Wondering if your homeowner’s insurance will protect you? You’re not alone

July 16--As South Floridians head into a hurricane season predicted to be busier-than-average, homeowners are wondering whether their insurers will pay up if their house is hit -- and how to find out before a storm arrives.

Marcelo Salup, a Coral Gables resident who owns a three-bedroom home built in 1954, spends between $5,500 and $6,000 annually on premiums to Heritage Property & Casualty, a Florida insurer created in 2012.

Salup said he isn't confident in Heritage's ability to pay his claims but doesn't think he has better options. "It seems to me like [Heritage] just appeared out of nowhere," he said. "But on the other hand, it seems that we as consumers are kind of trapped."

The squeeze may be tightening. While state-run Citizens Property remains the largest windstorm insurer in South Florida, 111 other companies hold the windstorm policies on roughly 79 percent of insured homes in Miami-Dade, Broward and Monroe counties.

And despite a decade of relatively calm weather, in the past year some private insurers have pulled out of the South Florida market or raised rates -- in one case, as much as 16 percent.

Those moves, say ratings and policy analysts, mean private carriers are finding it too expensive to continue their current business in South Florida. And the problem is only getting worse. Left unaddressed, South Florida rates may leap by 60 percent over the next five years, projects the Florida Office of Insurance Regulation.

"They're pulling out because they're losing on [their South Florida businesses.] And we're failing to do anything about it," said Jay Neal, president and CEO of the Florida Association for Insurance Reform.

The main culprit is assignment of benefits claims, or AOB claims. Such clauses allow homeowners to sign their claim rights over to contractors, who can then bill insurers directly. In South Florida, contractors have been using these contracts to perform unnecessary work and collect large fees from insurers, according to industry analysts. Insurance companies that deny the claims run the risk of getting mired in costly lawsuits.

State lawmakers have taken up the issue but have failed to make progress. This May marked the third year in a row that a bill on AOB reforms died in the Senate without a hearing.

"Every year that we delay fixing it, we'll have double-digit rate increases," Neal said. "Every year that we delay fixing, it will be bad for consumers."

Meanwhile, the threat of a hurricane still looms. The newer, smaller insurers are still untested by a major storm because of the relatively calm past decade, as the Miami Herald reported last year. According to analysis by Fitch Ratings, about 60 percent of Florida homeowner's policies are held by Florida-based companies. But are they up to the task?

Insurers Pulling Back

Twenty-five years ago, when Hurricane Andrew struck, most South Floridians were insured by national companies like Prudential and State Farm. The then-record $27 billion tab drove many companies out of the state, leaving Florida to create state-owned Citizens Property Insurance. In the last decade, the state has made a concerted effort to reduce its own risk by offering incentives to new, private companies.

Initially, the strategy showed progress, and Citizens shifted more than two thirds of its statewide policies and 61 percent of South Florida policies to other insurers. But in the past year, those insurers have balked at taking on more South Florida policies.

Heritage, South Florida's third-largest insurer, announced earlier this year that it will no longer be writing new policies in South Florida. It has already reported a slowed 2017 first quarter, when Heritage wrote only 733 new residential policies in Miami-Dade, Broward and Monroe counties -- more than a 65 percent drop from the same period a year before.

It isn't alone. In this year's operating budget, Citizens reported a significant drop in other insurers' willingness to take up its South Florida policies. The trend is rapidly accelerating; the number of residential policies transferred from Citizens to other insurers in the first quarter of 2017 was about a third of the policies transferred in Miami-Dade, Broward and Monroe than during the same period in 2016.

The company has highlighted its own growing costs and said 2017 "will undeniably present the most demanding challenges ... due in large part to Assignment of Benefits (AOB) activity."

Already, Citizens is predicting an uptick in its new policies and expects to see private markets contract. This could erase the state's efforts to shrink Citizens, taking Florida back to a situation where taxpayers hold most of the risk.

"We could have a potential availability crisis approaching, if we don't already have one, and that's going to cause folks to have the only option once again to be Citizens," said David Altmaier, commissioner of the Florida Office of Insurance Regulation, in a February presentation to Florida's Cabinet.

Unless the trend reverses, "[insurers] will begin to close down ZIP Codes in certain regions of the state," Altmaier said. "Many companies already have."

