Florida Property Litigation StatisticsAs the Florida insurance market continues to experience volatile times, unfortunately, Florida also continues to experience significantly higher litigation than any other state.
At times, contractors persuade homeowners to sign over benefits, then sue the insurance company if coverage is denied. Insurers typically settle rather than risk trial because plaintiffs’ attorneys can be awarded fee multipliers, as described in The Florida Bar.
The state of Florida has the most insurance payouts in the country. In fact, according to WBUR, since 2013, insurance companies made $15 billion in payouts in Florida, but less than 10% of that went to policyholders; more than 70% of this number went to attorneys. In addition, more than 75% of all property insurance litigation in the entire country originates in Florida.
This map illustrates the explosion of Florida lawsuits from 2013 to 2021.
Insureds cannot recover damages from the insurance company if they failed to comply with the policy and failed to allow the insurer to make the needed repairs, a Florida appeals court decided Wednesday.
Florida’s 3rd District Court of Appeal upheld without comment a 2020 decision by Miami-Dade Circuit Judge Mark Blumstein.
“As a result of plaintiffs’ actions, inactions and lack of cooperation, Florida Peninsula was unable to restore the property to its pre-loss condition, although Florida Peninsula was ready, willing, and able to do so,” Blumstein wrote. “Thus, plaintiffs’ failure to comply with the option to repair bars any recovery under the policy.”
An insurer’s right to repair with its own contractors has been a point of contention for at least a decade, with a number of homeowners and plaintiffs’ attorneys arguing that some restoration work has been incomplete and subpar in quality. But appeals courts have upheld the policy provisions in several cases.
In this case, John Rose vs. Florida Peninsula, the insurer actually paid for some plumbing repairs that were not covered by the policy. But the insured’s refusal to cooperate with Florida Peninsula’s other repair efforts, as well as legal maneuvering by the claimant’s attorney, ultimately doomed any attempt to win damages through litigation, the circuit court found.
“Even a court order could not get the plaintiffs to allow the repairs to commence,” Judge Blumstein wrote.
The claim began almost a decade ago after the Roses said their home suffered water damage from a leak. Florida Peninsula notified them that it was exercising its option to repair, in keeping with the policy. Months later, in October 2013, the insurer said the claim would be denied if the repair work did not begin within 14 days.
Despite that, the homeowners still would not allow the repairs and their attorney, with the Alvarez, Carbonell and Feltman firm in Coral Gables, alleged that the invocation of the insurer repair clause was improper “for reasons left unstated,” the court explained. The lawyer then requested copies of all estimates, communications, emails, and invoices between Florida Peninsula and its contractor.
In the lawsuit complaint, the Roses’ lawyer argued that the couple had, in fact, allowed access to the property and the insurance company had improperly denied the claim.
The judge didn’t agree.
“In sum, the uncontested facts show that Florida Peninsula exercised the option to repair the damages at the plaintiffs’ property consistent with the policy’s option to repair provision,” Blumstein wrote. “Despite Florida Peninsula’s request and a court order, the plaintiffs failed and/or refused to allow the repairs to commence. Instead, they used threats and unsupported conditions to prevent the repairs from commencing. This was in violation of Florida law and the policy.”
The 3rd DCA also upheld a Miami-Dade court’s ruling against Citizens Property Insurance Corp. In the decision, Citizens vs. Carlos Hernandez, the court also agreed to a motion by Hernandez to award his attorney’s fees.
United Insurance Holdings, parent of United Property & Casualty Insurance, said it has completed most of its major reorganization plan, consolidating its four Florida-based carriers into two.
The news was accompanied by second-quarter catastrophe losses of $17 million after taxes, net of expected reinsurance recoveries, United said in a news release. The publicly traded company will reveal more about its Q2 financial results at an earnings call Aug. 8. For Q1, United reported a $33 million loss, following a $59.9 million loss for 2021 and a $95 million loss in 2020.
The financial troubles began to surface in late in 2021, when United Property & Casualty, based in St. Petersburg, Florida, announced it would suspend new HO business in Florida. That led to speculation that it was teetering toward insolvency.
UPC was once one of the largest property insurers in Florida, with more than 180,000 policies in force. This month, it was ranked 22nd largest in the state, with about 1.4% of the market and $172 million in direct written premium, according to the AM Best financial rating firm.
Also this month, UPC announced that it was exploring a range of other options, including the sale of the company or merger with another insurer.
