Insurance industry woes in the aftermath of Hurricanes Katrina & Rita.

• Author: Rosenberg, David J.

HURRICANE Katrina was a natural disaster unlike any that the United States has experienced in the past. We will never forget the images, which were with us every waking hour on television, in print, and on the Internet. The Gulf Coast has endured many powerful storms in the past, but previous damage had generally been confined to relatively discrete areas. How many times have we heard the warnings of the impending terrible storm and seen foolhardy reporters clinging to street posts in driving rain and wind? During previous storms, citizens evacuated, buildings collapsed, roofs were ripped off, and debris strewn, but there was minimal loss of life and injury. People returned, insurance companies rebuilt, and life returned to normal.

Katrina was different. In late August and early September, 2005, the hurricane headed toward the Gulf Coast with initial predictions of a direct New Orleans hit. Many locals evacuated thinking they would be back in a few days, while others believed in the general good fortune of the bayou and chose to ride out the storm. At first it seemed as if the citizens of New Orleans had waltzed with Lady Luck once more. The brunt of the storm had struck to the east, in Mississippi. New Orleans, it seemed, had been spared the worst. Bars in the French Quarter remained open, but the real tragedy was just beginning.

The levees of New Orleans allowed the city to flourish, despite the city's location below sea level and surrounded by the Gulf of Mexico and Lake Pontchartrain. Unfortunately, after Hurricane Katrina struck, New Orleans was lashed by heavy rains, wicked winds, and storm surge, but the real damage came when the levees failed and Lake Pontchartrain met the Gulf in the once proud streets of New Orleans. We then saw images that we never imagined we would see in the United States as a result of a natural disaster, a disaster that could be blamed on bad luck, bad planning, bad budgeting, and bad engineering. The images of bodies floating in the streets, desperate people stranded on their rooftops, looters gone wild, flames throughout the city, and scenes from the Superdome and Convention Center beyond description are burned into our memories forever.

Months later, time has passed and people have returned to New Orleans. The attention that was focused for so long on relief efforts is now turning to the causes of the disaster. Many issues not considered before the storm are coming to the fore, and it is clear that political forces seeking to divert the public's attention from the inadequate governmental response will closely examine the insurance industry.

A thorough analysis of the issues facing the insurance industry is important to help weather the gale force storm that faces the industry in the wake of the natural storm. Will government legislate coverage where it otherwise wouldn't exist? Will contractual language be given a fair reading? Which damage was caused by floods, and which destruction was caused by the storm itself? Who will pay? What if businesses simply do not want to take the risk of moving back and rebuilding--what will they be owed? The region has become an incubator for mold, pollutants, and other toxins: who is responsible for the clean up? The answers are not necessarily clear, but a review of decisions, legislation, and previous governmental action should provide guidance.

1. Regulatory and Legislative Responses to Hurricane-Related Insurance Issues

   The devastation wrought by the hurricanes that plagued the United States Gulf Coast in 2005 placed both the government in the affected states and the insurance industry under unprecedented pressure to deliver relief to the affected populations. State executives and legislatures faced with extraordinary pressure from constituents devoted and continue to devote substantial attention to addressing problems, real or imagined, with the insurance industry's response to the crisis. Not surprisingly, the attention has, by and large, been negative, designed to limit insurers' actions in favor of perceived public interest.

   Insurers operating in this environment need to be aware of the various regulatory and legislative initiatives. (1) Surplus lines insurers should not presume that the new regulations and proposed legislation do not affect their interests, as many of the provisions specifically purport to be applicable to both admitted and non-admitted insurers doing business in the state.

   1. Louisiana

      Louisiana was the hardest hit state, and perhaps as a result, it has been most active in the regulatory and legislative arenas.

