NOVEMBER 30, 2007

                                    CRAIG A. BERRINGTON

 Presented at the Consumer Federation of America’s Annual Financial Services Conference:
    “The Consumer in the Financial Services Revolution – Challenges & Opportunities”

I’m delighted to be here at CFA’s annual Financial Services conference with:

   •   My old friend Steve Brobeck. (I hope “outing” our friendship doesn’t tank your career,

   •   My sometime negotiating partner Bob Hunter; and

   •   The very influential people in this room who do so much to set the consumer legislative
       agenda both in Washington and around the country.

So I consider it a distinct privilege to be able to spend some time with you and share some views
with you-- views that might be new to some of you or might cause some discomfort for some
others of you.

As mentioned in the introduction, I am a partner here in D.C. at the Wiley Rein law firm, and for
almost 20 years prior to joining the firm was general counsel of the American Insurance
Association. In both jobs, I have been privileged to represent some of the nation's leading insurers.
However, today, here at the CFA, I am just representing myself. My views, of course, are informed
by my decades of working in the insurance-public policy vineyards. But, my clients are absolved of
any responsibility for what I say today.
Wiley Rein LLP

The text for today’s panel is “new insurance claims paying practices -- are they fair?” But the
subtext I suspect is much less neutral. The subtext is the allegation -- indeed assumption -- that
these practices are and have been unfair, if not illegal. While these types of allegations have
always lurked in the shadows of our continuing national discussion about insurance, they have come
out of the shadows in the very public debate that has arisen in the wake of the hurricanes of 2004
and 2005, especially Hurricane Katrina. This debate has been fed by the very personal stories of
homes lost; memories of a lifetime swept out to sea or buried in the muck of the New Orleans levee
breaks; and lawsuits brought by lawyers skilled in court and on television -- lawsuits against
insurers for alleged failure to pay their customers’ legitimate claims.

Since there is nothing I can do this morning to compete with these emotions or the skills of such
experienced trial lawyers, I thought I'd try a little different tack and do four specific things:

   •   First, put a few facts of the table.

   •   Second, talk with some specificity about what actually happened in one of the most
       publicized of these lawsuits.

   •   Third, talk about two very recent governmental legal actions. The first is a lawsuit brought
       by the Louisiana Attorney General alleging, among other things, that the Katrina claims
       settlement practices used by certain insurers broke Louisiana anti-trust laws. The second is
       a federal criminal indictment handed down just this Wednesday.

   •   And fourth, I’d like to take a little time to talk about the insurance mechanism in a

First, here are some facts for the Katrina Claims Handling debate table:

   •   Private insurers have paid over $40,600,000,000 to their policyholders for Katrina claims.

   •   About half of this amount has gone to homeowners, and about half to business customers.

Wiley Rein LLP

   •   All told, private insurers have paid claims to over 1,700,000 of their customers.

   •   In Louisiana, private insurers have paid $10, 800,000, 000 to 688,000 homeowners.

   •   In Mississippi, private insurers have paid $5,400,000,000 to 350,000 homeowners.

In addition to the payments by private insurers, the federal government's national flood insurance
program has paid $15,700,000,000 to homeowners and businesses who bought a federal flood
insurance policy. So, all told, $56, 000,000,000 has been paid out on insurance claims on a disaster
where the initial estimates of insured losses ran from $40,000,000,0000 to $60,000,000,000.

Now, of course, this is not just a dollars question -- although dollars are pretty darn important -- it's
a people question. So how do these dollars translate into people issues. Well, if you look at the
polling, these numbers are consistent with the dollar figures. An IPSOS Public Affairs poll of
Louisiana and Mississippi homeowners found that 89% of Louisiana homeowners were satisfied
with the way their insurer handled their claim. Ninety three percent of Mississippi homeowners
were satisfied. Although these are incredibly high figures for such a traumatic experience, there
obviously were some people who were unhappy about the way they were treated. And their trauma
was every bit as important as the feelings of those who were satisfied with how their claims were
handled. So, in this connection, it is useful to look at the litigation figures that have come out of
Katrina. The number I have is that about 2% of all Katrina claims have gone to either mediation or
litigation-- which probably means something under 1% went to litigation.

Do these numbers tell the whole story? Of course not, but I suspect that they tell a story that most
of you haven't heard before. Do they tell a story of a rapacious insurance industry that has
irresponsibly refused to pay legitimate claims? Or do they tell a different story? Perhaps a story of
an industry that tried its darndest and did not just an excellent job, but a wholly unreported
job. Unreported, perhaps, because it didn't fit the prevailing storyline of homes destroyed, lives put
in limbo and the need to assess blame in a world where it was useless to blame the hurricane itself.