The company said that the reorganization of its subsidiaries turned out to be more extensive than expected. Effective May 31, Family Security Insurance was merged into United Property & Casualty. As of June 1, Journey Insurance was merged into American Coastal Insurance. As part of the merger, $30 million of Journey’s capital was redistributed to United.
United, founded in 1999, continues to write some policies in Florida, Louisiana, New York, and Texas. It also writes in Georgia, South Carolina and North Carolina, where renewal rights have been sold and all premiums and losses are ceded, the company said.
Florida’s insurance commissioner announced today that his office has found an “unprecedented solution” to the pending property insurer rating crisis – let Citizens Property Insurance Corp. provide a level of reinsurance to companies in case they are downgraded, at least temporarily.
Insurance industry advocates called it “innovative” and an “elegant solution.” And Citizens officials have agreed to the arrangement.
“We’ve been working closely with stakeholders, from OIR, the governor’s office, and the CFO over the past several days and are onboard with OIR’s plan,” said Citizens’ communications director, Michael Peltier.
Florida Insurance Commissioner David Altmaier
The Florida statute governing Citizens authorizes the state-created insurer to enter into quota-share agreements for hurricane coverage and other eligible risks. Having that in place will now let carriers take advantage of an exception in otherwise strict federal home lending rules, the OIR said in a statement.
The Florida insurance market was thrown into an uproar last week when the Demotech rating firm sent letters to 17 Florida property insurers, warning that they will soon face financial strength downgrades. Demotech has since said it will hold off on the ratings until further notice.
The downgrades are problematic for Fannie Mae and Freddie Mac, the quasi-governmental secondary mortgage-lending corporations. Without strong ratings, the lenders won’t back mortgages, which could have forced thousands of Florida homeowners to seek new coverage or be moved into expensive force-placed policies, state regulators have said. But Fannie and Freddie both offer loopholes to the rating requirements if the insurer is covered 100% by a reinsurance endorsement for any loss payable, the OIR said.
“OIR, in conjunction with Citizens, has formed a program that meets the exceptions to the Fannie Mae or Freddie Mac guidelines,” the OIR statement reads. “Therefore, there should be no reason for lenders to require a replacement policy, or force-place coverage based solely on the ratings downgrades.”
The Florida Insurance Guaranty Association would remain responsible for paying claims for any insolvent carriers going forward, up to its statutory limit. But the OIR plan appears to let Citizens cover liabilities above the FIGA limit.
“This innovative arrangement satisfies requirements set by the secondary mortgage market,” OIR said. “In the event we need to implement this temporary solution, consumers will not need to seek coverage elsewhere, agents will not need to move policies, and lenders can have confidence that these insurers continue to meet the mortgage qualifications.”
The announcement quickly raised questions around the industry, including concerns about how long would the arrangement will remain in place; and if it proves workable, would that mean financial ratings are no longer needed? If the mortgage requirement is the chief reason for financial stability ratings, perhaps regulators have found a new way to meet the unique needs of the Florida market.
The ultimate impact on Citizens was not made clear Wednesday. Commissioner David Altmaier’s office said in the release that the arrangement will help keep Citizens from assuming more homeowner policies. The 20-year-old corporation, established to be an insurer of last resort, is growing by more than 30,000 policies a month and is on track to be the largest property insurer in the state with at least 1.2 million policies in force by year’s end.
But taking on ceded policies from some struggling private insurers could ultimately affect Citizens’ exposure.
Despite that, the plan is a good one, said Paul Handerhan, president of the Florida-based Federal Association for Insurance Reform. He noted that it is similar to a “cut-through endorsement” that essentially guarantees an insurer’s obligations.
Ratings downgrades likely would not have cost Fannie Mae significantly, but the new arrangement should give the lenders confidence that loans are fully protected, Handerhan said.
Demotech and Florida regulators have not named the 17 carriers facing potential downgrades. Several reported to be on the list have declined to comment.
A number of companies rated by Demotech have made major changes this year to try and manage the turbulent Florida waters. This week, Southern Oak Insurance notified agents that it had instituted a $250,000 coverage limit, and will only write structures built in 2022. The carrier, which covers about 1% of the Florida market, also said it would no longer write policies in 10 counties.
The changes are set to take effect July 30. New quotes meeting the current guidelines must be bound by 6 p.m. on Friday, July 29.
The Florida homeowners insurance markets remain in ‘a sort of free fall’, says a new note from ALIRT Insurance Research.
The note, an update on the domestic insurer market in the US state, says that a number of factors are buttressing the ongoing narrative that is the market’s decline in recent years.
