|Date:||February 23, 2017|
Hurricane season is still more than three months away, but a different kind of tempest is threatening Florida property insurers, their policyholders and the state’s economy.
This month an Ohio firm that rates the financial health of insurance companies announced it would downgrade 10 to 15 Florida property insurers from A to B starting in March. Demotech Inc. cited soaring losses for these insurers from nonweather-related water-damage claims. Cutting these insurers’ ratings could jeopardize thousands of their policyholders’ federally backed mortgages that require coverage from an A-rated company.
Demotech blamed the losses on the abuse of a century-old state law that allows policyholders seeking home repairs to assign the right to collect reimbursement from their insurers to the contractors they hire to do the work. This assignment of benefits system is intended to spare homeowners any out-of-pocket costs for repairs — which makes good sense. But the law doesn’t require contractors to meet the same responsibilities as a homeowner who deals directly with the insurer, such as reporting a claim to the insurer on a timely basis, or allowing the insurer to inspect the damage, or documenting the repairs. Hazards for homeowners also lurk in the system. In some cases, they unwittingly allow contractors to put a lien on their property to cover any balance unpaid by the insurer.
And contractors — especially those in Southeast Florida filing claims for repairs to water damage from leaking pipes or appliances — have been hiring attorneys to pursue payment for their claims. Under another Florida law, the attorneys are guaranteed reimbursement for their costs if the insurer loses in court — a legal advantage that gives them more leverage to get paid. The number of these lawsuits shot up from 405 in 2006 to 28,000 last year, according to Florida’s chief financial officer, Jeff Atwater. A handful of law firms and attorneys have been taking the bulk of the cases.
Citizens Property Insurance Corp., the largest insurer in Florida, says its cost from assignment of benefits claims has risen more than fivefold since 2011. Fewer than 15 percent of its water-damage claims in 2011 resulted in lawsuits, but almost half did last year. The average payout for the company of a litigated water claim is three to six times higher than one handled without a lawsuit.
Insurers argue that the assignment of benefits law is being exploited to encourage and inflate claims and generate legal fees. Representatives for contractors and attorneys insist the problem is being exaggerated by insurers who don’t want to pay the benefits they owe, and by those who would try to repeal the law, which remains a formidable tool to force insurers to cover claims promptly. But the numbers from Citizens back up insurers’ arguments about the severity of the problem.
The frequency of nonweather-related water-damage claims from Citizens’ policyholders in Miami-Dade, Broward and Palm Beach counties has increased by more than 50 percent since 2010. The company says no other factors — including the age, location or construction type of the homes involved — can explain the extent of the increase. Meanwhile, Citizens’ average cost for those claims from the three counties has almost doubled over the same period.
And according to Citizens, the practice is spreading to other parts of Florida, including the Tampa and Orlando metropolitan areas.
Insurers in Florida that lose money this way will hike premiums on policyholders to recoup their losses. A higher cost of living for Florida homeowners will hurt the state’s economy. It’s especially bad news for low- and moderate-income policyholders who might already be struggling to afford insurance.
Citizens has made changes when issuing or renewing policies to curb abuse of the assignment of benefits law. For example, it is requiring the company’s inspection or approval before permanent repairs begin, and capping the cost of emergency repairs without approval.
State legislators, who will convene next month for their annual 60-day session, can do more. There are reasonable proposals that would preserve the law, but require contractors to meet the same responsibilities as policyholders before proceeding with repairs, and protect homeowners from getting stuck with the bill when insurers won’t pay. Those would be a good start.
Curbing the abuse of the assignment of benefits system belongs among the top priorities for legislators in 2017. It’s time to calm this storm.