Regulators Want Policies Honored : Insurer Flooded With Drought Relief Requests

Thousands of Midwestern farmers have belatedly learned that the “drought insurance” they thought they had bought in June has evaporated, but some farmers who do have policies are now turning them in for refunds worth twice what they paid for coverage.

This turnabout is only the latest wrinkle in a series of events that began last month when a subsidiary of the Chubb Group of Insurance Cos. offered farmers an unusual form of drought insurance in 10 Midwestern states. The coverage is unusual because it does not pay off for crop loss but for lack of rain from June through August.

Sales, the company said, “were slow to moderate” until 48 hours before Chubb’s June 15 deadline for applications. Then, with the parched weather showing no signs of ending, thousands of anxious farmers suddenly overwhelmed Chubb sales agents, trying to get in on a deal that one farmer described as “buying dollar bills for 90 cents.”

In other words, the insurance suddenly looked like a sure thing.

A nervous Chubb apparently thought so, too.

Threating Letter

The company, which is headquartered in Warren, N.J., said it had planned to limit its risk to a total of $40 million but suddenly found itself staring at a potential loss nearly 10 times that size--$390 million, and with no rain yet in sight. As a result, Chubb ordered its Federal Insurance Co. to reprocess applications and reissue policies on a first-come, first-served basis only up to the $40-million limit. It also ordered the return of the remaining thousands of premium payments, later agreeing to double the refund at a cost of $20 million.

Insurance regulators from the 10 Farm Belt states sent a joint letter July 15 to Chubb Chief Executive Dean R. O’Hare threatening to force the company to accept all applications made by the June 15 deadline.

“Chubb maintains that it doesn’t owe policies to all those people,” Illinois Insurance Director John E. Washburn, who signed the letter for the group, said in an interview Tuesday. “But, at first appearance, it looks like Chubb will have to accept the risk.”

Joining Washburn are regulators representing Iowa, Indiana, Kentucky, Michigan, Minnesota, Missouri, Ohio, Tennessee and Wisconsin. Their ultimate penalty would be to revoke Chubb’s license to sell insurance in their states.

“We’re trying to find out just what happened,” said Washburn, who is also president of the National Assn. of Insurance Commissioners, which represents regulators in all states. He called Chubb’s $40-million limit and refund offer “unacceptable.”

“That coverage must be offered to anyone who originally applied and paid premiums for the drought insurance at the time it was offered,” he said.

But now the company says some farmers who bought the insurance apparently prefer the company’s double-refund offer instead. Spokeswoman Mary Lu Korkuch said Chubb has written to and now is telephoning the 8,007 farmers who applied for the unusual insurance to explain the company’s problem and offer double refunds. Chubb representatives have talked to about half of the farmers involved so far, she said, adding that “the vast majority” have accepted the double-refund offer, including some whose insurance applications had been accepted.

The average premium paid was $2,500, Korkuch said, which makes the average refund about $5,000.

‘Unprecedented Thing’

The insurance offered by Chubb pays off not in the event that crops are lost but only if the weather remains abnormally dry in a farmer’s area during the term that the insurance is in force--in this case, from June 1 to Aug. 31. It is a form of protection most typically used by promoters who insure against rain in order to protect their investment in open-air special events such as concerts and parades.

Washburn said the present scattered rains and thunderstorms continuing to rumble across much of the Midwest have probably already reduced the company’s potential financial risk. That assessment is supported by Chubb’s acknowledgement that some farmers are trading in their policies for double refunds--a sure 100% profit on what they had paid for insurance.

But that also raised the question for Washburn of whether Chubb was selling insurance or a bet on the weather. “It seems to me,” he said, “that if you don’t have some sort of loss, then it’s a gambling policy.”

Korkuch had no comment on the gambling question but said the company offered the same policy last year and fewer than 1,000 farmers bought it. That was the pace again this year, she said, until the last two days before the deadline.

“This is definitely an unprecedented thing for Chubb,” Korkuch said, “and maybe even for the insurance industry.”