Amongst these are comments from Barry Gilway, CEO and president of Citizen, saying that three-quarters of the market was probably shutdown; the downgrading and placing into run-off of the Capacity Insurance Company; the announcement from United Insurance Holdings that it was looking at a sale or merger; the departure from Tower Hill of president Don Matz; and the FedNat Holding Company saying it had sold a majority stake of Monarch National Insurance Company.
The authors of the report wrote: “As in a Thomas Pynchon novel, all of these apparent odds and ends do ultimately contribute to a coherent narrative, which in this case is that the Florida homeowners insurance market remains in a sort of free fall, with a number of once substantial players sounding a more urgent retreat.”
It added: “The FedNat Holding Company and United Insurance Holdings announcements only serve to remind us that no capital structure remains immune in this difficult market, with most of publicly traded cohort seeing price drops of well over 50% since year end 2017 (with 3 of these groups reporting drops of over 85%).
In May, Florida governor Ron DeSantis signed new legislation into law that seeks to stabilise the troubled property re/insurance market in the state, following a week of discussions by lawmakers at a special emergency session.
The reforms, which include a $2bn reinsurance fund and new rules on coverage denials and attorney fees, were signed by the Florida Governor after successfully passing the house.
They are designed to enact pro-consumer measures that help to alleviate rising insurance costs, increase insurance claim transparency, and crack down on frivolous lawsuits that have driven up prices in recent years.
Specific provisions include $2bn in reinsurance relief through the Reinsurance to Assist Policy (RAP) program to help policyholders over the next two years.
Other measures $150m for hurricane retrofitting, as well as rules that require insurers to provide a reasonable explanation for denying coverage, and that prohibit insurers from denying coverage based on factors such as the age of a home’s roof.
Despite the reforms, a majority of respondents to a recent survey by Reinsurance News have said they believe that it could take years for the recent property reforms passed by Florida lawmakers to have a positive impact on reinsurance conditions in the state.
Out of the hundreds of responses from identifiable market participants, of which 70% make or provide input to reinsurance buying decisions, 37.3% expect Florida market reforms to take one to two years to positively impact reinsurance, while another 16.0% said it will likely take more than two years.
Together, then, a significant 53.3% of respondents expect the changes to take at least a year and possibly multiple years to effect beneficial change for the state’s troubled market.
With just 10.7% of respondents saying reforms could yeild positive impacts within six months, this option was the least popular of those offered to survey participants, but it’s worth noting that more than a third (36.0%) were optimistic that positive change could be observed from six months a year after the reforms are introduced.
On a similar note, 77% of respondents to the survey believe that some carriers will fail to obtain sufficient reinsurance protection on June 1, in part due to the ongoing challenging conditions in the Florida market.
Rating Firm Postpones Ratings for 17 Carriers After Backlash
The property insurance community has divided into two camps after the firestorm that erupted over the potential financial rating downgrades for 17 Florida insurance carriers.
One camp argues that the Demotech rating firm has gone too far, has lumped healthy insurers in with those teetering on the edge of failure, and has used inconsistent criteria to rate the companies. A new rating organization is badly needed for the Florida market, several have said.
The other camp notes that the bad news has been years in the making and that outraged Florida regulators themselves have warned that many carriers are in trouble.
“Why were they surprised?” asked Mark Friedlander, director of corporate communications for the Insurance Information Institute. “A mass ratings downgrade is unprecedented but it’s not surprising.”
The downgrades were virtually inevitable after the spring session of the Florida Legislature failed to address the insurance problems and a special session in May did not go far enough to rescue companies, to provide enough affordable reinsurance measures, and to stem the excessive claims litigation seen in the Sunshine State, Friedlander and others said.
Demotech is simply doing the job that needed to be done and Florida regulators are guilty of shooting the messenger, critics said.
Meanwhile, the backlash against Demotech, disingenuous or not, has had an impact. The rating firm’s president, Joe Petrelli, said in a statement Monday that ratings due out today, July 26, have been delayed while the company conducts further discussions with affected carriers.
“As the current regulatory climate has become hostile and negative and we have and will expend a significant effort creating responses to third party letters, we will be taking additional time to review information and consider the issues affecting the companies operating in Florida,” the Demotech statement noted.
Petrelli did not say when the ratings will be released, but noted that all would be posted at the same time. But significant revisions to the ratings may not happen.
“It is inappropriate to revise potential rating actions in response to unhappiness with the outcomes or threats, including the threat of litigation,” Petrelli said in the statement.
