New Court Ruling Alert: For Commercial and Residential Property Owners, Two Federal Property Insurance Cases Worth Attention
By Charles L. Stern, Jr.
In the aftermath of the 2005 hurricanes, Katrina and Rita, property insurance continues to be a source of new court decisions that affect the rights of both commercial and residential property owners. Two new cases from the federal courts are worth attention.
Whether you are a commercial or residential property owner, two recent opinions by the United States Court of Appeals for the Fifth Circuit, applying Louisiana’s bad faith insurance statutes to claims made by insureds, under their policies, will be of interest. One case, Seacor Holdings, Inc. v. Commonwealth Ins. Co., provides some protection to an insurer when it disputes the extent of its liability based on a good faith, if ultimately erroneous, interpretation of certain policy provisions. The second, French v. Allstate Indemnity Co., however, emphasizes the extent of an insurer’s liability for penalties when it fails to pay its undisputed liability within the thirty day limit contained in La. R.S. § 22:1892(B)(1). Both highlight the continuing uncertainty in this body of law, which continues its development in the aftermath of Hurricane Katrina.
Case One – Seacor Holdings, Inc. v. Commonwealth Ins. Co.
Background An oil-and-gas company, Seacor Holdings, Inc., sustained significant damage to its property in Hurricanes Katrina and Rita. The company brought declaratory judgment action against its all-risk property insurer, Commonwealth Insurance Company, seeking clarification as to which deductible and liability limit applied.
Ruling In Seacor Holdings, Inc. v. Commonwealth Ins. Co., decided on March 10, the Fifth Circuit was asked to interpret the deductible provision of an all-risk policy in the light of damage that plaintiff’s property suffered from the hurricanes. Both the trial court and the Court of Appeals rejected the insurer’s interpretation, siding with the policy holder and mandating additional payments on its claim.
The policy holder also sought penalties from the insurance company, arguing that prior Louisiana decisions mandate that an insurer be held liable for penalties whenever it fails to make timely payment because it misinterprets its own policy. The Fifth Circuit rejected that argument, however, finding the Louisiana authorities on this point to be “less than uniform.” Because it found no evidence that the insurer acted arbitrarily or capriciously in its reading of the policy (even though its reading ultimately was rejected), the Fifth Circuit found penalties to be inappropriate.
Case Two – French v. Allstate Indemnity Co.
Background Two homeowners filed state court action against their homeowners’ insurer to recover additional insurance payments for damage to their home resulting from Hurricane Katrina.
Ruling French v. Allstate Indemnity Co., decided on April 4, illustrates the severity of the penalties that apply when an insurer fails to make prompt payment of undisputed amounts due under such a policy. Allstate’s adjuster recommended payment of just over $80,000 to the homeowners, an amount the homeowners contended was far too low. Allstate paid $10,000 of this amount within a few days, but it did not pay the remainder of the undisputed amount until 36 days after the adjuster’s recommendation. The delay violated La. R.S. § 22:1892(B)(1), which requires that the undisputed amount due under an insurance policy be paid within 30 days of submission of satisfactory written proofs. The statute at that time provided for a penalty of 25% of “the amount found to be due” (the statute later was amended to increase the penalty to 50%).
The Fifth Circuit ultimately found that the plaintiffs were entitled to recover $348,000 under their policy, as opposed to the $80,000 that Allstate’s adjuster originally had recommended. Even though Allstate had been in good faith in disputing its liability under the policy for any amount exceeding its adjuster’s original $80,000 estimate, the Fifth Circuit nonetheless held that the 25% penalty had to be assessed on the entire award of $348,000, less $10,000 for the sole payment made within the 30 day limit. In other words, if an insurer fails to pay any undisputed amount within the 30 days limit, it owes a 25% penalty on everything it owes, even amounts that it has disputed in good faith.
In French, that holding increased the penalty against Allstate from just over $17,000 to $84,500. Under the current version of the statute, the award would have increased from $34,000 to $169,000, all because the insurer was six days late in making an initial payment.