Travelers Retreats from Confrontation over SBA Loans in La.

April 4, 2007

One insurance company is dropping a claim in Louisiana that getting Small Business Administration loans cancels policyholders’ right to sue if they feel their insurance payments are too low, and another company may do the same.

Travelers Insurance Co. has withdrawn a motion to dismiss the suit brought by an eastern New Orleans grocery store owner who got a disaster loan after Hurricane Katrina from the Small Business Administration.

State Farm Insurance Co. said it plans to work with attorneys for a Plaquemines Parish homeowner about the same question.

SBA press secretary Christine Mangi said her agency was delighted by Travelers’ decision.

Travelers is Louisiana’s largest commercial property insurer and State Farm is the state’s largest residential insurer.

SBA Administrator Steven Preston and U.S. Sen. Mary Landrieu criticized both for claiming that plaintiffs in a class action lawsuit had given up the right to sue when they got the SBA loans, because SBA borrowers must agree to use any additional insurance proceeds to repay the loan.

Preston said he was very concerned. Landrieu, D-La., called the claim outrageous, saying it would leave policyholders stuck with loans to cover work which insurance ought to pay.

The plaintiffs say insurance companies are paying too little for contractor overhead and profit in post-Katrina Louisiana.

Insurers typically pay up to 20 percent above labor and materials costs to bring at least three trades – such as plumbers, electricians and roofers – into one job. The plaintiffs say that is too low because competition for qualified builders is so keen. Insurers argue that their calculations are appropriate.

The case itself could involve large amounts of money. But critics say the motions to dismiss the cases could add up to far more. At least 95,330 home and business owners in Louisiana have received SBA disaster loans.

On March 29, Travelers withdrew its motion to dismiss the small-business case brought by Vu Nguyen and signed an agreement with Nguyen and the SBA to pay any additional insurance money jointly to them.

“We want to dispel any concern that Travelers policyholders might have that participating in an SBA loan would jeopardize their right to purse their claim, because it does not,” Travelers spokeswoman Jennifer Wislocki said.

Nguyen’s attorney, Mark Smith, said, “We’re pleased that they decided to abandon what is basically a heartless and shameful defense to a claim without even addressing the merits of the claim. I’m glad they recognized that.”

State Farm has not withdrawn its motion to dismiss the claim brought by Plaquemines Parish homeowner Billy Melancon, but spokesman Fraser Engerman said the company is working on a stipulation similar to Travelers’.

“Once we have that resolved, our motion that we filed a few weeks ago probably isn’t going to be necessary,” he said.

Engerman said his company just wanted to be told whether the SBA or the homeowner should receive any additional insurance proceeds, because it didn’t want to pay twice.

“We were simply trying to get clarity. There was no intent on State Farm’s part to deny payment to people who have SBA loans,” Engerman said.

Smith said he’s heard nothing from State Farm on the SBA issue. Until State Farm actually withdraws its motion to dismiss the case, the matter is not resolved and it’s heading for court April 18.

Information from: The Times-Picayune,

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