Godzilla and coastal hurricane insurance. This is not a combination you would expect to hear in a legal decision, especially one involving something as mundane as wind insurance, but a recent court ruling in Maryland found a way to include both. The case involved Allstate Insurance’s request to stop writing new homeowners policies in areas along Maryland’s coast in 2007.
The Maryland Court of Appeals, the state’s highest court, ruled in favor of Allstate last week. It upheld a previous lower court’s ruling that the insurer was within its rights to stop writing new homeowners policies in coastal areas of the state in 2007.
The court said Allstate’s decision was based on the company’s catastrophic storm forecasting models and that it was not discriminatory.
According to court documents, in February 2006, Allstate filed with the Maryland Insurance Administration a new underwriting rule stating that due to “catastrophe management actions,” it would no longer write new homeowners insurance policies on properties lying within one mile of the Atlantic Ocean. That was significantly expanded in December 2006, when Allstate filed a new underwriting rule stating that pending regulatory approval, it would stop writing new homeowners and renters policies in all ZIP Codes located within what it defined as Hurricane Bands 4, 5, and 6, covering one third of the state including most of the Eastern Shore.
While the Maryland Insurance Administration found the decision to stop writing policies along the coast reasonable and non-arbitrary, the Maryland General Assembly’s People’s Insurance Counsel Division filed a challenge, arguing that the decision to stop writing policies along the coast was discriminatory and not based on realistic projections.
In May 2007, Maryland Insurance Administration told Allstate that it had reviewed the filing and that the regulators, based on the information submitted, concluded that the geographic designation had an objective basis and was neither arbitrary nor unreasonable. The new underwriting rule was put into effect in June 2007.
However, the Maryland General Assembly’s People’s Insurance Counsel Division, a consumer protection unit, filed a challenge against Allstate and other insurers who adopted comparable underwriting rules. The consumer unit alleged that the insurers’ decision to stop writing new policies in coastal areas was discriminatory and was based on improbable scenarios.
Now here is where Godzilla comes in. In a dissenting opinion to the decision to allow Allstate to stop writing new policies along the coast, Judge Glenn Harrell of the Court of Appeals compared Allstate’s justifications for halting the writing of new policies to an hypothetical company not writing policies due to the unlikely event of an attack by the reptilian monster Godzilla. Judge Harrell argued that the catastrophe models used by Allstate to justify their choice to stop writing new policies overstates the risk of a strong hurricane hitting Maryland’s shores, given the state’s historical weather trends.
And in what has to be one of the more colorful arguments in an insurance case, Judge Glenn Harrell of Court of Appeals wrote a dissenting opinion that compared Allstate to a hypothetical insurer — “Alternate Allstate” — that stops writing new policies because of a highly unlikely risk of being attacked by Godzilla.
He argued that recorded history on the subject shows, again and again, that a catastrophic hurricane of the order of magnitude described in Allstate’s plan justification and forecasting models has not made landfall in Maryland yet. And the chance of such a hurricane hitting Maryland in the future is so improbable that the insurers might as well be waiting for Godzilla to attack Maryland.
“Imagine a parallel universe with an Alternate Maryland…where the head of Alternate Allstate’s underwriting department settles in to watch an all-day fest of Godzilla movies,” the judge wrote.
“First thing the next morning, he inquires confidentially of the head of Alternate Allstate’s actuarial department how likely it might be that, assuming Godzilla exists, it might meander ashore along Alternate Maryland’s Atlantic coastline. Being an eminently cautious person, the underwriter decides that, at a minimum, Alternate Allstate should cease writing new policies of property insurance to a distance in Alternate Maryland along its Atlantic coastline corresponding to how far inland Godzilla had ravaged Japan.”
“Alternate Allstate” tells alternate Maryland regulators that “It is too hard to calculate whether, when, and how often over time a giant amphibious lizard will attack Alternate Maryland, but if it does, the damage will break our company. We prefer not to take that chance.”
Judge Harrell continued: “In the real Maryland, the real Allstate decided not to write new homeowner’s insurance policies in nearly one-third of Maryland because of unsubstantiated fear of a hypothetical force of nature, a Category 2 or greater hurricane making landfall in Maryland.”
Colorful arguments aside, the catastrophe models used by Allstate are widely accepted by the insurance market while making a great effort to ensure that insurers are aware of the potential risk that policyholders face along the Atlantic Coast. Hurricanes hitting the Maryland coast may be rare, but unlike Godzilla, they are a real risk that insurers and policyholders need to take into account.