As the water levels in New Orleans recede and the images on our television screens become less vivid, donations for the victims of Hurricane Katrina will probably decrease as well. Such trends are not uncommon. In the wake of many national disasters, the rate of charitable giving spikes immediately after the disaster, but decreases precipitously as the images associated with the tragedy fade from public consciousness.
This pattern is not necessarily problematic when much of the property affected by a disaster is insured: Initial charitable contributions can be used to provide for those in immediate need, whereas the rebuilding process can largely be financed by insurance money. The story of Sept. 11, for instance, fits this description. According to the Rand Corp., private insurance companies ultimately paid approximately 75 percent of the total dollars that went to businesses for property damage and related costs caused by Sept. 11.
Unfortunately, the amount of private insurance money that will be available to support long-term recovery from Hurricane Katrina, particularly in New Orleans, will be significantly less than in the case of previous disasters such as Sept. 11. Hurricane Katrina has caused an estimated $125 billion in damage, more than half of which is attributable to the New Orleans’ flood. But the latest estimates suggest that private insurers’ exposure from Katrina will total no more than $60 billion, and will potentially be as little as $14 billion.
In many ways, these numbers actually overstate the amount that private insurers are likely to contribute to rebuilding New Orleans. Although standard business and homeowner insurance policies cover losses from wind and rain, they do not cover losses resulting from flooding. For this reason, private insurance will cover a disproportionately small amount of all property damage in New Orleans, which was largely caused by the breach of the levees and the subsequent flooding. And whatever the ultimate amount of such private insurance coverage comes to, it will likely take years of litigation before these payments are made in full. Because of the general flood exclusion in most policies, the success of many individual claims will depend on whether the specific insured’s property damage is attributable to the wind and rain from Katrina’s initial passage over New Orleans, or to the subsequent flooding of the city. Those factual inquiries are likely to be immensely difficult and time-consuming.
Federal flood insurance will only partially close the gap between private insurance and the full economic damage caused by Hurricane Katrina. Though the federal government underwrites flood insurance policies, many people do not purchase this coverage. In all of Louisiana, which has a population of almost 5 million people, there were only about 380,000 flood insurance policies in force at the end of 2004. The numbers are equally striking in New Orleans: With a population of approximately 500,000, only 84,000 flood insurance policies were in force at the close of 2004. These numbers only tell part of the story, of course: Many insurance policies cover multiple people (as in homeowner policies), whereas many policies are for businesses. But they suggest that many buildings and homes will not be covered by any flood insurance at all. At least part of the reason is that private insurance companies, who sell the federally-underwritten flood insurance, have little incentive to market such policies to consumers. Although private companies receive expense allowances and reimbursements from the government for selling flood insurance, they do not earn any investment income from insured’s premium dollars, a primary source of income for ordinary insurance policies.
Even those who did purchase flood insurance may have insufficient coverage. The federal government does not offer flood insurance coverage beyond $500,000 for nonresidential buildings and $250,000 for residential homes. And those in New Orleans who are most likely to have purchased these policies – the comparatively wealthy and mobile – are also most likely to be able to relocate entirely rather than endure the challenges that will inevitably accompany returning to the devastation they left behind.
All of this makes the physical devastation wrought by Hurricane Katrina significantly different from the damage that previous disasters have caused. For this reason, the response of the government and the public must also be different. American citizens in a position to make charitable donations must do so even after Hurricane Katrina no longer dominates the front page of newspapers. And the government must make unprecedented efforts to support the rebuilding process, not only by providing basic services to the poor, but also by offering financial incentives to businesses and the relatively affluent to return to New Orleans and begin again. Only through such efforts will New Orleans have any chance of returning to its former glory.
Daniel Schwarcz is a lecturer at Harvard Law School and works on insurance-law issues.
