A report for the Louisiana Insurance Department shows that the state-sponsored “insurer of last resort” had trouble handling claims for hurricanes Katrina and Rita because it was switching to new outside contractors and activating a new computer system when the 2005 storms hit.
Citizens Property Insurance Corp., the state’s third-largest insurer, was selected for a market conduct examination by the Louisiana Department of Insurance because it had the highest ratio of complaints to market-share of any company in the state.
The report recommended that Citizens and its service providers implement procedures that will allow for the timely adjustment and payment of claims, overhaul the service provider contracts to make sure they’re appropriately structured to handle catastrophes, and make sure that claim files are adequately documented.
Citizens switched from using Audubon Insurance Co. , which had run the predecessor Fair and Coastal programs since their inception in 1970 using a proprietary computer system, to Bankers Insurance Co. , First Premium Insurance Co. and the MacNeill Group in 2005.
Litigation over the award of the contract delayed the implementation of a new computer system for Citizens until Oct. 1, 2005. Problems with that new computer system, combined with the fact that the three new companies contracted to run the insurance plan were not yet in place, left Citizens ill-prepared to handle claims.
Katrina hit Aug. 29, 2005; Rita hit almost a month later.
“It took two weeks after the storm to even get Audubon involved. There was a possibility between the hurricane and (Oct. 1) that no one was contractually obligated to handle this stuff,” said Ron Musser, who oversaw the examinations as assistant commissioner of financial solvency at the Insurance Department.
In its response, Citizens offers another explanation for why it was unable to pay claims quickly: It didn’t have the money.
After paying all policyholders in the hurricane-affected areas $1,500 in emergency cash advances and beginning work on claims, the company found itself strapped for cash. The program ultimately issued $1 billion in bonds to raise money, but the process took time.
“As a result of the unprecedented damage caused by Hurricane Katrina, Citizens incurred a deficit which required the Board to secure one of the largest bond issues in the history of Louisiana. Although this was done as quickly as possible, due to the statutory scheme under which Citizens operates, there was a brief period beginning in February 2006 and continuing into March when the FAIR plan did not have sufficient funds available to pay all claims,” Citizens’ written response reads.
Sen. Don Cravins Jr., D-Opelousas, the new chairman of the Senate Insurance Committee, said that the Legislature is working closely with Citizens and the Insurance Department to remedy any problems in the way Citizens operates under current law.
“We’re willing and able to tweak the whole Citizens issue to make sure that if we have to go through that situation again, it won’t be the same,” Cravins said.
Soren Gisleson, chairman of the insurance section for the Louisiana Association for Justice, doesn’t buy the notion that delays caused by the bond issue excuse Citizens for poor claims handling.
If Citizens had sent adjusters promptly to adjust claims and they had given people an accurate appraisal of damage, but told homeowners that they may need to wait a few months for their money, he believes policyholders would have been tolerant. Instead, he argues, Citizens low-balled damage, angering policyholders and forcing them to fight for resources.
Information from: The Times-Picayune,