Law bans dropping coverage
Battle with Allstate may go to court
Tuesday, July 25, 2006
By Rebecca Mowbray
Allstate's efforts to drop wind and hail coverage for existing homeowners policies in coastal areas violates Louisiana's most important consumer protection statute on property insurance, Louisiana Insurance Commissioner Jim Donelon said, adding that the efforts are likely to end up in court.
On Friday, Donelon said Allstate planned to drop hurricane coverage for 30,000 of its 140,000 customers in 18 coastal parishes.
"It's totally opposite of what the reading of the statute says, and what the practice of the industry has been statewide since that statute was enacted in 1992," Donelon said. "They are gutting the homeowners protection policy and taking the majority of coverage away."
But Allstate said it has a different interpretation of the law, and plans to move ahead with the same types of policy changes it is making in states such as Texas, Florida, New York and North Carolina to try to reduce its exposure to catastrophe losses.
"Nowhere along the Gulf Coast and the Atlantic Coast are we writing new policies on the coast, and we're either ceding business, doing deductibles or nonrenewing," said Rob Hair, senior state manager for Allstate, which is making changes in response to new computer models that show a heightened hurricanes risk for the foreseeable future.
Matter of interpretation
At issue is a 1992 consumer protection statute on insurance that Donelon calls the best in the country. That law prevents insurers from dropping customers once they have been policyholders for three years, save for a limited number of exceptions. It states:
"No insurer providing property, casualty, or liability insurance shall cancel or fail to renew a homeowner's policy of insurance or to increase the policy deductible that has been in effect and renewed for more than three years unless based on nonpayment of premium, fraud of the insured, a material change in the risk being insured, two or more claims within a period of three years, or if continuation of such policy endangers the solvency of the insurer. This subsection shall not apply to an insurer that ceases writing homeowners insurance or to policy deductibles increased for all homeowners policies in the state."
Donelon says the meaning of the statute is clear, that insurance companies can't drop coverage for their policyholders once they've been together for three years, save for some notable exceptions. The industry, including State Farm, the state's largest residential insurer, have indicated with their actions in the past that their reading concurs with the insurance department's, Donelon said.
But Allstate Regional Counsel Lorrie Brouse said that Allstate, the state's No. 2 residential insurer with 20.2 percent of the homeowners insurance market, isn't breaking the law with its proposed action. It's not dropping customers, Brouse said, it's utilizing an endorsement to make policy changes.
"We're simply stating we're not in violation of that statute because we're not nonrenewing. We are offering people the same policy, but on a select group of homeowners, we will remove the wind and hail." Brouse said. "We had this researched very well. We feel very comfortable with our position."
Donelon said he respectfully disagrees, and insurance department attorneys are figuring out what's the next step. "Ultimately our state Supreme Court will decide that," Donelon said.
Opening the door
But Allstate appeared to back off of its threat to drop coverage for 220,000 customers statewide and leave the homeowners market over the issue, saying that Donelon had "mischaracterized" their stance on Friday.
"Since we believe that our plans are not in violation of state law, we do not plan to exit the state," Brouse said. "Withdrawal is always an option, but it's a last resort."
Robert Hunter, director of insurance at the Consumer Federation of America, said that Louisiana's law is an important consumer protection, and that it's critical that Donelon stick to his guns. Hunter said he's not surprised that Allstate is pushing the issue, and warned that if the insurance department caves to Allstate's request, other companies will demand the same treatment and render the law useless.
"The insurance commissioner has to fight. Otherwise, how can the insurance commissioner say no if someone comes in next week and asks for the same thing? He has to stand firm. It's the law," Hunter said. "It's an open door for others to come to the department and say the same thing. You've got to stand firm on the first one. Allstate is usually the heavy."
In calls to local media on Monday, puzzled homeowners questioned why Louisiana Farm Bureau Mutual Insurance Co. was allowed to begin dropping the wind and hail coverage for 7,500 customers in southern Louisiana in June and re-book them with the Louisiana Citizens Property Insurance Corp., the state-sponsored insurer of last resort, if Allstate isn't allowed to drop wind and hail coverage.
