Honor the Contract: The Long-Term Benefits to Insurance Consumers
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In any major tragedy, and particularly those wrought by Mother Nature there is a natural desire to ensure that innocent victims are compensated for the harms they suffer. It is tempting, in such circumstances, to adopt a simplistic view that ordinary consumers ought to be protected from insurance companies, even where the pertinent insurance policies foreclose the relief the consumers are seeking. To succumb to that temptation, however, is to disserve the long-term interests of consumers generally.
To be sure, insurance companies must stand by the plain meaning of their agreements, and courts should not immunize them from bargained-for risks, even if enforcing coverage will impose a financial strain. At the same time, however bending policy language beyond its natural meaning to ensure compensation of sympathetic victims of natural disasters does not simply benefit "vulnerable" policyholders at the expense of "deep pocket" insurance companies. To the contrary, as we discuss below, a wealth of economic data and academic literature shows that such an approach to insurance contract interpretation ultimately harms other consumers, who pay higher rates to compensate for the greater risk borne by the insurance industry. In some circumstances, as illustrated by the aftermath of the decision below, contorting policy language to facilitate recovery by sympathetic victims of a weather-related tragedy may force insurers simply to cease providing coverage-decreasing consumer choice and damaging the economy as a whole. At the same time, stretching the language of insurance contracts beyond its plain meaning ignores the institutional role of state insurance officials, who regulate insurance to ensure that carriers are solvent and that rates are not excessive or unfairly discriminatory. Although genuine ambiguities in insurance contracts should be interpreted to protect insureds-who do not draft their agreements and who generally lack the information available to those specializing in the business- rewriting contract language approved by state experts upsets the regulatory scheme and increases the risk of carrier insolvency.
Such contract reinterpretation is especially inappropriate here, where state officials not only approved the contracts and rates at issue but expressly warned consumers that those contracts do not cover flood-related damage-that coverage for flood damage required separate insurance from either the National Flood Insurance Program or certain private insurers. By erroneously restricting the meaning of the policy term "flood" and ignoring the considered judgment of these insurance policy officials, the decision below threatens to harm consumers through higher costs, consumer dissatisfaction, and a shrinking pool of insurers.
INTEREST OF AMICUS CURIAE
Amicus Curiae FreedomWorks (formerly Citizens for a Sound Economy), a nonprofit, nonpartisan organization dedicated to promoting free-market solutions to economic problems at the state and national levels, believes that the district court' s decision creates these kinds of risks to consumers. For more than two decades, FreedomWorks and its predecessors and affiliates have been leading voices on a range of economic policy issues, from taxation and regulation to entitlement reform, competitiveness, and consumer protection. Freedom Works is vitally interested in these cases because they highlight both the importance of promoting a viable property insurance industry by enforcing the plain language of contracts approved by state experts, and the harms to average consumers created by an overly aggressive effort to read insurance policies in a pro-policyholder fashion.
Freedom Works strongly supports affirmance of the ruling below as to State Farm, either on the ground (adopted by the district court) that State Farm's anticoncurrent cause provision, read together with the "water damage" exclusion, precludes coverage for the flood damage at issue regardless of the cause, or on the (alternative) ground that, if "flood" is given its ordinary and common meaning, the water damage" exclusion unambiguously bars coverage for flood damage of the sort that followed the Katrina-related levee breaches. Freedom Works strongly supports reversal, however, of those portions of the decision below that read the flood exclusions and "acts or omissions" provisions out of the other policies at issue. The district court' s holding as to State Farm serves the interests of consumers as a whole; the latter holdings disserve those interests.