With fewer choices, prices will likely rise.

Last year, Citizens raised its homeowners' rates in South Florida counties by between 5.8 percent and 9.3 percent. For 2018, it is requesting additional rate increases of more than 10 percent for policies in Miami-Dade and Broward counties because of AOB activity. The new rates, if approved, would go into effect February 1.

Despite minimal losses from last year's Hurricane Matthew, the company posted a net operating loss in 2016 of $27 million, its first loss in more than a decade, primarily because of the assignment of benefits issue.

Private companies are also posting losses and citing AOB claims. Heritage posted a 63 percent decrease in net income at the end of 2016 compared with 2015, and its first quarter income fell another 19 percent in 2017 compared with 2016.

Earlier this year, ratings agency Demotech threatened to downgrade several Florida insurers after studying the AOB situation, which would effectively stop those insurers from operating in the state. After a burst of capital infusions and merger activity, only one, Cypress Property & Casualty Insurance Co., saw a slight downgrade, but the near-miss demonstrates rising concern about the financial health of companies as their costs grow.

A spokesman for the Florida Office of Insurance Regulation said in a written statement to the Miami Herald: "The abuse of AOBs is creating a significant issue for Florida insurance consumers. Unless this abuse is addressed, consumers will likely see increased premiums, reduced choices of coverage and reduced policy options. AOBs were the top priority of the Office this year as we feel this is the single biggest threat to the health of the property insurance market."

According to analysis by Citizens, the cost of resolving AOB claims in South Florida is at least 74 percent higher than non-AOB claims. The AOB claims are more frequently litigated, which pumps costs. Most of these claims are for non-weather-related water damage and roof repair claims.

And they're on the rise. AOB use has grown in Florida from nearly 6 percent of all water damage claims in 2010 to approximately 16 percent in 2015, with the highest rates of AOB claims occurring in South Florida. The size of the claims has also increased by 28 percent over that period. According to regulators, the increase is caused by contractors that abuse AOB clauses and exploit legal loopholes.

How We Got Here

Floridians used to have more options for their homeowners insurance. But after Hurricane Andrew, national companies left the state or massively reduced their coverage. At least 11 companies were rendered insolvent. Many of the smaller companies that stayed went under after the severe 2004-05 storm seasons, when Florida was battered by Hurricanes Charley, Frances, Ivan, Jeanne, Dennis, Katrina and Wilma. These hurricanes cost Florida insurers a total of $41 billion in today's dollars.

As insurers exited the market, state-run Citizens Property Insurance Group became the sole option for many South Florida ZIP Codes.

To reduce the state's liability, Florida legislature introduced its "takeout" program in 2007, creating incentives for private insurance companies to take over policies from Citizens. The strategy to shrink Citizens worked; today the company holds fewer than a half million policies, down from its high of 1.5 million in 2011. Forty-four percent of those are in South Florida.

Some of those policies moved to existing companies. Others went to newly formed companies created under the state's incentive program.

Not all homeowners switched away from Citizens by choice. Many had their insurance changed automatically after failing to submit opt-out notices, or switched under threats of dire rate hikes if they stayed with Citizens.

Jay Pellis, whose Coral Springs home is insured by Heritage Property & Casualty, is one of the South Florida residents who left Citizens for a takeout company, after receiving a "strongly worded letter" that scared him away from Citizens with claims that his rates would rise exponentially.

Now, he regrets the change because he isn't reassured that Heritage will cover his claims, even after he sought guidance from officials and his insurance company.

"In trying to get information from anybody," Pellis said, "it was impossible. I was calling the state of Florida, the Office of Insurance Regulation. It was impossible to get any real feedback."

Pellis said he hasn't looked into switching insurers because he doesn't think it would make a difference. "Even if I did the research," he said, "I don't think there are a lot of options."

Are Fears Warranted?

Experts are divided on whether the newer companies who have never faced a major storm are healthy enough to withstand one.

Though Heritage's profits have taken a hit recently, it holds $955 million in assets and has maintained its A, or Exceptional, rating from Demotech. The company's reinsurance would provide up to $1.75 billion in relief if a catastrophic hurricane hit the state, and more in a multi-event scenario.

