Hurricanes Katrina and Rita exposed many misconceptions and misunderstandings that consumers had, or claimed to have had, with respect to their insurance coverage for hurricane related damage. The aftermath of these two hurricanes also revealed that some insurance professionals are surprisingly uninformed or misinformed about the insurance coverages related to and available for damage from hurricanes.
Not surprisingly, due to the magnitude of the damage done by the two hurricanes, legislation has been passed in Louisiana and bulletins issued by Mississippi Insurance Commissioner George Dale to address these issues. The following summarizes the more notable insurance related legislation and bulletins resulting from Hurricanes Katrina and Rita affecting the insurance industry.
Time to file claims
Many insurance policies contain provisions requiring the insured to file property damage claims within one year of the date when the damage in question is sustained. Effective June 29, 2006, the Louisiana legislature enacted L.R.S. 22:658.3, which provides that for filing claims under their insurance policies, insureds claiming damage resulting from Hurricane Katrina have until Sept. 1, 2007, and insureds claiming damage resulting from Hurricane Rita have until Oct. 1, 2007. The statute specifically directs the Louisiana attorney general to file suit seeking a declaratory judgment to determine its constitutionality. Presumably, the legislature was concerned that the statute was an unconstitutional ex post facto interference with contract rights.
Allstate Insurance Company had asked that the issue be removed to Federal court in order to challenge the constitutionality of the extension, however, Judge James J. Brady of the United States Middle District Court sent the case back to state court. On Aug. 23, 2006, State District Court Judge Kay Bates determined the statute to be constitutional. Appeals of Bates’ were expected to be sent to the Louisiana Supreme Court without delay.
Under Mississippi law, insureds generally have three years to file suit for claims under their insurance policies. (Miss. Code & §15-1-49.) On April 26, 2006, the Mississippi commissioner issued Bulletin 2006-8, noting that Mississippi Code §15-1-5 nullifies any provision attempting to change the time to file suit and stating that, therefore, any provision in an insurance policy limiting the insured’s right to file suit to less than three years is null and void. The bulletin further states: “Insurers whose policy forms contain a provision that may appear to have a statute of limitations period of less than three (3) years are hereby directed to file with the Mississippi Department of Insurance amended policy forms and endorsements, with clear language prescribing the correct statute of limitations period.”
Denial of claims
Effective Aug. 15, 2006, the Louisiana Legislature enacted L.R.S. 658.2, which provides that with respect to claims under insurance policies for damage to real property:
1. When determining whether a loss is covered under a homeowner’s insurance policy, insurers shall not use the floodwater mark to deny coverage, without considering other evidence.
2. When determining whether a loss is covered under a homeowner’s insurance policy, insurers shall not deny coverage based solely on the fact that a home is removed or displaced from its foundation, without considering other evidence.
3. If damage to the property is covered in whole or in part by the policy, the insurer bears the burden of establishing an exclusion under the policy and any clause which attempts to alter this burden is null and void.
L.R.S. 22:658.2 further provides that the violation of any of the foregoing provisions is deemed to be a breach of L.R.S. 22:1220, which imposes a duty on the insurer to adjust and settle claims fairly and in good faith. The legislation creating L.R.S. 22:658.2 does not specifically state whether it may be applied to those claims for damages resulting from Hurricanes Katrina and Rita, which are unresolved as of the Act’s effective date, Aug. 15, 2006.
The Louisiana Legislature also enacted L.R.S. 22:682, which provides that insurers may not automatically deny claims for damage to covered property based on an insured’s inability to provide sufficient proof of loss within the time limits and requirements of the policy when those losses are due to an event for which a state of disaster or emergency is declared. For those losses, the statute permits any insured with replacement cost coverage to complete repairs to the property within one year from the date of loss or receipt of insurance proceeds, whichever is later, with the insured entitled to receive the full value of the covered damage that has been repaired without reduction for depreciation.
L.R.S. 22:682 is specifically applicable only to policies and renewal policies delivered in Louisiana after the Act’s effective date of Aug. 15, 2006.
In Mississippi, the commissioner issued Bulletin No. 2005-6 on Sept. 7, 2005, stating that when adjusting a claim under a homeowner’s policy, an adjuster cannot summarily determine the cause of property damage without first inspecting the property itself, and further instructing all insurers to “fully inspect any damaged property before a coverage decision is made.”