The Louisiana Department of Insurance said the difference is that Louisiana Farm Bureau demonstrated to then-commissioner Robert Wooley that it faced "imminent insolvency" if it continued to insure wind risk on the coast, and got a special permission from the department to cancel existing customers.
Donelon notes that Louisiana Farm Bureau is a single-state entity that was overwhelmed facing damage from two of the most costly hurricanes on record, while Allstate is a large national company that announced record second-quarter profits of $1.21 billion on Friday. He also said that Mississippi Farm Bureau failed after Katrina, and other Farm Bureau entities are paying its claims. Allstate has received no such designation of insolvency.
"In no way is the solvency of Allstate Insurance company in jeopardy. I have asked them that on many occasions," Donelon said.
Allstate's efforts to drop wind and hail coverage in Louisiana is part of the company's nationwide efforts to reduce its exposure to catastrophic losses while it lobbies the federal government to create a national catastrophe fund to cover excessive losses from events such as hurricanes and earthquakes.
Last October, the company notified insurance regulators in North Carolina that it planned to drop wind and hail coverage in some coastal areas of the state. In February, Allstate started dropping customers in coastal areas of New York. In May, Allstate told 65,000 coastal policyholders in Texas that the company would not renew their windstorm coverage starting Sept. 15. Also in May, the company announced it would not renew 120,000 homeowner policies in Florida.
During the winter, Allstate approached then-Insurance Commissioner Robert Wooley, who resigned in mid-February to work for the law firm of Adams and Reese LLP, about selectively nonrenewing customers in coastal areas to manage its catastrophe exposure the way the company is doing other states. But when the insurance department explained that Allstate would have to demonstrate its financial insolvency to be able to drop the wind and hail coverage for existing customers, the company didn't follow through.
Allstate says that was merely a courtesy call to advise Wooley of where it wanted to go, and it never considered itself to be facing financial hardship. "We've always been consistent that we never felt that we were violating any of the statues," Brouse said.
'A contract is a contract'
During the spring legislative session, a bill was filed proposing that a "reduction in existing coverage or increase in policy deductible shall not constitute a cancellation or failure to renew a property, casualty or liability policy."
Rep. Karen Carter, a Democrat from New Orleans who chairs the House insurance committee, said she introduced House Bill 944 on behalf of State Farm because it was trying to find a way to ease some of the burdens on the insurance business in northern Louisiana during the homeowners insurance crisis that has developed after Katrina and Rita, but Carter said State Farm suggested she withdraw the bill after it became clear it would gut the 1992 statute. Carter said the bill would have allowed Allstate to do exactly what it's trying to do now.
Brouse said Allstate had been interested in the bill because the insurance industry had been invited to weigh in to help clarify the 1992 statute. She said Allstate never thought it applied to their situation with the wind and hail customers.
Carter said she is surprised about Allstate's moves on the wind and hail coverage, because she said the company has been a leading voice saying that "a contract is a contract" with regard to the one-year statute of limitations on filing lawsuits over claims.
"They've been the biggest advocate for protecting contractual relationships. It's ironic that something like that would come from their company. It's inconsistent," Carter said. "You can't have it both ways."
Carter sided with Donelon that Allstate's proposed action would violate the 1992 law. She said she is considering holding joint hearings of the insurance committees of both houses of the legislature to make sure that the legislative intent of the consumer protection statute is clear. "It's completely inconsistent with public policy and with what the legislature intended," she said.
Allstate says it will start sending notices that customers will lose their wind and hail coverage in January as customers' policies start coming up for renewal. Customers will get a letter notifying them of the change 90 days ahead of time, then they'll get their actual renewal 45 days before the policy expires.
The 30,000 customers in Cameron, Vermilion, Lafayette, St. Mary, Iberia, St. Martin, Terrebonne, Assumption, Ascension, St. James, St. John, St. Charles, Lafourche, Jefferson, Plaquemines, St. Tammany, St. Bernard, and Orleans parishes who are slated to lose their wind and hail coverage will receive notices throughout the year as their policies come up for renewal.
Allstate agents will help those who are dropped get rebooked with Louisiana Citizens Property Insurance Corp.
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Rebecca Mowbray can be reached at email@example.com or (504) 826-3417.