Insurance is a very special product. You pay and you pay and you pay premium dollars, often for your entire life. In return you only get a promise. A promise that if you ultimately have a covered claim, and you’re paid up, they must pay that claim. The problem is that they must have that money, for years and years, kept safely and invested legally in order to be able to pay your claim if they so choose. It’s that special relationship of trust that imposes on an insurance company an obligation of truthful financial reporting in their financial statements.
If you, too, consider insurance a very special product, as you read AIG CEO formerly headed up Allstate insurance company you will see how the industry’s conduct following Hurricane Katrina caused that special relationship of trust to become a deep sense of betrayal.
To many on the Gulf Coast, watching AIG chief executive officer Ed Liddy talk about the sanctity of contracts in defending the award of $220 million in bonuses to employees at the embattled insurer was an ironic moment.
If only Liddy held that same view of contractual obligations to policyholders after Hurricane Katrina when he was at the helm of Allstate, Louisiana’s second largest insurer.
“How about that?” quipped Bob Hunter, a New Orleans native who is director of insurance at the Consumer Federation of America and the author of a 2007 study documenting the decline of claims payout ratios at Allstate during Liddy’s tenure. “He’s always disregarded contracts to maximize profits.”
Liddy was appointed by the federal government in September to run AIG when the ailing insurer got its first installment of taxpayer bailout money, which now totals $170 billion.
Before caving to pressure on Wednesday and saying that he would ask those who received more than $100,000 in bonuses to return half of the money, Liddy argued that the money needed to stay where it was because contracts are sacrosanct.
That Liddy was forced to cave in to pressure is eye for an eye– justice to policyholders pressured to settle for less coverage than they purchased. Many had to fight for even that; and, sadly, some still are.
“We cannot attract and retain the best and the brightest talent to lead and staff the AIG businesses — which are now being operated principally on behalf of American taxpayers — if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury,” he said earlier in the week.
Few, if any, understand the challenge of attracting and retaining the best and brightest talent any better than those trying to lead the recovery of New Orleans and coastal Mississippi and Louisiana. If the industry had considered policyholder contracts sacrosanct, Liddy might have avoided being both goose and gander.
But contracts with policyholders weren’t always so pristine during Liddy’s long tenure at Allstate.
Liddy ran Allstate Corp. from when it was spun off from Sears, Roebuck & Co. in 1995 until the end of 2006. During that time, Allstate perfected the practice of getting tough with policyholders to delay and deny claims, as documented in the book by New Mexico attorney David Berardinelli, “From Good Hands to Boxing Gloves.”
While that book dealt mainly with a strategy for tamping down car insurance claim pay-outs to increase profitability, many believe those same practices could be seen at work en masse after Hurricane Katrina in Louisiana, where thousands of policyholders filed suit against the Illinois company.
“There is a fiduciary obligation on the part of an insurer. You’re not to create an adversarial relationship with the policyholder,” said Johnny Denenea, an attorney for Slidell homeowners Bob and Merryl Weiss, who won a verdict against Allstate in the first insurance trial to be completed in federal court after Hurricane Katrina. “It’s rather ironic that Ed Liddy is espousing the sanctity of contracts when it serves the interests of the insurance company, but when the sanctity of contracts is violated from the homeowners’ perspective, there’s no obligation and it’s up to the homeowners or the courts to enforce it.”
Allstate also didn’t appear to be concerned with the sanctity of contracts with the federal government to administer policies through the National Flood Insurance Program. Evidence emerged after Hurricane Katrina that Allstate shifted the burden of paying for wind damage covered by its homeowners policies onto taxpayers by overcharging the federal flood program.
Slidell resident Chris Karpells, noticed at his townhouse, for example, that Allstate systematically charged the government more money to replace to common construction materials than what it billed itself. Allstate charged the government $3.31 a square foot to replace Sheetrock at Karpells’ townhouse, but only 76 cents a square foot for Sheetrock when the company would be paying for it.
Others noticed, too, and the systematic overcharging became the basis for the Branch Consultant’s qui tam complaint. When the Fifth Circuit recently reinstated the Branch claim, Allstate was noticeably missing from the list of defendants dismissed by Rigsby that became subject to a “first to file claim” by Branch. Earlier this week, the Fifth released a revised Opinion requested by Branch that appears to be a needless attempt to open the door for Branch to make a “first to file” argument on Allstate.
Expecting a court to rule there is a lack of particularity in a non-existing claim against a non-existing defendant makes a much sense as AIG paying bonuses – but, to paraphrase Gene Taylor, “Is anyone surprised?” that instead of spending time adding the needed particularity to their complaint, the Branch consultants focused the court’s attention elsewhere.
“Bilking American taxpayers is what insurance companies do. Why is anyone surprised?!” Mississippi Congressman Gene Taylor said in a press release Wednesday afternoon about the AIG bonuses. The press release also called upon Congress to investigate how much of the flood program’s $17 million deficit after Katrina was caused by overbilling by insurers.
Under Liddy’s tenure, Allstate also became the most vocal company to retreat from providing homeowners insurance coverage in coastal states after Hurricane Katrina, saying that the risks were too great for shareholders. At the moment when policyholders had few options other than state-government run pools to provide bare-bones coverage, Allstate walked.
In Louisiana, the company was particularly aggressive. In July 2006, it announced that it wanted to drop wind and hail coverage on 30,000 policyholders in South Louisiana, even though many were covered by a state law that says that a company can’t arbitrarily drop coverage once a policyholder has had an insurance contract with them for three years. Although that number was eventually whittled down to 18,000 because of the state law, the insurance department again had to do battle with Allstate when it began dropping wind and hail coverage against longtime customers in late 2007 who received new policies without their knowledge when they accepted offers for good-credit discounts in 2006. That bait-and-switch resulted in a $250,000 penalty, the largest fine ever issued by the Louisiana Department of Insurance.
In the interim, Allstate dropped 4,772 policyholders for having unrepaired or unoccupied properties in a controversial drive-by inspection process that took about a minute per home in late 2006. When many homeowners protested that they were in the house or had repaired it, the insurance department forced the company to reinstate them in spring 2007.
But Louisiana Insurance Commissioner Jim Donelon says it’s unfair to tag these issues as examples of Allstate violating contracts with policyholders under Liddy’s tenure. He views them as Allstate having different interpretations of state law than the insurance department.
“That issue wasn’t about their contracts, it was about our law that applied to those contracts,” Donelon said.
Hunter believes otherwise. “If they were managing their business right, they wouldn’t have entered into contract with those people along the coast and then dumped them,” he said. “You expect that if you’re in good hands, the company will keep you.”
Mr. Donelon’s judgment in this matter seems to be as sound as his view Bob Weiss was lucky to have Allstate’s meager offer – suggesting insurance in Louisiana is in “good hands”.