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A Florida judge has thrown out a constitutional challenge to an insurance litigation reform law, noting that the state officials named in the lawsuit were not the correct defendants.
Plaintiffs Restoration Association of Florida and Air Quality Assessors, headed by contractor Richie Kidwell, argued that Senate Bill 2D, approved in the Florida Legislature’s special session in May, violates contractors’ constitutional rights by singling them out and blocking their attorney fees in assignment-of-benefit cases.
The plaintiffs sued the Florida secretary of Business and Professional Regulation and the director of the Construction Industry Licensing Board, since they have disciplinary and regulatory authority over contractors.
Leon County Circuit Judge Lee Marsh did not address the constitutional question, but found that the named officials were not proper defendants and were not in charge of enforcing the law. Marsh cited a 2017 appeals court ruling, State vs. Francati, and noted that for state office holders to be considered defendants, they must meet three criteria: whether the official is in charge of enforcing the statute; if the issue involves a broad constitutional duty of the state; and if the official has an actual interest in the matter.
Kidwell
The judge said the named officials did not meet those requirements. Marsh’s order, handed down Monday, did not indicate which state officials would be the correct defendants. He also dismissed Citizens Property Insurance Corp. and three other property insurers from the suit.
“We agree with the judge’s well-reasoned decision,” said Citizens spokesman Michael Peltier.
Senate Bill 2D, signed into law by Gov. Ron DeSantis at the end of May, included several measures aimed at stemming property insurance claims dispute lawsuits and attorney fees. The insurance industry has repeatedly argued that excessive litigation and one-way attorney fees provide an unhealthy incentive for assigned contractors and plaintiffs’ lawyers to file fraudulent or exaggerated roof claims, then litigate when insurers don’t accept the claims.
The law bars assignees of benefits from having their attorneys’ fees paid by defendants when the AOB plaintiffs prevail in court. Kidwell’s lawsuit charged that the section of the law violates equal-protection and due-process rights and denies contractors access to courts.
“The inability to recover prevailing party attorneys’ fees will effectively shut the courthouse door to plaintiffs because it will be cost-prohibitive to pay an attorney for these types of of small claims,” the complaint reads.
Kidwell and his attorney could not be reached Wednesday morning to answer questions about whether the plaintiffs may appeal the ruling or file another suit, naming other state officials.
Restoration Association and Air Quality Assessors have filed other constitutional actions this year. One challenges policy endorsements adopted by American Integrity Insurance Co. that offer binding arbitration instead of litigation in claims disputes, and a policy restriction by Heritage Property & Casualty Insurance on assignment-of-benefits agreements.
Restoration Association and Florida Premier Roofing Inc. also filed suit over another law passed at the special session, SB 4D. That lawsuit names the same state officials as in the SB 2D suit and argues that 4D unlawfully singles out roofers and allows insurers to pay only for roof repairs, not full replacement, in some circumstances.
Those cases are still pending in Leon County Circuit Court, before Judge Angela Dempsey.
There has been a striking upswing in hurricane insurance lawsuits targeting major property insurance carriers in Louisiana Western and Eastern District Courts. The surge comes ahead of the two-year anniversary of Hurricane Laura, a highly destructive Category 4 storm that hit the Pelican State in late August 2020.
On August 23, 2022, more than 100 cases were initiated against Fortune 500 insurance firms, including 66 against State Farm. The volume of cases filed on that date was over 1,000% higher than the typical daily average. Monitoring over the last few days has indicated that this trend will continue until the end of the month, after which many claims stemming from Hurricane Laura may become time-barred.
While the 112 claims filed on August 23 were filed against six major insurance carriers, they were mostly filed by the same law firm, McClenney Moseley & Associates, and mostly involved a similar set of facts and accusations.
According to the complaints, the majority of the cases stem from damages caused by first, Hurricane Laura, and 43 days later, Hurricane Delta, which was equally catastrophic and caused extensive additional damage to properties. While Delta was not quite as intense as Laura, the storm caused even more destruction to homeowners attempting to recover from one of the most powerful storms in the state’s history. The damage from Delta was arguably different from other hurricane damages as residents had not yet had the opportunity to mitigate damages.
Following the hurricanes, plaintiffs gave timely notice of and reported covered damages, losses, and claims to the insurers. The insurers conducted inspections of the properties. The inspections that the insurers performed of the plaintiffs’ properties and the corresponding adjustments of the covered losses were deficient, resulting in an estimate of damages that grossly misrepresented the nature, scope, and extent of the covered damages to the properties.
The complaints allege that the defendant insurers continued to unfairly and improperly delay action and deny payments owed under the policies, resulting in contract breaches and statutory violations and penalties under Louisiana Revised Statute § 22:1892, which requires insurers to “pay the amount of any claim due any insured within thirty days after receipt of satisfactory proof of loss from the insured,” And further, to “make a written offer to settle any property damage claim . . . within thirty days after receipt of satisfactory proofs of loss of that claim.”
Specifically, the complaints allege that the defendants breached statutory obligations by failing to pay the full amounts owed under the policies within 30 days of receiving satisfactory proof of the losses, and failing to make a written offer to settle the claims within 30 days of receiving satisfactory proof of the losses.
Additionally, state law imposes a general duty of “good faith and fair dealing” on property insurers issuing policies in the state, specifically requiring “an affirmative duty to adjust claims fairly and promptly and to make a reasonable effort to settle claims with the insured.” The duty also includes an obligation not to misrepresent pertinent facts and an obligation to pay the full amount of any claim due to an insured within 60 days after receipt of satisfactory proof of loss.
