Donelon: Litigation-Spawned Disaster Looming for Louisiana Citizens

By | August 19, 2009

Louisiana Commissioner of Insurance says a $95 million litigation award against Citizens Property Insurance Company has the potential of creating a disaster for the state-backed insurer of last resort and the state of Louisiana.

The litigation, which Donelon called both “morally and legally deficient,” stemmed from a class action lawsuit against Citizens filed in Jefferson Parish that accuses the company of taking too long to settle claims after 2005’s Hurricane Katrina.

At a press conference, Donelon explained that a settlement has been reached over similar class action suits filed in Orleans and St. Bernard Parishes, limiting the award to $17 million, of which the attorneys who filed the suits would share a total of $5 million.

Citizens has been unable to reach a similar agreement in the St. Bernard lawsuit and hopes to make its case before the state Supreme Court. But it must post a $95 million appeal bond – equal to the amount of the jury award, which was upheld by an appeals court in St. Bernard Parish – if a settlement has not been reached by the end of day on Monday, Aug. 24.

Donelon has argued that as a quasi-state agency, Citizens, like other state agencies, should not have to post an appeal bond in order to appeal a court’s decision. That request has so far been denied.

He said one option, if forced to post the appeal bond, would be, with the help of Governor Bobby Jindal, to buy a commercial bond to cover the amount of the appeal bond. He said Jindal has approached several insurers, including Zurich, Chubb and Liberty Mutual, about the possibility of fronting the money to Citizens for an appeal bond.

Citizens has also offered to pay the St. Bernard claimants and their attorneys $3 million in exchange for supporting the request to waive the appeal bond. That offer has also been rejected.

Citizens currently has $100 million in its coffers. Donelon said the final option, which he called the “nuclear option,” would be for Citizens Board of Directors to authorize the use of $95 million of that to post the cash bond and to temporarily suspend the payment of claims and commissions while implementing an assessment on every property insurance policy in the state to replenish its treasury.

Citizens CEO John Wortman says Citizens takes in about $20 million in premiums each month but pays out around $15 million monthly for claims, commissions and operations.

Donelon said at this point, the “nuclear option” appears most likely. That scenario would require all property insurance policyholders, Citizens policyholders as well as those with private market insurance coverage, to be assessed.

In an announcement released by the insurance department just after the press conference, Donelon stated:

“All of the options being weighed at this point are the result of a class action lawsuit which resulted in actual fisticuffs in the courtroom between the warring groups of attorneys representing plaintiffs in Orleans and Jefferson Parishes. …

“On the day of the plaintiffs’ attorneys scuffle in court, I testified in New Orleans for a $17 million settlement that would have resolved all penalty cases pending in St. Bernard and Orleans Parishes and preempted the case in Jefferson Parish. That settlement was approved by Judge Kern Reese of the Civil District Court in Orleans Parish but enjoined by Judge Henry Sullivan of the 24th Judicial District Court in Gretna,” said Commissioner Donelon.

Donelon noted that “90% of claims filed against private insurance companies post Katrina/Rita, like my own insurance claim, were not adjusted in a timely fashion due to extreme circumstances caused by both hurricanes but were denied class certification by the federal courts in New Orleans, so only policyholders of the state-financed residual market will enjoy this $5,000 per head windfall if we are ultimately unsuccessful in our efforts to overturn this judgment.”

The federal courts have refused to get involved in the case, but have offered a federal magistrate to mediate the case. Donelon, Wortman and others are scheduled to participate in a special meeting on Aug. 20 in New Orleans with U.S. District Court Magistrate Judge Joseph Wilkinson in an effort to reach a compromise.

Citizens’ Board will hold a special meeting on Friday, Aug. 21 at 1:00 p.m. to discuss the case and, if necessary, authorize the use of $95 million of Citizens reserves to post the appeal bond.

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