Louisiana Federal District Judge Stanwood Duval issued an attention grabbing ruling in an attention grabbing Katrina insurance case filed by former Louisiana Attorney General Charles Foti on his way out the door after losing his bid for re-election last year. The Sun Herald has the story.
A judge has asked a state official to review the validity of private attorneys’ contracts to represent Louisiana’s attorney general in a case over the state’s Road Home hurricane recovery program.
U.S. District Judge Stanwood Duval said insurance company attorneys “persuasively” raised questions Wednesday about whether former Attorney General Charles Foti followed state law when he hired the lawyers.
He gave the commissioner of administration 45 days to decide whether the contracts were valid. If the commissioner finds them faulty, the judge said, he will remove the lawyers from the case…
The insurance companies don’t have any legal standing to challenge the attorneys either on behalf of the state agencies or the plaintiff class, Duval wrote. “The most prudent course, however, is not to ignore this issue,” and the commissioner of administration is the proper person to decide, he wrote.
The class “could potentially number in the tens of thousands,” he wrote. “Finding replacement counsel capable of handling litigation of this size and complexity will significantly, if not fatally, stall the class suit” and unacceptably delay a fair resolution.
A possible conflict with unidentified possible clients – and the fact that no conflict has yet arisen – isn’t enough reason to remove the attorneys, Duval wrote.
Naturally, I couldn’t resist the temptation to google, google, google all night long and that took me down memory lane until I hit the Road Home and read Underpayment may be costing Road Home.
In a mad dash to beat an Aug. 29 filing deadline, Attorney General Charles Foti is preparing to file one or several lawsuits against property insurance companies for possible unpaid or underpaid claims by Road Home applicants.
The state’s top lawyer is getting involved because Louisiana’s Road Home grant program was designed to compensate homeowners for losses insurers don’t cover, but insurance companies have paid out about $860 million less for those applicants than the state expected they would. The Road Home is fast running out of money and has had to appeal to Congress to help it fill a $5 billion shortfall, at least in part because insurance payouts have lagged expectations.
I certainly remembered the $5 billion shortfall; but, tonight was the aha moment when I linked the shortfall to the lawsuit. Check this out.
Federal and state documents obtained by The Times-Picayune pin the largest chunk of a multibillion-dollar shortfall on hurricane wind damage that Road Home is paying because insurance companies did not. The two sides are in dispute about who is responsible, a debate that will figure strongly in whether Congress steps in with more money to cover an estimated $3 billion gap.
The state documents contend that a significant part of the Road Home shortfall emerged either because homeowners had insufficient insurance coverage or because insurance companies failed to meet their obligations.
The Bush administration, stunningly, despite everything, gets it wrong, blaming the state for paying wind claims, instead of blaming insurers for NOT paying wind claims.
But the Bush administration foresees the Road Home coming up short by anywhere from $2 billion to $6 billion simply because Louisiana decided — against the federal government’s wishes — to pay for homeowners’ uninsured wind damage instead of limiting grants to flood damage…
A source close to Federal Recovery Czar Donald Powell is quoted as saying he’s concerned the state is wasting federal money.
If you’re ROFL at that last sentence, pick yourself up and read on because here comes the ITP War Eagle with a rather profound question and some data from the Louisiana Recover Authority Insurance Analysis, May 2007,
How about making wind insurers pay for wind damage as a backup plan? Is this complicated?
Among the reports findings:
1. Insurers paid only 61% of total damages, including the flood program, while the state expected 76%.
2. Only 23% of policyholders got 100 cents on the dollar.
3. 37% of policyholders received less than 50 cents on the dollar, including flood.
4. About 8% received less than 10 cents on the dollar…
If you’re wondering, the Insurance Information Institute says insurers paid $10.3 billion in Louisiana Katrina claims, with about 95% of claims closed. Louisiana says they came up $2.7 billion short, about 26%. But think about this: the III figure includes commercial, auto, business interruption and other claims, while the Louisiana number is pure homeowners. I think insurers’ shortfall is going to wind up in the 40 to 50% range.
