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Sha'Ron James

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Property insurance overhaul by Legislature aiding insurers or consumers?

By Ryan Mills, Naples Daily News

April 3, 2011

TALLAHASSEE — One cracked kitchen tile didn’t worry Ryan Fullerton as he made a final walk-through of his Punta Gorda home before closing on it in May 2008.

He became concerned in the coming months, however, when more tiles cracked for seemingly no reason.

Fullerton, 32, grew even more concerned when workers pulling up carpet found two large cracks in the concrete underneath, when his 3-year-old son fell into a hole in the yard, and when he and his wife found large cracks on the outside walls.

“I didn’t know if it was faulty craftsmanship,” he said of the home, built in 2004.

An adjuster from his insurance company, Royal Palm, suggested possible sinkhole activity, Fullerton said.

Sinkhole claims like Fullerton’s have nearly tripled in Florida during the past five years, increasing from 2,360 in 2006 to 6,694 in 2010, according to Florida Senate records. The increase is costing insurance companies a bundle, and is the reason du jour why some officials say the state’s property insurance industry isn’t ready to handle a major hurricane.

It’s a statistical certainty – sooner or later a major storm will hit Florida, causing billions of dollars in damage.

Sen. Garrett Richter wants the state to be ready.

The Naples Republican has taken the lead this legislative session in pushing for a massive property insurance overhaul.

He is attempting to weed out fraud, which he believes has evolved into a significant industry cost-driver, and create an environment in which insurance companies can compete and thrive. In particular, Richter is targeting questionable sinkhole claims.

“What I’m trying to do on a statewide basis is create a solvent industry where policyholders can depend on and count on their claims to be paid when a major Category 5 hurricane comes through Florida,” Richter said.

Richter’s plan has become a lightning rod for critics, who contend Senate Bill 408 is an irresponsible giveaway to big business that strips away consumer protections.

Provisions of the bill could have a devastating effect on the already fledgling housing market, critics say, by making it nearly impossible for residents to purchase sinkhole coverage required by some mortgage lenders.

“It is a sad day when I have to tell you that what we see coming before us in the Legislature, both in the Florida House and the Florida Senate, are some of the most anti-consumer (pieces of) legislation ever filed in my 17 years as a legislator,” Sen. Mike Fasano, R-New Port Richey, said during a press conference addressing Richter’s bill and other insurance reform legislation.

Richter’s 115-page omnibus bill is designed to tackle cost-drivers in the property insurance industry — costs that get passed along to the consumer.

“The most expensive policy any policyholder in the state of Florida can purchase is a policy that doesn’t pay a claim when it’s filed,” Richter said.

Among its many provisions, the bill would increase minimum surplus – cash-on-hand – requirements for insurance companies from $5 million to $15 million, narrow the window in which most claims can be brought from five years to three, and increase regulations on public adjusters who have been accused of ginning up specious sinkhole claims.

Many of those provisions were included in a bill that passed through the Legislature last year, but which was vetoed by then-Gov. Charlie Crist.

Through a bill amendment, Fasano successfully removed a provision that would have limited payouts from the insurance company to actual cash value, rather than replacement value, until a homeowner proved repair work was being done.

More controversially, under this year’s bill, for the first time insurance companies no longer would be required to offer sinkhole coverage at all in Florida.

Private insurers – losing millions or making millions?

Charley, Frances, Ivan and Jeanne. Dennis, Katrina and Wilma.

Florida seemingly couldn’t catch a break during the hurricane seasons of 2004 and 2005. But eventually, it did.

“One would think that if we’ve gone five years without a hurricane, insurance companies would be able to build a capital surplus so they have funds to pay claims when we do get a catastrophe,” Richter said. “Yet that is not the case.”

In 2005, Allstate began scaling back in Florida, shedding nearly 100,000 policies. Last year, State Farm dropped about 125,000. Although it is no longer writing new policies, State Farm still has nearly 680,000 property insurance policies in force in Florida – the second most in the state.

Even without any major storms, insurance companies claim they’re losing millions in non-hurricane losses, including sinkholes.

State Farm Florida reported total losses of $39 million in 2010, ending the year with $327 million in surplus.

Today, the No. 1 property insurance policy writer in Florida is Citizens Property Insurance Corp., a government-run nonprofit that covers more than 1.2 million Floridians.

