Property insurance companies in West Virginia are finding themselves caught between a rock and a hard place over an ordinance in the city of Huntington that forces them to pay funds on some total fire losses to the city rather than directly to policyholders as they believe state law and their private contracts with insureds require.
The new Huntington ordinance forces insurers to put up to 13.3 percent of a policy’s property coverage amount into an escrow account from which the city can then pay itself for any debris removal costs it incurs due to a property owner’s failure to clean up after a fire. The city can also deduct any unpaid municipal fees or taxes from the account.
The ordinance, adopted last November over industry protests, went into effect July 1.
The insurer trade group, the West Virginia Insurance Federation (WVIF), has gone into Cabell County Circuit Court to challenge the ordinance that its member insurers, along with state Insurance Commissioner Jane Cline, believe violates state insurance law.
Charleston Attorney Jill Cranston Bentz, president of the WVIF, said the group filed its complaint July 1 seeking to stay implementation of the ordinance as well as a final ruling that it is invalid. The court has scheduled a hearing for July 31.
In the meantime, the city has had two fires that could fall under the ordinance, and the property owner involved in one has also filed a suit challenging the ordinance, according to Bentz.
Under the ordinance, known as Article 954, policyholders whose property suffers a total fire loss must within six months obtain a “certificate in good standing” from the city that confirms they have cleaned up debris from the burned out site or have a contract in place to do so. The city can withhold a certificate if the insured’s debris removal plan is not to its liking or if there are unpaid taxes or fees on the property.
If the certificate is denied, the city then orders the insurance carrier to pay into escrow $2,000 for every $15,000 of property insurance coverage available. Then within 90 days, if the policyholder still has not qualified for a certificate from the city, the city takes from the escrow what it says it is owed to pay for debris removal and any unpaid taxes or fees.
Insurers argue that the city ordinance unlawfully infringes upon the state’s authority to regulate insurance, a position with which the state’s insurance commissioner’s office concurs. They also contend that it contradicts the state’s “valued policy” insurance law that requires insurers to pay proceeds directly to policyholders and the state’s unfair trade practices act that requires claims payments to be made promptly.
The complaint also alleges that Article 954 is an unlawful invasion into private insurance contracts. It forces insurers to pay costs such as taxes and fees that were not anticipated by the policy and tries to unilaterally rewrite a contract to which the city is not a party, according to the complaint.
The city’s stated purpose for the ordinance is to deter arson, discourage abandonment of burned out properties and “prevent urban blight and deterioration.”
City officials adopted the new rule under the state’s new Home Rule Pilot Program that was created to give four municipalities more freedom in their operations. Three other municipalities are also participating in the pilot program but Huntington is the only one that has used it to justify a debris removal insurance escrow program.
The case could have ramifications beyond insurance law as the WVIF petition also challenges the entire pilot project as being in violation of the state Constitution.
According to WVIF President Bentz, other states including Ohio and Pennsylvania have debris removal provisions but those states do not have valued policy or home rule provisions like West Virginia’s.
Insurers say the city has a right to collect for debris removal costs and unpaid taxes and fees, but it shouldn’t use insurance companies as “agents for unlawful confiscation.”
Bentz said the industry’s lawsuit was filed reluctantly.
“We met several times with city officials and leaders over the past year trying to resolve this problem. We believe that West Virginia already has existing state laws which the city could better utilize in addressing the problem of abandoned properties within the city limits,” said Bentz, who is with the Charleston firm, Dinsmore & Stohl LLP. “The city could utilize existing laws rather than create a new unconstitutional ordinance requiring insurance companies to withhold money that state law requires must be paid directly to their policyholders.”
The complaint was filed for WVIF by James D. Lamp and Matthew J. Perry, attorneys with Lamp, O’Dell, Bartram, Levy & Trautwein in Huntington.
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