with and 
people spend more time often and money in compliance than they 
do trying to do their job.
    But you need to look maybe internally, and I--you know, you 
need to represent the people of your State. I'm not criticizing 
you for that at all. But maybe you need to look back 
internally. And if your insurance commissioner or their 
agencies are approving polices that are not enforceable or 
vague and ambiguous, maybe you as the attorney general need to 
look back on Mississippi and correct that in the future. I 
mean, that's where I'd go.
    But, I mean, we can't just blame one side in this.
    Mr. Hood. These policies are pretty much standard in 
California or all--
    Mr. Miller. Yes, but you approve them within your State. 
You don't approve California's. You approve Mississippi's.
    Mr. Hood. That's correct. But there again, you can't put a 
provision in a contract that's illegal. You can't make a 
    Mr. Miller. But I can put a provision in that is not 
    Mr. Hood. That's correct.
    Mr. Miller. And you used the word ``ambiguous'' when it 
came to settling a claim, because I wrote it down, because that 
really bothered me. And when I talked to the chairman before, I 
was concerned about the regulations we have that are not 
working throughout this country and it's been demonstrated in 
the Gulf States that there's a problem.
    Mr. Hood. We submitted a bill in our State legislature 
shortly after Katrina went through. It was a consumers 
insurance bill of rights that required standard language, and 
maybe the ambiguity came when I was discussing their failure to 
place in their water exclusion the words ``storm surge.'' And 
under law--
    Mr. Miller. Additional 30 seconds?
    Chairman Watt. Without objection.
    Mr. Miller. My concern is that it's like you've been in a 
bar fight. Well, we do things when we're in a bar fight we 
might not otherwise do because we're angry. There are a lot of 
people in your State who have been hurt because of a major 
disaster, and there are a lot of insurance companies that lost 
a lot of money, and, you know, they're trying to turn a profit, 
    People on both sides are looking at this thing trying to 
determine how to come out. I just pray that what you do in your 
State doesn't create this exodus of the private sector. Because 
if you do that, you can put all the language you want to into 
law that says we're going to protect the people. But if they 
can't get anybody to write a policy on it afterwards, then 
you're not protecting your people.
    And Mr. Chairman, I thank you for the additional time. I 
yield back.
    Mr. Hood. California--
    Chairman Watt. I think he was just lecturing you rather 
    Mr. Miller. I was lecturing.
    Chairman Watt. He never asked a question, so I'm not going 
to allow you to answer the nonquestion. Mr. Mahoney is 
recognized for 3 minutes.
    Mr. Mahoney. Thank you, Mr. Chairman. This has been very 
enlightening for me today because I didn't realize for the last 
25 years that the property and casualty industry has been a 
losing money proposition. So I appreciate, Mr. Hartwig, of you 
telling me that the insurance industry has been doing this as a 
public service for the American people.
    And as such, it makes me ask the question, which is, in the 
State of Florida, you know, one of the things our insurance 
commissioners are trying to do is they're trying to figure out 
how to incent the insurance industry to stay in and to provide 
services, their services to the people of the State.
    And one of the things that happened in the State of Florida 
as an incentive was the idea that we should provide insurance 
companies the ability to operate ``pup'' companies or 
subsidiary companies in order to operate in the State. And my 
question, Mr. Hartwig, to you is, if it's already a money-
losing proposition, why would there be a need for an insurance 
company to operate a subsidiary in a State?
    Because in my simple way of looking at insurance is that 
the bigger the pool, the more people that are, you know, 
contributing to it, the safer it is for both the insurance 
company and the person receiving the insurance in terms of 
making sure that the claims are being able to be paid. Why 
would these insurance companies in the State of Florida and 
other States operate in subsidiaries as opposed to operating 
just as a nationwide company?
    Mr. Hartwig. A couple of things. First, your first comment, 
the industry operating as a public service entity, that's not 
been the case. When I talked about the fact that there's been 
consistent losses for 25 years in the aggregate, I was 
referring specifically to homeowners insurance.
    But in terms of ``pup'' companies--
    Mr. Mahoney. So homeowners insurance has been a loss leader 
or a public service?
    Mr. Hartwig. Not a loss leader. It's been a money loser.
    Mr. Mahoney. Okay. And why would the industry continue to 
operate if it loses money?
    Mr. Hartwig. Again, as I said earlier on questioning, that 
in aggregate, that has been the case, but not in every State. 
And in some States like Florida, they've had a disproportionate 
    Mr. Mahoney. Okay. Thank you.
    Mr. Hartwig. In terms of ``pup'' companies, if people 
aren't aware of what ``pup'' companies are, effectively, they 
are subsidiaries of insurance companies that operate in a 
single State typically. And the question is, is why would an 
insurer do such a thing?
    There are a variety of reasons they might do it, in part 
because usually these operations are set up in States where the 
risk characteristics of operating there are significantly 
different from the overall business. So, Florida homeowners 
insurance would be a good example of that. You might have a 
separately capitalized company. It has its own set of rates and 
underwriting guidelines, and you run that company differently 
than you would operate a homeowners insurer, say, in Indiana, 
Illinois, or Ohio.
    So the difference in the business is sufficiently great 
that it needs to be handled differently, and that is basically 
tied to the risk associated with operating in that State.
    Mr. Mahoney. But that being the case, isn't one of the 
benefits of having a subsidiary company to be able to protect 
the parent in the particular case of a catastrophic loss 
business event that would threaten the welfare of the parent 
company? I mean, isn't that one of the benefits of subsidiary 
    Mr. Hartwig. The benefit and the rationale is to isolate 
the risk. And it is very important that insurers keep in mind 
their obligations to their millions and millions of 
policyholders across the country. It is the case that no 
insurer can afford to be brought down by its experience in a 
given State. And I think it's extremely important. I mean, one 
thing we've talked about here a lot about is insurer profits. 