The controversy erupted last week after 17 property insurers received a letter from Demotech, notifying them that their financial strength ratings would soon be changed from from “A Exceptional” to “S Substantial” or “M Moderate.” Any rating lower than “A” is not acceptable to secondary mortgage lenders, and could mean that millions of Floridians would lose insurance coverage required for mortgaged properties.
The Florida Association of Insurance Agents, Florida’s chief financial officer and the state’s insurance commissioner all responded swiftly. FAIA’s President Kyle Ulrich, in a blog post, questioned Demotech’s motives and urged state leaders and insurers to find another rating method. CFO Jimmy Patronis asked lenders to rethink their use of the firm’s ratings. And Commissioner David Altmaier, in a letter to Demotech, faulted the firm’s methodology and said it had not adhered to consistent standards.
Industry sources said that while some downgrades were expected, pulling the rug from a whopping 17 carriers – a third of the Florida market – was seen as reckless and ham-handed, especially for those insurers that had secured enough reinsurance this year. Demotech has tried for years to get Fannie Mae and Freddie Mac to accept its lower ratings for insurers, and a mass downgrade could be a way to force the lenders’ hands, some speculated.
Regulators may also have been pressured by the governor’s office to raise objections, industry advocates said. And insurance agents, fed up with having to scramble repeatedly in the last year to find new carriers when insurers are downgraded or become insolvent, have raised an outcry.
Petrelli
Petrelli said last week that his intentions had been misconstrued and the regulators’ letters and the FAIA blog were inaccurate. He did not release the names of the 17 companies that received his letter.
Four insurance companies said to be on the list declined to comment to the Insurance Journal. But Frontline Insurance, based in Lake Mary, Florida, told WFLA TV in Tampa that it would not take a downgrade lying down and would appeal the action.
“Rest assured we are in great financial shape, have plenty of reinsurance, and are doing better than our peers,” reads a statement from Frontline CEO Leman Porter. “This is a matter of politics being played out between Demotech and the Florida Legislature, and between Demotech and Fannie Mae/Freddie Mac to get Demotech’s S rating accepted. We unknowingly have gotten caught in the crossfire and will move past this to continue our success in the marketplace shortly.”
Petrelli’s statement Monday did not address Porter’s charges. But others share some of Porter’s frustrations.
After Hurricane Andrew churned through South Florida in 1992, bankrupting some insurers and sending others fleeing the state, Demotech was asked to step in and be the financial rating group for the smaller regional carriers that remained in Florida. But with the recent flap, Demotech has raised more questions than it has answered, said John Rollins, an actuary and former CFO at Olympus Insurance Co., who now oversees capital investments for Evans Insurance Holdings.
Demotech’s letter to the insurers last week makes it sound like it’s hopeless for the 17 carriers and perhaps others in the Florida market, even though some appear to be doing better than others, Rollins said. All insurers have different business models, quota-share arrangements and debt levels.
“In prior reviews of FSRs (financial strength ratings), Demotech has accepted remedies; i.e., capital contributions, revisions to business plans or business models, etc., when a carrier’s reported operating results failed to meet our financial metrics,” Demotech’s letter to the insurers reads. “In these limited cases, our decision to do so anticipated legislative reform(s) to reverse the revisions to the legislative, regulatory, or judicial environment that was the proximate cause of operating results being unfavorable.”
In other words, Demotech previously let companies appeal or show access to additional capital when faced with lowered ratings. Now, though, that’s not feasible, Petrelli seemed to indicate.
“In Florida, the unwillingness or inability of the Legislature to address longstanding disparate, disproportionate levels of litigation, and increasing claims frequency has resulted in a level of dysfunction that renders our previous accommodation inapplicable,” the Demotech letter said last week.
Rollins responded: “For those of us whose job is to differentiate among existing insurers who are promising versus problematic targets for support (in the form of new capital, management talent, and technology), the letter raises the question of whether it is worth it to assemble and fund such improvements,” Rollins said.
He gave this analogy: A classic, 1969 sports car might be worth restoring if it just needs a paint job and minor repairs. “But if it’s a 1982 Yugo, you might just call the salvage yard,” Rollins said.
The big question now is, which type of cars are Florida property insurers driving? “Would Demotech recognize the companies running sound businesses in a tough cycle that just need some runway to be restored to health?” Rollins asked.
In his release Monday, Petrelli said that insinuations by regulators that Demotech is not allowing appeals is inaccurate and the firm has already had discussions with a number of insurance executives.
Another question is, if Demotech has outlived its usefulness, what organization or organizations could take up the ratings mantle? Some, including Scott Johnson, a former insurance agent and now a consultant and frequent blogger, have suggested letting Florida State University’s esteemed insurance program set up a rating service.