Rather than being the insurer of last resort as intended, critics say Citizens has become the insurer of first resort, in part because its rates are kept artificially low.

More concerning, critics say, is that Citizens’ $4.6 billion surplus and invested assets only amount to $11.3 billion, about half of what would be needed to cover the estimated $22.2 billion cost of a 1-in-100 year storm.

The difference would be covered by assessments on all insurance policies statewide.

“Some people think it’s not fair that somebody who doesn’t even own a house but drives a car can have an assessment on their auto insurance premium,” said R. Terry Butler, Florida’s interim Insurance Consumer Advocate. “It’s hard to argue against that, except that we’re all in this thing together, and there’s an attempt to try to spread the risk of hurricanes around, which some people don’t like.”

Butler said Citizens will be active in Florida “basically forever.” He doesn’t believe private insurers will ever increase their risk along the coast.

Others argue private companies, rather than losing money, are in fact making millions in Florida.

Critics contend the companies are hiding their profits in unregulated “managing general agents” – subsidiaries set up to manage the insurers’ day-to-day operations – and in offshore re-insurance companies run by their parent companies.

“They play this shell game in order to portray a balance sheet that shows them losing money,” said Gary Farmer, an attorney and consumer advocate fighting Richter’s bill.

A solution or a bigger problem?

Since 2006, the vast majority of sinkhole claims have come from four counties – Hernando, Pasco, Hillsborough and Pinellas.

In 2009, Citizens incurred more than $84 million in sinkhole losses and expenses, but took in only $19.6 million in premiums to cover the costs, according to Senate records.

Richter said there’s no geological explanation for the increase, but critics of his bill point to aggressive building and development.

“I’m suggesting that there’s fraud,” Richter said. “People are making claims for cracks in their walls, and they’re getting huge payouts, and they’re taking those payouts and they’re buying a boat, or they’re paying their mortgage off. They’re not fixing their properties.”

To combat the alleged problem, Richter’s bill removes the requirement that insurance companies offer sinkhole coverage.

Critics call it cherry picking.

“I don’t think it’s right for the government to tell you what you have to sell, and then tell you what you have to sell it for, especially when what you have to sell it for is less than what it costs you,” Richter said.

If insurance companies are allowed to opt out of sinkhole coverage, they will leave consumers with no options, Butler said.

“With all due respect, insurance companies have been trying to get out of writing sinkhole coverage for years,” Butler said. “Why in the world are they going to write it for anybody when they’ve gone to all this trouble to make sure they don’t have to offer it to anybody?”

Many banks and mortgage lenders require sinkhole coverage, senator Fasano said. If no companies offer insurance, the housing market will suffer.

“We’re already suffering economically in this state,” he said. “This bill will dig it deeper for us economically.”

In a capitalistic society, markets fill voids, and Richter contends there will be companies offering sinkhole coverage. But he acknowledges it’s not a certainty.

“This is kind of like changing a tire on a moving car,” Richter said. “I think we do have to figure out, OK, if the private companies don’t come in, where’s the back-up plan? We’re working on the back-up plan now with various people in the industry and with staff.”

Richter’s bill would create a two-year deadline for filing sinkhole claims, and could require policyholders to pay a portion of the sinkhole testing costs if they demand tests, and no sinkhole is found.

It would also redefine sinkhole loss coverage by setting a stricter interpretation of the term “structural damage” – making it even more difficult for people like Fullerton to collect.

These days anything attached to Fullerton’s walls – doors, windows, cabinets, countertops – is breaking loose, he said.

After performing tests on his property, Fullerton said the insurance company blamed the damage on “natural settling” and denied his claim.

“All the time we were waiting on the results, my entire kitchen was continuously cracking,” Fullerton said.

David Murray, an attorney representing Fullerton, disputes the claim that people are intentionally filing fraudulent sinkhole claims.

“The insurance adjuster that came out to the house looked at the damage and said, ‘I think this is sinkhole activity,’” he said.

Fullerton, who had his property tested by another engineer, is challenging the “natural settling” decision in court.

“I’m saddened by it, really,” Fullerton said. “I pay out all this money every year for insurance to protect my family. … Now they’re trying to take that away from me to protect themselves.

“This is the biggest investment I’ve made for my family, and I’m just starting out. It’s heart-wrenching.”