While the cease and desist order against imposing hurricane deductibles only applies to State Farm, Insurance Commissioner Jim Donelon suggested Friday that he wouldn’t hesitate to issue more orders against other companies if there are similar consumer complaints.
It’s unclear what impact such a decision might have, but it could lead some insurance companies to rethink their insurance policies and premiums they charge, said Bryan Duplantier, president-elect of the Professional Insurance Agents of Louisiana and owner of Alpha Insurance Agency.
“The reaction could be that (insurance companies) end up cutting coverages to meet their objective in pricing the product correctly,” Duplantier said.
The disagreement between State Farm, which has about 300,000 residential customers in the state, and the insurance commissioner is based off one consumer complaint and stems from whether a hurricane watch issued for Tropical Storm Barry on July 10 means that it was a hurricane or still just a tropical storm. Donelon says hurricane deductibles should only apply after the storm was declared a hurricane on July 13, just before hitting Louisiana.
Most of the storm damage from Barry occurred before it was declared a hurricane on July 13 and about 75% of claims State Farm received was for damage that happened before then, according to the Insurance Department, which met with State Farm after the storm.
“If that’s the case, they (customers) should go ahead and file a claim,” Donelon said. “This could negate that (hurricane deductible) and allow them to file it subject to their 'all perils' deductible, which is in the neighborhood of $500 dollars."
On average, hurricane deductibles are between 2% and 5% of the value of the house insured. So a house that is insured up to $300,000 with a 5% deductible means the policyholder must pay up to $15,000 out of pocket before insurance kicks in to pay for damage. A 2% deductible would be up to $6,000 on a $300,000 home.
State Farm has said in a statement that "for Hurricane Barry, the hurricane deductible applies starting at the point when a hurricane watch or warning was issued for any part of the state of Louisiana by the National Hurricane Center of the National Weather Service and ends 72 hours after the termination of the last hurricane watch or warning for any part of the state."
State Farm has 30 days to appeal the insurance department decision and has indicated that it plans to challenge the order.
The cease and desist letter issued to State Farm cites the insurer over unfair claim settlement practices.
The order enables homeowners with State Farm policies who have an existing insurance claim for storm damage that occurred before July 13 to pay an all perils deductible rather than a hurricane deductible. This decision is likely to impact thousands of homeowners, the Insurance Department estimated.
There are likely State Farm policyholders who didn't file an insurance claim for storm damage suffered from July 10 through July 12 because they thought the hurricane deductible would apply and exceed the cost of the damage.
Duplantier noted that there was more damage in New Orleans several days before the hurricane was declared.
While the order is only for State Farm, Donelon suggested that he wouldn’t hesitate to issue more orders against other companies if there are verifiable consumer complaints.
“I don’t see it leading to a new advisory or ruling but I do see the possibility of it happening again. We would consider cease and desist orders for other companies as well,” Donelon said. “What I expect to happen is for State Farm to amend this language to correct this unintended — they say — outcome. This hurricane was a very unique situation.”
Duplantier said there is standard policy language used for hurricane deductibles in Louisiana, which is similar to State Farm’s regarding when a hurricane deductible is triggered — when the watch or warning is issued by the National Weather Service.
“There are some differences in policies but most of them are pretty darn close, it’s a standardized form that most of the insurance companies use,” Duplantier said.
The tricky part of the policy description is that a homeowner could have to pay a hurricane deductible even if no hurricane happened — only if there was a warning.
Allstate, which is the second-largest underwriter of homeowners policies in Louisiana, declined to share information or comment about its hurricane deductible policy. Liberty Mutual, another large underwriter for homeowners insurance in the state, did not respond to a request for comment.
Duplantier said one way insurers could respond to Donelon's stance is to just offer a wind and hail deductible, but cover less damage overall instead of having a hurricane deductible.
Not all companies have hurricane deductibles in Louisiana. For example, Louisiana Farm Bureau doesn’t have a hurricane deductible, instead using a windstorm or hail percentage deductible. Likewise, United Insurance Holdings Co., known as UPC Insurance, doesn’t require a hurricane deductible and instead has a named storm deductible and separate deductible for all other perils.
Ultimately it depends on what is in each individual homeowner insurance policy.
“Consumers need to know that an insurance policy is a contract; the insurance company writes the contract and you pay a premium which signifies that you agree to the terms,” said Albert S. Pappalardo Jr., president of the Professional Insurance Agents of Louisiana and vice president of Pappalardo Insurance Agency.
“Usually if there is confusion with the way a contract is interpreted, either with regards to a loss or existing legal statutes, the court will rule in favor of the one who didn’t write the contract,” Pappalardo said.
Donelon is up for re-election this year and said his decision regarding the consumer complaint was not based on influencing voters. He said he would have come to the same conclusion if the same facts were presented any other year.
“My goal is to ensure that policyholders get what they are entitled to,” Donelon said.