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Public Policy Analysis & Opinion Big discontent in the Big Easy Disgruntled policyholders face claim denials because evacuation was not "mandatory" By Kevin P. Hennosy One year ago, several downtown hotels and numerous fine eating establishments in New Orleans were awaiting the arrival of the National Association of Insurance Commissioners (NAIC). When NAIC Executive Vice President Cathy Weatherford brings her regulatory bund to a city, the hospitality industry celebrates. A thousand or so insurance lobbyists “building relationships” with 300 or 400 state officials beyond the intruding gaze of state ethics commissions provide excellent business for fine restaurants and lobby bars. Of course, before Mrs. Weatherford’s Flying Circus could descend upon NOLA, Katrina and her ugly sister, Rita, hit town. The eateries and liquor distributors of the Big Easy suffered a triple whammy in August and September 2005. I have visited New Orleans twice since the storms. The Chamber of Commerce wants the world to know that New Orleans is rebuilding and reviving. There is truth in that message. Most of the grand old convivial establishments have reopened. But, of course, there is more to the story. The story of New Orleans has always been deliciously complex. For every colorful or playfully off-color attribute one could point to, there was a dark and sinister undercurrent that the convention and visitors bureau did not want tourists to see. If partisans for any other part of the country are tempted to point fingers at New Orleans’ negative traits, let’s just remember that the best gumbo starts when a cook applies high heat to Midwestern butter and wheat. We are all in this together. Political discussion in New Orleans is a rhetorical blood sport. The storied “window” at Molly’s at the Market (1107 Decatur Street) is a central arena for such combat, particularly on Saturday and Sunday afternoons. A removable counter slipped between the frame of a French door and surrounded by barstools serves as an academy of all things political. On a weekly basis the problems of the world are solved by local politicos, journalists and General Observers of the Heavens and the Earth. Not surprisingly, that political discussion in the past year has focused on recovery from the storms. The topic of insurance and its lack of regulation provide some lively punctuation to the discussion. There is no denying the fact that the insurance sector has paid billions of dollars in claims, but there is much discontent with insurers in NOLA. All one has to do is mention a connection to the insurance sector to a New Orleanean and The Conversation will follow. Almost every local I talked to said that the shenanigans surrounding Katrina take the prize for bad behavior in insurance history. To give you a taste of the perspective, think about this observation: “At least after the Chicago Fire, approximately 70 insurance companies went out of business paying claims.” There is a general consensus among the property owners of New Orleans that claims have not been paid so easily since August 28, 2005. Time and again, people told me about claims being denied or materially reduced by insurers. Often the bad news followed directly after an insurance agent or broker said something along the lines of: “Mr. and Mrs. Nola, I have some very good news for you!” It is at this point that the producer would offer the claimant a settlement. Rightly or wrongly, there is a perception that the offers were calibrated by insurers to be intriguing, but much lower than expected. The perception of commercial lines claims payment is not much better. Commercial lines payments play an important role in the recovery after any catastrophe. These payments provide the economic pump priming that will ultimately drive the recovery of the great city of New Orleans. During a visit to New Orleans in January, a disgruntled policyholder showed me the insurance policy for his business, a bar and restaurant, which included coverage for loss of business income and rents. The policy was written in a peculiar fashion to which some might apply the label “only in Louisiana.” The policy transferred the risk to Lloyd’s of London, through an Arkansas-based intermediary and local producer, using an Insurance Services Office form. The producer who sold the policy initially argued that the insured should not file a claim on the policy at all. The insured property had not suffered significant storm damage, so the policyholder could not claim a loss of business of income based on physical damage caused by the storm. In addition, the policyholder was told that the carrier would probably deny a claim for business interruption because utility services had been turned off, a loss that is specifically exempted. The policyholder decided to move ahead with a business interruption claim on the grounds that his business was closed as the result of a civic action. The policy contained specific coverage for losses related to civic actions. When the insurer repeated that it was denying coverage because the policyholder had closed his business because of a loss of power, the policyholder countered that his claim was not based on the lack of power but on a public order to close and leave. He pointed out that he kept another similar business open without power and did not file a claim under that establishment’s policy. From a layperson’s standpoint, the business owner was justified in feeling confident in the validity of his claim. The City of New Orleans evacuation was the direct result of a series of civic actions. Public officials from City Hall to the State Capitol to the White House told the people of New Orleans to get out of town. Officials initiated the formal evacuation plan, which was designed to move people out of the city. The vast majority of citizens followed the officials’ orders. Public officials restricted reentry into the city and used police powers to enforce it. Any business that tried to stay open after the storm had no customers or employees for weeks. The policyholder’s claim for losses sustained by the temporary closure of his restaurant and bar was denied. Lloyd’s reason for the denial of payment was that the evacuation order was not “mandatory.” The losses suffered by countless New Orleans businesses are just the type of financial losses that business interruption insurance was created to pay for at the turn of the last century. A 1914 insurance text touts business interruption insurance as useful when a business is closed due to city sidewalk construction or maintenance. Say what you will about the official response to Katrina, I think it goes beyond a closed sidewalk. There are numerous business owners in New Orleans with similar stories who believe that insurers should have honored the promise of protection. The insurance sector is not very popular in New Orleans right now. Insurance is a business based on trust, and the people of New Orleans I met do not seem willing to extend trust to insurance companies. Since my last visit to New Orleans, Mayor Ray Nagin has issued a new catastrophic evacuation plan. The new plan stresses the mandatory nature of the evacuation order. If the new city policy had been in place before Katrina, I believe insurers would have been compelled to pay more claims—particularly for loss of business income. This change in city policy could have many effects. If insurers were on the hook for such claims, they might be persuaded to use their powerful lobbying machine to mitigate risk. It would be wonderful to see the insurance lobby fighting for wetland renewal and the reclamation of the MR GO industrial canal, which played an important role in destroying the Louisiana wetlands. The reduction of the wetlands allows storms to hit New Orleans with more force. Insurers’ investment power could help too. Insurers could make private placement investments and purchase bonds and equity instruments to fund new businesses as local areas transition away from environmentally damaging commerce. Why should insurers do all this? Well, how about profit? Paying claims builds public trust; and, as noted earlier, insurance is a business based on trust. Environmental renewal equates to the reduction of hurricane risk, which reduces insurers’ future claims liability. Ultimately, the rebuilding and rebirth of southeastern Louisiana will generate shareholder profits. Brokers and agents also should be leading the charge because they will be facing increasingly disgruntled policyholders, not just in New Orleans but in all coastal areas as the insurance market continues to tighten. Agents also could face E&O claims from policyholders whose claims are denied. Finally, a word about insurance regulation in Louisiana. The state has a rather colorful history with regard to insurance regulators. In recent years the state has been a leader in commercial lines deregulation, with one of the arguments being that business owners are sophisticated insurance buyers and do not need the same type of consumer protections that personal lines policyholders need. The results in New Orleans seem to undermine this assertion. Owners of small businesses do not have time to worry about insurance coverage. They buy the coverage that they are advised to buy and rely on that advice. And they are not satisfied when claims are denied. There is a place for efficient and effective insurance regulation. Such a system of public oversight of private business shores up the public trust. Right now, the people of Louisiana do not know whom to trust. * The author |
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