Remember, this is like a bank giving you 50 cents on the savings you deposited. There is no difference.
(Correction: Sop here, I edited the next section for accuracy thanks to the heads up from Beau and info from Mr NAAS. Nowdy initially wanted me to do a tag team post with her on this topic but I was feeling too badly to help when she was ready to publish the piece. Somehow Nowdy always manages to get her way though. 🙂 )
Foti did file suit for the Road Home program. It seeks recovery on behalf of homeowners who assigned their insurance claim to the State as part of the grant process. Thanks to a reader, here is a copy of Judge Duval’s order which is salient to the Sun Herald story that lead off this post along with the memorandum of support and exhibits for the motion to disqualify counsel that was subject to the ruling issued by Judge Duval.
The companies named in the lawsuit are: State Farm Fire and Casualty Co. and Allstate Insurance Co., Louisiana’s two largest residential insurers; Farmers Insurance Exchange, the state’s fifth-largest homeowners insurance company; Standard Fire Insurance Co., better known as Travelers, the state’s seventh-largest home insurer; military insurer USAA Casualty Insurance Co., the eighth-largest homeowners policy company; and tiny Lafayette Insurance Co., a division of United Fire Group.
The lawsuit also names Marshall & Swift/Boeckh LLC and Xactware Solutions Inc., companies that manufacture leading claims-adjusting software; and Xactware’s parent company, insurance data collector Insurance Services Office Inc. It also names McKinsey & Co., an international consulting firm that has advised many major insurance companies on practices to adopt in computing claims…
The lawsuit posits that the consulting company, McKinsey, advised major insurance companies how to reduce the amount of money they pay on claims. Insurers accomplished McKinsey’s goals by turning to software providers whose claims-adjusting programs allowed them to standardize claims settlements, ostensibly with objective third-party data on what different repairs should cost.
But, the lawsuit says, insurers actually had the ability to customize those figures in-house by shaving money off the costs reported in the database to depress the values and force people to accept lower claims settlements. Meanwhile, those settlements get recorded in the massive claims database at ISO — the owner of the Xactware software maker — creating a “tainted” record of what it costs to repair a home. The gambit was so financially successful, the lawsuit says, that it created pressure for other companies to follow suit.
All those familiar names made me feel like this last story was reporting on old home week here at Slabbed – and even moreso when I noticed this quote from Tulane Law School professor Raymond Diamond above the next story.
The insurance companies’ defense will be that if their actions are similar, it’s because they’ve all adopted the most efficient and productive business practices to spend consumers’ premium dollars wisely, not because they’re conspiring.
Sure enough, that’s exactly the party line I found on a site that follows Farmer’s.
Once enough companies are on board using a certain product, others are under pressure to follow. Farmers, according to the suit, visited with other leading insurance companies in 1998 and 1999, and when it saw the financial benefits of using the standard claims-processing software, it started using Xactware, too.
The lawsuit alleges:
• the industry has been able to standardize its tactics for low-balling claims and create a “tainted” database of claims settlement figures that the industry uses to further depress estimates for what people need to repair their homes.
• all of the data is centralized by Xactware’s parent company, Insurance Services Office, better known as ISO, allowing companies to collude.
• By using the outside vendors to unify “power and control,” insurers systematically reduce the percentage of premium dollars that companies return to policyholders in the form of claims payments “under a shroud of secrecy,”
• While the industry has historically paid 70 cents on every premium dollar collected back to policyholders in claims payments, in Katrina, it paid 50 cents for every premium dollar.
Usually hat tips come at the beginning of a post; but, as I strolled down memory laneand connected Foti’s Anti Trust suit with Road Homeand Duval’s ruling, I realized I owed the biggest hat tip ever to Sop. (You got that right Nowdy 😉
Finally back to Judge Duval’s ruling on the lawyer DQ in Road Home. As in Mississippi private counsel selection by the elected AG has been a source of controversy in Louisiana. For those interested in going a bit further back down memory lane here is an ethics opinion dating from the Ieyoub administration on the tobacco litigation. The gist of it is private counsel had to repay $650,000 in legal fees. It seems some things never change.