Foti prepares to sue insurers

Section: SoundOFF

David Hammer

n a mad dash to beat an Aug. 29 filing deadline, Attorney General Charles Foti is preparing to file one or several lawsuits against property insurance companies for possible unpaid or underpaid claims by Road Home applicants.

The state's top lawyer is getting involved because Louisiana's Road Home grant program was designed to compensate homeowners for losses insurers don't cover, but insurance companies have paid out about $860 million less for those applicants than the state expected they would. The Road Home is fast running out of money and has had to appeal to Congress to help it fill a $5 billion shortfall, at least in part because insurance payouts have lagged expectations.

When designing the Road Home program last year, the Louisiana Recovery Authority, led by trial lawyer and Housing Chairman Walter Leger of Arabi, was worried about private insurers underpaying and homeowners not fighting as hard for payments when they had Road Home to fall back on. With that in mind, the LRA made sure to have Road Home grant recipients assign their rights to any future insurance proceeds to the state.

Under the so-called subrogation agreement signed by homeowners at their grant closings, if a grant recipient recovers additional insurance money in court or through a settlement, the state gets the proceeds, up to the amount of the grant award and minus any legal fees.

Logistical nightmare

But with eight days to the second-anniversary deadline to file civil claims from Hurricane Katrina, the state hasn't figured out how it will assert the Road Home property rights the LRA had the foresight to protect. It's still unclear how the state is going to lay claim to an unknown number of unpaid or underpaid insurance claims, especially when about 73 percent of eligible Road Home applicants still haven't closed on grants and haven't officially signed over their rights to outstanding insurance payments.

Filing a lawsuit or hundreds of individual civil claims is sure to be a logistical nightmare for the attorney general's office, which only recently decided to handle the case. But Leger, whose New Orleans law firm has experience on both sides of insurance litigation, isn't worried about the late date.

"For those (Road Home applicants) who haven't filed their own lawsuits, that's going to be the toughest thing," Leger said. "We have three groups of people here: The ones who already filed lawsuits, their rights are preserved; the ones who haven't but have gotten grants, we're doing those on their behalf; and then there are those who haven't gotten grants."

There will likely be 111,000 people in that latter category by the time Road Home figures out who is and who isn't eligible, and figuring out how many of them have filed suit for themselves won't be easy.

"The attorney general is the one charged with the duty of recovering any money owed to the state," Foti spokeswoman Kris Wartelle said. "We do recognize there are hurdles, and the staff is researching now how to overcome any hurdles to a lawsuit."
No evidence gathered

The biggest of those hurdles may be that the state has never gathered any evidence of underpayments to Road Home applicants, even in isolated cases.

In an initial analysis in May, David Bowman, the LRA's director of research and special projects, suggested ways to determine if homeowners were simply underinsured or if insurance companies weren't meeting their obligations. These measures, including finding trends for which insurers have low payout ratios, were never taken. All the LRA has to go on is a new analysis by Bowman that finds insurance payments have covered 69 percent of applicants' damages, shy of the 76 percent the Road Home planned on. As a result, the Road Home is paying $5,700 more than it originally planned to cover gaps in insurance coverage for each of its 153,000 eligible applicants.

"It's under our estimate, but that doesn't mean it's an underpayment," LRA Executive Director Andy Kopplin said.

Now, that daunting task lies at the attorney general's feet.

"The problem the state will have, assuming it gets subrogation rights from everyone eventually, is how they're going to prove on a case-by-case basis if any of the insurers are committing bad-faith" underpayments, said John Lovett, a Loyola University property law professor who has closely tracked the Road Home.

'Dangerous territory'

When Bowman first analyzed insurance payments in the spring, he warned that investigating underpayments would be "dangerous territory" as the state tries to keep old -- and woo new -- insurers into the market. Such a "chilling effect" is exactly what an attorney general's lawsuit is going to cause now, said Greg LaCost, a former insurance company lawyer who speaks for the industry.

"It's a bunch of closed-door stuff they're relying on and not entering into any discussion with the industry," LaCost said. "I'd hate to see the attorney general bring a suit and then find out it's inappropriate."

LaCost said his trade group, the Property and Casualty Insurers Association of America Inc., has filed public records requests for a study that backs up Bowman's analysis, but Kopplin said there never was such a study.

The state has put $100 million into attracting insurers to the state, but LaCost said a lawsuit would undermine those efforts. Kopplin said it's possible to balance such recruiting efforts with enforcement.

"Everything in the recovery is a balancing act, and one of the most significant issues homeowners are facing right now is the availability and accessibility of homeowners insurance," he said.