Others have suggested petitioning the AM Best rating firm or the Kroll Bond Rating Agency to review more Florida insurers. The Insurance Journal hopes to explore those options later this week.
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When questioned by members of Congress, the Federal Emergency Management Agency said its new update to the nation’s flood insurance program will prompt more people to sign up for coverage, even though many will pay more for it.
But in a FEMA report obtained by The Associated Press under the Freedom of Information Act, the agency estimates one million fewer Americans will buy flood insurance by the end of the decade – a sizable number of people at risk of catastrophic financial loss.
As climate change drives increased flood risk in many parts of the country, FEMA has updated its flood insurance program to more accurately reflect risk, but also make the program more solvent. It’s a response in part to criticism that taxpayers were funding big payouts when coastal mansions in risky locations flooded.
But nine senators from both parties expressed “serious concerns” about the new pricing system in a letter last September, after hearing that the agency’s internal numbers predicted policies would drop off by 20%. The next month FEMA told the AP those figures were “misleading” and “taken out of context” and that on the subject of how many people will be insured “there is no study or report to share.”
The agency painted a different picture however at the end of the year when it sent a report to the treasury secretary and a handful of congressional leaders saying higher prices would drive a fall off of 1 million policies compared to the beginning of the decade.
The issue of how many people go uninsured for flooding is vital, said Chad Berginnis, executive director of the Association of State Floodplain Managers.
“We are talking the basic economic health, I think of not only our households and businesses, but our communities at large,” if fewer people buy flood insurance, he said.
The federal flood insurance program was started when many private insurers stopped offering policies in high-risk areas. It operates in the red, paying out more in claims than it collects in premiums. By more accurately setting rates, the update, officially referred to as Risk Rating 2.0, makes it more expensive to develop in flood-prone regions, shifting the risks of disaster towards those homeowners.
Risk Rating 2.0 will factor in a property’s unique flood risk – like its distance to water and cost to rebuild. The old system was based largely on a home’s elevation and whether it was in a designed flood zone. Most policy holders will now see their rates go up. But for the first time, nearly a quarter of policyholders will see theirs go down. Buyers of new policies began seeing the new prices in October.
FEMA downplayed the report obtained by the AP as a pessimistic projection, aimed at forecasting finances, not insurance participation. The agency said it has not directly studied how many people will buy flood insurance.
“There’s numerous reasons that growth could occur as time goes on,” said David Maurstad, a senior executive of the National Flood Insurance Program, adding that an enrollment analysis should consider the agency’s marketing efforts, the program’s clear messaging of flood risk, price decreases and other factors.
But critics like Sen. Bob Menendez, D-N.J., said affordability is a problem and FEMA didn’t disclose the impact of those higher costs.
“This report makes it crystal clear that FEMA failed to be transparent with policyholders, Congress, and ultimately the American public,” Menendez said in a statement. It shouldn’t have taken a records request for details to emerge, he said.
When Francisca Acuna, a climate and community activist in Austin, Texas, was given a new quote, it was hard for her to believe.
“I go, ‘no, you’re making a mistake,”’ she said.
Acuna had previously paid $446 a year. Under Risk Rating 2.0, she was quoted $1,893. Rate increases that large are rare. Increases are generally capped at 18% a year, but Acuna, juggling other expenses, had let her policy lapse so she was required to pay the full amount right away.
“There’s no way, no how, that I can afford it,” Acuna said.
Told of Acuna’s situation, Maurstad said the rates reflect actual risk. It’s unfortunate when people face big increases, but ensuring the financial health of the program and accurate rates, is “good public policy,” he said.
Jim Rollo, a New York-based insurance agent, said he’s seeing a change in some buyer attitudes. Some seem more skeptical about properties that have previously flooded and have higher premiums. Others “roll the dice” and forego costly insurance if it’s not required.
“We are writing fewer policies than we were before,” Rollo said.
Congress should create an affordability program for people struggling to buy insurance and fund efforts to improve flood protections, said Joel Scata, a lawyer at the Natural Resources Defense Council, an environmental advocacy group.
But Maurstad said FEMA’s mission is different from the private sector. FEMA must help people “before, during and after” disasters as well as charge premiums that are risk-based and financially sound.
“We have certain responsibilities we are charged with. The number of policies sold isn’t one of them, again, because we are a government program,” he said.
Nevertheless the agency report predicts that the program, even with higher revenue, will continue to sink deeper into debt.