The complaints allege that defendants are liable for all amounts owed under the policies that remain unpaid, plus an additional statutory penalty of “two times the damages sustained or five thousand dollars, whichever is greater.”If found in favor of the plaintiffs, these demands could amount to millions of dollars of liability for State Farm and other high-level insurers implicated in the suits; and the lawsuits continue to roll in at a shocking rate, and are expected to continue until the end of the month.
On August 24, 255 additional lawsuits were filed in Louisiana Western and Eastern District Courts on similar fact patterns.
Insurance Coverage Law Center editor’s note: Industry experts speculate that these claims may be surging now due to La. R.S. 22:868(B) which states in part that:
“No insurance contract delivered . . . in this state and covering subjects located, resident, or to be performed in this state, or any health and accident policy insuring a resident of this state regardless of where made or delivered, shall contain any condition, stipulation, or agreement limiting right of action against the insurer to a period of less than twenty-four months next after the inception of the loss when the claim is a first-party claim.”
Since August 27 marks the two-year anniversary of the landfall of Hurricane Laura, this is the last chance for some of these lawsuits to be filed as the statute of limitations runs from the date of the property loss and in the cases above, the initial property losses suffered from Hurricane Laura are the main subject of the suits.
The duty of “good faith and fair dealing” is one of the first principles taught to new insurance company adjusters; insureds and claimants must be dealt with fairly, and no company wants to be accused of, let alone be found guilty of, bad faith. Insurers take such claims seriously.
This is not the first time State Farm has been sued related to hurricane claims. The company was sued in 2006 regarding Hurricane Katrina losses and it was claimed that the company improperly attributed wind claims that it should have paid to storm surge, which would be paid by the federal government.
This trend was surfaced by our fantastic team at Law.com Radar, a source for high-speed legal news and litigation updates personalized to your practice. Law.com Radar publishes daily updates on just-filed federal cases like this one. Click here to get started and be the first to know about new suits in your region, practice area or client sector.
The wide-ranging impact of Hurricane Andrew on the Florida insurance market is a familiar story within the risk management world. However, 30 years on from August 24, 1992, when Andrew made landfall in Dade County, Florida, memories appear to be getting shorter, as the insurance industry once more seems to be in danger of underestimating its exposure to a Category 5 storm hitting the state.
When Hurricane Andrew came ashore as the first named tropical storm of the 1992 North Atlantic hurricane season, it followed a seven-year hiatus in major hurricane activity in Florida. Industry predictions at the time were that it would cost insurers around $4 billion to $5 billion, but Andrew ended up costing the insurance industry $15 billion (in 1992 values) for Florida claims, and it caused the deaths of 44 people in the state. Following Hurricane Andrew, more than 650,000 claims were filed, leaving eight insurers becoming insolvent and a further three driven into insolvency the following year.
Fast forward to today, and RMS predictions for a repeat of Andrew would see the insured loss for wind and surge in the range of $80 billion to $90 billion, in which other non-modeled losses and social inflation could lead to a US$100 billion event.
Aftermath of Andrew
The losses from Hurricane Andrew vindicated the need for catastrophe modeling solutions including the use of multiple simulated storms beyond those previously experienced in history. Catastrophe models enabled the new Bermuda reinsurance market: eight new reinsurers were established without the need for their own historical experience. In time, catastrophe models would enable the creation of insurance-linked securities such as catastrophe bonds, to tap into capital markets for alternatives to reinsurance. Without Hurricane Andrew, it might have taken much longer for this revolution to happen.
The crisis caused by Andrew certainly precipitated some rapid and innovative changes to help manage a much larger hurricane risk cost than previously recognized, allowing the market to prepare for the hyperactive Florida hurricane seasons of 2004 and 2005. However, the following years were unusually quiet for intense storms landfalling in Florida, encouraging actions that further raised insurers’ hurricane risk costs.
Among these was the 25 percent roof replacement rule in 2007, which mandated that if 25 percent or more of a roof is ‘repaired, replaced or recovered’ in any 12-month period, then the entire roofing system or roof section must be brought up to the latest building code. “Until the hurricanes returned with a vengeance in 2017,” says Peter Datin, senior director of modeling at RMS, “the significant additional cost imposed on insurers due to this code update was not clear.”
Development of Hurricane Modeling
Before Hurricane Andrew, exposure mapping by the insurance industry involved tracking premiums at a fairly coarse ‘Cresta Zone’ resolution. Post-Andrew, as modelers provided insurers with the ability to model exposures at a finer scale, insurers recognized how higher resolution data could provide a more accurate assessment of risk.
Since the first hurricane risk models were introduced in the early 1990s, there have been many updates and innovations, from basin-wide stochastic tracks, coupled ocean-atmosphere storm surge modeling, and significant enhancements in damage assessment modeling.
After Hurricane Katrina in 2005, the term ‘post-event loss amplification’ (PLA) to cover all processes that can raise losses after a major catastrophe, such as demand surge and claims inflation was introduced, as risk modelers worked on how to quantify these different factors in generating the overall insurance loss after cat events.
For the most extreme catastrophes, when damage requires the long-term evacuation of large parts of a city, the definition of a “super catastrophe” (or “super-cat”) event applies, where secondary consequences can be a significant component of the original damage. The flooding of New Orleans after Hurricane Katrina was such a super-cat.
Auguste Boissonnade, vice president – model development at RMS, who designed one of the early hurricane risk models in 1993, stated “With the hurricane catastrophes of 2004 and 2005 came the realization that cat loss models needed to allow for undervaluation of insured exposures as well as the secondary impact of economic, social, and political factors that could amplify the losses.”
After major hurricanes, vulnerability modelers review the lessons that can be learned from the events and the resulting claims data. “Through claims analyses, it has been possible to quantify the degree to which changes in wind design codes have reduced damage and losses to buildings and incorporate those learnings into cat models,”added Datin.
