Proposed insurance reforms take aim at attorney fees, roof deductibles and reinsurance to keep shaky companies alive [South Florida Sun-Sentinel]

Florida’s Legislature will enter next week’s special session on property insurance with a long list of potential reforms to debate, including restrictions on attorneys fees, an optional roof deductible for policyholders, and the creation of a $2 billion reinsurance fund to ensure financially shaky companies survive the upcoming hurricane season.

The proposals are in bills filed Friday evening after several days of work by Gov. Ron DeSantis and leaders of the state House and Senate.

The bills are an effort to respond to growing demands to stabilize Florida’s precarious property insurance market.

Insurers have been warning for the past three years that the industry in Florida is in danger of collapse — an unthinkable prospect that could suffocate the state’s all-important real estate market.

One major proposal would deny third-party assignees of policyholders the right to collect so-called “one-way” attorneys fees in any lawsuit arising from a claim dispute. The revision addresses years of complaints by insurers that contractors and plaintiffs attorneys solicit claims from homeowners primarily to file lawsuits and collect the fees.

The one-way attorney fee statute, in place for a century in Florida law, was intended to empower policyholders to sue insurers without having to fear paying insurers’ legal fees if they lose. But contractors have exploited the statute by convincing policyholders to sign over their rights to bill their insurers.

In addition, attorney fee multipliers — when attorneys seek payment of 1.5 to 3 times their normal fees from insurers — would no longer be awarded except in “rare and exceptional cases.” A 2017 state Supreme Court ruling threw out the rare and exception requirement and allowed fee multipliers to be applied in nearly every case.

A separate bill would address claims that roofing contractors are defrauding insurers by soliciting costly roof replacement claims.

It would create an exception to a Florida Building Code requirement that an entire roof must be replaced if 25% or more of the roof is damaged. The bill would require replacement or repair of only the damaged portion as long as the roof was built in accordance with the building code in effect in 2007 or later revisions.

Insurers would be allowed to establish a separate optional deductible for roof coverage that would take effect unless the house is totally destroyed, if the roof is destroyed by a fallen tree, if the needed repair is less than 50% of the roof, or if the roof is damaged in a hurricane. Notices of the deductible would be spelled out in 18-point or larger type in the customer’s policy.

However, insurers would be prohibited from refusing to write or renew policies if roofs are less than 15 years old.

The two Senate versions of the bills were filed by Sen. Jim Boyd, a Tampa Bay Republican and chairman of the Senate Banking and Insurance Committee. Boyd is an insurance agent who has been active in recent insurance-related legislation.

“I believe the legislation I will file for your consideration during the special session will address the many issues leading to the instability of the current property insurance market in our state,” Boyd wrote in a memo to senators. “The proposal balances fair costs and protections for consumers while adding reasonable guardrails for insurance companies against the frivolous litigation and fraudulent claims that drive up rates for everyone.”

Another reform proposes creation of a $2 billion state-backed reinsurance program to help undercapitalized companies secure sufficient claims-paying ability in time for the upcoming hurricane season.

Fears have been growing that some Florida-based insurers would not be able to secure reinsurance, which is insurance insurers must buy, and would face potential downgrades of their financial stability ratings and be ordered into receivership by state insurance regulators.

Other highlights of the bills include:

A growing crisis

While claims have spiked as a result of recent hurricanes and other severe weather events, the biggest danger stems from a bombardment of litigation by a select group of repair contractors and plaintiffs attorneys, insurers say.

Roofing contractors dispatch teams of solicitors to knock on doors and ask for permission to go on top of houses, insurers say, promising owners they’ll get free roofs from their insurer if they can find damage, which they always do. Plumbers responding to emergency pipe breaks refer homeowners to sophisticated water extraction companies that set up drying machines, tear out walls and cabinetry and submit invoices for thousands of dollars.

Lawsuits are filed if insurers reject or underpay invoices. Often a lawsuit is how insurers first learn about a claim.

These “bad actors” have figured out how to exploit loopholes in court rulings and state laws, insurers say, to extract legal fee payouts that far exceed the amount of money paid to policyholders.