Tim Battle, a partner at a Hialeah-based insurance agency Keen Battle Mead & Co., carries Heritage and about 25 other insurers, but steers clear of some of the smaller takeout companies because of solvency concerns.

"They're small, they have limited assets, they have limited surplus," Battle said. "They have good reinsurance at the moment, but the problem is, what happens when that big one hits?"

"That's always going to be a concern, no matter which year it is," Battle said.

The brief histories of these companies create "uncertainty as to how these firms will respond to a future hurricane that generates significant industry losses," according to a Fitch Ratings analysis about the 2017 U.S. Hurricane Season published in May.

"There's a lot of questions about [the insurers'] ability to remain solvent and pay claims when a major hurricane hits the region," said Fitch director Chris Grimes, one of the authors of the report.

While Hurricanes Matthew and Hermine in 2016 were the first major hurricanes to hit Florida since the takeout incentive programs began a decade ago, Grimes said the losses were not large enough to give a sense about how the market would respond to a catastrophic loss.

The insured losses from Matthew and Hermine totaled $5 billion. During the 2004-05 season, Florida insurers dealt with losses of more than eight times that amount.

But other industry analysts and experts said they are confident that Florida-based companies are in a strong position, having spent the low-storm decade building up cash reserves to pay back future claims.

"Overall, the trend is toward a better situation than we've had in years," said Gavin Magor, a senior financial analyst with Weiss Ratings. The Palm Beach Gardens-based ratings company has been rating financial property and casualty insurance companies since 1993, the year after Hurricane Andrew struck.

Magor said the two main reasons for the industry's health are legislative changes that have increased capital requirements, and the past decade's relatively favorable weather.

"We're looking at a gradual movement away from what had been a very weak sector to a strengthening sector," he said.

One of the legislative changes requires insurers to buy reinsurance contracts. While some buy reinsurance from private companies, the state-run Florida Hurricane Catastrophe Fund offers another layer of protection. The FHCF was established in 1993 and partially reimburses losses to insurers if damages from a hurricane are severe enough.

This year, the FHCF had $14.9 billion of cash available to pay damages, and additional money in liquid assets that would allow it to cover the $17 billion maximum payout it might face. In its annual report of probable maximum losses, it attributed its record level of cash on hand to low levels of claims in the past eleven seasons.

Florida regulators monitor the financial stability of insurers using several tools, including an annual catastrophic stress test. This test models severe storms to examine if a company's finances can withstand different hurricane scenarios, including multiple severe storms and a storm of 1-in-100 year severity. Though the office did not release a public report for 2016, the commissioner's office told the Miami Herald that all 69 participating insurance companies passed the rigorous tests last year with enough capital to remain solvent.

The Biggest Risk?

While opinions are mixed on the short-term health of companies, all agree that the effect of AOBs is threatening the long-term health of the industry.

"We've seen some insurers scaling back, particularly in the region of South Florida," said Grimes, of Fitch Ratings, "just because the AOB problem is so big. For the ones that haven't scaled back, we've seen tremendous price increases put in place to offset those [AOB] losses. If this issue isn't resolved in the near-term, you could see more insurers backing away from the region."

Already, homeowners are noticing the rising costs as they are passed on to consumers.

South Florida's high premiums are forcing some homeowners to buy cheaper, but less complete coverage -- or go without coverage at all. Most lenders will require those with a mortgage to have wind coverage, but increasingly, homeowners who own their homes outright are going bare, say agents.

Frank Kowalski, president and owner of Miami-based insurance agency Koski & Co., offers insurance from 30 to 50 carriers in the tri-state region and has seen an increased number of people foregoing insurance, though the practice is still not common.

"You could say it comes up with more frequency [now] than it has in my 40 years of being an insurance agent in Dade county," Kowalski said. "You would never have thought of that 20 or 30 years ago, but with the increase in premiums, people are forced to make some difficult decisions. I'm well aware of how difficult those decisions can be."

Never miss a local story.

Sign up today for a 30 day free trial of unlimited digital access.

SUBSCRIBE NOW

___

(c)2017 Miami Herald

Visit Miami Herald at www.miamiherald.com

Distributed by Tribune Content Agency, LLC.