Current Market Dynamics
The average cost of an annual homeowner’s policy in Florida is expected to soar to $4,231 this year, almost three times the U.S. annual average, according to the Insurance Information Institute.
Five Florida market insurers have already gone insolvent so far in 2022, faced with rising claims costs and increased costs for reinsurance. Meanwhile, the number of policies written by Citizens, a post-Andrew creation, has risen to over a million, as insurers have either gone insolvent, withdrawn capacity from the market, or had their ratings downgraded, making it harder for insureds to secure coverage that will meet their mortgage lenders’ approval.
In July 2022, rating agency Demotech wrote to 17 insurers warning them they could be downgraded from A (exceptional) to S (substantial) or M (moderate), potentially impacting millions of policyholders whose mortgage providers demand home insurance from the strongest-rated carriers. Florida legislators then looked to circumvent the use of Demotech ratings with a new stopgap measure, where Citizens take on a reinsurance role to pay claims for insolvent insurers.
At the same time, insurers are struggling to secure reinsurance capacity, and Citizens only managed to get a third of its desired reinsurance cover, making it harder for carriers to deploy sufficient capacity to meet the demand for hurricane coverage. There has also been a huge increase in the volume of catastrophe claims in recent years, driven by social inflation and undervaluation of exposures.
Likely Impact of Andrew Now
“Our prediction that a repeat of Andrew today could cause as much as $100 billion in insured losses is based in large part on changes in exposure and population since 1992, coupled with updated predictions of the impact of wind and storm surge, with significant anticipated post-event loss amplification. Together these components reveal a more complete picture of potential economic and insured losses,” says Mohsen Rahnama, chief risk modeling officer at RMS.
Combined wind and surge losses for a repeat of Hurricane Andrew are estimated at $87 billion. Post-event loss amplification, whether it is from a slow recovery, supply chain issues from COVID-19, or current inflationary trends, could take the ultimate loss closer to $100 billion. The impact of storm surge, particularly with the climate change-related rise in sea levels, is also more pronounced now compared to estimates at the time of Andrew.
Added to this is the significant demographic shift in Florida. As of this year, the population of Florida is estimated at over 22 million – a 61 percent increase from the number of people in 1992. Building counts in Andrew’s wind and surge footprints have increased by 40 percent to 1.9 million and by 32 percent to 55,000 respectively.
Economic exposure has also increased by 77 percent in the wind footprint and 67 percent in the surge footprint. And in Miami-Dade County, the number of high-rise buildings that are over 15 stories has tripled since 1992, many of which are now potentially in Andrew’s surge footprint.
“While the wind was the main driver of loss in 1992, the number of new, high-valued buildings near the coast suggests that storm surge losses may play an increasing role in a repeat of this event,” says Rahnama.
In constant-dollar terms, economic exposure has grown substantially within both Andrew’s wind and surge footprints, based on an analysis of the total built floor area (see Figure 1). On top of this, cost inflation since 1992 has been substantial, with replacement costs in Florida estimated to have increased between two times and 2.5 times since 1992, based on historical construction cost indices.
One key uncertainty in estimating the losses from a repeat of Hurricane Andrew concerns the impact of claims litigation. “Irma in 2017 was the first significant hurricane to make landfall since the 25 percent roof replacement rule was expanded in 2017 to all buildings across Florida, and it contributed to a significant increase in claims frequency and severity, as roof damage sustained during the storm attracted many roofing contractors, who handed over their exaggerated claims to be pursued by attorneys,” recalls Datin.
An estimated $15 billion has been paid to claimants by insurers in Florida since 2013, driven by assignment of benefits (AOB) cases, where litigation has capitalized on the 25 percent roof replacement rule, with a significant portion of the cost being driven by attorney’s fees on both sides.
However, a new law passed by the Florida legislature in May 2022 changed the 25 percent roof replacement rule to exempt roofs “built, repaired, or replaced in compliance with the 2007 Florida Building Code, or any subsequent editions of the Florida Building Code.”
“This means that only the damaged portion of the roof on newly built or upgraded roofs needs to be repaired after a damaging wind event instead of the entire roof or roofing system. Most importantly for insurers, the right of the contractor or assignee to obtain compensation for attorney fees – that drives up the cost of claims even further – has been removed,” adds Datin.
Robert Muir-Wood, chief research officer at RMS adds: “There is further hope for insurers following a recent appeal court ruling in Florida which could provide the blueprint for insurers to successfully argue against contractors in such lawsuits. Here we have at least one factor that is now being brought under control, which has significantly raised the insurance costs of hurricane losses. However, insurers will be watching closely to see if there is any reduction in social inflation because of recent legislative measures.”
Can the $100 Billion Repeat of Andrew be Prevented?
Should another Category 5 hurricane make landfall in southeast Florida today, not only will the insured loss be more considerable, but the insurance industry will face major challenges that could severely impact its ability to withstand the event. What can the risk management industry do to mitigate losses?
Risk modeling has advanced dramatically. “Insurers need to collect detailed data on their exposures and values and then employ high-resolution modeling alongside all those factors that can affect the ultimate loss, whether from post-event loss amplification or from more resilient construction standards,” says Muir-Wood.
The spirit of the industry working together with regulators, similar to post-Andrew, needs to be resurrected. “To help insurance carriers to remain competitive, regulators and legislators have been working with the industry to prevent claims litigation from getting out of control and potentially threatening the viability of hurricane insurance in Florida,” adds Boissonnade. “And legislators also need to keep a close eye on how claims respond to the changes to the 25 percent roof replacement rule, and in measures that reduce the need for litigation, so as to reduce vexatious claims,” he adds.