And there seems to be, I don't know, a need or desire to drag 
these profits as close to zero, if not a negative number, as is 
humanly possible.
    The reality of it--
    Mr. Mahoney. So you are agreeing that one of the things is 
to protect the insurance company from being brought down, as 
you said?
    Mr. Hartwig. Part of the rationale for a ``pup'' company is 
to isolate that risk.
    Mr. Mahoney. Okay. That's my understanding.
    Chairman Watt. The gentleman's time has expired. I'm being 
stricter with the time, because we must clear this room for 
another meeting.
    Mr. Mahoney. I appreciate it, Mr. Chairman.
    Chairman Watt. I recognize myself for 3 minutes, just to 
ask a couple of questions to clarify.
    Mr. Maurstad, Dr. Hartwig said that one potential solution 
to some of this might be encouraging mediation of claims. I 
have a memo that the National Flood Insurance Program 
apparently sent out which basically prohibits Write Your Own 
principal coordinators or participants from allowing mediation.
    It says that your office apparently thinks that allowing 
any State entity to engage in this process would subject all of 
you to State regulation. Is that your position?
    Mr. Maurstad. Yes. We do believe that there are 
    Chairman Watt. Okay. If it were clarified in legislation, 
would that be helpful, in your opinion?
    Mr. Maurstad. Well, that would reduce one of the objections 
to it. I mean, part of it is that 99 percent of our claims are 
handled without any legal recourse at all, and it's a resource 
issue as to whether or not that's the only way that a claim can 
be handled. The Reform Act of 2004 required and we've put in 
place the appeals process for policyholders. So, in this case--
    Chairman Watt. In other words, you have other objections 
other than the fact that it was subject you to State 
    Mr. Maurstad. Yes.
    Chairman Watt. Why don't you submit whatever other 
objections you have so that we have that information and can 
make it a part of the record so that when people look at it and 
other subcommittees consider possible solutions to what we are 
trying to do here, we have a balanced approach on that?
    Now I'm going to ask one more question of Mr. Hartwig, 
because I'm a little concerned that this hearing has maybe been 
misrepresented, and I just want to use this to send a strong 
message to those out there who may be inclined to misrepresent 
what we're trying to do here.
    The ranking member told us, Dr. Hartwig, that you were 
invited because you were an expert in insurance, and then I get 
a memo that was sent out by representatives of State Farm 
saying that you are here testifying on behalf of the insurance 
industry. My question to you is, are you here testifying on 
behalf of the insurance industry?
    Mr. Hartwig. I'm here to testify on--as an expert within 
the insurance industry.
    Chairman Watt. All right. That's--
    Mr. Miller. May I make one quick point?
    Chairman Watt. Sure.
    Mr. Miller. I selected him because I looked at his resume 
as chief economist of the Insurance Information Institute. Our 
side believed he was most qualified and knew more about 
insurance than anybody we could bring before this committee who 
was not working for any insurance company.
    Chairman Watt. And I absolutely respect that. The point I 
want to make here is that I don't think anybody who's been here 
the course of this hearing today would suggest that I, as the 
Chair, have not framed the issue in the most balanced way that 
it could possibly be framed.
    And I'm going to submit for the record, by unanimous 
consent, this memorandum to the Great Lake Zone employees from 
some senior vice president who first of all says that--
undermines Mr. Hartwig's testimony by saying that he's here 
representing the insurance industry, and then undermines the 
impartiality that we have tried to proceed under by 
representing that no one from State Farm nor any other 
insurance carrier has been invited to testify. We're going to 
get to that.
    But if you all would tell the folks at State Farm, I see 
some of their representatives in the audience, that if they're 
expecting to get a fair hearing, they don't get it by trying to 
sabotage the hearing process that we have. We can't do 
everything in one day, but I guarantee you, by the time we get 
to the end of this process, we will have heard from everybody 
in this process who wants to be heard.
    And just to prove that, I'm going to ask unanimous consent 
to submit for the record statements that today were submitted 
by the National Association of Realtors, a statement of Gilbert 
Randolph LLP on behalf of the Mississippi Center for Justice 
and William Quigley, Professor of Law and Director of the 
Loyola Law Clinic, and Gillis Long, Poverty Center, Loyola 
University, New Orleans College of Law, a statement of the 
Mortgage Bankers Association, a statement of Jeffrey Rose from 
Lake Shore, Mississippi.
    I just want to close this by making it clear that we are 
going to continue to try to build a factual record in this 
subcommittee, and anybody who goes out of here and suggests 
that somehow we're on a witch hunt or they haven't been asked 
to testify or won't be allowed to testify, please ask them to 
call me before they send out these memoranda to their 
employees, because I don't appreciate it.
    Now the Chair notes that some members may have additional 
questions for the panel, including the members who do not serve 
on the committee but who participated in the hearing today. 
Without objection, the hearing record will remain open for 30 
days for members to submit written questions to these witnesses 
and to place their responses in the record.
    Without objection.
    This hearing is adjourned, and we want to thank the 
witnesses for appearing and testifying, and I've been asked to 
request that you all kindly exit as quickly as possible to 
accommodate the next meeting that's taking place in the room.
    Thank you so much.
    [Whereupon, at 5:25 p.m., the hearing was adjourned.]

                            A P P E N D I X

                           February 28, 2007