FLOOD INSURANCE
As eight Atlantic states staggered out from the most costly floods in U.S. history last week, underwriters reported that insurance will cover only 5 to 10% of losses totaling $1.6 billion. Worst hit were railroads, industrial plants, cities and houses, most of which were massively insured against every disaster but the one that struck. "There just isn't any flood insurance available." lamented a spokesman for the New Haven railroad, whose $10 million losses were among the ravaged area's heaviest.
Why is flood insurance so hard to get? Insurance companies fear that in major floods they could not begin to meet the claims for damage to real property, e.g., buildings and machinery, which are most susceptible to water damage. Insurers believe that they can economically cover only property which can be moved out of the flood's path. Thus, in the Northeast, the companies' heaviest payments will be for wrecked or damaged cars, boats, and goods in transit. The small percentage of homeowners who had all-risk personal-property floaters also can collect for damage to belongings.
On the other hand, many policyholders who assumed that they were at least partly protected are in for a disappointment. For example, some businessmen whose plants were wrecked or halted by the flood, hoped to be reimbursed for loss of income under business interruption policies. But most of these policies specifically exclude interruptions caused by flood.*
The principal economic argument against flood insurance is the nature of the risk. The most destructive (average yearly toll: some $420 million) and widespread calamities in the U.S., floods tend to haunt the same areas, e.g.. the Missouri and the Mississippi river basins, which had floods costing more than $1.5 billion from 1936 through 1951. Said one insurance executive: "Potentially, every insurance company could be bankrupted by one casualty."
If flood insurance were available, only the worst risks—those who are most exposed to floods—would buy it. Since the market would thus in all probability be limited to less than 10% of all property owners, the premiums would be prohibitively high. On the other hand, if floods were included like hailstorms as a standard risk in all extended-coverage policies, and the cost were spread among all property-owners, premiums would be many times the cost of present insurance. The man who lived on a hill would be subsidizing the riverbank dweller.
Even if flood insurance were feasible, argue insurance men, the company that offered it as a standard risk (necessarily at a higher premium) would lose business to competitors who preferred to keep their feet dry. Concluded a Manhattan insurance executive: "The Bible tells you to build your house on a rock. I guess you'd better be sure the rock is a high one."
Public demand for flood insurance quickly crests and drops off, most companies find. "Wait six months," said a Boston insurance man. "Even those who suffered losses will begin to feel that it could never happen to them again." Nonetheless, many Northeastern businessmen and politicians are talking about Government-backed insurance as the only solution.