Wiley Rein LLP

Second, let's talk with some specificity about what really happened in the most publicized of
the Katrina claims litigation. Let’s take the Leonard case, which was the first case to work its way
through the federal courts. The Leonards were homeowners with a Nationwide insurance policy.
They were represented in the case by a famous Louisiana trial lawyer, Dickie Scruggs (remember
that name) who planned to use the case as the pace setter for lots of other law suits. A point of full
disclosure. Nationwide is a client of mine. I'm privileged to represent them on public policy and
legislative matters. I didn't represent them in this case.

I want to walk you through what actually happened in this case-- because I think "insurance issues"
public debate often occurs at a level of abstraction which can lead to demagoguery -- on either side.
Sticking to the facts has a certain cleansing effect and makes demagoguery harder to do. I’ve
always felt that In the end -- when all else fails -- its useful to try to grapple with what actually
happened. Doing so, here, will provide you with a useful window into the question of whether
claims practices have been fair or not. It won’t give you the whole answer, of course, but it will
give you a big part of it.

So, here goes. Here are the facts straight from the court opinion by federal district court Judge
Senter. Leonard was a police officer, who had a house 12 feet above sea level, 200 yards from the
Mississippi Sound at Pascagoula. He had had a Nationwide insurance policy since 1989, which he
testified that he had read and which had an exclusion for damage from "flood, surface water, waves,
tidal waves, overflow of a body of water, spray from these, whether or not driven by wind..."

As the house was not in Flood Zone A, flood insurance was not required, but was available. When
Leonard bought his policy, he allegedly asked his agent, Jay Fletcher, about flood insurance.
Leonard testified that Fletcher told him he didn't need it because he wasn't in Flood Zone A and that
Fletcher, himself, didn't buy it. The trial established however, that Fletcher had sold flood insurance
to about 187 of his other Pascagoula customers, including a dozen of Leonard's neighbors.
Moreover, at every policy renewal from 1990 on, the Leonards received a notice from Nationwide
stating that the policy did not cover flood losses and informing Leonard of the availability of that
coverage from the federal flood program. The Leonards, however, never purchased it.

Wiley Rein LLP

Katrina came ashore with 100 MPH winds and torrential rains. Later a 17 foot storm surge swept
up from the Sound and inundated the first floor of Leonard's home. The only other damage was
from the winds, which took off some shingles. In examining the damage, Nationwide said they
would pay for the wind damage, but not the damage caused by the flooding. At its highest point, the
flood waters came up 5 feet in the first floor of the Leonards' home; there was no damage to the
second floor. Nationwide offered to pay for the wind damage -- some shingles had been blown off -
- reduced by their $500 deductible, thus tendering Leonard a check for $1,661.17. But, while
Nationwide said it was responsible for the wind damage, not the flood damage, Leonard argued
that since the hurricane wind had caused the storm surge, the flooding caused by that wind-driven
storm surge should be covered by the policy.

Leonard sued. After a full trial, Leonard lost before Judge Senter, who found that the Nationwide
flood exclusion was crystal clear. Senter directed Nationwide to pay on the wind damage, which he
calculated as a smaller amount than Nationwide had originally offered.

Now, in deciding the case, Judge Senter dealt with one other issue. It wasn't relevant to this
particular case, but was relevant to other cases. When judges do this, it is called dicta. Basically
dicta is commentary in an opinion not necessary to decide the case, but which the judge thinks is
important. This dicta related to a part of the insurance policy called the "anti-concurrent cause"
provision. The precise language may differ from insurer-to-insurer, but it basically says that
whenever damage is caused concurrently by a covered factor (wind) and a non-covered or excluded
factor (flood), the policy won't cover the damage. You may like or not like this type of provision,
but it has been approved by state insurance regulators for decades. You might be able to buy a
policy without it, but since coverage would be greater, so would be the premiums. Senter
essentially said that if he had found a concurrent cause in this case -- which he didn't -- he
would have interpreted the policy language as ambiguous and unenforceable, thus providing
insurance coverage for the Leonards.

So, both sides appealed to the 5th Circuit United States Court of Appeals. Leonard appealed on the
principal decision. Nationwide appealed on the anti-concurrent cause dicta. In the Fifth Circuit
decision, the judges upheld Senter on the principal decision against Leonard, but reversed Judge

Wiley Rein LLP

Senter on the anti-concurrent cause provision, holding that the contract language was clear, not
ambiguous. The court said that the purpose of the policy was perfectly clear-- that it only covered
wind damage. It didn't cover flood damage, and it didn't cover damage that was caused by wind and
flood acting together.