Datin acknowledges the role that risk modelers can play, “The catastrophe modeling community has already helped drive positive change in Florida by demonstrating the impacts of building codes and the effects of AOB-driven claims inflation on modeled risk.”
In addition, says Rahnama: “It’s crucial that modeling for hurricane risk takes greater account of the effects of climate change on global warming and sea level rise, and the impact those will ultimately on wind and storm surge in the event of another hurricane like Andrew. Let’s not sleepwalk into another Andrew-type scenario. The insights are there, and the warning signs have flashed – we just need to learn from history.”
Gavin Bradshaw is a London-based freelance journalist. This article was first published by RMS, a catastrophe modeling firmed owned by Moody’s Analytics, and it appeared in Claims Journal.
Photo: A storm approaches in the Bahamas in 2019. (Andrew Caballero-Reynolds/AFP/Getty Images)
Several insurance industry trade associations used the 30th anniversary of Hurricane Andrew – a storm that upended and transformed insurance and the manner in which communities prepare for natural disasters – to broadcast their conclusion that man-made threats are today the “root causes of most market instability.”
A paper, It’s Not Just the Weather: The Man-Made Crises Roiling Property Insurance Markets, jointly published by the American Property Casualty Insurance Association (APCIA), the Reinsurance Association of America (RAA), the Association of Bermuda Insurers and Reinsurers (ABIR), and former Insurance Information Institute president and economist Robert Hartwig, said costs to insurers from legal-system abuse, claims fraud, and regulatory interreference have created volatile market conditions.
“These unmodeled and largely uncontained risks are in some cases solvency-threatening, obligating insurers to take drastic steps to protect and conserve capital, with predictably adverse consequences on price, coverage availability, and competition,” according to the paper, which singled out Florida, Louisiana, and California for “having failed to learn from their past mistakes” by enacted legislation and regulation that hinder insurance markets. The paper details the crises in each state.
The authors conclude that legal-system abuse is rampant across the country but is particularly evident in catastrophe-prone states. Claims involving litigation are “increasing at previously unseen rates.” The average personal-injury verdict was $125,366 in 2020, up nearly 320% from $39,300 in 2010. Billion-dollar verdicts are becoming more common. Furthermore, the median cost of a single-fatality claim has increased over 240% in the last 17 years, according to data within the paper.
In addition, fraudulent property insurance claims represents a growing amount of insurance fraud in the U.S., resulting in additional premiums for families. The Coalition Against Insurance Fraud estimates fraud occurs in about 10% of P/C insurance losses.
Meanwhile, interference from state regulators and legislators “too often fail to recognize the real underlying issues, and their actions often unintentionally exacerbate the symptoms and throw markets into further chaos,” the groups said. “To fix broken property insurance markets, insurers have urged state lawmakers and regulators to focus on addressing the underlying issues roiling those markets. Legal system reform, anti-fraud measures, and promoting regulatory stability and mitigation to help reduce future losses are imperative to restoring market health in catastrophe-prone markets.”
The associations said they included within the report recommendations to form an action plan.
The Board of Directors made the decision to borrow $150 Million after five property insurers have gone insolvent in Florida since February.
In more fallout from Florida’s troubled property-insurance market, an agency that handles claims after insurers go insolvent approved a plan Friday to borrow $150 million — with policyholders across the state slated to pay back the loan.
The Florida Insurance Guaranty Association Board of Directors made the decision after five property insurers have gone insolvent since February.
The agency, commonly known as FIGA, is a non-profit organization set up by the state to help address insurance insolvencies. It has authority to levy “assessments,” which are costs passed on to insurance policyholders.
FIGA already has in place a 1.3 percent assessment and a 0.7 percent assessment because of insolvencies. The plan approved Friday will lead to the 0.7 percent assessment being extended through 2023 to finance the loan.
“We realize this is the Florida policyholders’ money we are spending, and we don’t take that lightly,” Corey Neal, executive director of FIGA, said during Friday’s board meeting.
Neal said the loan is primarily needed to cover claims from the insolvency of Southern Fidelity Insurance Co., which was placed into receivership in June.
Other property insurers that have gone insolvent since February are Weston Property and Casualty Insurance Co.; Lighthouse Property Insurance Corp., Avatar Property & Casualty Insurance Co. and St. Johns Insurance Co.
The 1.3 percent assessment, which was approved in March, was primarily related to claims from St. Johns Insurance Co., according to the FIGA website
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United Property & Casualty Insurance Co., facing heavy losses, in July put out feelers for a potential sale or merger with another carrier, after a ratings downgrade and a substantial reorganization plan.
But the firm’s holding company announced Wednesday that it’s now pulling out of the market altogether in several states.
UPC has filed plans of withdrawal in Florida, Louisiana and Texas and will soon file a withdrawal plan in New York. The company, which until this year held 180,000 policies in Florida, will non-renew personal lines in those states and has placed itself into an orderly run-off, UPC said in a news release.
“Due to significant uncertainty around the future availability of reinsurance for our personal lines business, I believe placing United P&C into an orderly run-off is prudent and necessary to protect the company and its policyholders,” UPC Chairman and CEO Dan Peed said in a statement. “The company is actively pursuing opportunities to leverage our people, technology, and other capabilities.”
UPC was founded in 1999 and is headquartered in St. Petersburg, Florida. Late last year, the company suspended new homeowners business in Florida. This year, parent company United Insurance Holdings went through a major restructuring, consolidating four subsidiaries into two.
The moves came after heavy underwriting losses in 2021 and early this year. In July, the Demotech financial rating firm downgraded UPC’s financial strength rating. About that time, UPC said it was exploring a range of options, including potential sale or merger with another insurer.
That apparently did not happen. UPC did not address a sale in its news release and an investor relations official could not be reached Thursday morning.
