In this year’s legislative session, the Louisiana Legislature passed some meaningful changes to La. R.S. 22:1892, which governs claim handling practices in Louisiana. The law came into effect on August 1, 2021, just as hurricane season began. Overall, the changes are positive and are aimed at protecting policyholders.
Insurers Must Now Explain Depreciation
The first and most significant change to the law is insurers must not provide a written explanation of how it calculated depreciation. The prior version of La. R.S. 22:1892 contained no requirements for explaining or breaking down how an adjuster depreciated a claim. Most policyholder advocates have likely witnessed depreciated payments that have no basis in reality or are simply unexplainable.
The new version of the law states that “depreciation shall be reasonable and based on a combination of objective criteria and subjective assessment, including the actual condition of the property prior to loss.” We can all likely agree that the term “reasonable” is subject to interpretation. The law also requires the insurer use “objective criteria” in setting depreciation. This suggests that the insurer should have a standard set of “reasonable” criteria that it follows when setting depreciation. However, the law also permits an insurer to base depreciation on a “subjective assessment.” At a minimum, hopefully we will no longer see depreciation of items such as labor, which cannot be depreciated.
Requiring insurance companies to explain how they depreciated a loss is a step in the right direction. The biggest challenge will be to see how it is applied in practice.
If there is no explanation of depreciation, does this mean an insurance company is not permitted to withhold depreciation?
Another question we have is will an insurer’s failure to reasonably depreciate a loss or provide a written explanation provide a basis to recover penalties or attorney’s fees under La. R.S. 22:1892 or 22:1973.
Insurers Cannot Recommend Vendors or Contractors
The Louisiana Legislature also modified La. R.S. 22:1892 to provide that an insurance company cannot require an insured to use a preferred vendor or recommend a contractor when making payment on a residential or commercial property damage claim. Moreover, the changes to the law state that “an insurer shall not recommend the use of a particular preferred vendor or recommended contractor without informing the insured that it is under no obligation to use the preferred vendor.”
Over the last several years, we have dealt with numerous claims in which insurance companies will send a preferred vendor or contractor to a property soon after a loss. It may be a fire remediation company, a contents cleaning service, or even a general contractor. The people showing up to the property often suggest that the property owner has to use their services. The reason insurance companies send certain companies to a property is because the vendor’s or contractor’s allegiance is with the insurance company, not the customers they are suppose to serve.
Our experience with these companies is that they are there to help the insurance company “control the claim.” A few examples of insurer-preferred vendor problems include:
- Failing to disclose more extensive damage to the insured so supplemental claims will not be made;
- Falsely claiming certain items of personal property are restored when they were not;
- Refusing to reevaluate the scope of damage;
- Refusing to reconsider the scope of work to be performed to reduce overall claim payout;
- Telling insureds that must let them work on the property because they were sent by the insurance company.
Removing the conflict of interest created by the relationship between a preferred vendor and insurance companies is a good thing. Still, the law does not prevent insurance companies from sending preferred vendors to the property following a loss. It only requires honest disclosures by the parties involved.
General Contractor Overhead and Profit Cannot be Ommitted
Finally, the law has clarified that general contractor overhead and profit as well as sales tax must be included in the adjustment of a property damage claim. This is a huge development. Numerous battles have been fought over payment of overhead and profit. We have personally dealt with insurance companies who have claimed that O&P is not covered in Louisiana. Some insurers have even claimed that O&P is a cost incurred expense that cannot be paid upfront in an ACV policy. Exactly how the insurance industry can rationalize that contractors should not earn income from the work they perform is still not clear. As it now stands, insurance companies must include overhead and profit in their estimates and cannot refuse to pay contractors reasonable sums for overhead and profit.