Florida Must Restrain Insurance Abuse
The state needs to get this right.
Until Hurricane Matthew raked the Atlantic coast last October, Florida had been spared major storm damage since the 2004 and 2005 hurricane seasons devastated homes and businesses — and the state’s property insurance industry. That historically long respite was supposed to give insurers opportunity to regain solid financial footing, which should result in lower premiums for consumers.
Unfortunately, those potential savings have been eroded by an increase in what is known as “assignment of benefit” abuse. “Assignment of benefits” agreements or “AOBs,” is the practice in which property owners sign away the task of negotiating with insurance adjusters and collecting payment to the contractors who are doing the repairs. In theory, it appeals to homeowners who can get work done immediately to fix roofs or water damage without having to go through the often lengthy insurance claims process. But in practice it has led to some unscrupulous contractors and attorneys to inflate claims and perform unauthorized upgrades, which they then sue the insurance companies for payment. Insurers often settle these bogus claims to avoid costly court battles, and the price can include paying attorney fees as well.
According to William Large of the Florida Justice Reform Institute, a subsidiary of the Florida Chamber of Commerce, from 2014 to 2015 AOB litigation increased 10.7 percent, and then 21 percent from 2015 to 2016. Last year, Ormond Beach-based Security First, one of the largest property insurance companies in the state, looked at water-damage claims it handled in 2015. While only 15 percent had AOBs, those claims cost an average of twice as much as normal water-damage claims.
Citizens Property Insurance Corp., the state’s taxpayer-backed insurer, slowly built up its reserve funds following the 2004-05 hurricane seasons and has shed more than a million policies as the private market improved. However, last week Citizens announced its first net loss since 2005 — $27.1 million — and that it expects to lose another $86 million by 2018. It attributes much of the red ink to AOB abuse.
Those costs are passed on to consumers in the form of higher premiums. Citizens calculates that in South Florida, where AOB abuse is particularly prevalent, the annual cost of covering just a moderately priced home ($150,000) is expected to jump by $1,500 or more over the next five years.
Last year, state Sen. Dorothy Hukill, R-Port Orange, sponsored a bill that would clamp down on AOB abuse, but it died during the session. In February she refiled similar legislation (SB 1038) that would severely restrict AOB agreements and prohibit paying attorney fees. Alas, a competing bill (SB 1218) was filed a week later by Sen. Gary Farmer, D-Fort Lauderdale, a trial attorney. That measure imposes some restrictions on AOB contracts, but also maintains attorney fees and prohibits insurers from passing on such legal costs to consumers when the company loses in court; instead, they must dip into their profits.
While that sounds like a consumer protection, it doesn’t reduce incentives to abuse the AOB system, and could wind up discouraging insurers from writing more policies. Tightening the private market would send the state back to the post 2004-05 era when property insurance (let alone affordable coverage) was hard to find, hence the explosive growth of Citizens.
Florida’s insurance commissioner David Altmaier opposed the Farmer bill, arguing that paying attorney fees was meant to protect homeowners against large insurers, not to apply to litigious contractors. Sha’Ron James, Florida’s insurance consumer advocate, also expressed concern about the long-term effects the measure would have on insurance rates.
So of course last week, Sen. Anitere Flores, R-Miami, chair of the Banking and Insurance Committee, refused to allow Hukill’s bill onto her committee’s agenda, killing it. Monday, the committee passed Farmer’s bill on a 6-2 vote.
The Legislature has allowed AOB abuse to fester for too long, but Farmer’s bill is the wrong solution. The state needs to get this right.