Court Upholds Hurricane Insurance Decision
OCEAN CITY -- Maryland’s highest court this week ruled a major insurance carrier was well within its rights to stop writing new homeowner policies in coastal areas of the state, pointing out the company’s decision was based on sound business practices and was not discriminatory.
The Maryland Court of Appeals on Wednesday issued a majority opinion upholding an earlier opinion by the lower Court of Special Appeals essentially ruling Allstate acted legally and according to state law when it decided several years ago to stop writing new homeowner insurance policies in vast coastal areas across the state. The Court of Appeals ruled in favor of Allstate’s decision to stop underwriting new homeowner policies in about one third of the state including much of the Eastern Shore after a majority ruled the company’s catastrophic storm forecasting models were not discriminatory.
In December 2006, Allstate Insurance informed the Maryland Insurance Administration it would no longer be writing new property insurance policies in “certain catastrophe-prone areas” in the state effective Jan. 1, 2007. The decision was made in the aftermath of Hurricanes Katrina and Rita, during which Allstate and most the major carriers took devastating and losses on property insurance claims totaling hundreds of millions of dollars.
The big insurance companies cited the potential risk of increased losses in the future in coastal areas of Maryland, including Worcester and Ocean City, as the basis for the decision not to write any new homeowner policies in the designated catastrophe prone areas. The MIA reviewed Allstate’s decision and deemed it valid. However, in 2007, the Maryland General Assembly created the People’s Insurance Counsel Division (PICD) during a special session as a watchdog agency of sorts to look out for the interests of the consumers in insurance issues.
The PICD filed a challenge against Allstate and the other major insurance carriers who made similar policy changes, calling the decision to not write any new insurance policies in hurricane-prone areas across Maryland discriminatory. In the years since, the case has gone up and down the state’s judicial ladder before the Court of Appeals upheld the earlier rulings this week.
The Court of Appeals ruled in favor of Allstate, essentially agreeing the company’s decision was based in sound and prudent business fundamentals and was not in any way discriminatory against residents in coastal areas of Maryland. In advance of its decision, Allstate designated the catastrophe-prone areas in Maryland with hurricane bands numbered 4, 5 and 6, with 6 being the band most likely to be impacted by a catastrophic hurricane. Naturally, Worcester County fell within the boundaries of the designated hurricane bands, along with all or portions of every county bordering the Chesapeake.
Allstate then commissioned a research company to create a model that provided real risk data down to the zip code level, which the insurance company used as the basis for its decision to stop writing new property insurance policies in the designated at-risk geographic areas identified.
The model generated storm strike probabilities in hurricane bands 4-6 for the next 100 years. For example, the model predicted four hurricanes making landfall in Worcester County with two more making landfall in Virginia and another making landfall in Delaware. According to the data, those hurricanes would cause losses in Maryland alone at $500 million dollars.
However, the PICD was not satisfied with Allstate’s data and continued to assert the insurance carrier’s decision not to write new policies in hurricane-prone areas was arbitrary and unreasonable. However, the Court of Special Appeals disagreed and the Court of Appeals this week upheld that earlier decision.
“Whether the statute applies, and, if so, how it should be interpreted, are questions of law and the court must make the ultimate legal interpretation,” the Court of Appeals opinion released this week reads. “Allstate was not proposing to cease writing homeowner’s insurance in Maryland. It intended to remain very active in that market, including properties that it currently insures in the designated geographic areas. What it determined to do was to refuse to underwrite new business in those areas.”
However, while the majority on the Court of Appeals upheld Allstate’s decision, not all on the panel agreed. In his dissenting opinion, Judge Alan Wilner asserted Allstate’s forecasting models were flawed.
“Recorded history on the subject shows again and again that a catastrophic hurricane of the order of magnitude described in Allstate’s plan has not made landfall yet in Maryland,” the dissenting opinion reads. “This court, nonetheless, approves Allstate’s decision to cease writing new homeowner’s insurance policies in the artificial hurricane bands, nearly coinciding with zip code areas, because Allstate’s computer models predict such a hypothetical hurricane would make landfall in Maryland every 25,000 years. The basis for this decision is folly.”