The principal news coverage of Hurricane Katrina’s aftermath went from shelter horror stories to warm human interest stories; from there to optimistic discussions about the rate at which water was being removed to speculative stories about how much of New Orleans will be rebuilt in what way and when. Screaming alongside like an unmedicated schizophrenic has been the name calling, buck passing and hand wringing over the shoddy response by all levels of government.

But what surprised me is that the coverage has not made the usual stop at insurance company bashing. Rebuilding the devastated areas will cost vast sums of money, and insurance will provide little of that in the hardest hit areas.

The Limitations of Insurance

When viewed (from a safe distance) as a purely intellectual proposition, insurance policies are a fascinating intersection of lawyering and statistics. They are written by lawyers, intended for the most part to be understood only by other lawyers. Even the policies supposedly rewritten in “plain language” use seemingly simple terms that have subtle but specific shades of meaning well established in statutory and case law. Trust me, there are no ambiguities in any standard form of insurance policy which would ever be resolved in the policyholder’s favor.

Homeowner’s insurance covers windstorm damage—that’s good, since hurricanes are windstorms. It covers damage from wind-driven water, and water damage that is the result of windstorm damage—you know, after the roof blew away. But it does not cover flood damage, or “rising water” damage, as that is usually termed.

I grew up on the Texas Gulf Coast and lived through a Category 4 hurricane as a teenager. You learn quickly with your first hurricane that both kinds of water damage almost always occur. Broken levees are not required for flooding, only a sewer system not capable of draining the water quickly enough. Typical hurricanes produce rain at 2–3" per hour, and rates as high as 6" per hour have been recorded. Most sewer systems cannot handle even 1" of rain per hour.

Telling what damage was caused by water moving in which direction at what speed is difficult in the best of circumstances, and particularly so when severe flooding has followed the windstorm. How badly was the house damaged before the levee broke? Was that wood floor ruined by the water that came up from the foundation, or the water that came down from the attic? And so forth, in agonizingly detailed squabbles that matter enormously.

Insurance company adjusters are supposed to be fair, and some are. Some are determined to protect their employer. And others, particularly those brought from outside the region to help with the crush, may be just ignorant of how to tell the difference. Apparently, massive denials of claims (based on dubious assertions that all the damage is flood based) is not newsworthy.

Flood insurance is available, underwritten not by commercial insurance companies but by the federal government. It is relatively inexpensive, averaging about $350 per year, probably because rate setting for flood insurance is a political decision rather than a statistical or actuarial one. Its only significant drawback is that you cannot buy more than $250,000 of coverage for a home.

So why, then, does virtually nobody buy it unless forced to do so? Various shades of high, medium and low risk areas have been mapped out across the country. Mortgage lenders absolutely require it in the highest risk areas.

For everyone else, it is optional. People seem to believe floods, like heart attacks and cancer, happen only to other people. I do not have flood insurance, but I live on an ancient sand dune which makes up some of the highest ground in Chicago. But if I lived in even a moderate risk area, say near Lake Michigan, or close to the Chicago River, I would buy it.

Limitations Only Matter If You Have Insurance

The areas hardest hit by Katrina are poor ones—not just the low-lying districts of New Orleans that have been featured prominently on television, but also the remote rural areas of southern Louisiana and coastal Mississippi. You cannot appreciate how poor and how remote these places are unless you have been there. They were, to be polite, seriously neglected by government even before the disaster.

A startling number of these folks lack even homeowner‘s insurance. With old houses passed down in the family, and no mortgage, nobody is forcing them to buy insurance. And when you‘re scraping to pay for food and clothes and medicine, insurance is an unaffordable luxury.

Insurance companies will take much heat for shorting the bourgeoisie. But I doubt that government will take the same heat for neglecting the poor. As Senator Barack Obama put it, “Passive indifference is as bad as active malice.”

This is not about race, though I have no doubt many people will try to make it so. It is about class, and specifically about the economic underclass. (Of course, as an old lefty and devotee of George Bernard Shaw, I tend to think many things are about class.) The problem is that race and poverty too often correlate in our country.

The reflexive Republican response of income tax cuts does nothing for those who have no income and no businesses in which to earn income. Neither will the low-interest loans that have been a standard of disaster relief for decades. Some will scrape together the resources to rebuild. Others will leave, or not return from Houston or Shreveport or Memphis or wherever. But the gap between rich and poor in America—already the widest it has been in our country since 1929 according to former U.S. Secretary of Labor Robert Reich—will widen.

And the number of people without insurance will increase. Some insurance companies will pull out of the region altogether as they did in Florida after Hurricane Andrew. The remaining ones will raise their premiums drastically. “Have to, you know. Bad actuarial experience.”

Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or call 773/525-1778 (888/525-1778 toll-free outside the Chicago area) or e-mail greg@gregmermel.com.

Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He has also been known to produce theatre.

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