The company said renewal rights for its policies in Georgia, South Carolina, and North Carolina have been sold and all premiums and losses have been ceded.
An orderly run-off is far from being placed in rehabilitation or insolvency, but it could mean that the insurer will place less emphasis on handling existing claims, according to a posting by attorneys with Reed Smith, a global law firm that often represents policyholders.
“Being in run-off does not absolve an insurance company of its duties under policies it has already sold. The contractual relationships between the insurance company and its policyholders do not end,” lawyers Elizabeth Vieyra and Tim Law wrote.
The insurance company will continue to owe its policyholders the obligations that the policyholder purchased, they noted. And the insurance company must pay claims as they come due under the policies.
Rabb is Southeast Editor for Insurance Journal. He is a long-time newspaper man in the Deep South; also covered workers’ comp insurance issues for a trade publication for a few years.
It was 30 years ago today that Hurricane Andrew, the strongest storm to make U.S. landfall in more than two decades, gouged its way across south Florida, destroying more than 25,000 homes, by some estimates, and causing more than $15 billion in insured losses.
Within a year, seven Florida-domiciled property insurers went broke and some of the largest U.S. carriers decided to pull out of Florida altogether. Remaining companies were forced to rely heavily on the reinsurance market.
The 165-mph winds also exposed weaknesses in building practices in one of America’s most densely populated and vulnerable areas, and led to new building codes and wind-mitigation efforts across the state.
In part, Andrew was seen by some as a wake-up call for Florida, a chance to reshape the state’s property insurance market in ways that could protect insureds and insurers alike, for years to come.
Three decades later, insurance industry leaders agree that the pain of Andrew led to some positive developments, including innovative new companies and new capital entering the Florida market, improved hurricane modeling and beefed-up construction materials and building codes.
But many Floridians are now caught in a new cyclone, a man-made storm of epic proportions, as damaging in its own way as Andrew was physically.
Thompson
“I’ve never seen it this bad,” said David Thompson, a former insurance agent in Vero Beach, active for 36 years in the business in Florida. “If you talk to retail agents, I think everyone would tell you it’s never been as bad as it is now.”
In addition to the threat of hurricane wind and waves, insurers and agents today say they are now facing a confluence of exaggerated roof claims, a seemingly relentless amount of claims litigation from insureds and assignees of benefits, soaring reinsurance costs, troublesome financial ratings, and a state-backed insurer of last resort that has become the largest – and in many areas the lowest-priced – carrier in the state.
Add to that the impact from rising seas, increased tidal flooding, and many more – and more expensive – structures in some of the same areas that were pounded by Hurricane Andrew in 1992.
The threat of another Andrew-sized storm, or even two major storms in one year, now hangs like a sword of Damocles over regulators and insurers. Citizens Property Insurance Corp., this year took on a potentially new level of exposure with a plan to act as reinsurer for some struggling insurance companies.
And despite three years of legislative reform bills, several industry activists say Florida lawmakers next spring need to take another major step to close the gap on costly claims litigation and put Florida on equal footing with most other states.
“They need to tackle the one-way attorney fee statute, there’s no question about it,” said Fred Karlinsky, an attorney and insurance lobbyist with the Greenberg Traurig law firm.
This Aug. 25, 1992 photo shows Florida City after it was hit by Hurricane Andrew. Two decades later, Homestead and Florida City have doubled in size. (AP Photo)
He was referring to Florida statutes that were modified somewhat this year but continue to require insurers to pay most of the plaintiffs’ attorneys fees if the insured prevails in court.
The attorney-fee statute, he said, has really put insurers in a tough position: “They really can’t fight when there are these inflated and fraudulent claims without the risk of harm to them being even worse.”
Others in the industry agreed, pointing out that regulators have said that insurers’ litigation defense costs in Florida reached $3 billion in 2021 – double what they were five years earlier.
“While Florida’s governor and Legislature implemented positive reforms during a special session earlier this year that are a step in the right direction, it will take time and additional reforms to stabilize Florida’s volatile property insurance market,” Frank Nutter, president of the Reinsurance Association of America (RAA), said in a statement.
National and international groups said the 30th anniversary of Andrew puts a stark spotlight on the latest stormfront, and not just in Florida.
“Now, 30 years later, we are experiencing a new major catastrophe in states such as Florida, California, and Louisiana, except this one is man-made,” said David Sampson, president of APCIA, the American Property Casualty Insurance Association. “Unchecked plaintiff bar tactics, legal system abuse, fraud, and misguided government policies are having a significant impact on the availability and affordability of insurance…”
A report from APCIA, RAA and the Bermuda Insurers & Reinsurers, released this month, noted that thanks in large part to the one-way fee statute, lawsuit abuse has long been incentivized in Florida, with greater opportunities than in any other state to recover settlements in excess of policy limits. The promise of fee recovery has likely led to a 61% increase in the number of legal and claims soliciting advertisements in the state, from 2016 to 2020.
Florida carriers have attempted to adjust, with some drastically limiting the age of homes they’ll insure and imposing arbitration requirements for claims disputes while raising premiums. Agents have reported that for some expensive homes, the annual premiums quotes are higher than what the policy will cover, Thompson said.
Florida plaintiffs’ attorneys have disagreed that they’re to blame, arguing that some Florida insurance companies have long found ways to drag their feet on paying claims, leaving homeowners with little choice but to sue.
Regardless of the legal costs, the insured losses from another Category 5 storm like Andrew would be exponentially greater than they were 30 years ago, thanks to south Florida’s relentless building of glittering high rises, condominiums, luxury homes and congested suburbs.