Collectively, Florida-based carriers reported net losses of more than $1 billion in 2021 for a fifth-straight year of unprofitability, according to data from S&P Global Market Intelligence.

In 2021, Florida accounted for 79% of all homeowner insurance lawsuits in the nation but just 9% of homeowner insurance claims, according to data released by the Florida Office of Insurance Regulation that DeSantis cited in his call for a special session. More than 100,000 lawsuits were filed in Florida last year.

A 2021 report by analyst Guy Fraker, commissioned by a political action committee seeking insurance reforms, found that just 8% of $15 billion spent on litigated claims since 2015 went to policyholders. Plaintiffs lawyers got 71% and defense attorneys hired by insurers took the other 21%.

In a guest editorial published this week by the Jacksonville Daily Record, state Sen. Jeff Brandes, a Tampa Bay Republican, called the crisis “the biggest economic challenge in the state’s history.”

Echoing assessments by insurance industry leaders and investment analysts, Brandes blamed the problem on “a highly coordinated network of a few lawyers and contractors that have helped shape and used current laws to their advantage to make it impossible for insurance companies to offer reliable and affordable coverage.”

The crisis, he wrote, “is not, as some will claim, a war between consumer protection champions (plaintiffs attorneys) and insurers with Florida citizens caught in a legal crossfire.” Rather, he said, “Florida citizens and insurers are the pawns and targets, respectively, in a carefully planned and executed assault.”

Insolvencies increasing

Six Florida-based insurers have been liquidated under state supervision since 2018, including one of the state’ largest, Orlando-based St. Johns Insurance Co., which was ordered into receivership in February while it had 147,000 policies. Those customers were able to maintain their coverage when startup insurer Slide agreed to take over their policies uninterrupted.

Customers of Tampa-based Avatar Property & Casualty weren’t so fortunate when that company went into receivership in March. The dissolution forced 37,000 policyholders to find new carriers. Many had no choice but to go into state-run Citizens Property Insurance Corp., the so-called insurer of last resort.

Most recently, Sunrise-based FedNat Holding Company announced plans to cancel 68,200 policies as part of a rehabilitation plan ordered by the state Office of Insurance Regulation. The order followed a downgrade of FedNat Insurance Company’s financial strength rating by ratings agency Demotech.

Demotech downgraded the rating after determining that FedNat could not purchase required levels of reinsurance — which is insurance that insurers buy to ensure they can pay claims after catastrophes —without a fresh infusion of capital investment.

The rehabilitation plan will include a transfer of FedNat’s 83,000 remaining policies to sister company Monarch, which entered an agreement with a new investor to provide capital “through an acquisition,” according to terms of a consent order signed by state Insurance Commissioner David Altmaier.

Insurers that haven’t yet gone bankrupt have responded by raising rates — some by up to 40% to 50% — resulting in premium increases driven higher by inflation-driven hikes in replacement value costs for nearly all covered homes.

The cost of homeowner insurance in Florida increased by an average 32.5% between 2016 and 2021 — highest in the nation, according to price-comparison website Valuepenguin.com. Overall in the United States, the cost increased by an average 10.9%.

Many have also tightened eligibility requirements by reducing ages of homes they are willing to cover, requiring customers to replace their roofs as a condition of renewal, limiting coverage of water damage from pipe breaks, appliance leaks and other non-weather-related events, and refusing to write new policies in high-risk zip codes and regions.

Rising premiums, failing carriers, non-renewals and increased coverage restrictions have converged to push hundreds of thousands of policyholders into Citizens.

The safety net insurer is on the verge of increasing from 420,000 policies in early 2019 to a projected 1.1 million by the end of the year. That’s dangerous for several reasons, analysts say.

The first is that, because it cannot increase rates as quickly as private market insurers can, Citizens remains a lower-cost choice and makes higher-cost private companies less attractive to consumers.

Also, the larger pool of policyholders increases the likelihood that Citizens’ $6 billion surplus will be depleted before covering all claims after one or more major hurricanes.

Information from the News Service of Florida was used in this report.

Ron Hurtibise covers business and consumer issues for the South Florida Sun Sentinel. He can be reached by phone at 954-356-4071, on Twitter @ronhurtibise or by email at [email protected].

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