Floods leave victims high and dry when it comes to insurance coverage

In Stockton, the flood didn't damage Donna Roedeske's house too badly. Her husband's semi-trailer truck floated into an empty field. Muck and water completely filled their pool, garage and basement.

This flood was worse than the Stockton flood in 1991, she says. And, no, they didn't have flood insurance.

"The last flood, my agent said, when they didn't pay anything last time, he says, 'Look at it this way, Donna, you couldn't have got the flood insurance anyway.' I says, 'well why is that?'" Roedeske said.

Actually, she could get flood insurance, but it's not automatic. To understand why, we need to go back to 1965.

"I would not worry about the insurance companies. They are quite capable of taking care of themselves."

The basic idea of insurance is this: People pay premiums to insurance companies. Insurance companies gather those premiums together and invest them. When damage occurs, a policy holder files a claim, and insurance companies pay a relatively large sum to the holder.

Insurers assume only a few people will actually need to file a claim. Consumers assume that they'll be covered when disaster strikes. But over the years and disasters, that formula hasn't always worked.

In 1965, Hurricane Betsy did $1 billion worth of damage to the southern states, and insurance companies decided covering floods was too risky. So the federal government took over, and in 1968 launched FEMA's National Flood Insurance Program.

To date, only 5.5 million Americans participate in the program. Only two of them live in Stockton.

University of Minnesota insurance professor Andrew Whitman says it doesn't make sense for the federal government to pay for flood insurance. He says the insurance companies have a simple way to cover catastrophes -- spread the cost.

"The particular peril has to be a part of the standard property packages and they have to have all people buy it, not just those who are exposed to it," according to Whitman.

Currently, the two types of people who typically hold national flood insurance live in a flood plain or hold a federally insured mortage. That means the federal government will end up paying a lot of claims.

So, despite hefty subsidies, the insurance can be very expensive -- anywhere from $100 to $4,000 a year. Whitman says that's too expensive for most people. Whitman dismisses insurance company claims that it's too expensive to cover these people.

"I would not worry about the insurance companies. They are quite capable of taking care of themselves," he said.

Whitman points out that the insurance companies and the federal government have worked out other ways to deal with unpredictable disasters, like terrorist acts and riots.

"The way we deal with that, and have dealt with that, for riot for example, is we created a federal riot reinsurance program," he said.

Whitman says essentially, the federal government agrees to insure the insurance companies against such claims. Whitman says the same could be done in floods, earthquakes and nuclear disasters. However, he says premiums would have to increase overall.

Mark Kulda, the lobbyist for the Insurance Federation of Minnesota, says it doesn't make sense to charge everyone more when a small group living in a risky area is most likely to file claims.

"It's smarter for consumers overall to remove some of the really high-risk things, and make the people who live in those areas more subject to pay the correct premium," Kulda said.

But in southeastern Minnesota, many people weren't in areas that were considered high risk. Nonetheless, U of M law professor Daniel Schwarcz, who teaches insurance law, says it doesn't make economic sense to expect insurance companies to pay these claims.

"To the extent there is a nuclear disaster, to the extent there is a flood, to the extent there is an earthquake, everyone within an area is going to be affected," said Schwarcz. "And so the normal mechanism of insurance, which tries to make predictable losses by aggregating them, doesn't work when you're dealing with this."

Insurance company advocates encourage people to know what they are buying and to get all the coverage they can, if they think they need it.

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