Jernigan Copeland Attorneys | Mississippi Construction & Insurance Law

Mississippi Windstorm Underwriting Association still clearing debris from Hurricane Katrina

Hurricane Katrina was the largest disaster in United States history in terms of both property damage and the destruction of institutions, programs and agencies created to deal with natural disasters. While much of the public is familiar with the operational weaknesses that Katrina exposed in many of the affected states, municipalities and federal agencies, such as FEMA and the Army Corps of Engineers, most are unaware that Katrina also leveled the entire structure of the Mississippi Windstorm Underwriting Association (MWUA). Following Katrina, MWUA’s entire enabling legislation, Miss. Code Ann. §§ 83-34-1, et seq., was significantly altered because of its incapability of dealing with such a catastrophe. MWUA survived as an organization under the Mississippi Economic Growth and Redevelopment Act of 2007, but it now operates under an entirely different basis for providing insurance and benefits to coastal residents who are unable to obtain adequate property insurance in the private market.

Despite the establishment of an entirely new means for providing coastal residents with an insurance market under the revamped MWUA, the legislative debris left by Katrina is still being cleared almost eight (8) years later. Under the legislation existing at the time of Katrina, MWUA provided coastal residents a market of last resort for purchasing insurance policies and backed those policies through the purchase of reinsurance coverage in the event of disaster. If there was a shortfall in reinsurance coverage, MWUA’s enabling legislation provided that the property insurance companies doing business in Mississippi would be assessed their proportionate market share to cover any shortfalls. Because reinsurance purchases were historically adequate to cover most of the MWUA policy losses of the years, the system met with little objection or notice by the many of the insurance carriers doing business in Mississippi. However, because Katrina defied all reasonable projections and models concerning the amount of reinsurance needed by MWUA to cover potential losses on its policies, the assessment process hit many carriers by surprise. Although MWUA had purchased $175,000,00.00 in reinsurance coverage for all its 2004 and 2005 policies, Katrina resulted in losses of approximately $720,000,000.00 on those same policies. After exhausting the $175,000,00.00 in reinsurance proceeds to pay its policyholder claims, MWUA recorded a net loss for policy years 2004 and 2005 in the approximate amount of $545,000,000.00. “Policy year” is simply the year in which a policy was written. The year that a policy was written is the year that its premium would be recorded for purposes of determining the participation percentage. Because property insurance policies cover a period of one year, losses incurred by a policyholder from Katrina could either be based on annual policies purchased in 2004 or 2005.

Pursuant to its enabling legislation, MWUA looked to its members comprised of all property insurance companies conducting business in this state to make up for the reinsurance shortfall. The total assessments to all members for Katrina have so far been approximately $545 million ($10 million on August 31, 20005, $285 million on December 2, 2005, and $250 million on April 17, 2006). Given the shear magnitude of the assessments, the apportionment among member companies is a matter that is still being disputed to this day. There were two previous instances (Hurricane Georges and Hurricane Ivan) in the last thirty (30) years requiring special assessments beyond the annual closing of the books, and never a case such as Katrina with multiple assessments. As a result, many carriers were either lulled to sleep or simply unaware for a variety of reasons that their premium figures utilized to calculate market share, and their resulting proportion of the Katrina assessment, were grossly inaccurate. As the Katrina assessments continued to build, many of these same carriers discovered and reported the inaccuracies based on various factors and instituted appeals to MWUA and the Mississippi Insurance Department, demanding a recalculation or “true-up” to adjust the assessments to reflect each carrier’s true market share before the books were closed on Katrina. Union National Fire Insurance Company was the first carrier to initiate an appeal, with others to follow, all of which were consolidated into a single cause of action that ultimately wound its way to the Mississippi Supreme Court. Despite a ruling by the Mississippi Supreme Court in early 2012, the apportionment process still continues to this day.

The question remains as to why the matter has not concluded. At the heart of the many assessment appeals was the insistence that the legislation was expressly based on the need for a fair and accurate apportionment of assessments, with the express right of appeal under MWUA governing rules, for the purpose of ultimately reaching accurate figures. Pursuant to its enabling legislation, MWUA issued property insurance policies in the six (6) high risk counties of George, Hancock, Harrison, Jackson, Pearl River and Stone to policyholders unable to procure insurance in the private market. In order to fairly and equitably fund the MWUA insurance program, all private insurance companies authorized to write and sell property insurance in Mississippi were required to become MWUA “members” as a condition of doing business in Mississippi. Members were subject to annual assessments to cover the cost of purchasing reinsurance coverage for the MWUA policies and any shortfalls should the reinsurance coverage not be enough to cover claims in a given year. Annual assessments were required to be apportioned among members based on the amount of business each member conducted in the State, rewarding those members already providing insurance policies to property owners in the six coastal counties. This was accomplished by calculating the total dollar amount of property insurance written (premiums received) by a member in Mississippi, crediting the dollar amount of property insurance voluntarily written by that member in the coastal counties that same year. Based on the net premium figure calculated for each member, MWUA determined each member’s “participation percentage” in the Mississippi property insurance market, which fluctuated from one year to the next. Annual assessments were directly proportionate to each member’s participation percentage for the preceding policy year.

