State Insurance Market Badly Needs an Oil Change

As the Florida Legislature prepares for its 2nd Special Session on property insurance in 2022, it’s time we look at why our market sputtered uncontrolled and focus on the mandatory options to repair it. Many Floridians are questioning:

• How may 9 insurance corporations go bankrupt in lower than two years?
• Why have charges tripled, on common, for each house owner?
• What precipitated the state-backed Citizens Property Insurance Corp. to develop from an all-time low of 420,000 policyholders to greater than 1 million — and heading for two million?

Media retailers throughout the state have accomplished a good job of highlighting the failing insurance market. However, there are a lot of misconceptions related to these reviews. The first, that storms are in charge, and the second, that reinsurance charges are exploding on account of local weather change. In fact, many elements have contributed to the disaster and the bancrupt corporations failed or have been failing lengthy earlier than the 2022 Hurricane season even started. Reinsurance charges have risen, however the price that may be handed onto the buyer is statutorily capped at 15% per yr. While appreciable, that solely accounts for 60% of the 300% in price will increase since 2018.

In brief, this disaster begins and ends with litigation.

Most have probably seen the headlines that Florida accounts for 80% of our nation’s property insurance lawsuits, whereas solely accounting for 8% of the claims. Breaking that information down additional exhibits that each different state averages lower than 1,000 lawsuits yearly, whereas Florida averages 100,000. This leads us to the multi-billion-dollar query: How? This query deserves a posh reply, for positive, however could be boiled right down to this: The mixture of assignment-of-benefits (AOB) proliferation, an obscure, 2016 determination by the Florida Supreme Court (Sebo vs. American Home Assurance), and the 100-year-old one-way legal professional price statute (627.428), created an ideal authorized storm so nice that it introduced our state’s insurance market to its knees.

A layman’s try to explain every is as follows…

AOBs have been usually utilized in healthcare. You go to the physician, and also you assign your advantages to them to allow them to work together with your insurance firm for billing functions. One day a number of Florida attorneys found out they may apply this observe to a home-owner in want of a quick restore, and assume full management of a declare, together with the flexibility to file a lawsuit. And, Voila! An enormous incentive was created from skinny air and a cottage business was born. Prior to 2010, the state noticed about 400 lawsuits yearly, however as soon as the AOB scheme was unleashed, that quantity ballooned to 30,000 in 2016. It took robust phrases from Gov. Ron DeSantis, in his very first State of the State tackle in 2019, to maneuver the needle on reasonable reform when he declared that AOB’s “had degenerated into a racket.” Unfortunately, by then, this racket had already metastasized uncontrolled.

This then brings us to the 2016 Sebo determination by the state Supreme Court, which changed the long-standing and environment friendly proximate trigger doctrine with the concurrent causation doctrine. In sensible phrases, this enabled contractors to seek out very minimal harm on already deteriorating roofs or buildings and declare that the small harm, mixed with the crummy situation of the construction, necessitated a full alternative at insurers’ expense. So, one windblown shingle on a 20-year-old roof was artfully used to get somebody a brand new roof for “free”.

Now, allow us to issue within the holy grail — one-way legal professional charges, courtesy of Florida Statute 627.428. The approach this statute works is comparatively easy: If you sue your insurance firm and the case goes to trial, you solely must win $1 greater than their final pretrial supply, whatever the quantity for which you have been suing. If profitable, the house owner will likely be compensated for all legal professional charges on the insurance firm’s expense. This price construction, hailed because the David vs Goliath statute, was created to degree the enjoying discipline so the Smith Family (David) may struggle again in opposition to Big Insurance Co. (Goliath). For a long time, it was thought of to be a good and affordable idea.

However, mixing these three elements collectively is the place issues go radioactive.