Interestingly, Leonard withdrew his appeal just before oral argument, telling the court that since he
was withdrawing his appeal, Nationwide shouldn't be allowed to continue its appeal, either. The
Fifth Circuit gave Leonard's lawyers a gold star for creativity, but said that not even Mr. Scruggs'
law firm could deny the other side its right to its appeal. One suspects that Mr. Scruggs may have
had an inkling on how the Fifth Circuit was likely to rule.

In retrospect was this a fair and just result? Leonard had a policy for almost 15 years. He read the
policy. He got an annual notice from Nationwide that told him his policy didn't cover flooding.
and that he needed a federal flood insurance policy to get that protection ( a policy that would have
cost him around $250 per year, because you taxpayers would have subsidized his premiums).
Leonard's house was a couple blocks from the beech and 12 feet above sea level. Leonard claimed
that his agent told him he didn't need it, but the extrinsic evidence placed some doubt on that
assertion. In any case, as you recall, the same agent sold flood insurance to a lot of his other
customers, including those who lived in Leonard's neighborhood. Was Nationwide fair? Did they
handle that claim in a fair way under the contract? I don't think there is any doubt that they did, but
you would have been hard pressed to figure that out from the media reports.

Now, let's talk about two very recent governmental lawsuits. The first is a suit brought by the
outgoing Louisiana Attorney General, Charles Foti, early this month. The suit alleges, among
other things, that insurers have conspired to use unfair claims decision-making tools. In short, the
lawsuit alleges a conspiracy among insurers and the vendors who them sell claims estimation
software (software that includes, among other things, estimates of the going price for construction
materials and services by geographical area). The argument in the lawsuit appears to be that
insurers (1) base their premiums on one set of prices for construction materials and services, and
then actually pay lower prices for those materials and services when a claim arises, thus pocketing

Wiley Rein LLP

unconscionable profits; and (2) that this is done through an agreement among the insurers and
their software vendors to do this. According to a statement from Foti's office:

       "This alleged scheme gave insurers an unjust advantage over policy holders, which they
       used before, during and after one of the greatest disasters this country has ever suffered, by
       reaping huge profits from the misfortunes of persons whom they pledged to protect from the
       risk of loss. I believe this unjust advantage resulted in the unjust enrichment of themselves
       to the detriment of the state, policy holders, and commerce in Louisiana. But to be clear,
       these abuses were not new to the recent hurricanes."

Now, get this: Foti's suit was filed in conjunction with a number of private law firms (Joseph
McKernan of Baton Rouge, Mark Glago of New Orleans, and the New Orleans law firms of
Herman, Herman, Katz & Cotlar and Capitelli & Wicker), thus farming out the government’s
business to private plaintiff lawyer firms. All of you should find this a deeply unsettling maneuver.
Instead of using the AG’s office’s career lawyers to make decisions about a lawsuit that the state
should bring and how that lawsuit should be handled, AG Foti gave that suit to private law firms (
without apparently even so much as a competitive bidding process) who then get to make
governmental decisions and pocket for their own account a large percentage of any award that the
state might get. Over the last five or six years, this is a practice that has become more common—a
practice rife with opportunities for favoritism, fraud and corruption. A practice that CFA ought to
investigate and help bring to an end.

As to the merits of the suit, time will tell, but it is no secret that after a major catastrophe, there are
attempts at price gauging, in addition to the general laws of supply and demand. Insurers wouldn't
be carrying out their responsibilities -- and would be justly subject to criticism -- if they just
shoveled out money for materials and services without trying to get the best price. After all, don't
you try to get the best price? Moreover, from a policy holder’s standpoint, if insurers are able to
keep the price gauging down after a catastrophe, they will be able to get more reconstruction done
within the dollar limits of insurance policies, thus providing enormous benefits to their customers.
Can you imagine the howls that would go up if insurers didn't do this?

As to the allegations of a horizontal conspiracy among insurers, it seems from the complaint that it
is based on insurers buying claims estimation software from the same vendors. Well, that theory

Wiley Rein LLP

won't wash -- not in any real court. You need an actual agreement, and there is nothing in the
complaint that meets the credibility test for that.

Sooner or later, this litigation will run its course and the costs of it will have to be -- you guessed it -
- fed back into the price of the insurance product. But, Mr. Foti will be long gone from his AG job.
Indeed, he's on the way out now. I hope -- for the sake of baseline propriety -- that in the years after
he leaves his current job he does not wind-up in a financial relationship with any of the firms that
are handling this case or with any other firms who may have handled cases for him during his
tenure as Louisiana AG.

The second case is a federal indictment just handed down, Wednesday, naming Dickie Scruggs
(remember that name?) for attempted bribery of a judge in a fee splitting case, where Scruggs and
another law firm were fighting over their share of a $26M attorney fee in a Katrina class action case
that they settled.