A just-released report from CoreLogic, a property analytics firm, estimated that 3.7 million residences would be in the path of an Andrew-like storm if it hit today, with a total replacement value of more than $900 billion. Insured losses would top $72 billion, from wind damage and flooding.
South Florida’s population now stands at about 6.1 million, 50% greater than in 1992.
And while the 2022 hurricane season has been eerily quite so far, more hurricanes are expected in coming years. An increase in the annual number of named storms is the “new normal,” which will further challenge the risk management and surplus positions of property insurers in Florida, the KBRA insurance and bond rating firm said in a report posted last week.
The good news may be that Hurricane Andrew spurred insurers and their actuaries to utilize new and more reliable storm modeling and property data.
“Hurricane Andrew was the catalyst for the advent of what we now call enterprise risk management and risk-based capital requirements in the reinsurance industry today,” AM Best Director Steve Chirico said in a recent report from the financial rating and analytics firm.
One lesson from Andrew and its long tail, Karlinsky said, is that Floridians are living in paradise, but they’re also in hurricane alley, an expensive risk to bear.
“We’re better prepared than we were in ’92, but we have significant challenges right now,” he added.
Top photo: Orlando Somante sits with his sons amid the rubble of their home in Miami-Dade County on Aug. 27, 1992, after Hurricane Andrew. (AP Photo/Gaston de Cardenas)
Published Aug. 12 Florida relies heavily on one insurance ratings company. Why?
TALLAHASSEE — Florida’s crumbling homeowners insurance market is exposing one of the state’s long-running flaws: its reliance on a single company to certify the majority of the state’s insurers. For the last few weeks, state regulators and Gov. Ron DeSantis’ administration have been scrambling to contain the fallout after the state’s primary ratings agency, Ohio-based Demotech Inc., warned of downgrades to roughly two dozen insurance companies, according to the state. The downgrades would have triggered a meltdown of the state’s housing market, a pillar of Florida’s $1.2 trillion economy. Without the ratings, a million Floridians could be left scrambling to seek new insurance policies, possibly triggering a housing crisis in the middle of hurricane season and months before the November election. State regulators believe they have staved off a disaster, at least temporarily, but the episode has observers questioning how it was handled and how the state could be so reliant on a single company few have ever heard of. “If this was a movie title, it would be ‘The Sum of all Fears,’” said Sen. Jeff Brandes, R-St. Petersburg, who has been warning for years that the state’s property insurance market was heading toward collapse. The DeSantis administration cobbled together a short-term fix to allow insurers to stay afloat by using state-run agencies to back them up. And it went after the ratings agency, Demotech, and its president and co-founder, Joe Petrelli, calling it a “rogue ratings agency” and urging federal officials to disregard the company’s actions. Ghosts of Hurricane Andrew The drama is just the latest problem as the state experiences its biggest insurance crisis since Hurricane Andrew in 1992. In the last two years, more than 400,000 Floridians have had their policies dropped or nonrenewed. Fourteen companies have stopped writing new policies in Florida. Five have gone belly-up in 2022 alone. The record, set after Hurricane Andrew’s devastation, is eight in one year. The latest casualty was Coral Gables-based Weston Property & Casualty, which leaves 22,000 policyholders — about 9,400 in South Florida — scrambling to find new insurance companies. Costs also have skyrocketed. In 2019, when DeSantis was sworn in, Floridians paid an average premium of $1,988. This year, it’s now $4,231, triple the national average, according to an Insurance Information Institute analysis.
In several ways, today’s problems have their roots in the decisions lawmakers and regulators made after Andrew, experts say. The storm reshaped Florida’s insurance landscape, forcing several companies out of business and others to flee the state. With homeowners struggling to find coverage, the Legislature created the state-backed Residential Joint Underwriting Association — essentially a forerunner to today’s Citizens Property Insurance — to insure homes that couldn’t be covered by private carriers.
The program quickly became one of the largest insurers in the state, and concerns grew that it was taking on too much risk. State officials provided incentives for companies to take over its policies, and a number of new, smaller insurers got in line.
The new insurers faced a problem, however: They were unable to get a financial stability rating from a qualified ratings agency. Homeowners with federally backed mortgages, such as Fannie Mae and Freddie Mac, are required to have highly rated property insurance companies protecting them.
State insurance and banking regulators, plus Fannie and Freddie, looked to various ratings agencies for help. Only Demotech was willing to rate the new insurers. The company, based in Columbus, Ohio, was founded in 1985 by Petrelli and his wife, Sharon Romano Petrelli. Its“A” rating was approved by both Fannie and Freddie.
Since then, Demotech has been the primary ratings agency for Florida-based insurers, which dominate Florida’s market and which pay Demotech to rate their financial strength. Although other ratings agencies, such as New Jersey-based AM Best, provide ratings for some insurers, no one has stepped in to compete with Demotech.
Without Demotech, Florida would not have an insurance market, said Kevin McCarty, the state’s insurance commissioner from 2003 to 2016.
“Regardless of whether you agree with them, they serve an invaluable service to the state of Florida and across the wider economy,” McCarty said.
‘We never got a phone call’
Florida’s reliance on smaller insurers has caused homeowners to ride out a series of booms and busts ever since.
Smaller insurers are mostly able to survive Florida’s hurricanes because of reinsurance — essentially, insurance for insurance companies. When a storm hits, an insurer might be on the hook for a few million dollars, while the reinsurer pays the rest.
But the smaller companies in particular are vulnerable to increases in the cost of reinsurance. A series of storms in 2004 and 2005 wiped out a number of insurers and drove up the cost of reinsurance, putting firms in a pinch. Several have gone out of business due to mismanagement or incompetence.
In the last few years, insurers and state regulators have blamed excessive lawsuits for their woes, and Petrelli has been an outspoken critic of the Legislature’s inaction to curb litigation.
