Allstate ordered to reinstate policyholders in post-Katrina settlement.

Louisiana Insurance Commissioner Jim Donelon has reached a settlement with Allstate Insurance Co. after ordering the company to reinstate nearly 5,000 homeowners he said it had improperly dropped for "abandoning" their Katrina-wrecked homes. An investigation by the state commission found that Allstate used questionable investigation tactics to determine that homes were abandoned when, in reality, the owners still lived on the damaged properties and were trying to fix them.

The Allstate cancellations came on the heels of an emergency rule that Donelon issued during hurricanes Rita and Katrina--Emergency Rule 23--that prohibited insurance companies from dropping policyholders in areas of the state affected by the hurricanes. The rule was slated to expire in December 2006. In October, Donelon issued an advisory letter explaining the procedure companies should use to transition back to pre-hurricane status. The letter told companies they could begin reevaluating policies in November.

"Allstate, by its own admission, jumped the gun," Donelon said. "They had a routine inspection scheduled for October, and they decided to just start then."

Allstate inspected roughly 40,000 homes in four Lousiana parishes: Jefferson, Orleans, Plaquemine, and St. Bernard's. In February, more than 4,700 policyholders received notices of cancellation or nonrenewal. The notices said the decisions were based on inspections that found that the homes in question were abandoned.

Louisiana has a unique law regarding insurance, Donelon said. "It's called the Three-Year Statute," he explained. "It holds that once you have insurance for three years, the company cannot drop you, fail to renew, or change your premiums unless you have more than two claims within that time, don't pay your premiums, or don't keep your property in its original, insured condition."

Allstate used the third provision as the basis for its cancellations, saying homeowners had failed to meet the company's deadlines for starting repairs on the homes.

But the homeowners claimed that many of them were living in the houses and attempting to restore them. About 800 policyholders filed formal complaints with the state insurance commission, and Donelon launched an investigation.

"We started with the most egregious ones," he said. "We selected 18 of the worst cases, and when we investigated, we found that in all 18 cases, the inspections were flawed."

The commission found that Allstate had followed the procedure it uses for routine inspections rather than new ones specifically designed to assess hurricane damage. The process consisted of two Allstate employees driving past the property in question and deciding whether it looked like it was inhabited--without getting out of the car, talking with the owners, or looking for signs of repair. The state commission found that Allstate was performing 300 to 500 of these two-person drive-by inspections daily.

In March, Donelon ordered Allstate to reinstate the homeowners' policies. He also instructed the company to develop comprehensive inspection practices that included written documentation spelling out the reasons for canceling a policy, in statements dated and signed by the inspectors.

The company appealed the decision to an administrative law judge, and the settlement was reached at the end of March. It reinstates the policies for homeowners who chose to keep their insurance (around 1,300 did not), adopts the new inspection procedures, and makes Donelon the final arbiter of any disagreements.

The settlement also gives homeowners a longer deadline for beginning repairs on their homes and allows them to be reinstated if they can prove that they have started repairs--for instance, by showing a building permit, a written contract with a contractor, or even receipts from a store like Lowe's or Home Depot.

"It's a very comprehensive settlement," said Donelon. "It does everything that I had hoped to accomplish, which was to protect these policyholders."