According my reading of the indictment, here's what happened. After Scruggs led a $80 million
settlement between State Farm and hundreds of clients, an attorney who had formerly worked with
Scruggs disputed the $26.5 million chunk of that settlement to Scruggs' law group. Scruggs wanted
his money, and he and his associates decided that the best way to get it was to bribe the county
judge presiding over the case, Henry Lackey. But Lackey went to the feds as soon as Scruggs'
associates made the overture.

Leckey has told reporters that he volunteered to wear a wire, but that the federal prosecutors thought
it would be more effective to place concealed video and audio equipment in his chambers. Among
the things picked-up was this statement to the judge from a lawyer working for Scruggs:

        "...[M]my relationship with Dick [Scruggs] is such that he and I can talk very private [sic]
        about these kinds of matters and I have the fullest confidence that if the court, you know, is
        inclined to rule... in favor... everything will be good.... The only person in the world outside
        of me and you that has discussed this is me and Dick [Scruggs].... We, uh, like I say, it ain't
        but three people in the world that know anything about this...and two of them are sitting here
        and the other one...the other one, uh, being Scruggs...he and I, um, how shall I say, for over
        the last five or six years there, there are bodies buried that, that you know, that he and I

Wiley Rein LLP

        know where...where are, and, and, my, my trust in his, mine in him and his in mine, in me, I
        am sure are the same."

The indictment has other interesting language. There are plenty of mentions of the "package" and
the "order" among Scruggs' associates (apparently conversations on tapped phones). In October
and November of this year, Mr. Scruggs, through his associates, paid the judge $50,000. And when
it came time for the order to be prepared, the indictment quotes one of Scruggs' associates as saying
to two others (one of them Scruggs' son), "we paid for this ruling; let's be sure it says what we want
it to say."

Now, Mr. Scruggs and all the other defendants are presumed innocent-- which is a constitutional
presumption we all cherish. But, I must say that this cloud on Mr. Scruggs, plus the surprise
retirement from the Senate of his brother-in-law, Trent Lott (who has also been a hostile critic of the
insurance industry), may well put the debate over industry practices in a different light in the
months to come.

To me, what this smells a little like is when Federal judge Janice Jack (a nurse early in her career
and a Clinton appointee to the court) got suspicious in a class action asbestos case and ultimately
got evidence of massive fraud by the plaintiffs lawyers in her case and in others. More than perhaps
anything else, this discovery burst the asbestos litigation balloon. I am not saying that there has
been fraud in the Katrina lawsuits, but if the federal indictment has credibility then the actions of
those very same lawyers in their Katrina cases should not go without examination. And the real
question should be not whether insurers have been using fair claims practices, but whether certain
plaintiffs lawyers have been knowingly urging cases without merit—and perhaps soliciting them.

Finally, I want to leave you with some commentary on the obligations of insurers, because their
obligations -- contractually, statutorily and morally -- are of the highest order. Insurance is at the
core of a free market, democratic system. Free markets demand the willingness and ability of
people to take risks. Insurance let's them do so by spreading their risk. Without the ability to do
that, people wouldn't take the risks that a successful, democratic and entrepreneurial society needs,
and economic growth would then slowly grind to a halt.

Wiley Rein LLP

Most insurers take their risk spreading responsibility very seriously. Never more so than when a
disaster strikes. I saw this after Hurricane Andrew, after 9/11 and after Katrina. I've seen insurers
fight to get their claims teams into dangerous areas, set-up rapid response teams, get housing for
their customers and cash into their hands. And I’ve seen them – up close – beg, plead and fight
with government agencies to get these things done in the most difficult of conditions.

Are insurers perfect? Of course not. They are human beings -- with all the human fragilities --
acting in high stress situations. Are there some sharp operators? I assume there are. But, they are
small in number and are reviled by the rest of the industry.

It is also important to understand that insurers operate in state regulatory systems that are often
dysfunctional; that discourage new and creative products to help consumers deal with the risks they
have; that   often deny insurers the ability to charge enough to cover the real risks that high
risk customers present; and then criticize insurers for not committing more capital to provide
insurance in their states.

In the last analysis, however, the irony of the Katrina claims litigation is that -- like the Leonards’ --
almost all of the litigation could have been avoided if people had just bought the federal flood
insurance that was available to them at an incredibly low, subsidized price. When they didn't buy
that insurance and were hit by the flooding associated with the hurricane, they wanted their losses to
be covered one way or another. And who can blame them? I certainly don't. But I also don't think
it is right for insurers to take the fall for people who didn't get the coverage they could have gotten.

Insurers have a big obligation to the public they serve. But the public has obligations, too. With
insurers working in a public spirited way, and with legislators leaving their “blame game” at home,
I think -- we can develop new public policy to solve these problems for the future. Insurers will
surely want to be at that table helping to do so.

Thank you.


To top