Private Role

The property/casualty insurance industry, whose employees do their share of volunteer work and whose financial contributions support many charities, occasionally finds itself involved involuntarily in efforts to improve communities. It might be a tribute to the vital role private insurance plays that it is seen as the answer to public problems. But sometimes what insurers are “asked” to do is unreasonable, if not illegal.

One example is when insurers have been asked to pay fees charged by some municipalities for emergency response teams that show up at accident scenes. That’s been stopped in some states including Florida, where Governor Charlie Crist recently signed into law legislation blocking local governments from billing motorists for emergency response services at the scene of an automobile accident. That’s why people pay taxes.

Most recently, interest in private insurance as a solution to a public problem has led to insurers being asked to pay a city’s costs to clean up debris from burned out buildings and any delinquent taxes or fees. The city of Huntington, West Virginia is forcing property insurers to send claims payments on some total fire losses to the city rather than directly to policyholders. The city says it wants to discourage abandonment of burned out properties and prevent urban blight. City officials want the insurance money upfront to pay for debris removal before the property owner skips town or spends it on other activities.

The new Huntington ordinance forces insurers to put up to 13.3 percent of a policy’s property coverage amount into an escrow account from which the city can then pay itself for any debris removal costs it incurs due to a property owner’s failure to clean up after a fire. The city has also reserved the right to deduct unpaid municipal fees or taxes.

While applauding the concern over abandoned buildings, the insurer trade group, the West Virginia Insurance Federation (WVIF), along with state Insurance Commissioner Jane Cline, think Huntington officials have gone too far.

The state has insurance laws and regulations that prohibit insurers from doing what the city fathers want them to do. Not all states have such laws but West Virginia’s “valued policy” insurance law requires insurers to pay insurance proceeds directly to policyholders and the state’s unfair trade practices act requires that insurers make claims payments promptly.

There’s another problem as well. The ordinance forces insurers to pay costs including taxes and fees that are not covered by insurance and that were never part of the contract between the insurer and the policyholder.

There are already laws in place that the city could use to address the problem of abandoned properties. But rather than use, or strengthen, those laws, the city turned to private insurers for an easy solution.

Industry officials say they regret they had to file their suit and did so only after city officials refused to listen to them. In the end, however, city fathers may be the ones who regret the legal action. They adopted the escrow rule under the state’s new Home Rule Pilot Program, an attempt to give cities and towns in the state more leeway in how they run and fund their operations. City fathers are now worried that the insurers’ lawsuit could do more than just wipe out the debris removal escrow account for abandoned properties; it could also force the state to abandon the entire home rule experiment.