Attorney James Napper II sits on the board of Louisiana Citizens Property Insurance Corp., the state-backed insurer of last resort. He remembers attending a board meeting a week for maybe two months after Hurricane Katrina.
“It wasn’t like a normal board meeting,” he says. “They just came and told us the 16 new crises we had that week.”
For more than a year, every time Citizens had a problem, staff members would present the board with multiple options, each worse than the last. When 50,000 people are trying to call Citizens, and the phone system’s down and can’t be fixed for at least a week, there’s really no solution that’s any good, Napper says.
The legislature created Citizens in 2003 to replace the FAIR and Coastal plans for home and business owners who can’t find property insurance in the private sector. Napper says the Legislature didn’t appropriate any money to the program, but expected it to be up and running by the beginning of 2004. Officials ended up outsourcing virtually everything, which might have been the only viable option at the time.
Then came the 2005 hurricane season, which would have bankrupted Citizens if not for its ability to impose assessments on private insurers, who pass the cost of those assessments to their policyholders. The Legislature has let policyholders write off those assessments on their taxes, which puts every taxpayer on the hook for the company’s losses.
Now, after years of mismanagement, a faulty and expensive software system and one former CEO accused of theft, the quasi-public insurance company seems to be on firmer ground. No assessments were required after 2008 hurricanes Gustav and Ike, this year’s quiet storm season have helped build up Citizens’ coffers and new CEO John Wortman has garnered mostly positive reviews. But class-action lawsuits left from those chaotic days after Katrina and Rita threaten to derail some of that progress.
Concern No. 1 is the $92.8 million awarded by a Jefferson Parish judge to 18,573 policyholders [$5,000 each] who say Citizens didn’t begin dealing with their claims within 30 days of notification as required. Citizens is appealing that judgment, which could become a lot more expensive if similarly situated policyholders are added to the class as expected. The company’s board could have settled the Jefferson Parish case for $50 million in March, but passed on the offer.
At one point there were three class-action suits over timely handling of claims by Citizens. Two were consolidated in Orleans Parish. As Wortman explains, officials thought $35 million set aside for the Orleans case would be enough for all of those types of claims, but attorneys in the Jefferson Parish case argue that settlement is unfair. Citizens has repeatedly asked the Louisiana Supreme Court to resolve the differences between the two lower courts, but has so far refused to step in. Both sides recently met with a federal magistrate, and both sides say no progress was made.
“It’s all the same people, you know,” Wortman says. “I’m not a lawyer, but it kind of seemed silly to me that people would get paid more than once for the same thing.”
The worst-case scenario, according to Wortman: another 15,000 claimants are added, and each is awarded the maximum $5,000 penalty, whether Citizens was one day or six months late. That would be another $75 million, plus attorney’s fees. But the mild hurricane season allows Wortman to strike a hopeful note.
“If the wind doesn’t blow, we could probably handle it with a small assessment to the [insurance] industry, or no assessment at all,” he says.
Fred Herman, an attorney who is working on the Jefferson Parish case, says he was shocked when Citizens’ board let the $50 million offer expire against the advice of its own attorneys, and believes Insurance Commissioner Jim Donelon’s influence was the biggest obstacle to a deal. As Herman explains it, the settlement would have allowed Citizens to take care of his clients over more than two years, with an option to defer payments in the event of a major storm.
“It’s not surprising, as much as it is dumbfounding,” he says. “This has become, in my view, not a business analysis but a political analysis for these people.”
The state’s Fifth Circuit Court of Appeal will hold a summary judgment hearing on the Jefferson Parish case Dec. 8. Herman says as many as 15,000 to 20,000 claimants could be added to the suit, which Donelon calls his biggest Citizens-related concern. Donelon, who says he expects the total to rise to $150 million, doesn’t remember what Citizens’ attorneys recommended, and he staunchly defends the board’s refusal of the $50 million settlement.
“To just give them $50 million to go away, for nuisance value, in effect, is preposterous,” he says. Private-sector companies that got into federal courts avoided class-action suits for similar complaints because those courts decided “one size does not fit all, and one day late is not the same as one year late,” Donelon says.
A couple of other class actions remain in the very early stages, making it tough to guess how much they could end up costing Citizens, if anything. One comes from a group who say they shouldn’t have had to pay a $65 policy fee, which Wortman finds “kind of silly,” but says the class has been certified.
Another suit says Citizens failed to pay contractor overhead and profit as required. When a repair job requires three or more professionals, insurers must pay an extra 20% to cover a general contractor to coordinate the various parties. Attorney Mark Smith estimates 15,000 to 20,000 policyholders might have been affected, while Citizens counters the number is between 5,000 and 10,000, he says. Smith says they might owe about $3,500 per person, not counting attorneys’ fees or penalties.
Smith says there might have been some inadvertent oversight, as Citizens had some very inexperienced people in the field at the time, although he says a former Citizens official testified the company just stopped making the payments for a while because it didn’t have the money. Wortman says he’s been told that suit could end up costing anywhere from $5 million to $60 million.
