Commercial insurer to pull out of area
St. Paul Travelers Cos. Inc., Louisiana's largest commercial insurance provider, plans to cancel all its commercial property policies in the New Orleans area next year, sparking fears that other insurers will follow and slow the region's economic recovery.
While the St. Paul, Minn., company refused to say how many commercial policies will be affected or specify where the cuts will be in South Louisiana, two insurance brokers who were briefed by the company this week say Travelers will not renew any property insurance for businesses in Orleans, Jefferson, Plaquemines, St. Bernard and eastern St. Tammany parishes. Cuts will also affect individual businesses in other parts of South Louisiana, including St. Charles and St. John the Baptist parishes.
"I said, 'May I tell anybody who asks that Travelers is withdrawing from the commercial property insurance market in southeast Louisiana?' " said Anderson Baker, president of the New Orleans agency Gillis, Ellis & Baker, who met with the company Wednesday. "The answer was, 'Yes.' "
Travelers spokeswoman Jennifer Wislocki said the company has "a high concentration of commercial policies in the hurricane-prone areas of Louisiana" and will not renew many commercial policies when they expire.
"To keep future losses to a more acceptable level for continued financial stability, we are reducing our exposure in some of these areas by non-renewing a number of small to mid-sized commercial properties," Wislocki said.
Crisis summit called
State Insurance Commissioner Jim Donelon, who was tipped off about Travelers' plans Wednesday night by the Business Council of New Orleans and the River Region, said he was stunned by the news. When he met with Travelers on Thursday, he was equally stunned by the stated reason for the company's retrenchment.
"They cited the state of the rebuilding of our levee system as the primary reason for their decision," Donelon said.
In conjunction with Gov. Kathleen Blanco and Louisiana Department of Natural Resources Secretary Scott Angelle, Donelon quickly convened a summit of commercial property insurers for Tuesday. At the meeting, the three hope to advise commercial property insurance providers about the efforts to restore the Louisiana coast and improve the levee system to stave off other defections.
"I have lived in the New Orleans metropolitan area for 61 years, and I can personally vouch for the fact that the levee system is better and stronger than it ever has been, and is getting stronger as every day goes by," Donelon said. "We need to let Travelers and the rest of the commercial property writers know of that effort."
Donelon said he was puzzled by Travelers' logic, since private insurers don't cover flooding. But insurance companies say that when there is a disaster that includes both wind and flood damage, they end up paying more on claims and facing higher costs in litigation because policyholders who don't have enough flood coverage press harder for money, he said. And unlike storm surge at the beach, which rolls back out to sea, houses in the New Orleans area have the potential to marinate in putrid floodwaters for weeks, as they did after Hurricane Katrina.
Not connected to ruling
On Monday, Travelers found out it could face additional legal liability for levee breach flooding when U.S. District Court Judge Stanwood Duval ruled that the flood-exclusion language in the policy forms of Travelers and a number of other insurance companies was vague, opening the door for the insurers to be held responsible for flood damage. Since insurance companies write the contracts people sign, lawyers said, any finding of ambiguity in an exclusion is generally a win for the policyholder.
Wislocki said there is "no connection at all" between the timing of the court decision and Travelers' decision against renewing commercial property policies.
"We especially disagree with Judge Duval's ruling and intend to appeal it," Wislocki said. "The ruling is inconsistent with many other court rulings that held a flood is a flood, whether or not man-made factors are involved. The language in our policies specifically excludes damage from floodwater."
Donelon has taken a hard line against other insurance companies that have tried to drop policies because of environmental considerations such as coastal erosion or concerns about levees, such as a homeowners insurance company for teachers, Horace Mann Educators Corp., but Donelon says he has little leverage in the lightly regulated commercial insurance market.
Donelon, commercial insurance agents and business leaders said they worry that Travelers' retreat will inspire others to follow, deepening a crisis in the limited availability and rising cost of commercial insurance.