Photo: Homes, businesses and roads are flooded in the aftermath of Hurricane Ida in LaPlace, Louisiana, Aug. 31, 2021. (AP Photo/Gerald Herbert)
Copyright 2022 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
The policyholder claimed that the endorsement did not limit “tear-out” expenses, and thus the expenses related to tearing out and accessing the damaged plumbing should not be subject to the $5,000 cap. (Photo: Leonard/Adobe Stock)
On June 29, 2022, Florida’s Fourth District Court of Appeal issued a favorable decision for insurers, but on its face, the decision may seem to conflict with Fifth District law.
In Herrington v. Certain Underwriters at Lloyd’s London (Florida Fourth DCA June 29, 2022), the court reviewed an order granting summary judgment to an insurer. The policyholder’s home suffered damage caused by a water pipe leak, and while the insurer acknowledged coverage, it only paid the maximum under the policy’s “water damage aggregate limitation” endorsement: $5,000. The policyholder claimed that the endorsement did not limit “tear-out” expenses, and thus the expenses related to tearing out and accessing the damaged plumbing should not be subject to the $5,000 cap.
The Fourth District disagreed, finding that the endorsement covered all such loss arising out of water damage, including tear-out and access damage. The court relied on the plain language of the endorsement and recognized that to the extent an endorsement is inconsistent with the policy, the endorsement controls. Notably, the endorsement stated, “It is hereby understood and agreed that for such insurance as is afforded by this policy, loss(es) paid for damage arising out of water shall be subject to a maximum amount of $5,000 during the policy term.”
Herrington cited the Third District’s decision in Certain Interested Underwriters at Lloyd’s London v. Pitu, Inc. (Florida Third DCA 2012) (citing the Fifth District), for the proposition that “arising out of”is a broader term than “caused by,” and instead, akin to “growing out of,” “flowing from,” and “incident to.” However, the court declined to recognize a difference between the terms “arising out of water” and “arising out of water damage.” It thus affirmed summary judgment, holding that the insured’s covered loss for water damage, including tear-out expenses, was limited to $5,000 by the endorsement.
The Fifth District rules for the policyholder
On February 18, 2022, the Fifth District issued an opinion on the subject, which at first glance seems to be in conflict with Herrington and Pitu. In Security First Insurance Company v. Vazquez (Florida Fifth DCA 2022), the court reviewed an order granting summary judgment in favor of the policyholder in a water damage case. But, unlike in Herrington, it found that the endorsement did not limit “tear-out costs,” and thus such expenses were not subject to the endorsement’s $10,000 limit. The specific endorsement language at issue in Vazquez stated, “Sudden and accidental direct physical loss to covered property by discharge or overflow of water or steam from within a plumbing . . . system . . . .” and the limit of liability stated, “all damage to covered property provided by this endorsement is $10,000 per loss.” The insurer argued that the limit applied to both water damage and tear-out costs, while the homeowners argued that the $10,000 limit only applied to the water damage.
The court acknowledged the insurer’s claim that a water damage loss necessarily includes tear-out costs, but ultimately concluded that while that may be true, the limitation of liability provision did not use the term “water damage loss,” but “damage to covered property.” The court relied on the plain language of the limit of liability provision and found that it supported the homeowners’ argument because the concrete slab that had to be removed was not damaged by the discharge or overflow of water. The court also pointed out that this specific policy had a mold endorsement that expressly included “[t]he cost to tear out and replace any part of the building or other covered property as needed to gain access to the fungi, mold . . .” but the court declined to read that language into the water damage endorsement. Thus, the water damage endorsement did not also limit tear-out costs.
Importantly, the endorsement language in Herrington was distinct from the language in Vazquez. In Herrington, the endorsement limit accounted for damagearising out of water, which is more encompassing than the endorsement limit in Vazquez,which limited all damage to covered property. In fact, the Fifth District specifically acknowledged that the Vazquez endorsement did not state, “water damage loss,” which made it unclear whether tear-out costs were included.
Rather than a circuit split, the two decisions involve endorsements that are distinguishable. Nevertheless, policy drafters should be clear and specific when attempting to limit coverage for certain categories of loss, because when faced with the question of whether tear-out costs are subject to a water damage limitation, the answer is a lawyer’s favorite: “It depends.”
David B. Levin is a shareholder in Baker Donelson’s Fort Lauderdale office and has developed substantial experience successfully representing a broad range of private and institutional clients in state and federal courts. He can be reached at dlevin@bakerdonelson.com.
