Louisiana’s bailout program for failed insurers wants $600M to cover losses

The action is rare. If the bond sale is approved, it would be the first time the organization has borrowed to pay off claims since a nationwide auto insurance crisis in the early 1990s.

"This is a reasonable approach — it's not ideal. At some point, somebody's got to pay the piper with interest," said Robert Hartwig, who directs the Risk and Uncertainty Management Center at the University of South Carolina.

Insurance companies go out of business every year, and they sometimes leave unpaid claims. Those become the responsibility of LIGA. So the association is accustomed to seeing one to three insolvencies a year, which typically generate a few dozen claims between them, said John Wells, LIGA's executive director.

But the seven insurance company failures in the last year, spurred by Hurricane Ida, have disrupted the organization's normal rhythm of operations.

By the end of 2020, a year when three major hurricanes made landfall in Louisiana, LIGA oversaw the final payment of about 1,232 pending insurance claims to Louisiana policyholders across the industry, according to its annual report.

Then a wave of homeowners' insurers collapsed after Ida, having already been weakened by the previous storms. By the end of 2021, LIGA was on the hook for 13,434 open claims — more than five times the number in a typical year.

"What makes them (the company failures) especially extraordinary is that they are happening around the same time," Wells said.

As of July 1, more than 26,000 homeowners' claims have poured into the association, creating a bottleneck as LIGA tries to finish the job left by the insolvent companies. Although the association has hired at least nine adjusting firms to handle the influx, consumer complaints about delays have quickly surfaced.

A backlog of more than 10,000 claims is still pending.

"It's just damn frustrating — pay all this damn money for insurance and they treat you like crap. They kick you at your lowest point," said Kenner resident Markey Dietrich, whose homeowners policy was with Americas Insurance Co., the fourth Louisiana insurer to go out of business.

It's getting harder for LIGA to keep up with the number of insurance company failures. The association is currently handling claims for five of the seven failed firms, and they're girding for as many as 17,000 more unpaid claims from the recent collapse of Southern Fidelity insurance Co.

Claims from Gulfstream Property & Casualty, the first company to go belly up before Ida struck, are much smaller in number.

LIGA'S role

When a Louisiana insurer fails and runs out of money, the remaining insurers licensed to operate in the state can be assessed as much as 1% of their written premium in a single year. LIGA uses that money to cover the outstanding claims. The association is liable to pay up to $500,000 per claim.

Taxpayers foot the bill in the end, though. Insurance companies are allowed to recoup the money paid to the association by reducing the amount of premium taxes they pay to the state. Insurers can deduct up to 10% of their tax bill until the money is fully recovered.

Wells said the 1% percent levy typically generates about $100 million a year. He said the board, largely made up of industry representatives, approved assessments for last December and again in April.

"We did bring in almost $200 million, but of course, we have spent that much money on these insolvencies and homeowners claims," Wells said.

In June, LIGA's board agreed to issue bonds with an interest rate no higher than 6% and a plan to pay the money back through assessments over 12 years, records show. Wells said if the plan is approved by the State Bond Commission, they will continue collecting assessments from member insurers to make future payments.

Though this is the first time LIGA has had to take such drastic action in three decades, borrowing from Wall Street to pay off insurance claims is not an unfamiliar concept in Louisiana. After Hurricane Katrina, the state-run insurer of last resort, Louisiana Citizens Insurance Corp., borrowed $1 billion by issuing bonds so that it could settle claims. State taxpayers are still paying those bonds off.

The plan to issue bonds is an admission that the association cannot raise enough money to pay out all the claims it owes without making policyholders wait for years.

"Ultimately, this is going to cost more than it would have if these insurers had never gone bankrupt because interest is going to have to be paid on this obligation," Hartwig said.

LIGA could have taken another route and given homeowners with open claims the equivalent of an IOU. That's what they did in 1993 after Champion Insurance Co. and a string of auto insurers went out of business.

Wells said the officials running LIGA back then paid consumers 30% of their claim and promised to provide the rest once the money was raised from bonds and future assessments. Wells said issuing bonds is a better option "rather than making homeowners wait for the next five years."

Still waiting in Kenner

After Katrina, Dietrich's Kenner home had to be gutted to the ceilings. Still, he and his wife said they were back in the house by June the following year.

By contrast, it's coming up on a full year since Ida ripped off parts of their roof, allowing "just enough" water to come in that they needed to replace the floor. Mold turned up quickly.

Americas Insurance Co. wrote Dietrich a check for $43,000 that allowed him to replace the roof, but the inside damage remains. Dietrich said he needs more money to finish the repairs.

After the state took over the company last December, his fortunes have changed little. Multiple adjusters have requested the same information. To Dietrich, it feels like a stall tactic.

"It seems LIGA is trying to pay the least possible they can," Dietrich said. "It seems their game plan… is to delay and deny claims."

He was more optimistic at first, especially after he read on the Department of Insurance website that LIGA was capable of paying up to $500,000 per claim. He thought: What's another $40,000 compared to that?

But it's been a fight with the adjusters on multiple fronts, he said. After the storm, he and his wife rented a home owned by her mother and have struggled to be repaid for living expenses while their home awaits repairs.

They sent a copy of the lease and receipts for every month, he said. But the adjusters wanted more proof of payment, like bank statements and checks. Now Dietrich regularly thinks about hiring a lawyer, especially after he catches snippets of their ads on the radio.

"This is the second time we've had to rebuild this house in the last 20 years, and I'm not getting any younger," said Dietrich, 67. "Something has got to change the way they're doing stuff."

More insolvencies on the way?

Insurance regulators and LIGA officials are dreading the idea that there could be more company failures in the near future - for instance, if Louisiana experiences another busy hurricane season. And what shape would the state's response take then?

The underlying reasons for each of the insolvencies to date remain somewhat elusive.

"Before Hurricane Ida, we had never had insolvencies that were spurred by a hurricane," said Wells, the head of LIGA. "There is so much that goes into managing insurance companies, there is so much that goes into regulating them, that it's just hard to put your finger on any one thing that caused this."

Wells offered his own educated guess: that several carriers were trying to underprice their policies to compete and also underfunded their reinsurance – essentially, insurance for insurance companies. That's a risky approach that cost them "the ultimate price, getting shut down."

Insurance Commissioner Jim Donelon agreed that the seven companies failed to buy enough reinsurance. Reinsurance allows them to spread the risk of underwriting in disaster-prone areas among different companies abroad.

Smaller insurance companies, in particular, have to buy enough coverage or risk quickly running out of the cash and assets needed to pay claims after a catastrophe. So insurance regulators in every state constantly monitor them for compliance — and to avoid an abrupt failure.

In a recent interview, Donelon said he's not losing sleep over the possibility of more failures.

"I don't think there's any on the horizon," he said. Donelon said the LDI identified 15 troubled companies after Hurricane Laura, and the seven that failed were all on the department's list. "The others are good to go."