"This is sending a shock wave through the business community," said Mark Drennen, president and chief executive officer of Greater New Orleans Inc., a public-private partnership that seeks to promote economic development in the area. "If one company has come to that conclusion, you would anticipate that others would come to that conclusion. Without insurance, we have a calamity. We cannot exist as a business community without insurance."
Greater New Orleans Inc. and the Business Council issued a press release Friday urging the governor to delay a special session set to start Dec. 8 to find more time to look for potential solutions, and so the state doesn't blow through its budget surplus in case it's needed to help solve insurance issues in a systematic way.
"Nobody's there yet with a solution," Drennen said. "One of our big concerns is if the Legislature comes in now and spends it, it takes an option off the table that we may need to use."
The business groups' release says that Travelers' pullout amounts to a loss of $3 billion of commercial property insurance coverage in the New Orleans area, according to the insurance brokers who met with the company.
Wislocki said she couldn't verify that figure. "I don't even know if that's in the ballpark," she said.
Other pullouts feared
Marc Eagan, president of Eagan Insurance Agency Inc. in Metairie, said Travelers' pullout is a devastating blow to the region, and he worries that other companies will follow in March after a special emergency rule expires that had artificially held insurance coverage in place after Katrina and Rita.
"This is going to be a blood bath," said Eagan, who added that Hanover Insurance Group, Lafayette Insurance Co. and possibly Zurich North America have indicated that they are likely to not renew some commercial policies.
Zurich, the state's third-largest provider of commercial multi-peril insurance, said in an e-mailed statement: "Zurich is still open for business in Louisiana. We continue to take on new and renewal business where terms and pricing correspond to the risks, while prudently managing our exposure in coastal areas and our aggregate exposures overall. We don't have any present plans to change this practice."
Surplus lines insurers, which are regulated even less than commercial insurers such as Lloyds, are likely to pick up some of the displaced Travelers business, but much of the business will likely go to the state-sponsored insurer of last resort, the Louisiana Citizens Property Insurance Corp.
"The Citizens plan is going to be overloaded after March. That is my greatest fear, other than a hurricane coming in 2007," Eagan said.
Citizens traditionally has not done much commercial insurance business. In anticipation of doing more, Citizens plans to raise its coverage limits from $2 million per business building to $5 million per building. It also is seeking permission from the Louisiana Insurance Rating Commission this month to raise rates by a statewide average of 129.6 percent.
While that rate increase may seem astronomical, it's not as high as the increases that many businesses are reporting from private carriers. Donelon said this week that he is concerned the state could end up taking on too much commercial insurance liability with inadequate premiums if it's priced wrong.
A wave of commercial policies in Citizens will more quickly add financial exposure than homeowners policies, because business properties are usually more expensive than homes, creating additional headaches for the state at a time when many Louisiana lawmakers are already calling to overhaul Citizens.
Worried about the same thing, Baker said he's flying to Bermuda next week to meet with companies that can provide "excess insurance" -- essentially insurance to supplement a commercial policy with a low ceiling -- and try to get them to come to Louisiana. "I'm knocking on every door I can," said Baker, a member of Greater New Orleans Inc.'s insurance task force.
Travelers said its changes concern only commercial property coverage; liability, workers' compensation and other non-property coverage will remain in force, and residential policies won't be affected by the commercial pullback.
Wislocki also said the company will cancel business on a rolling basis as property policies come up for renewal, so the "non-renewals" should take place over the 12-month period starting in March. "There will be no midterm cancellations," she said.
Eagan said business owners should call their insurance brokers to check on the status of coverage for next year -- and start hunting for replacements now if there's a hint of bad news.
After receiving high rates of complaints about Travelers, Citizens and Allstate after Katrina and Rita, the Louisiana Department of Insurance hired independent contractors to initiate "market conduct" studies of each of the three companies to examine their claims-handling and business practices. The reports are expected to be released in February.
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Rebecca Mowbray can be reached at email@example.com or (504) 826-3417.