Brian W. Fernandez, an associate in Baker Donelson’s Fort Lauderdale office, concentrates his practice in the areas of insurance services, commercial and business disputes, health care, aviation, and financial services litigation. He can be reached at bfernandez@bakerdonelson.com.
Elizabeth Sardinas, a summer associate in Baker Donelson’s Fort Lauderdale office, contributed to this article.
Florida’s top insurance regulators and the Florida Association of Insurance Agents on Thursday blasted the Demotech financial rating firm after the organization reportedly notified 17 insurers that they will soon be downgraded.
Demotech President Joe Petrelli said Thursday evening that the Florida insurance commissioner, the state’s chief financial officer and the FAIA had misconstrued his firm’s plans in their strongly worded missives that were released Thursday.
Petrelli
“The OIR letter, the CFO’s letter and the FAIA press release are all inaccurate,” Petrelli told the Insurance Journal. He declined further comment and declined to name the 17 troubled insurers, but promised to provide a fuller explanation by Monday.
Demotech began rating Florida insurers in the 1990s, after powerful Hurricane Andrew hit the state’s southern end in 1992, causing billions of dollars in damages. The storm resulted in several carriers becoming insolvent and some national carriers, which are rated by larger rating firms, fled the state. Now, Demotech has become the dominant rating system for most Florida insurers.
It has carriers over a barrel and is using questionable methodology in its analyses, FAIA and regulators charged.
“After 25 years, Demotech virtually holds a monopoly on issuing financial strength ratings to Florida domestic carriers while being largely unknown/unnecessary in other parts of the country,” FAIA President Kyle Ulrich wrote Thursday in a blog article titled, “Is it time for Florida to turn the page on Demotech?”
“It is abundantly clear that Florida’s property market has been held hostage by unscrupulous trial lawyers, public adjusters, and contractors for years,” Ulrich argued. “Now, the actions of one rating company could add to the list.”
Ulrich
The controversy flared this week after FAIA said it had obtained copies of letters from Demotech to the 17 property insurers, notifying them that their financial strength rating will be downgraded next week, from “A Exceptional” to “S Substantial” or “M Moderate.”
Downgrades are never good news and in some cases have preceded insolvencies or rehabilitation proceedings for insurers. The S rating suggests the carriers still have substantial reserves, Petrelli has said. But it’s not enough for Fannie Mae and Freddie Mac, the quasi-governmental secondary lenders that back the majority of residential mortgages in the United States.
Without Fannie’s and Freddie’s blessings, millions of Florida homeowners insured by those 17 carriers could be required to obtain expensive force-placed policies, CFO Jimmy Patronis said in his letters to the director of the Federal Housing Finance Agency and to the heads of the lending corporations. He urged them to rethink the lenders’ reliance on Demotech insurance ratings.
If Fannie Mae and Freddie Mac “de-authorize a sizeable percentage of Florida’s insurers based on the dubious ratings of one company, it would create financial chaos for millions of Floridians,” Patronis wrote.
Some 115,000 Florida insurance agents also could be exposed to litigation risks, and may not have adequate coverage under their errors and omissions policies, Patronis and Ulrich said.
Insurance Commissioner David Altmaier’s letter to Petrelli, dated Thursday, charged that Demotech has failed to adhere to its own standards in determining the financial ratings. The office has “noted several discrepancies between these recent decisions and the rating methodology posted on Demotech’s website,” Altmaier wrote.
Patronis
Ohio-based Demotech has previously indicated that targeted carriers can appeal and provide further financial information and perhaps obtain additional capital. But insurers have told OIR that Demotech is now unwilling to consider additional information and access to capital infusions, the commissioner’s letter said.
The timing and the tenor of the agents’ and regulators’ outrage surprised some in the Florida insurance industry. Petrelli had suggested in May that several carriers could be downgraded this year, thanks in part to the continued costs of fraudulent roof claims and excessive claims litigation. He also sent open letters to Florida’s governor and others, noting that legislation approved in May had not gone far enough to help some companies.
Perhaps it was the sheer number of insurance companies that could be in trouble that set off the alarm bells this week. Ulrich declined to comment other than the sentiments included in his blog post.
Others in the industry have warned for months that many insurers are in trouble, especially after reinsurance prices rose by as much as 50% for some companies. Four carriers have been deemed insolvent so far this year and 12 have stopped writing new business.
“Everyone knew this was coming,” one industry source said Thursday.