Essentially, nothing prevents a contractor from coming to your private home and assuming your rights, discovering minimal harm but submitting a big declare; after which working with a lawyer to inflate the declare increased to garner an enormous settlement. Financially, it really works like this: They sue an insurer for $100,000 for a brand new roof that, if legitimately broken, prices $25,000. But it has solely two shingles lacking that ought to price $150 to switch. The insurance firm should meet within the center and settles for $65,000 as a result of it might price extra to go to trial. Now multiply by 130,000, which is the variety of lawsuits filed final yr, in accordance with state Department of Financial Services information.

That equates to greater than $8 billion and a wholesome dose of eyeball emojis.

Now you would possibly end up saying: “How can these insurance companies claim poverty and any of this be true when 4 out of 5 television commercials is an advertisement for an insurance company?” The reply is that these “national” carriers mix for less than 10% of the market share in Florida. This has been the case for the reason that 2004-2005 hurricane seasons when Mother Nature alone was trigger for concern. Citizens Insurance is now the biggest supplier within the state with greater than 15% of the market share. “Domestic” (Florida-only or predominant) carriers are the first supply of house owners insurance within the state.

These insurers, nationwide and home, aren’t with out blame, both. Despite the continued multibillion greenback racket being dedicated in opposition to them, many carriers that went stomach up did so as a result of they ignored probably the most basic side of insurance, threat administration. The few corporations which have weathered this market responsibly did so as a result of they selected to sacrifice development to guard solvency. The now-defunct carriers have been 2-3 years too late when it got here to tightening their underwriting practices. It can be unfathomable that some corporations would pay not simply regular, however elevated, dividends or investor bonuses at a time when their firm surpluses have been being depleted by the tens of hundreds of thousands yearly. Even worse, some took on debt to take action. Regardless of the reforms enacted in December, there will likely be extra insolvencies and the variety of present corporations on secure floor shifting ahead could be counted on one hand.

The subject of insurance can appear boring, however it’s important state infrastructure. It is the oil that retains a free-market engine operating, and it’s protected to say Florida’s property insurance market wants an oil change! What ought to the brand new artificial mix appear like? Thus far, the state has tried thrice since 2019 to halt abusive practices: AOBs have been first regulated to permit for a 14-day rescission interval and a brand new fee-shifting measure for third-party lawsuits was put in place. Then in 2021, a hybrid model of that price construction was enacted for first-party lawsuits and the period of time to file a declare was lowered from 5 years to 2 years. Finally, within the May 2022 Special Session, one-way legal professional charges have been eradicated altogether for AOBs, legal professional price multipliers have been prohibited, and building-codes for roofs have been up to date to fight the loophole being exploited post-2016 and the Sebo case.

Has it labored? Some, however not fast sufficient. Thankfully, Hurricane Ian didn’t ship a demise blow to the insurance business partly as a result of these earlier reforms had been enacted. Each reform was a troublesome battle introduced forth by good legislators and none made it throughout the end line with out the governor’s vocal help. However, simply surviving Ian will not be ok as a result of Floridians know there’ll at all times be extra hurricanes on the horizon.

To stabilize {the marketplace} for the foreseeable future, the one-way legal professional price should be abolished throughout the board, simply as it’s in most different states. Other adjustments: Price and scope arguments could be resolved via arbitration or impartial value determinations. The timeframe to file a declare needs to be lowered to 1 yr and any project of rights, advantages, and so on. needs to be banned fully. Litigating when an insurance firm has really engaged in bad-faith practices needs to be allowed to proceed.

If these measures occur, we are going to slowly get again to regular — or as regular as Florida could be.

The higher in-class carriers will start to develop once more, stress on Citizens will likely be relieved, and new capital will kind to enter the state and fill the void left by insolvencies. Reinsurance pricing can even stabilize. Their world-class modeling can challenge storm losses right down to the decimal, however no mannequin can predict how authorized rackets create hurricane-esque losses in years with no hurricanes. With the precise public coverage, the insurance market will fireplace on all cylinders once more.

The oil change is lengthy overdue.

Kevin Comerer is a guide and registered lobbyist with Rubin, Turnbull & Associates, in Tallahassee. He was beforehand legislative director for American Integrity Insurance Co.

Top photograph: AP

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