The torrential rains of June 2008, and the flooding that ensued, will not soon be forgotten. For days, surging floodwaters threatened the lives and property of many Midwestern families and businesses. As the immediate threat began to recede with the floodwaters, worries set in of a different kind—namely, worries about starting over, rebuilding homes, and minimizing damage from polluted water.

Insurance factored heavily into all of these concerns, and that spurred action from the insurance departments of Illinois, Indiana, Iowa and Wisconsin. The insurance departments of these four states issued bulletins requesting, imposing, or reminding insurers of certain protections for insureds relative to the payment of premiums and the cancellation or non-renewal of policies.

While certainly well-intentioned, these bulletins do raise some questions about their intended applicability and scope. In this Expert Commentary, Thomas R. Hrdlick and A. John Richter, attorneys with Foley & Lardner LLP and members of that firm’s Insurance Industry Team, provide analysis of the bulletins and some of the legal issues they present.

The authors outline the contours of the regulatory action in each of these four states and provide links to the complete directives and bulletins issued by each state’s insurance department. The authors state: “Viewed collectively, the actions taken by the Illinois, Indiana, Iowa and Wisconsin insurance authorities reveal a shared concern that insureds may be unable to make their required premium payments (whether due to logistical or financial reasons) and/or that insurers may take action to cancel or non-renew coverage because of new concerns over the nature and location of the risk."

The authors also outline some general points to consider when evaluating the impact of these bulletins on an insurer’s operations. The authors note that nothing in the directives or bulletins draws a distinction between property/casualty and life/health insurers and caution that “the bulletins should be noted and/or adhered to by all insurers regardless of lines of business.” They also point out a similar ambiguity as to whether the bulletins and directives apply only to “licensed” insurers transacting business in these states. As to commercial vs. personal lines, the authors write “It appears from the language of these bulletins that they are intended to apply to both commercial and personal lines insurers,” and caution that the Illinois provisions may be construed as targeting individual, personal lines consumers as opposed to commercial lines consumers.

Finally, the authors address whether these state actions to alter or interfere with the contractual terms of existing insurance policies are constitutionally valid under the Contract Clause. Based on the U.S. Supreme Court’s holding in Home Building & Loan Ass’n v. Blaisdell, 290 U.S. 398, 439-40, 1934 U.S. LEXIS 958 (1934) upholding a Minnesota law granting a moratorium on mortgage foreclosures during the Great Depression because of the emergency situation and temporary nature of the modification, the authors conclude” the recent floods arguably present a similar emergency situation and the bulletins issued in response represent a temporary modification. Thus, it is unlikely that a constitutional challenge of the state bulletins at issue under the federal Contract Clause would succeed.” 

Access the complete commentary on lexis.com