In the bulletin, Commissioner Dale stated that: “In instances where the insurance company believes the damage was caused by water, I expect the insurance company to be able to prove to this office and the insured that the damage was caused by water and not by wind.”
On Feb. 3, 2006, Dale issued Bulletin 2006-2, which reaffirmed his instruction that if there was an issue as to whether property damage was caused by wind or water, his office expected the insurer to be able to clearly demonstrate the cause of the loss. The bulletin also instructed insurers not to rely solely on a paid structural engineer’s report, but to review and take into consideration eyewitness accounts of damage to neighboring structures and all other evidence compiled by the insured before making a final coverage decision.
Notice
As a result of apparent widespread misunderstanding of the scope of coverage under homeowners policies for hurricane damage, the Louisiana Legislature enacted a number of statutes requiring insurers to provide detailed notice about the coverage provided by those policies. Most significantly, effective May 12, 2006, the legislature enacted L.R.S. 22:1477, requiring insurers develop a form, to be inserted in the front of homeowners policies, that prominently provides the following disclosures:
1. Which coverages are included in the policy for which the insured has paid premiums;
2. Whether the insured has coverage for flood or mold;
3. Advising the insured that flood insurance is available through the National Flood Insurance Program and excess flood insurance may be available by a separate policy;
4. Whether an increased deductible is required for hurricane, wind and/or named storm damage;
5. An explanation of the distinction between replacement cost and actual cash value, including how depreciation is used in determining payments;
6. Whether the policy contains time limits for repairs to be completed in order to receive full replacement cost;
7. The time periods provided by law of when claims must be adjusted, settled and paid, including an explanation of the penalties which may be imposed on the insurer for failing to meet these requirements; and
8. That the insured may have the option of increasing the deductible to lower the
potential costs.
In Mississippi, several bills were filed in both the 2005 Fifth Extraordinary Session and the 2006 Regular Session, which would have required insurance agents to specifically notify insureds that their homeowners policies do not include flood insurance, but they did not pass. However, effective Aug. 14, 2006, Commissioner Dale issued Regulation 2006-2, which has the force of law, which requires property/casualty insurers to provide written notice to their insureds of any flood and earthquake exclusion in the policies and contains minimum language to be included in the notice. Written notice is to be sent to insureds by Sept. 1, 2006, and notice of the exclusion is required on declaration pages by Jan. 1, 2007.
Insurance brokers, agents and adjusters
Effective Aug. 15, the Louisiana legislature amended L.R.S. 22:1193(D) and (E)(2), and enacted L.R.S. 22:1193(M) to require insurance brokers, solicitors and agents to have three hours of continuing education in 2007 dedicated to flood insurance. This legislation was probably enacted in response to consumer complaints, and lawsuits, that their insurance agents told them that they did not need flood insurance or led them to believe that homeowner insurance policies covered all damage from hurricanes, including water damage. At least one insurance agent was quoted in the New Orleans newspaper several months after Hurricane Katrina as admitting that he was not aware that excess flood insurance coverage was available in some circumstances.
Several bills with similar continuing education requirements were filed with the Mississippi Legislature, but did not pass.
Penalties
Also effective Aug.15, the Louisiana legislature amended L.R.S. 22:658(B)(1) to increase the penalties for an insurer’s failure to offer to settle a property damage claim within 30 days after receipt of satisfactory proof of loss, when such failure is arbitrary, capricious or without probable cause, from 25 percent to 50 percent of the amount due to the insured. The amended statute allows the insured to recover attorney’s fees and costs in addition to the 50 percent penalty and prohibits the insurer from using these penalties in its computation of past or prospective loss experience for the purpose of setting rates or making rate filings.
Burden of proof
Of the foregoing, the most significant statutes and directives may well be those dealing with the burden of proof placed on an insurer denying coverage where the issue is wind versus water damage. Indeed, this is expected to a major issue, if not the primary issue, in most of the lawsuits filed as a result of Hurricanes Katrina and Rita. Only time will tell whether the Courts will uphold them and how they will be applied.
Topics Catastrophe Natural Disasters Carriers Agencies Legislation Claims Flood Louisiana Hurricane Homeowners Property Mississippi
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