Hurricanes Katrina and Rita: Effect on Claims Handling Procedures
June 2006
Insurers have faced unique obstacles in investigating
and settling claims resulting from Hurricanes Katrina and Rita. This series
examines the effect the 2005 hurricanes have had on the insurance industry. Part 1 dealt with rating and underwriting, and Part 3 discusses coverage disputes and pending litigation.
by Dana Harbin,
edited by R. Brent Cooper
Cooper & Scully
There are estimated 1.75 million claims from the damage Katrina caused in
Alabama, Florida, Louisiana, and Mississippi and 1.2 million claims from damage
caused by Rita in Texas and Louisiana, as well as damage caused by Dennis and
Wilma in Florida. Adjusters initially faced the difficulties caused by the damage
to the infrastructure of the regions where electricity and phone service were
down, which limited the amount of claims sites they could actually investigate.
Also, homeowners and business owners were displaced, slowing down the claims
process.
Then there was the problem of accommodating over 15,000 adjusters at one
time. Adjusters were forced to stay in remote places and drive long distances
to get to the damaged sites. Even some insurance companies suffered displacement,
as did their employees, due to the storms. Obviously, the practicalities of
adjusting claims after Hurricanes Katrina and Rita were difficult.
Texas Bulletins
The Texas Department of Insurance issued the following bulletins to address
the potential impact on claims handling processes from Hurricanes Katrina and
Rita.
- Bulletin No. B-0051-05 (September
21, 2005)—Reminds insurers that the Insurance Code authorizes them to use
nonresident and emergency adjusters to handle claims and provide prompt
and immediate relief to hurricane victims and evacuees.
- Bulletin No. B-0059-05 (September
28, 2005)—Commissioner acknowledges that certain adjusters may be approaching
people whose homes have been damaged and offering checks for living expenses
in return for the homeowners signing an acknowledgment that their claim
is for flood damage. Homeowners policies do not require that the policyholder
acknowledge coverage under any particular policy before being eligible to
receive additional living expense (ALE). Commissioner reminds insurers of
the specific claims settlement practices required in the Insurance Code.
- Bulletin No. B-0063-05 (September
30, 2005)—Recognizes additional time periods for processing claims as allowed
by Texas Insurance Code, Section 542.059 and 28 TAC 5.903.
- Bulletin No. B-0064-05 (October 10,
2005)—Commissioner recognizes complaints by policyholders that there may
be no coverage, they must travel to various areas of the state to obtain
settlement checks, that claims handling areas are closed, that property
cannot be inspected when there are means of inspection available to the
adjusters. TDI began conducting market examinations to ensure regulatory
compliance with claims handling requirements.
TDI explains that an insurer must timely inspect the property before denying
a claim in compliance with Texas Insurance Code, Chapter 542, subchapter B (formerly
Article 21.55).1 Furthermore, the insurer may have
a contractual duty to fully investigate any claim asserted by the policyholder,
including the claim that damage may have been caused by another covered loss
or ensuing loss allowed under the policy.2
Louisiana Rules and Directives
The Louisiana Department of Insurance (LDOI) also issued Emergency Rules
and directives to address the issues that arose in the claims handling process
after Hurricanes Katrina and Rita:3
- Rule 15 (August 26, 2005)—Suspends
all statutory and regulatory provisions that impose on the insured a time
limit to perform an act or transmit information or funds with respect to
insurance in specifically identified and designated areas of Louisiana.
This does not relieve the insured from the obligation to provide information
and cooperate in the claims adjustment process.
- Rule 16 (August 26, 2005)—Requires
that all public adjusters operating in Louisiana must register with the
LDOI. Failure to register is a violation of the Louisiana Insurance Code.
- Rule 22 (December 22, 2005)—Implements
a claims mediation program for personal lines residential claims resulting
from Hurricanes Katrina and Rita. The Rule also addresses guidelines for
construction pricing. The rule does not apply to commercial insurance, private
passenger motor vehicle insurance, or liability coverage contained in property
insurance policies.
- Directive 195 (February 27, 2006)—Prohibits
insurers from imposing a 6-month time period on insured to make necessary
repairs to property damaged by Hurricanes Katrina and Rita. Insureds now
get an additional 6 months, total of 1 year, to recover the replacement
costs for damages.
In October 2005, several class action lawsuits were filed in Louisiana against
Audubon/AIG and Louisiana Citizens Property Insurance Corporation (LCPI) for
failure to meet state mandated deadlines for adjusting claims. LCPI is a state-sponsored
insurer designed to provide insurance to those in the coastal areas who could
not otherwise get homeowners insurance from the private market. Audubon contracted
to administer the LCPI policies through the hurricane claims, however, it lost
its contract with LCPI shortly after Hurricane Katrina struck. LCPI Chief Executive
Officer Terry Lisotta has been noted to say that the fact that Audubon challenged
its loss of the administration contract caused delays in the changeover process
and, ultimately, delays in the claims handling process of Hurricane Katrina.4
Note that the Federal Emergency Management Agency (FEMA) may be less available
to those with insurance since it will not "duplicate assistance" provided by
an insurer and will only make decisions to aid policyholders after a claim has
been settled.5
It appears that progress in the claims handling process has been steady,
but slow, since the hurricanes. According to the Insurance Information Institute,
homeowners insurers have settled nearly 70 percent of claims from Hurricane
Katrina in Louisiana and Mississippi, which is over 732,000 claims, totaling
$11.4 billion. In addition, about 90 percent of more than 300,000 claims from
damaged vehicles have been settled in both states, according to the Insurance
Information Institute. Settled does not necessarily mean that the claims were
paid. It means that the insured and the insurer have agreed on the extent of
covered damage and the estimated repair costs.
Part 1 of this series examines the effect of
the hurricanes on rating and underwriting. Part 3 discusses coverage disputes and pending litigation.
Dana Harbin is an attorney in the Dallas office of Cooper & Scully, P.C. where she specializes
in insurance coverage and bad faith involving all types of insurance policies,
both first and third party. Ms. Harbin earned her BA degree from the University
of Texas in Arlington and her JD degree from the University of Texas at Austin.
She can be reached at dana.harbin@cooperscully.com.
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