Computer Data Bugs Lead to Shakeup, Lawsuit by La.’s Citizens

March 9, 2007

With its financial records in disarray, Louisiana’s state-run insurance company of last resort will get a new chief administrator and beef up its management with a chief financial officer and internal auditor, Insurance Commissioner Jim Donelon said.

The board of the Louisiana Citizens Property Insurance Corp. backed Donelon’s planned management revamp – and also moved Mar. 7 to hire a lawyer to sue the software purchaser it blames for the computer glitches causing the loss of a year and a half’s worth of financial records.

Citizens has become the state’s third largest property insurer since Hurricanes Katrina and Rita struck the state in 2005.

After discussions with Donelon and the Citizens board, Terry Lisotta agreed to leave his post as chief executive of Citizens. Lisotta said Citizens needs someone with greater expertise as it continues to grow and add policies. Donelon said he hopes to hire a new chief within the next month.

Donelon tried to ease fears of jittery Citizens policyholders and bondholders worried about the company’s wide-ranging financial records problems, saying claims would be covered and bond debts would be paid.

“Every policyholder should be secure,” Donelon said.

He said he didn’t believe that any money was missing or that Citizens’ staff mismanaged the books, though Legislative Auditor Steve Theriot said that was unclear because auditors couldn’t review the records.

“We can’t with any real assurance tell you that nothing has been misappropriated,” Theriot told the Citizens board.

Citizens board members questioned why the insurer and the state insurance department didn’t tell them of the financial mess months ago when it was discovered that Citizens couldn’t produce reliable financial data or determine the cost of its own operations.

Officials say an army of accountants and technical specialists will be needed to piece together the records lost amid computer software problems, and they don’t know how long it will take or how much it will cost.

A Texas-based firm is working with the insurance department to help retrieve the data, and officials with the insurance department said they are talking to a Florida firm about possible further assistance.

“The software didn’t work. Our data is trapped within the system. We can’t get it out,” said state Treasurer John Kennedy, a member of the Citizens board.

Citizens, created in 2003 as a state-sanctioned “insurer of last resort,” provides homeowners insurance to those who couldn’t get it on the open market. People pay premiums, albeit with higher prices, for the insurance coverage, just like they would for policies with other private companies.

Citizens contracted with the Property Insurance Association of Louisiana, an industry group, for services, including the $6 million purchase of the computer software to maintain Citizens financial and other records.

The Citizens board agreed to seek legal counsel to file a lawsuit against PIAL, and possibly the software creator, to try to recoup the costs of dredging up the documents or recreating them – rather than passing those costs to policyholders.

“We’re going to move heaven and earth to make sure the policyholders of this state don’t pay to fix this problem,” Kennedy said.

But the situation gets murky. PIAL was the old insurer of last resort for the state before Citizens existed. Many of the board members for both overlap, they have the same general counsel (though the lawyer said he planned to resign from PIAL), and Lisotta also serves as executive director of PIAL. Lisotta has agreed to serve only with PIAL.

Lisotta said it’s unclear if PIAL could be held liable for the software problems because of an immunity clause in its contract with Citizens, but he said he wouldn’t comment further until he discussed the matter with lawyers.

Meanwhile, the lost financial records were cited by Standard & Poor’s Ratings Service as it placed $1 billion of Citizens’ revenue bonds on credit watch with negative implications. Citizens sold the bonds to pay off claims stemming from hurricanes Katrina and Rita.

“It is not currently clear what effect Citizens’ loss of their financial records will have on their operations and ability to repay debt service,” said S&P credit analyst Alex Fraser. “Should they be impaired, the rating could be lowered.”

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