Wednesday, March 18, 2009

Hurricane Wall Street

Few communities in America know better than Pensacola Beach how ludicrous A.I.G.'s "sanctity of contract" argument is. Quite a number of beach house owners in years past bought insurance contracts against hurricane damage from one of A.I.G.'s many wholly-owned subsidiaries masquerading under other names.

We know. We were one of those insureds.

University of Pennsylvania law professor Tom Baker explains:
A.I.G.’s defense of its $160 million retention bonuses marks an inflection point in the financial crisis. The insurance giant barely even tried to justify the payments as a good idea. Instead, it raised the contract defense: “We made a deal to pay these bonuses. So now we have to pay them.”

Contracts get repudiated, renegotiated, modified, delayed, worked out, managed — pick the euphemism — all the time. A.I.G. knows this. Its insurance businesses pioneered the use of commercial leverage to get people to accept less than what the contract supposedly required.

Coming from A.I.G., the contract defense was a gilt-edged invitation for the government to push back, to exercise the bare-knuckled power of the deal that A.I.G. surely would exercise if the shoe were on the other foot.

[emphasis added]
In our case, we're happy to report, the A.I.G. subsidiary tried but failed to cheat us our of what we saw as our property insurance contract rights. A lot of other Pensacola Beach home owners weren't so fortunate.

A.I.G. (and, to be sure, other property insurance companies, as well) often use a wide variety of tactics to beat down homeowners after a storm. In many instances, the company simply refuses to pay, hoping that time and desperation eventually will lead customers to accept pennies on the dollar. In other instances, the transactional expense of litigation and costs of hiring expert witnesses discourage home owners from asserting their rights under the insurance contracts. In yet other cases, A.I.G. representatives occasionally drop dark hints about filing "counterclaims" against the homeowner for supposed breach of contract or even fraud. And so on .... and on... and on.

In every instance, the fundamental dynamic at work really is very simple: the property insurance company uses its much greater size, knowledge, and resources to intimidate, overwhelm, or out-last the insured homeowner. After hurricane Ivan, we even overheard one insurance adjuster candidly explain to a home owner, "You have a certain life expectancy. You need to settle this thing before you die, right? Our company can go on denying your claim forever, if we want to."

Abstract principles of "right" and "wrong" or the "sanctity of contract" have nothing to do with it in the real world aftermath of a disaster. It's all about wielding the greater economic power of the corporation and breaking the will or exhausting the resources of the individual homeowner.

To be sure, now the shoe is on the other foot in the aftermath of the economic disaster Wall Street has brought on us. Now it's us, the taxpayers in effect, who want to say, "Hey! That looks like water damage, not wind." Or, "So what if your house was washed off the foundation and the roof blew off? Just push it all back in place and it'll be good as new."

Schadenfreude time? Not really. When it comes to the bailout bonuses, the misfortune is ours, regardless. A.I.G. has already seen to that by ruining the economy and ripping us off for hundreds of billions of dollars.

But we should take consolation in Prof. Baker's central point: Contract law, fundamentally, has very little to do with the higher aspirations of public justice. It is private law, written by the parties to the contract, themselves. Or, as often as not, written, and re-written, and modified, conciliated, or even intentionally breached by one or both parties.

In the real world, if one of the parties can't live with the way another party is carrying out its agreed-upon obligations, then they can sue. Just as with hurricane insurance, it then becomes a battle of wills and resources and perseverance. Too often, the party with the bigger war chest and more fighting experience wins.

Insurance companies like A.I.G. know this. As the largest insurance company in the world, they have a bigger war chest and more weapons of intimidation than almost everyone else.

Except, of course, for the U.S. Government. And that is why A.I.G. should not prevail in its absurd defense of the indefensible multi-million dollar bonus payouts.

It isn't pretty. It never has been. But that's the reality Pensacola Beach homeowners have been living with. Now, in the wake of Hurricane Wall Street, it's A.I.G.'s turn.

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