I’ll admit it, I am some sort of weird geek that gets his kicks out of reading corporate financial filings at the Securities and Exchange Commission website. Occasionally a few disconnected events converge to make what at first blush is an unrelated post. In this case I won’t connect the disconnected events but I will give a hat tip to Editilla who linked a poorly written story in the Des Moines Iowa paper last fall regarding United Fire and Casualty Company and their continuing problem of mounting and massive losses related to Hurricane Katrina. I never composed a post on the article because it presented an uncritical parroting of a United Fire Press Release and as such was essentially free advertising. Rest assured we’ll be peeking under the hood with a bit more detail and clarity than the Gannett reporter as we again expose management misrepresentations made to investors. Simply put this company appears to be in financial trouble and is grasping both for straws and convenient scapegoats, in this case slabbing the integrity of the entire Louisiana state court system.
First we begin with the last form 10Q issued by United Fire, specifically the management discussion and analysis of the financial results (MD&A):
Hurricane Katrina made landfall in New Orleans, Louisiana, on August 29, 2005, causing an estimated $80 billion in damages. Over 95 percent of our policyholders in the New Orleans area suffered damage from Hurricane Katrina, with over 11,000 claims reported. Our total loss and loss settlement expenses inception to date, net of reinsurance, from Hurricane Katrina claims are $289.2 million through September 30, 2009. In the first nine months of 2009, our loss and loss settlement expenses from Hurricane Katrina litigation was $38.3 million, of which $19.0 million was incurred from an increase in our incurred but not reported (“IBNR”) reserves. The primary reason for this reserve increase is the continuing unfavorable legal environment related to insurers of Hurricane Katrina claims in Louisiana………
Conducting business under our subsidiary company, Lafayette Insurance Company, in the state of Louisiana has put us at a considerable disadvantage in regard to our Hurricane Katrina claims litigation. Because Lafayette Insurance Company is domiciled in Louisiana, we are subject to the jurisdiction of the state court system, with limited access to the federal court system. Hurricane Katrina was, and remains, the single largest catastrophe loss in our company’s history. Four years later, we continue to feel the impact of Hurricane Katrina as litigation surrounding the event progresses through the legal system.
Through time we have profiled certain litigation involving United Fire subsidiary Lafayette Insurance Company, Sher being one such case and Robert’s Fresh Market being another. My business insurer was also Lafayette and of the 7 insurance claims I filed after Katrina the only one I had trouble collecting was my business policy with Lafayette. I found out the reason for my bad experience later on as United Fire Group would admit in the Robert’s Fresh Market trial that they, “delayed and refused to make payments because of the financial stress put on that company because they didn’t purchase enough reinsurance to cover the extent of the catastrophic losses caused by Katrina.” Now this sounds suspiciously like the kind of nonsense our own Lynda would say and amazingly it evidently was said in open court in front of the Robert’s Jury. Admitting that fact to investors simply won’t do however and predictably management had a different spin on things for them. The problem for United Fire Group is that once they thoroughly trashed the integrity of the Louisiana courts they still had to deal with the reality of their own socially deviant behavior. So while pumping access to the Federal Courts as some sort of magical panacea United CEO Randy Ramlo failed to disclose the fact the largest judgement against them happened in federal district court in the Robert’s case as we continue with the United Fire Group MD&A:
In August 2009, we were notified by the U.S. Court of Appeals for the Fifth Circuit sitting in New Orleans that our appeal of a $21.0 million award to a commercial policyholder, which was awarded in June 2008, had been denied. On appeal, we raised several issues, including the coinsurance clause on the policy, the fact that the award exceeded the policy limits and excessive penalties were awarded with no consideration or offset for flood damage. While we strongly believed that these issues were meritorious, we will not be challenging the court’s ruling further, as we feel it is unlikely that the U.S. Supreme Court would grant a review of the case.
We recorded the final settlement of this litigation, which included additional interest and penalties awarded by the appellate court and the settlement of an additional claim that was not included in the original lawsuit, in August 2009. We paid the policyholder a total of $28.9 million, of which $10.8 million, net of reinsurance, was incurred in 2008 in response to the initial verdict, and $6.7 million, net of reinsurance, was incurred in 2009.
