When Ronnie Johnson, an attorney with McGlinchey, Stafford and Lang in Dallas and Baton Rouge, spoke in March at the LDI 2022 Symposium, he brought a defense attorney’s perspective to the current troubled insurance market in Louisiana and commented on some of the bills the state’s legislators are considering to “fix” the market’s problems.
A former deputy commissioner in Louisiana’s Department of Insurance, Johnson’s practice focuses on government relations and insurance regulatory law.
He initiated his presentation at the Higgins Hotel in New Orleans by saying that regulatory reach is having a profound effect on the surplus lines market. For example, he expressed concern that a bill which would require insurance companies to stay on a damaged property for 90 days after repairs are made would include surplus lines insurers.
Johnson articulated several criticisms of the bill, SB 162, regardless of whether it applies to admitted and/or surplus lines companies.
“First, the repair of the property is not under the control of the insurer. The insurer has no control over when or if the policyholder repairs the property,” he said.
Adding language saying that the time it takes to repair the property can’t be unreasonable does not solve the problem with the bill, according to Johnson. “As a lawyer, I love that language.” It invites litigation, because people will dispute what is reasonable. Also, some policyholders, residential or commercial, will get the money from the insurance company, and the property may never get repaired, he said.
“Something like this will reduce substantially the appetite that does exist to write property (in Louisiana),” he said.
The surplus lines market is there to insure the risks that cannot be insured in the admitted market, Johnson explained. When the admitted market doesn’t have the capacity or appetite to write business, the surplus lines market steps up and writes the risk, operating with freedom of rate and form. The rates are higher than the admitted market’s rates were when it wrote the business, but when the admitted market is not there, the surplus lines market can write the business.
There is a balance between availability and affordability, he said, and after a storm people are going to pay more for coverage, but at least they have coverage.
Johnson pointed out that Louisiana is unique in that it has a three-year rule, which was codified following Hurricane Andrew in 1992. Under the three-year rule an insurer can’t cancel the homeowners policy after being on the risk for three years.
Suppose the policy has been in effect for a year and one half, Johnson said. A hurricane hits, and it takes two years to get the property restored. Is the policy now subject to the three-year rule? Can the insurance company never get off the risk except for nonpayment of premium and other limited circumstances?
“That is an issue,” he said. Excluding those policyholders from the three-year rule legislatively “opens up another can of worms.”
Johnson believes the proposed legislation is well intentioned. Agents are concerned that, if an insurer cancels or nonrenews a policy when the property is still damaged, the agent is not going to be able to find coverage for the homeowner.
Johnson pointed to the state’s residual property market, Louisiana Citizens Property Insurance Corporation, as a more viable solution than mandating the insurance company stay on the risk.
As it happens, in January, LCPIC CEO Richard Newberry presented a new Homeowner Renovation Policy at the residual insurer’s board of directors meeting. The policy was developed to help the property owners who sustained storm damage to their personal homes, Newberry told the board.
The annual policy does not renew automatically, but one additional year is available if requested prior to the policy’s expiration date. The insured structure can have existing hurricane damage but must have either a building permit or a signed Louisiana licensed contractor’s contract. Coverage A cannot exceed $1 million.
LCPIC’s Agents’ Advisory Council provided input on the Homeowner Renovation Policy, according to the Surplus Line Reporter’s February issue.
On April 20, SB 162’s author, Sen. Kirk Talbot, R-River Ridge, opened the Senate Committee on Insurance meeting by announcing that the bill would be turned into a study resolution. Study Resolution 99 was reported favorably by the Senate Committee on Insurance May 11 and is pending Senate floor action.
Claims exceed reinsurance tower
At the time of Johnson’s presentation, three insurers had logged claims from Hurricane Ida, which exceeded their catastrophe reinsurance towers, he told the audience. Already, the Louisiana Insurance Guaranty Association has assessed member companies $100 million, and expects to pay more than that to cover the claims of the three insurers.
Johnson said he represented two of the three insurers and knows that they bought the amount of reinsurance that their reinsurance brokers recommended based on the models, which indicated the coverage would be sufficient.
Johnson said he believes there are other companies that will be similarly situated and that there will be a little delay in seeing them declared insolvent because most insurers have filed their annual statements for Dec. 31, 2121. The statements were due March 1. He believes the insurers will take their actuarial numbers as of Dec. 31, and use them to get a sense of what the development was.
According to Johnson, the companies he has talked to have told him their development “really sucks.”
Companies’ numbers aren’t getting any better, Johnson said. “Assuming they survive the payment of claims from Ida, the next hurdle is going to be the cost of the reinsurance tower in 2022,” Johnson said. He believes companies going to market now to place their catastrophe reinsurance towers are going to be “horrified” at the cost, not only in terms of dollars for increment of reinsurance, but also the retention level incurred. “I don’t think we will see reinsurers having much appetite for lower levels of coverage. Where the coverage was 15 x of 5, it will be 15 x of 10 and may be 15x of 15 this year. If a reinsurer covers the lower levels, I think it will be insanely expensive,” he said.
At Johnson’s last look, the department had received 3,305 consumer complaints coming out of Hurricane Ida. “When you look at the number of properties and the damage Ida caused, that is not an unreasonable number of complaints.” Johnson speculated that some people may have felt compelled to complain since there was an active campaign to solicit complaints because someone was dissatisfied with the process.
“The whole process is stressful and abused by a lot of people,” Johnson said, so he is not surprised by 3,305 complaints.
To mitigate some of the dissatisfaction, LDI created a Hurricane Ida mediation program, he said, which is available to authorized property/casualty insurers and surplus lines insurers.