      1. Regulatory Action Regarding Property & Casualty Insurance

         Louisiana has operated under a state of emergency since August 26, 2005, scheduled to terminate on March 24, 2006. (2) In Executive Order KBB 2005-40, Governor Blanco authorized the Louisiana Insurance Commissioner to implement emergency insurance regulations, including the ability to suspend applicable statutes and make any rules necessary to protect the public health, safety, and welfare of its citizens. Executive Order KBB 2005-70 extended the applicability of the rulemaking power to victims of Hurricane Rita, extended the applicability of Executive Order 40 until December 31, 2005, and, perhaps most importantly, stated that any rules, regulations, directives, or actions taken by the Governor or Insurance Commissioner during the state of emergency will continue in effect notwithstanding the lift on the state of emergency. (3)

         Exercising these powers, the Commissioner adopted two significant Emergency Rules. Emergency Rule Number 15, (4) promulgated on October 20, 2005, limited insurers' ability to cancel and/or non-renew policies due to non-payment of premium and deferred payment of premiums. (5) Emergency Rule 15 was in effect from August 26, 2005 until December 31, 2005 for victims living or working in the parishes affected by Hurricane Katrina and until November 30, 2005 for victims living or working in the parishes affected by Hurricane Rita. (6) However, Emergency Rule 15 clearly states that the premium deferment is not premium forgiveness. After the deferment period expires, insurers will be able to take offsets against claims payments for premiums due in the event a claim has not yet been adjusted and paid.

         Except for cases of fraud or misrepresentation, Emergency Rule 15 prohibited cancellation of any policy that was in effect on August 26, 2005 until after the state of emergency is lifted. Even a notice of cancellation sent prior to August 26, 2005 is ineffective. Notices of cancellation, nonrenewal, or non-reinstatement that were in effect or pending on August 26, 2005 were suspended, and any notice needed to be reissued after the Emergency Rule's termination in order to be effective. Further, state laws regarding the powers of premium finance companies were suspended during the state of emergency, meaning that a cancellation requested by a premium finance company with power of attorney from the insured would also have been ineffective.

         Emergency Rule 15 also restricted the bases of cancellation available to insurers. The rule provides that no policy may be canceled or non-renewed "solely because of a claim resulting from Hurricane Katrina or its aftermath." This prohibition was extended by Emergency Rule 23, published on January 20, 2006. Emergency Rule 23 suspended insurers' rights to cancel or nonrenew personal lines or commercial lines property insurance coverage covering insureds who filed claims as the result of the hurricanes. Instead, coverage on property damaged by the hurricanes cannot be cancelled or non-renewed until sixty days after the property is "substantially repaired." Policies cancelled for nonpayment of premium, fraud, or material misrepresentation related to the claim for damage caused by the Hurricanes, where the insured causes an unreasonable delay in repairs, where the insured has indicated an intent not to rebuild, where the insured has violated a material provision of the policy, or where the insured requests cancellation or non-renewal in writing are excepted from this limitation.

         Emergency Rule 15 was broadly applied. It applied to any and all insurers "doing business and/or regulated by the Commissioner" and was specifically intended to apply to surplus lines insurers. It applied to all persons living or working in any of the fourteen parishes primarily impacted by the hurricanes.

         While Emergency Rule 15 imposes significant restrictions on insurers, it did permit insurers to seek relief by filing a request with the Commissioner and showing undue burden or hardship as a result of adherence. Finally, the Rule specifically provided that the Commissioner has the sole authority to enforce the Rule and prosecute violations by imposing a fine or penalty of up to $1,000 per separate violation or up to $25,000 per violation for knowing and intentional acts. The Emergency Rule does not give insureds a private right of action to bring suit over violations.

         The Louisiana Insurance Commissioner has also taken steps to facilitate and regulate the operations of the public adjusters who flocked to the state in the wake of the storms. Under Emergency Rule 16, the Commissioner authorized public adjusters licensed in other states to operate in Louisiana if they registered with the Insurance Department. All public adjusters who were "actively engaged in the settlement of losses and damages resulting from this catastrophe" were required to provide such information. Emergency Rule 16 also banned contingent fees for public adjusters, declaring any such fee null and void.

         Emergency Rule 22, promulgated on January 20, 2006, established a procedure for resolving the tens of thousands of coverage disputes arising out of damage to residential properties. The rule established a special mediation program for personal lines residential insurance claims resulting from the hurricanes and also implemented a procedure to...