State Farm receives cease and desist order
Louisiana's Department of Insurance issued a cease and desist order against State Farm over questions of application of hurricane deductibles.
It seems that lately, more and more insurance departments are taking closer looks at insurance company actions in response to consumer complaints or regional catastrophes that impact the industry. Recently, the Louisiana Department of Insurance (DOI) announced that Commissioner Donelon issued a cease-and-desist order against State Farm Fire and Casualty for applying a Hurricane Duration Deductible outlined in their homeowners policies when the application of that deductible was considered “incorrect” by the DOI.
The policy language states that the deductible applies to certain damages that occur during a “hurricane duration” and result from a storm system that triggered the duration. The storm must have obtained hurricane status, as classified by the National Weather Service (NWS), within 48 hours before causing damage or after first causing damage as long as hurricane status was designated while a hurricane watch or warning was in effect in the state. A hurricane duration period starts when a watch or warning is issued by the weather service.
The consumer complaint centered around damages an insured sustained before Hurricane Barry was declared a hurricane. Apparently, State Farm and the insured disagreed about the claim, and the insured filed a complaint with the department.
The cease-and-desist order
Upon review, the DOI determined that the NWS bulletins for July 13, 2019, were to warn that there was a possibility of a hurricane developing, but a storm was not yet named or declared a hurricane. At 10:00 a.m. Central Time on July 13, the NWS declared the storm system would be named Hurricane Barry, that it had achieved hurricane status, and that it weaned to a tropical storm at 1:00 p.m. Central Time.
In light of this, the DOI found that State Farm’s imposition of the Hurricane Duration Deductible for losses occurring prior to 10:00 a.m. on July 13, 2019, is a violation of the Louisiana insurance code dealing with unfair or deceptive claim practices, and that State Farm cannot apply the Hurricane Duration Deductible to any Louisiana policyholders before 10:00 a.m. on July 13, 2019.
As a result of the department’s investigation, an order requiring State Farm to cease and desist from applying the Hurricane Duration Deductible to insured homeowners in the state of Louisiana when the policy indicated that deductible was not applicable was imposed upon State Farm Fire and Casualty. As noted by the order, failure to comply could result in further regulatory action.” Proposed action by the commissioner is listed as suspension or revocation of State Farm’s Certificate of Authority for the state of Louisiana.
This action is considered an administrative action, and State Farm may need to notify other states, depending on those states’ regulations. In order to avoid the suspension/revocation action, State Farm must explain how the actions were lawful and in compliance with the insurance code and why the commissioner should not take the proposed action against the company. State Farm has 30 days to respond.
State Farm’s position
According to a spokesperson for State Farm, the company disagrees with the commissioner’s ruling. In an email, State Farm said, “A hurricane deductible has been in place in Louisiana for more than 20 years and has been consistently applied to numerous Hurricanes throughout that timeframe. The Department of Insurance has approved our policy language for the Hurricane Duration Deductible many times without issue and the deductibles have helped us maintain the affordability of homeowner premiums for Louisiana customers.
“We fundamentally disagree with the DOI’s position and rationale and we are exploring all of our options to address this order. Eliminating the Hurricane Duration Deductible (HDD), or modifying the HDD, would have a negative long term impact on insurance affordability for over 300K State Farm customers in Louisiana.
“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. This application has been approved by this Commissioner and has been followed during previous LA hurricanes.”
The issue is likely to take on increased importance as Tropical Storm Dorian approaches Puerto Rico and Florida, and the 2019 hurricane season becomes more active.
Editor’s Note: This is a serious allegation, and highlights how seriously the insurance departments take consumer complaints and the interpretation of policy language. The policy language is clumsily worded, and we believe that the insurance department’s opinion is correct. If the DOI finds State Farm’s response lacking, they can suspend the carrier’s ability to provide policies in the state. It is more likely that a fine will be levied, although time will tell what actions the department finally decides on.
Christine G. Barlow, CPCU, is managing editor of FC&S Expert Coverage Interpretation, the authority on insurance coverage interpretation and analysis for the P&C industry. It’s the resource agents, brokers, risk managers, underwriters, and adjusters rely on to research commercial and personal lines coverage issues. She can be reached at cbarlow@alm.com.
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