One of the insurance companies arguing that policyholders forgo their right to sue insurers for additional money when they accept loans from the Small Business Administration has backed off from the argument and another company is considering doing the same.
Travelers Insurance Co. has withdrawn its motion to dismiss litigation by an eastern New Orleans grocery store owner because he has a disaster loan from the Small Business Administration, and State Farm Insurance Co. said it plans to work with attorneys for a Plaquemines Parish homeowner to resolve the issue in a related case.
SBA press secretary Christine Mangi said her agency was delighted at the development with Travelers. "We are pleased that Travelers has decided to withdraw," she said.
Travelers, Louisiana's largest commercial property insurer, and State Farm, the state's largest residential insurer, came under fire last week from SBA administrator Steven Preston and Sen. Mary Landrieu after the insurers filed motions in a class action lawsuit in New Orleans arguing that the plaintiffs didn't have standing to sue because they had SBA loans.
Because SBA borrowers are required to assign any additional insurance proceeds to the SBA to repay the loan, the insurers argued that the borrowers had taken themselves out of the equation and lacked the legal stature to bring suit. Preston said he was "very, very concerned" and Landrieu, D-La., called the situation "outrageous," saying that, if granted, the motions would allow insurers to get out of paying additional insurance benefits, leaving policyholders stuck with loans instead of insurance proceeds.
The case centers on whether insurance companies are paying enough money for contractor overhead and profit to enable property owners to realistically rebuild in Louisiana in the wake of Hurricane Katrina. Insurers typically pay up to 20 percent above labor and materials costs to bring at least three trades together on a job - say, a plumber, an electrician and a roofer - but plaintiffs argue that it's too low to get someone to take a job when competition to find qualified builders is so keen. Insurers argue that their calculations are appropriate and the case is without merit.
Although hefty amounts of money could be involved if insurers are required to increase their overhead and profit allowances, critics say the insurers' original legal tactic could have been far more costly to property owners, since at least 95,330 home and business owners in Louisiana have received SBA disaster loans.
On Thursday, Travelers filed paperwork withdrawing its motion to dismiss the small-business case Vu Nguyen v. Travelers, and signed a stipulation with Nguyen and the SBA agreeing that any additional insurance award would be paid jointly to the parties to the loan.
"That court filing was intended to get clarity on whether the policyholder or the SBA would receive any future payments. We've resolved that issue, so our motion to dismiss the case has been withdrawn," said Travelers spokeswoman Jennifer Wislocki. "We want to dispel any concern that Travelers policyholders might have that participating in an SBA loan would jeopardize their right to purse their claim, because it does not."
"We're pleased that they decided to abandon what is basically a heartless and shameful defense to a claim without even addressing the merits of the claim," Smith said. "I'm glad they recognized that."
State Farm has not withdrawn its motion to dismiss the Plaquemines Parish homeowners litigation Billy Melancon v. State Farm over the SBA issue, but State Farm spokesman Fraser Engerman said his company is working on a stipulation similar to what Travelers worked out.
Engerman said his company filed the motion merely as a procedural step to try to determine whether the SBA or the homeowner should receive any additional insurance proceeds, because it didn't want to be at risk for having to make payments twice.
But Smith, who is also representing Melancon, said he's heard nothing from State Farm on the SBA issue. Until State Farm actually withdraws its motion to dismiss the case, the matter is heading for court April 18.
Smith called Engerman's statements about State Farm's intent "disingenuous," and noted that if clarity was really State Farm's goal, it could have filed a motion asking the court to determine the "true party at interest" or adding the SBA as an "indispensable party."
But Engerman stuck to his argument. "Although it was a motion to dismiss, it was really just a procedural effort to get the matter on the table. We had to file something to ask the court to decide who should receive any future claims payments," he said.
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