The program speeds up the resolution of claims up to $50,000. The program is voluntary. There are two mediation providers, and for 90 minutes of mediation services, the cost is $600.
Johnson said that all of the insurers he talked to found the program to be a “huge success. They love it.” As Johnson described it, the reason insurers like the program is that consumers are confused by the claims process. They do not understand and have a tendency to think they are being taken by their insurance company because “the less they pay me, the more profit they get.”
Johnson added, “Those in the industry know that is not really how insurers operate. They want to do the right thing, and getting everybody in a room and talking about it (helps).” Compounding the problem, “Sometimes a policyholder thinks there is coverage for X, Y, Z, but there is no coverage,” Johnson said.
Pay evacuation claims
Johnson said he is eager to hear the discussion relative to HB 83 and SB 134, which stem from Directive 218 mandating that companies pay evacuation claims even if there was no mandatory evacuation order. Initially, the department issued Bulletin 2021-07, and when State Farm declined to comply, so Commissioner of Insurance Jim Donelon issued Directive 218.
House Bill 83 by Rep. Laurie Schlegel, R-Metairie, and SB 134 by Talbot, provide that an announcement that an area should be evacuated qualifies as a civil authority’s prohibited use. House Bill 83 was reported favorably with amendments on a vote of 8-4 by the House Committee on Insurance and passed the House on a 68-31 vote. The bill was reported favorably by the Senate Committee on Insurance and on May 16 was scheduled to be heard on the Senate floor, according to the legislature’s website.
Likewise, SB 134 passed through the Senate and was reported favorable with amendments by the House Committee on Insurance, with no objections. The bill is scheduled to be heard by the House floor at the Reporter’s press deadline.
Consumer claims guide
If passed, SB 119 would require insurers to provide policyholders with a catastrophe claims consumer guide. There is a cost associated with this, Johnson said, but he believes the benefit may outweigh the cost.
Nonetheless, SB 119 remained pending in the Senate Committee on Insurance as of May 16.
Adjustment of residential claims
Senate Bill 198 requires the insurer to provide to the insured a written status report, a primary contact and two or more direct means of communication with the primary contact when a personal residential insurance claim arises out of a declared emergency or disaster and within a six-month period the insurer assigns a third or subsequent adjuster.
Johnson said that one of the complaints subsequent to the hurricanes about the claims handling is that the process got delayed because of changes in adjusters.
Even though Johnson understands the frustration of policyholders and the frustration and expense that falls on the insurers, he questions how the insurers can stop an independent adjuster from quitting and taking a better job.
In any case, Johnson said, the claimants have complained to their legislators.
Talbot’s SB 198 has found favor with legislators, according to the legislature’s website. The bill was reported out of the Senate Committee on Insurance, passed by the full Senate and was reported out of the House Committee on Insurance. So far, the bill has not received any nay votes, but was amended in both insurance committees. Currently the bill is pending final passage in the House.
Johnson explained to the audience that various adjusters have different duties. “There is the guy that goes out and inspects the risk; there is the desk adjuster,” he said. And if the report coming in from the field does not properly address something, the insurer may decide to get a third, specialized adjuster, to go look at the risk. “That’s three adjusters right there,” he said.
Johnson said he prefers SB 198, proposed by LDI, to SB 13 by Sen. Joseph Bouie, D-New Orleans, and SB 345 by Sen. Gary L. Smith Jr., each of which require claims adjusters be limited to three per claim.
A member of the audience told Johnson that limiting the number of adjusters to three is “unrealistic.” She described the problem as stemming from insurers failing to inform the claimant about who was currently handling the claim, and the customer couldn’t get hold of the person they thought was handling the claim. “It really is all about communication,” she said.
Johnson believes an unintended consequence could be discouraging the company from sending out a specialized adjuster. “You don’t want to go there. You want to make sure the claim gets done properly,” he said.
From the audience, “Adjusting is not an exact science; every claim has a different characteristic, and it may take several professionals to get a claim done and pay (the policyholder).”
“When the independent third-party adjuster quits,” Johnson said, “there is a delay on how long it takes him to notify the firm (he’s working for),” then another delay on the third-party firm notifying the insurer, and then the firm has to find someone to “fill that duty.”
Commissioner of Insurance Jim Donelon said, “Before Hurricane Laura and before the pandemic, we didn’t have any of these complaints. It didn’t exist. With the pandemic, nobody was able to hire the clerk in the dry cleaners or the waitress in the restaurant.” Add to the hiring crisis, 750,000 claims were filed in 15 months.
Since 90 percent of claims are closed, Donelon contends a great majority of claimants are satisfied, but thousands out of 750,000 are not happy.
“The legislature is going to be really engaged in this. This is going to be a battleground issue,” Donelon said. He pointed out that Louisiana is the toughest state to get insurance coverage because Louisiana doesn’t have the volume Florida has (“They can’t get it right”) and Texas has. On a per capita basis, he said, Louisiana has been hit by hurricanes in the last 100 years way more than Texas or Florida.
Johnson expects something will be enacted, and if something is enacted, we want something as favorable and reasonable as possible.
So far, Donelon’s bill has found favor with legislators (SB 198 is on the House floor), while Bouie’s and Smith’s bills have yet to be reported by the Senate Committee on Insurance. Senate Bill 13 was heard by the Senate Insurance Committee in March and voluntarily deferred. Senate Bill 345 has not been heard.
“The department is trying to help the consumer and bring a sense of balance and fairness to the situation,” Johnson said. “You want them (insurers) to be able to send an adjuster out to do a supplement claim,” he said. Because of loss development, insurers are re-opening claims.