Management also did not disclose their conduct in these cases and it is that conduct we will highlight a bit later. You see management of publicly traded companies have a duty to shoot straight with their investors and it is clear management at United Fire and Casualty has done nothing of the sort. Further management has a duty to properly reserve for their losses and at United Fire Group that has not happened by definition as the incurred but not reported (“IBNR”) reserves was increased by $19MM in Q3 2009, 4 years after Katrina. Misstating exposures to Katrina losses is nothing new for United Fire as we find by reading their 2008 form 10K page 29:
In 2008, we increased our reserves for losses that occurred in prior years, which resulted in a net deficiency of $.5 million. The primary cause of the deficiency is related to Hurricane Katrina, which occurred in 2005. We recorded $26.6 million in Hurricane Katrina losses and loss settlement expenses in 2008, which included $10.8 million in net losses incurred on a claim that resulted from the adverse jury verdict in a lawsuit related to Hurricane Katrina. These Hurricane Katrina-related losses contributed to a deficiency in the fire and allied lines business of $12.2 million.
So here we have an insurer taking a non GAAP incremental approach to its loss exposure acting as if the adverse litigation developments are some sort of surprise and in the case of the Q3 2009 quarterly report outright blaming the Louisiana court system for their business failings. Frankly, I am shocked their auditors at Ernst and Young have not examined the loss reserves with a more critical eye or reported the internal control deficiency inherent to the serial failure to properly reserve for claims. I don’t know what United Fire and Casualty’s lawyers are telling Ernst and Young or management but it is also clear someone is not getting the straight story or United Fire would not have continuing problems reserving losses from Katrina. Since we’re past year-end Ernst and Young is probably in the clear on their 2008 report but if they turn a blind eye for 2009 they always have that Professional Liability coverage to fall back upon if they are sued.
Now back to the Q3 2009 form 10Q and that “considerable disadvantage in…….Hurricane Katrina claims litigation” United Fire and Casualty finds itself. Could it be the wounds are self inflicted? Let’s take a trip down memory lane to the Robert’s Fresh Market case and review the claims adjusting practices at Lafayette:
While it took me right at 15 17 months to settle my business claim with United it was chump change against the damage suffered by Robert’s. My own sense at the time after Katrina dealing with them is that the company’s claims adjusting process was overwhelmed by the scope of the disaster. The Robert’s verdict indicates they were also overwhelmed by the financial risk they took without benefit of reinsurance.
Susan Finch at the Times Picayune has the story:
The insurer for five Robert’s Fresh Markets should pay the grocery chain’s owner more than $21 million for unreasonably failing to pay what was necessary to fix Hurricane Katrina windstorm and other damage, a federal court jury ruled Monday.
“It’s the biggest Katrina judgment in Louisiana or Mississippi that we know of,” Philip Franco, who represented Marc Robert II in his battle against United Fire & Casualty Insurance Co., said Tuesday. Soren Giselson, head of the Louisiana Association of Justice insurance section, agreed with that assessment.
The $21 million award, Franco said, gave his client almost exactly what he said United Fire & Casualty Insurance Co. still owed him to repair the stores — $16.7 million — plus penalties for delaying payment.
Franco said the jury’s decision came after the jury heard “that this insurance company delayed and refused to make payments because of the financial stress put on that company because they didn’t purchase enough reinsurance to cover the extent of the catastrophic losses caused by Katrina.”
The Times-Picayune tried unsuccessfully to reach an attorney who represented United Fire & Casualty in the trial.
Of course if that is an insurance company’s defense I reckon they deserved the verdict. Sensing more business friendly waters at the 5th Circuit Court of Appeals the company actually appealed the verdict. Meantime there was a companion case involving one of the Robert’s stores in state court that my faithful blog partner Nowdy highlighted last year which revealed a bit more about the methods used by Lafayette to adjust their claims:
Attorneys Carey Wicker and James Watkins brought home the bacon for the Plaintiffs with evidence Lafayette’s engineer was not licensed to practice in Louisiana or supervised by a Louisiana licensed engineer as the law requires “direct control and personal supervision”.
While the engineer’s qualifications were clearly a significant issue, the Plaintiffs had a strong case against Lafayette. A reader from New Orleans provided SLABBED with a summary of the case tried in State court:
During Hurricane Katrina, wind and driving rain opened spaces in the roof, walls, doors and windows of the supermarket, and water and moisture entered the premises causing extensive damage.
Additionally, uplift forces on the flat roof (wind blowing over parapet) caused structural damage to the north-facing wall of the building as well as roof framing members’ connection to that wall. That structural damage, solely caused by wind forces, rendered the building a total loss because of the cost and time associated with repair compared to demolition and rebuild.
After inspecting the building, an Adjuster retained by Lafayette recommended a total loss, due to wind, and payment of policy limits on the building ($592,700), $111,000 in business personal property (contents), and an initial payment on the business income loss of $75,576.00 through 11/30/05. The adjuster then recommended depreciation of -$296,350.00 on the structure, -$33,300.00 on the contents and subtracted a deductible of $10,000.00 for a suggested payment of $439,626.00. Lafayette did not accept this adjustment.
