September 16, 2005 - Home owners – or more accurately former home owners – along the Gulf Coast are learning the hard realities of insurance coverage as adjusters from the nation’s insurance companies invade the hurricane ravaged area. While the spate of insurance company television ads promises that the adjuster teams are there to help rebuild the reality is that their job is really not to pay out money if they can figure out how to avoid it. The question that lets the company avoid paying is whether the damage was caused by a storm or by a flood. If the damage is the result of a flood then the company is off the hook. You can guess the answer that which the adjuster wilal be trying to justify.

The answer is significant. If the storm caused the damage then the homeowner’s regular policy will apply and he can be reimbursed for the cost of alternative living arrangements for up to two years under the policies loss of use provisions. If the damage was caused by a flood then the loss is not covered by the home owner’s policy but rather the federal flood insurance program. The federal program doesn’t cover those relocation expenses. Homeowners policies have an inflation protection provision covering the cost of rebuilding The Federal Flood Insurance covers 85% of the original cost of the building without regard to inflation.

Of course all of the money received from either the homeowners policy or from Flood insurance goes first to the mortgage lender. If the proceeds don’t cover the mortgage then the homeowner is still on the hook for the balance and pays for the house that he does not have. The Alabama Attorney General has sued the insurers seeking to re-write the policies and fund the rebuilding with insurance proceeds. The insurers say that if he is successful the insurance industry will be bankrupt.

The President vowed that the Gulf Coast will be rebuilt and suggested a panoply of projected programs to accomplish that goal. What he did not address was how the reconstruction of the area will be paid for. On that subject he was silent. Initial estimates of the cost run to $200 Billion, more than the Iraqi war has cost us so far. Like most estimates of federal spending you can be sure that number is too low.

Only the most dismal practitioners of the dismal science question whether the Gulf Coast must be rebuilt. As a nation we must reconstruct our damaged region. We must do it because the nation is one, indivisible politically and economically and morally. And we must do it because the whole world is watching us on the 24/7 worldwide news. We haven’t been asked to sacrifice to destroy Baghdad. We have already borrowed too much from our grandchildren. We must put the reconstruction effort on a sound fiscal basis and that means pay as you go. You can’t buy a two by four with a tax cut. You can’t pay the carpenter with a tax free enterprise zone. New Orleans may be the Voodoo capitol of the world but you can’t pay the bills with Voodoo Economics.