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Commissioner Donelon on litigation threat: Louisiana is not the new Florida

Jim Donelon insurance commissioner.jpg

Louisiana Insurance Commissioner Jim Donelon said the state will be highly focussed on holding back litigation against insurers in the coming years, during a visit this week to the London reinsurance market.

This comes as the state’s insurance market has been hard hit by two successive years of major hurricane losses, Laura in 2020 and Ida in 2021, and now faces the prospect of sharing in the fallout from Hurricane Ian upon Gulf Coast neighbour Florida in the 2023 renewals.

Like Florida, domestic insurers are an important presence in the state and these carriers are reinsured “up to their chins”, as the commissioner put it. Louisiana ranks around the sixth highest US state for premium income flowing to Lloyd’s, after the bigger urban peak peril states like Florida, New York and Texas. Keeping that premium dollar flowing is a top priority for Donelon.

Last year’s Hurricane Ida led to a spike in claims litigation and a greater visible presence from the kind of lawsuit-chasing lawyers that have troubled Floridian insurers since Irma.

According to data from Syracuse University, complaints from Lake Charles, Louisiana, made up more than one in five of the nearly 16,000 insurance lawsuits filed in federal courts for the 11 months from October 2021 to August 2022.

There was a spike in August of more than 3.5x the previous high for western Louisiana insurance actions, when 1,643 insurance lawsuits were filed in Lake Charles.

Civil insurance lawsuits filed in the Western District of Louisiana by month.jpg

The commissioner said avoiding social inflation and litigation is his top priority.

“We’re here to tell Lloyd's as strongly as we can that their fears … about Louisiana becoming the next Florida are unfounded,” he said.

He earmarked a move taken five years ago as emblematic of the state’s tactics, when rules were changed allowing insurers to offer policies that require insureds to seek pre-approval from their carrier for any assignment of benefits to a contractor.

“That was a significant step in preventing the growth of a cabal of public adjusters, lawyers and roofers that are knocking doors and cold calling for customers to get new roofs in Florida and now in Louisiana,” he said.

We’re here to tell Lloyd's as strongly as we can that their fears … about Louisiana becoming the next Florida are unfounded

Despite the uptick in activity, Donelon said cold callers were not as “brazen” in Louisiana as yet and were meeting resistance.

Among the initiatives Louisiana has introduced to try to fend off social inflation is a voluntary mediation programme for disputed Ida claims, a scheme similar to one successfully piloted by the state after Katrina.

This time around, Donelon blamed billboards and other advertising blitzes by the cabal for “overwhelm[ing]” the voluntary scheme, meaning it did not match the earlier pilot.

Another revived scheme is a capital incentive programme. This will provide matching funding to help attract new investment into the state, with stipulations around how much premium income must be written in the state’s coastal “go zone” parishes, as well as timeframes to keep the beneficiary insurers operating in the state.

After Katrina and Rita, a half-dozen companies each participated in the incentive scheme, and despite broader capital market dislocation at present, Donelon said he is already in discussions with several would-be participants.

On the E&S side, Donelon also does not expect any uptick in participation, although he noted Lloyd’s provides a notable share – albeit under 10% of local residential cover.

Rather than attracting new insurers, Donelon’s perception is that the state’s main challenge is securing capital from the reinsurance market.

He attributed two exits in the past year solely to challenges in sourcing affordable reinsurance, with nine brands in total being put into run-off or receivership over the past two years and around a dozen others exiting the state.

Questioned whether Louisiana would ever consider state support at the reinsurance level, Donelon said: “I won't say never, but Florida is a much bigger state government with much more powerful economic engines.”

Limiting the state’s sphere

Overall, Louisiana has eschewed the more interventionist stance that Florida has taken.

Louisiana Citizens is an insurer of last resort that is mandated to charge higher rates than private carriers, in contrast to the deliberate subsidies offered by Florida Citizens.

“We are very proud of our discipline with Citizens,” said Donelon. “I do not believe that political regulation is the best protection for policyholders against unaffordable insurance – I believe competition is.”

Outside the legal space, there are other controversial elements of Louisiana insurance law on which Donelon is more resistant to industry lobbying.

I do not believe that political regulation is the best protection for policyholders against unaffordable insurance – I believe competition is

Thanks to a law passed after Hurricane Andrew, state insurers have little room to flex their portfolios in the state because once they have covered a certain customer for three years, they cannot cancel that policy unless for limited specific reasons, such as fraud or non-payment, nor can they enforce changes in deductibles and other factors unless they apply a change for all customers in the state.

As Donelon put it: “You and your customer are ‘married’ for as long as you do homeowners business in our state”.

Donelon admitted that this “handcuffs” insurers, but added that the cost of change would be too high for the state. “We just can’t lose them,” he said, citing statistics that show the eight largest nationwide carriers have a 61% share of the residential market in Louisiana, versus just 25% in Florida.

In 2021, Louisiana Citizens only ranked as the 36th largest homeowners’ carrier in the state, which was dominated by large nationwide brands – although the state pool has been growing since.

Other than the incentive scheme and mediation, the commissioner’s final step this year to try to create a healthier environment for insurers in the long-term has been to introduce stronger building codes.

In the meantime, he is eager to urge reinsurers to consider the state’s coastline as a better short-term bet after the recent battering it has taken. The rebuild means “everybody’s got a new roof now”, he pointed out.