Instead, Lafayette sent its own adjusters, including an “expert” who would testify at trial, to “re-adjust” the claim and hired an engineer who found the building damage was caused by flood waters. Lafayette adjusters concurred with this assessment, and Lafayette accepted this adjustment and paid $15,494.44 (less $10,000 deductible) for the building, $0.00 for the contents and $4,047 for one week of business income loss/continuing expense. With application of co-insurance: this amounts to a difference of $420,000 from the initial estimate. It should be noted that the engineer retained by Lafayette and and all of the Company’s own adjusters reported interior damage (assessed at approximately $10,000.00) that was never paid.
Ferrara, Inc. hired their own engineer who confirmed the earlier assessment of the general contractor: the building had suffered structural damage as a result of uplift forces in the roof of the building rendering the building a total loss caused by wind.
Isn’t the MO of an insurer hiring engineers until they received the answers they wanted a recurring theme in Katrina litigation? The Slabbed have gotten a close peek at how certain professions conduct their work and I am sad to say that structural engineers as a group have taken a black eye for their rent-an-opinion ways. I don’t know off the top of my head which engineers Lafayette ultimately ended up hanging their hats upon but the bad faith engineering fits HAAG Engineering to the T in this case as we have well chronicled here on Slabbed. Against this backdrop it is no surprise that the 5th Circuit Court of Appeals wasted little time kicking Lafayette’s bogus appeals straight out of the Minor-Wisdom Courthouse. Of course we linked all the docs and in a turn of events even we could not have imagined the 5th circuit not only affirmed the clear-cut verdicts they also added $1MM in bad faith penalties per the Robert’s cross appeal as we highlighted:
What is most meaningful is that certain of the judges at the 5th Circuit have learned how to correctly apply Louisiana’s bad faith insurance statute and related LA Supreme Court decisions in the area. Our knowledge in this area is derived from the willingness of the lawyer who argued the landmark case before the Louisiana Supreme Court to spend a few minutes with us explaining the concepts which are not that complicated. Insurers remain stuck on stupid in this area disingenuously citing cases that clearly do not apply as their legal precedent in support of their arguments.
Could it be Lafayette isn’t getting good legal advice from their Louisiana based law firm? Or is the management team making the decisions in Cedar Rapids is living in denial failing to take good legal advice? Or perhaps the folks at United Fire Group are socially deviant miscreants that game the court system in the process manufacturing problems where they did not previously exist? For the answer we need look no further than the case of Michelle Dufrene who had a pre Katrina claim against Lafayette in a case that resulted in sanctions against the insurer for their outrageous conduct during the litigation:
This is defendant’s second appeal. The events that led to this appeal were set forth in our prior opinion, Dufrene v. Gautreau Family, LLC, 07-467 (La. App. 5 Cir. 2/22/08), 980 So.2d 68, 72-73, writ denied, 08-0629 (La. 5/9/08), 980 So.2d 94, and 08-0628 (La. 5/9/08), 980 So.2d 698, as follows:
Plaintiff, Michelle Dufrene Lassley, filed suit for damages on May 21, 2002, for injuries received when she fell in a stairway in independence Mall, 4241 Veterans Blvd, Metairie, LA. Named as defendants in this suit were Gautreau Family, LLC (“Gautreau”), owner of the property; SRSA Gulf South Management. Inc. (“Gulf South”), responsible for the management and maintenance of the property; and United Fire and Casualty Co. (“United FirelLafayette”), Commercial General Liability insurance carrier for Gautreau Family, LLC. I After a four day trial on the merits, the jury found that the stairway contained a defect which presented an unreasonable risk of harm, and that defendants knew or should have known of the defect, that the defect contributed to plaintiffs accident, and that the accident caused plaintiffs injuries. The jury further found that plaintiff was 10% at fault in the cause of the accident. The jury awarded damages totaling $3,206,000.00. The jury verdict was made the judgment of the court. After the denial of defendants’ motion for JNOV/remittitur on December 21, 2006, defendants appealed.
