SNR Denton on Oubre v. Citizens Insurance Co.: Louisiana Supreme Court Clarifies Penalty Statutes

William Barker   By William T. Barker, Partner, SNR Denton

In Oubre v. Citizens Insurance Co., a divided Louisiana Supreme Court resolved a split in the courts of appeals by holding that the statutory penalty for an insurer's failure to timely initiate loss adjustment may be assessed without any showing that the insurer acted in bad faith.  It also held that the maximum penalty in the absence of proven damages is $5000 per claim.  Finally, it held that distribution of preprinted checks as an advance on loss of use benefits did not constitute initiation of loss adjustment.  This commentary examines the decision.

As the commentary explains:

Oubre was a class action filed in the wake of Hurricane Katrina.  La. Rev. Stat. § 22:658(A)(3) ("Section 658") required that "[i]n the case of catastrophic loss, the insurer shall initiate loss adjustment of a property damage claim within thirty days after notification of loss by the claimant." The statute further provided that "[f]ailure to comply with the provisions of this Paragraph shall subject the insurer to the penalties provided in R.S. 22:1220 [("Section 1220")]."  The class was defined as all of those insured by Citizens at the time of Hurricane Katrina who provided notification of loss but Citizens did not initiate adjustment of the loss within 30 days of such notification.  Documents obtained from Citizens established that the time between notice of loss and either making an appointment to inspect the property or an actual inspection (without appointment) exceeded 30 days.  But Citizens had distributed pre-printed checks for $1500 as an advance on loss of use benefits and argued that this adequately initiated adjustment of the claim.

Under prior case law, "initiation of loss adjustment" is deemed to happen when "the insurer [takes] some substantive and affirmative step to accumulate the facts that are necessary to evaluate the claim."  A divided court concluded that delivery of a check is not itself a step toward accumulating information.

The issue on which the courts of appeals had split was whether a showing of bad faith was necessary to permit assessment of penalties.  As the commentary explains, the court concluded that

Section 658(a)(3) imposed a mandatory duty and authorized imposition of a penalty for failure to comply.  Nothing in that section indicated any relevance of good or bad faith, arbitrariness or capriciousness.  Section 1220 authorizes penalties for certain breaches of the duty of good faith, but untimely initiation of adjustment is not among those breaches.  Accordingly, "to subject the insurer to penalties, the insured need only provide proof of notice and the failure of the insurer to initiate loss adjustment for a certain amount of time, i.e., thirty days. It is the insurer's inaction alone that triggers the penalty; no justification or lack thereof on the part of the insurer need be shown."

The dissenters disagreed, relying on the rule that penal statutes are narrowly construed.  But the commentary concludes that, even giving the insurers the benefit of that rule, the statutory language seems clearly to support the court's construction.

The commentary also examines the court's ruling on determination of the amount of the penalty.

William T. Barker is a member of SNR Denton's Insurance Litigation & Coverage Practice Group and practices in the firm's Chicago office.  He has a nationwide practice in the area of complex commercial insurance litigation, including coverage, claim practices, sales practices, risk classification and selection, agent relationships, and regulatory matters. He is the co-author, with Ronald D. Kent of THE NEW APPLEMAN INSURANCE BAD FAITH LITIGATION, SECOND EDITION and with Charles Silver of the forthcoming PROFESSIONAL RESPONSIBILITIES OF INSURANCE DEFENSE COUNSEL; he has written over 100 published articles on insurance and litigation subjects.  He has been described as "[t]he leading lawyer commentator" on the relationships between insurance and civil procedure.  Charles Silver & Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 Duke L.J. 255, 257 & n.4 (1995).  He is an Adviser to the American Law Institute project on Principles of the Law of Liability Insurance.  He is a member of the EDITORIAL BOARD OF THE NEW APPLEMAN ON INSURANCE LAW LIBRARY EDITION and THE NEW APPLEMAN INSURANCE LAW PRACTICE GUIDE.  He is Editorial Board Director and Senior Contributing Editor of INSURANCE LITIGATION REPORTER and a member of the Board of Editors of DEFENSE COUNSEL JOURNAL.

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Damage in New Orleans from Hurricane Katrina

Lexis.com subscribers can access the Lexis enhanced version of the Oubre v. La. Citizens Fair Plan, 2011 La. LEXIS 3014 (La. Dec. 16, 2011) decision with summary, headnotes, and Shepard's.

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