AIG Chief didn’t Always Defend Sanctity of Contracts
“He’s always disregarded contracts to maximize profits. … “
by Rebecca Mowbray
March 18, 2009
To many on the Gulf Coast, watching AIG Chief Executive Officer Edward Liddy talk about the sanctity of contracts in defending the award of $220 million in bonuses to employees at the embattled insurer was an ironic moment.
“How about that?” said Bob Hunter, a New Orleans native who is director of insurance at the Consumer Federation of America and author of a 2007 study documenting the decline of claims payout ratios at Allstate, Louisiana’s second-largest insurer, during Liddy’s tenure. “He’s always disregarded contracts to maximize profits.” …
Liddy ran Allstate Corp. from when it was spun off from Sears, Roebuck & Co. in 1995 until the end of 2006. During that time, Allstate perfected the practice of getting tough with policyholders to delay and deny claims, as documented in the book by New Mexico attorney David Berardinelli, “From Good Hands to Boxing Gloves.”
While that book dealt mainly with a strategy for tamping down car insurance claim payouts to increase profitability, many believe those same practices could be seen at work en masse after Hurricane Katrina in Louisiana, where thousands of policyholders filed suit against the Illinois company.
“It’s rather ironic that Ed Liddy is espousing the sanctity of contracts when it serves the interests of the insurance company, but when the sanctity of contracts is violated from the homeowners’ perspective, there’s no obligation and it’s up to the homeowners or the courts to enforce it, ” said Johnny Denenea, an attorney for Slidell homeowners Bob and Merryl Weiss, who won a verdict against Allstate in the first insurance trial to be completed in federal court after Hurricane Katrina.
Evidence emerged after Hurricane Katrina that Allstate shifted the burden of paying for wind damage covered by its homeowners policies onto taxpayers by overcharging the federal flood program.
Slidell resident Chris Karpells, noticed at his townhouse, for example, that Allstate systematically charged the government more money to replace common construction materials than what it billed itself. Allstate charged the government $3.31 a square foot to replace wallboard at Karpells’ townhouse, but only 76 cents a square foot when the company would be paying for it.
“Bilking American taxpayers is what insurance companies do. Why is anyone surprised?!” Rep. Gene Taylor, D-Miss., said in a news release Wednesday afternoon about the AIG bonuses. The release also called on Congress to investigate how much of the flood program’s $17 billion deficit after Katrina was caused by overbilling by insurers.
Under Liddy’s tenure, Allstate also was among several companies to retreat from providing homeowners insurance coverage in coastal states after Hurricane Katrina, saying the risks were too great for shareholders. This left many policyholders few options other than state-run pools to provide bare-bones coverage.
In Louisiana, the company was particularly aggressive. In July 2006, it announced that it wanted to drop wind and hail coverage on 30,000 policyholders in South Louisiana, even though many were covered by a state law that says a company can’t arbitrarily drop coverage once a policyholder has had an insurance contract with them for three years. Although that number eventually was whittled down to 18,000 because of the state law, the insurance department again had to do battle with Allstate when it began dropping wind and hail coverage against longtime customers in late 2007 who received new policies without their knowledge when they accepted offers for good-credit discounts in 2006. That resulted in a $250,000 penalty, the largest fine ever issued by the Louisiana Department of Insurance.
In the interim, Allstate dropped 4,772 policyholders for having unrepaired or unoccupied properties in a controversial drive-by inspection process that took about a minute per home in late 2006. When many homeowners protested that they were in the house or had repaired it, the insurance department forced the company to reinstate them in spring 2007.
But Louisiana Insurance Commissioner Jim Donelon said it’s unfair to tag these issues as examples of Allstate violating contracts with policyholders under Liddy’s tenure. He views them as Allstate having different interpretations of state law than the insurance department.
“That issue wasn’t about their contracts; it was about our law that applied to those contracts, ” Donelon said.
Hunter thinks otherwise. “If they were managing their business right, they wouldn’t have entered into contract with those people along the coast and then dumped them, ” he said. “You expect that if you’re in good hands, the company will keep you.”