The Office of Insurance Regulation, in fact, this week released a market stability report that indicated that 27 insurers – more than half of the active carriers in Florida – have been placed on a watch list. Due to several factors that suggest the companies are facing financial difficulties, the OIR referred the companies to its newly created insurer stability unit for “enhanced monitoring,” as required by recent legislation.
Still, the FAIA said a new approach is needed.
“Is now the time for insurers, lawmakers, and regulators to look for a more stable and predictable alternative to Demotech?” Ulrich asked.
In 2021, Florida’s domestic property insurers spent more than $3 billion on legal defense costs and containment – double the figure reported in 2016.
That’s one jaw-dropping but not surprising takeaway from the Florida Office of Insurance Regulation’s recently posted Property Insurance Stability Report. The report also shows that Florida’s share of homeowners claims litigation in the United States dropped slightly in 2021, from about 79% in 2020 to about 76% last year. And more than two dozen insurers have been placed under extra scrutiny due to financial issues, the report said.
The study also put a spotlight on what insurers have said publicly and privately: The cost of reinsurance increased by 54% from 2019 to 2020, and 28% from 2020 to 2021. The analysis did not include 2022 reinsurance numbers – they’re due out Aug. 1. But carriers have reported that costs spiked again this year, meaning the cost of reinsurance has more than doubled for many insurers in the last three years.
The OIR report was mandated by Senate Bill 2D, passed during the special session of the Florida Legislature in May. The studies are due out each July and January to give a barometer reading on the state’s distressed property market. Industry experts said the 27-page report gives a good snapshot of the current crisis, but also leaves some questions unanswered.
As four insurers have been deemed insolvent this year and 12 have stopped writing new business, insurance agents have had to work overtime to replace policies.
Murphy
“We get asked all the time, ‘Where is the business going?’” said B.G. Murphy, director of government affairs for the Florida Association of Insurance Agents. “And other than Citizens, we still can’t answer that.”
Some carriers continue to decline to reveal policy and premium totals for OIR’s reports, calling it trade secrets. But industry advocates said the data is important, and regulators should find a way to publish some type of breakdown of the numbers.
The OIR market report also notes that Citizens Property Insurance Corp., the state-created insurer of last resort, in the first quarter of this year held more than 11% of the market, with some 541,000 policies, including those for homeowners and condominiums. But Citizens itself reported as many as 800,000 policies in force early this year and is on track to top 1.5 million policies in 2023.
OIR officials were asked about the difference in the numbers but did not have time to respond by Thursday morning.
The report also underscored what many insurance executives have said for months – that profits have taken a beating. The industry in Florida as a whole showed almost $700 million in negative net income in 2021, significantly greater than the losses reported for the year before.
Net underwriting losses, however, improved somewhat, to just under $1.2 billion.
On loss reserve development, the report showed that, with a two-year look-back, 2020 claims for the industry were $676 million more than were originally estimated.
“These numbers reflect the high degree of uncertainty which exists in the property insurance market, which in turn impacts reinsurance capacity and reinsurance rates for insurers,” the report noted. “In the simplest of terms, the greater the uncertainty that exists on future claims, the more reinsurers will tend to hedge their willingness to offer capacity, and the capacity that is available will cost more as a result. This loss reserve development trend has continued since 2018.”
Insurance Commissioner David Altmaier
The 2022 legislation requires OIR to keep a better eye on shaky insurers, to give warning before insolvencies are imminent. The reports shows that the office has recently referred 27 insurers to its newly formed financial stability unit for “enhanced monitoring.” Those carriers, which were not named in the report, were flagged for several reasons, including failure to file financial reports, non-renewal of 10,000 or more policies, requests for large rate increases and other indicators of unsound financial condition.
The analysis reported homeowner premiums by county for the first quarter of this year, but did not compare to previous years. It shows that Monroe County, home of vulnerable Key West, had the highest average annual premiums, at $6,729, followed by Miami-Dade, at $5,093. Palm Beach County and Broward County reported average premiums of $4,800.
The OIR offered no new recommendations on fixing the problems in the Florida market. The report noted that OIR had made a number of suggestions in early 2021, some of which were implemented by 2021’s Senate Bill 76 and 2022’s Senate Bill 2D.
“In consideration of the recent 2022 Special Session on property insurance, OIR will continue to monitor trends and impacts from SB 76 and SB 2D and propose additional recommendations for the next Property Insurance Stability Unit report due January 1, 2023,” the report concluded.
“The report also leaves one pressing question: Will Florida’s legislators use this information and act on behalf of consumers and the health of the insurance marketplace?” Murphy wrote in an FAIA blog Thursday.
The Home Insurance Guru 