Despite these equitable principals of apportionment, MWUA resisted any and all efforts by the appealing companies to reach an accurate apportionment. In this sense, MWUA’s guiding principal of resistance became one of “finality” over “equity.” While the argument gained merit at every stage of the litigation – that being that the process was already complete and that the member companies simply ran out of time to change their numbers – the result may have backfired. Although member companies were ultimately precluded from correcting their company-specific numbers, the Mississippi Supreme Court did conclude that MWUA improperly applied its reinsurance proceeds to the wrong policy years in determining the assessments between the 2004 and 2005 policies that were implicated in the Katrina disaster.

The reinsurance allocation error was revealed through MWUA’s financial statements which indicated that approximately 80% of the Katrina losses were incurred on policies issued in 2005, and only $120 million or 20% of the losses were attributable to policy year 2004. policy year” is the year in which a policy was written. The year that a policy was written is the year that its premium would be recorded for purposes of determining the participation percentage. Because property insurance policies cover a period of one year, losses incurred by a policyholder from Katrina could either be based on policy purchased in 2004 or 2005. (policies purchased from August 30, 2004 to August 29, 2005) However, MWUA applied $116 million or 66% of its $175 million reinsurance recoveries from Katrina to policy year 2004 and approximately $59 million or 33% to policy year 2005. MWUA applied the majority of the losses to 2004 simply to eliminate the need to calculate a 2004 assessment, reasoning found by the Mississippi Supreme Court to be arbitrary and impermissible. As agreed by the Mississippi Supreme Court, the method of assessment elimination for one policy year was fatally flawed since a member company’s market participation percentage changes annually for purposes of determining the accurate assessment for each policy year under § 83-34-9. Application of reinsurance that was not consistent with losses by policy year unfairly benefitted members whose participation percentage may have been larger in 2004 than 2005, but their 2004 assessment was completely eliminated for that year. As proven in the appeals, some member assessments would have been much less with the accurate application of reinsurance proceeds between policy years. Despite this mistake being dwarfed by the losses incurred by many member companies through inaccuracies in their company-specific writings, MWUA was ordered to correct only the reinsurance allocation error before issuing its final apportionment of the Katrina assessments.

In this sense, the finality urged by MWUA throughout its resistance to any and all corrections of premium figures has never been accomplished. Since the reinsurance error affects all assessments for both 2004 and 2005, there is no rational basis any longer for denying corrections of all inaccurate figures in the process.  In fact, a further appeal has now arisen from a member carrier who previously did not have 2004 assessment as a result of previous elimination by application of all the reinsurance proceeds. Also looming may be issues related to assessments avoided by companies that grouped their premium figures, some of whom were bankrupted by Katrina and should now be removed from consideration in both the grouping and assessment process.  Further appeals will certainly follow if such issues are not resolved to the satisfaction of all member companies. Furthermore, the reallocation of reinsurance without full correction for other inaccuracies may reveal further inequities since the reallocation of reinsurance truly affects two policy years while the current “true-up” only attempts to deal with just one.

Just recently, the Mississippi Supreme Court found that a member company had been misled by MWUA regarding the manner in which excess policies should be reported in premium numbers.  See Arrowood Indemnity Company v. MS Windstorm Underwriting Association, Cause No. 2014-CA-01638-SCT (Miss. June 16, 2016).  Because the case has been remanded to the Chancery Court of Hinds County, presumably for a recalculation of this members premium figures for the relevant Katrina policy years, such is yet another recent example of the lack of finality created by the operating procedures employed by MWUA, especially since all members may be again potentially affected by the recalculation for this individual member. 

It has been eight years since Katrina made landfall, yet MWUA is apparently still dealing with the apportionment of assessments. Perhaps MWUA would have been better and more efficiently served by pursuing a course of action designed to reach assessment figures based on complete and accurate reporting instructions and premium figures for all members. If they had instead responded with a massive campaign, lasting even a year or two, demanding accurate premium figures before issuing the final numbers, this matter might have been closed six years ago, and without alienating some of the member companies in the process. Instead, MWUA’s campaign of resisting any and all corrections based on the notion of “finality” has resulted in exactly the opposite. As a result, MWUA expends time and resources that would have been better spent moving forward under the new legislation instead of still trying to clear its debris left by Hurricane Katrina.

*This article was authored by Samuel L. Anderson, Esq., of the law firm Jernigan Copeland & Anderson, PLLC which represented one of the appealing member companies. The opinions expressed herein do not attempt to represent all competing arguments asserted during the appeals process. Insurance carriers needing representation in regulatory matters before the MWUA or the Mississippi Insurance Department are encouraged to contact Jernigan Copeland & Anderson, PLLC.

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