I’ll admit that I’ve forgotten more about this case than most folks will ever know but I do remember Ms Dufrene was seriously injured falling down the concrete stairwell at the mall. As I recall there was a known yet unfixed defect in the stairwell that was the main cause of Ms Dufreen’s fall thus the jury’s assignment of liability. But what follows is a self-inflicted wound on Lafayette’s part, one that exposes the seedy underhanded tactics employed by Lafayette in litigation that certain earned them the ire of the appealate judges that heard the case as we continue:
After the trial court granted defendants’ motion for appeal, plaintiff filed two motions for sanctions against United Fire/Lafayette. These motions alleged that defendants Gulf South and United Fire/Lafayette failed to identify and/or produce two applicable insurance policies until after trial, and only after the jury had returned a verdict in excess of the only insurance policy that had been produced. The first motion sought sanctions pursuant to C.C.P. arts. 863 and 1471 for discovery abuses. The second motion sought penalties pursuant to LSA-R.S. 22: 1220. The trial court rendered judgment on plaintiffs motion for sanctions pursuant to R.S. 22: 1220. In the judgment, the trial court imposed sanctions of $10,000.00 against United Fire/Lafayette for its failure to produce the two policies. Defendants appealed from the award of sanctions.
On September 22, 2008, the court heard plaintiffs motion for sanctions pursuant to LSA-C.C.P. art. 863 and 1471. The court granted the motion and awarded sanctions of$60,000.00, plus costs of the motion. In oral reasons for judgment, the court said United Fire and Casualty knew about the policies, and should have but failed to produce them in discovery in a timely manner. It is this judgment that is currently on appeal.
At the time of the accident, Gautreau (the owner) was insured by United Fire and Casualty Co. under a GCL liability policy that also provided coverage for SRSA Gulf South (property manager) (hereinafter “Gulf South”). In addition Gulf South was insured by Lafayette Insurance Company, a subsidiary of United Fire, under both a GLC policy and an excess umbrella policy. United Fire/Lafayette contends that when Gautreaux first notified it of plaintiff s claim, it determined that Gulf South was a named insured under Gautreaux’s policy and therefore no claim filed was ever opened for Gulf South under its own coverage polices. United Fire/Lafayette contends that the discovery requests were issued to Gautreaux and itself only, and not to Gulf South. During pretrial settlement negotiations, when it became apparent that liability exposure could be in excess of the $1,000,000.00 policy limit, Gulf South submitted a claim for its own defense, and sought indemnity under its own policy. Near or at the end of trial, United Fire/Lafayette supplemented the prior discovery request to furnish the Gulf South liability policies to plaintiff.
Now I am, certain our own Lynda would be able to concoct a whopper rationalization of why it is OK for an insurer to withhold salient documents during discovery but it is equally clear the judicial system in Louisiana did not appreciate being abused. Also we are beginning to get a clear picture that United Fire will do anything to avoid its contractual responsibilty to adjust their claims in good faith. I’ll add that being a bad faith insurer also adds to that “challenging legal environment” United Fire cited in their MD&A. It is also equally clear that United Fire’s CEO Randy A. Ramlo is not shooting straight with United Fire’s shareholders as their wounds are not only of the self inflicted variety but also born of the companies lack of capital to pay claims associated with the insurance contracts the company has executed.
Speaking of Randy he is quite the bitch as his letter to the Independent Insurance Agents and Brokers of Louisiana dated May 7, 2009 illustrates. Of course Randy leaves out the discovery abuses and the refusal to pay claims due to financial pressures preferring spin to facts. He even finds time to whine about the Sher case which they won. I hope since Randy is so knowledgable about the litigation he that he is deposed in future cases so that with his hand on the bible he is forced to further illuminate on his unsupported disingenuous assertions. He is right about the judgements in excess of policy limits…such as policies that Lafayette initially disclosed in cases like Dufrene while simultaneously hiding other coverages that applied.
Perhaps next time the business reporters with the Des Moines Register will take the time to do some real journalism instead of cheerleading. For those so interested I have uploaded Randy’s rant to Scribd so the entire world can take a glimpse into the mind of a socially deviant bad faith insurer. Randy something tells me this will get worse before it gets better but man o’man are you the gift that keeps on giving, just like your miscreant industry brethren at Kingsway Financial.
I know this based solely on my bad experience with United Fire and Casualty after Katrina that both consumer and business is much better served insuring with another company….one that doesn’t look to it’s claims processing as a source of cash flow. Simply put United Fire’s customers should not have to sue or wait 17 months for a company to honor it’s contracts. I was able to resolve my claim without the help of a lawyer, unfortunately most consumers are not cyber jedi knights like your (mostly) humble author. One day perhaps, I’ll highlight the posts I used to bring Ford Motor Company to its knees after Katrina. Meantime I’m most happy making short work of unethical corporate bullies like United Fire CEO Randy Ramlo.
[scribd id=25082852 key=key-115rbflvgpbxrflmd8da]