He has cited statistics from Florida’s insurance commissioner that from 2016 to 2019, Florida accounted for between 7.75% and 16% of the nation’s homeowners’ claims, but between 64% and 76% of the nation’s litigated homeowners’ claims. Critics say insurers’ problems are more complicated.
DeSantis called a special session of the Legislature in May to pass insurance reforms focused on stabilizing the market and reducing lawsuits, but Petrelli said it wasn’t enough.
On July 18 and 19, Demotech sent private notices to at least 17 Florida insurers, according to state officials — almost half of the companies it rates in Florida — warning that the insurance environment was worsening and that without corrective action, the companies faced a ratings downgrade. (Demotech has not said how many companies received the warnings.)
A ratings downgrade of that magnitude would create shockwaves. Fannie and Freddie back about 62% of all residential mortgages, according to the Florida Association of Insurance Agents.
Demotech’s “A” rating and above, which indicates a 97% certainty a company could afford all the claims from a 1-in-130 year hurricane, is approved by Fannie and Freddie, while its “S” rating, the next step down, is not.
A reduction from an “A” rating would force homeowners to find a new insurance company — and fast. Otherwise, the bank holding the mortgage could “force place” a homeowner with whatever insurance company they can find, which is usually far more expensive and offers less protection. That could include placing a homeowner with what’s known as a “surplus lines” insurer, which doesn’t need state approval for their rates. They can charge whatever they want.
“Getting force-placed insurance is terrible for a homeowner. You’re paying double the premium and getting half the coverage,” said Paul Handerhan, president of the consumer-oriented Federal Association for Insurance Reform, based in Fort Lauderdale.
Many homeowners would likely end up with Citizens, placing more risk with the state-run insurer that already covers nearly 1 million policies. (Its peak was 1.4 million, in 2011.)
Demotech, in large part, blamed the Legislature’s inaction for the changes.
“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,” several of the letters state.
DeSantis’ office coordinated a swift and public attack on Demotech.
In letters to federal housing authorities on July 21, Chief Financial Officer Jimmy Patronis called Demotech a “rogue ratings agency.”Florida Insurance Commissioner David Altmaier wrote that it was an example of “inconsistent, monopolistic power of a select rating agency and is trying to exert coercive influence over Floridians and policymakers in an effort to thwart public policy according to its own opinions.”
Even U.S. Sen. Marco Rubio waded into the fray, asking the Federal Housing Finance Agency to reexamine its dependence on Demotech.
Petrelli said he had no warning and no conversations with state officials before the letters were sent to federal officials and the news media. He said the correspondence with the companies was the normal course of business, part of regular, ongoing conversations with companies about their financial status that they’ve been doing every quarter since 1996.
The level of rancor was “unprecedented,” Petrelli said, but it did not change how it rates companies. In recent weeks, four companies have had their ratings downgraded and four, including Weston, have had their ratings withdrawn.
“It did not deter us,” Petrelli said.
Mark Friedlander, communications director for the industry-backed Insurance Information Institute, said the response was unlike anything he ever had seen. Ratings agencies are supposed to be neutral third parties that rate companies without influence, he said.
“It was definitely, in our opinion, stepping over the line,” Friedlander said of the state’s response.
On the other hand, Petrelli “has pushed himself further into the limelight by publicly engaging in political theater,” the Florida Association of Insurance Agents said in a memo distributed by the Office of Insurance Regulation.
The association’s memo wondered whether the state’s insurers should move on from Demotech. It raised longtime criticisms that Demotech often downgrades a company just days before it goes insolvent.
“That often begs the question, ‘Does a Demotech rating mean anything or provide the intended peace of mind to agents, consumers, and lenders?’” the memo stated.
Petrelli said companies keep their “A” rating as long as possible precisely because the “S” rating is not accepted by Fannie and Freddie, despite Demotech’s numerous attempts to get them to accept it.
When a company gets an “S,” he said, “unfortunately, they drop off the edge of the cliff.”
A ‘very elegant’ solution
Notably, the Office of Insurance Regulation’s letter did not dispute that Florida insurers were failing. The office has its own watch list of 27 companies under “enhanced monitoring.”
Patronis’ letter suggested insurance companies needed to find a new rating agency, but Friedlander said that likely wouldn’t help. The New Jersey firmAM Best has stricter requirements than does Demotech, he noted.
Six days later, the state announced a solution should the companies have their ratings downgraded.
Florida’s plan is to let insurance companies that are financially stable, but just missing that “A” rating from Demotech, to keep operating and covering people’s policies.
If they go under, homeowners’ claims would be covered by the long-running state program known as the Florida Insurance Guaranty Association, which covers the first chunk of claims for any failed insurance companies. Citizens would foot the bill for anything over the limit of $500,000 for homes and $300,000 for condo units.
Handerhan called it a “very creative, very elegant, very consumer-centric” solution.
But will it satisfy the federal mortgage holders?
Despite repeated emails and calls over the last week from the Times/Herald, representatives from Fannie Mae and Freddie Mac didn’t offer an answer. The Florida Housing Finance Agency didn’t respond to Rubio, either, according to his office.
An Office of Insurance Regulation spokesperson said they’re “confident” the solution will be acceptable.
Thanks to the mounting number of insolvencies of Florida property insurers in the last two years, the Florida Insurance Guaranty Association will have to borrow $150 million and extend a surcharge on policies through 2023.
The FIGA Board of Directors voted last week to borrow the money and ask state regulators to extend the 0.7% assessment on Florida policyholders. The assessment was added in 2021 to help cover the legacy costs of failed property insurers Gulfstream Insurance and American Capital, officials said. It was due to expire but now it’s needed to help cover claims from Southern Fidelity Insurance Co., which was deemed insolvent in June, and from Weston Property & Casualty Insurance, which became insolvent in early August.
“We realize this is the Florida policyholders’ money we are spending, and we don’t take that lightly,” Corey Neal, executive director of FIGA, said during Friday’s board meeting, according to The Free Press, a Tampa-based news site.
FIGA has received about 4,750 claims from Southern Fidelity policyholders, and could see as many as 6,000, according to information provide to the board. The Weston liquidation has resulted in 183 claims. Without the additional funding, FIGA’s account for paying claims would drop from a current level of $118 million to about $32 million by the end of the year, FIGA staff said.
The assessment is on top of a 1.3% charge needed to cover costs left by St. Johns Insurance Co., which was put into liquidation in February. The insurer had some 147,000 policies. FIGA has received 4,706 claims, with another 300 expected, a memo to the board said.
Neal
FIGA member carriers were able to start recouping the 1.3% assessment from policyholders starting July 1, 2022 and until June 30, 2023, FIGA’s website explains. That surcharge was expected to generate about $190 million.
Another insurer, Avatar Property Insurance was declared insolvent this year, and Lighthouse Property Insurance was ordered into rehabilitation. Neal said the Lighthouse claims will likely be covered by revenue from the 1.3% assessment. But it’s possible that the FIGA board will have to consider another small assessment again next year to cover some outstanding claims from Southern Fidelity, Neal said Monday.
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WRITTEN BYWilliam Rabb
Rabb is Southeast Editor for Insurance Journal. He is a long-time newspaper man in the Deep South; also covered workers’ comp insurance issues for a trade publication for a few years.
AM Best estimates that traditional reinsurance capital will drop by roughly $40 billion to $435 billion at year-end 2022, after hefty jumps recorded in each of the prior three years.
The projected 8.4% decline to $435 billion for 2022 from $475 billion in 2021, following increases of 15.5% for 2019, 8.9% for 2020 and 10.7% in 2021, takes into account both the tailwinds of the underwriting market and the headwinds of the capital and investment markets.
“With interest rates on the rise and equity markets declining, we do anticipate a rather substantial mark-to-market loss in traditional reinsurance capital levels,” Dan Hofmeister, senior financial analyst, AM Best, said in a video accompanying the report on the AM Best website. Working in the opposite direction, reinsurance capital has been boosted by underwriting results in spite of heightened cat loss activity in the first half of the year, he said.
As hurricane season plays out, however, “if we do see a reversal in these underwriting trends, it could prove to be very problematic for the industry’s capital levels,” Hofmeister said.
While the report notes that many reinsurers substantially decreased property exposure through the last renewal cycle, some are still exposed to material amounts of multiyear reinsurance contracts. Those reinsurers that did not manage risk exposures prudently could be exposed to material capital deterioration, AM Best said, referring to a double-whammy of underwriting losses and adverse investment market returns in 2022.
Overall, elevated catastrophe losses have been characterized as “earnings events” rather that capital depleting ones in recent years, the report says, noting that many reinsurers’ underwriting returns have been close to breakeven but that capital grew through investment gains and the ability to access affordable debt financing.
The AM Best report also includes a decade-long record of third-party reinsurance capital levels and a projection that third-party capital overall will stay steady at about $95 billion for 2022, compared to $94 billion in 2021.
Even though the downturn in the U.S. equity market has presented capital supply challenges for some insurance-linked securities funds, AM Best says the pullback of traditional reinsurance in catastrophe-exposed markets such as Florida may be creating opportunities for ILS funds. Where traditional capacity is lacking, ILS funds can take advantage of significant price increases and tighter terms and conditions, the report says.
Putting traditional and third-party capital together, AM Best is estimating a 6.7% drop in reinsurance capital from both sources—the first drop in a decade of figures compiled by the rating agency.
Estimating Dedicated Reinsurance Capital
AM Best works in conjunction with Guy Carpenter to estimate the total amount of capital supporting the reinsurance industry. AM Best determines traditional reinsurance capital; Guy Carpenter determines third-party capital.
The report notes that pure reinsurers with a global reach are rare, necessitating an “incisive analysis” on AM Best’s part to present an accurate picture of capital backing the reinsurance market. Global reinsurers are typically also engaged in businesses such as specialty insurance and large commercial, for example.
AM Best’s estimate of traditional reinsurance capacity takes into account the allocations by
business classification. “Since year-end 2018, our estimate has been less than 60% of total
shareholders’ equity of the consolidated figures for groups identifying as reinsurance writers,” The report says.
The 2022 estimates incorporates the assumption the more capital will be directed toward primary insurance operations of larger groups than had proportionally been allocated in prior years.
A Bit of History
The report explained the 10.7% jump in traditional reinsurance capital in 2021 highlighting substantially improved underwriting returns and strong equity market growth fueling the increase in shareholders equity of reinsurance market participants. In fact, AM Best’s Global Reinsurance Composite reported its lowest combined ratio in five years in 2021—96.4—and equity values soared 17% for the group.
The biggest year-over-year jump in capital recorded in the AM Best report was a 15.5% increase in 2019. AM Best’s 2020 report on capital levels explained that even though most reinsurers were underwriting at, or just above, breakeven in 2019, the vast majority of companies had been adversely impacted by mark-to-market unrealized losses from both fixed-income securities and equity holdings toward the end of 2018, which reversed in 2019.
“Notably, National Indemnity—given the scale of its balance sheet—was a key driver in these movements, with unrealized losses of $11.4 billion in 2018 and unrealized gains of $47.7 billion in 2019,” the 2020 report explained.
This article first was published in Insurance Journal’s sister publication, Carrier Management.
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