Florida Approves Property Insurance Reform

Homeowners’ insurers in Florida are breathing a sigh of relief after succeeding in a months-long battle to obtain property insurance reforms designed to reduce costs and stabilize the market.

After watching state lawmakers refuse to rewrite the state’s no-fault automobile injury law and leave by the wayside a plan to revamp the state-run property insurer Citizens Property Insurance Corp., the industry found itself in the last week of the session betting all of its chips on the property bill, hoping that the “most business friendly” legislature in decades would finally deliver.

In the closing days of Florida’s legislative session, lawmakers approved CS/SB 408, which includes provisions limiting sinkhole losses along with provisions changing the holdback provisions on dwelling and contents coverage, placing a statute-of-limitations on sinkhole and hurricane claims, capping public adjusters’ compensation, and repealing a provision that would have reduced the boundaries of Citizens’ high-risk zones.

While the memory of former Governor Charles Crist’s veto of a similar albeit smaller bill last year still hangs in the hair, insurers are nonetheless banking on current Governor Rick Scott signing the bill into law. So far Scott has remained mum on the issue, but Insurance Commissioner Kevin McCarty has publicly made it clear that he expects the bill will become law.

“The Office of Insurance Regulation would like to commend the Florida Legislature for its passage of SB 408 relating to property and casualty insurance,” McCarty said. “By focusing on cost-drivers in the system that include overhauling the replacement cost methodology and addressing the increase in sinkhole claims, this bill will pay long-term dividends by contributing to the stabilization of the market and an attract new capital investment to our state.”

McCarty’s statement was followed by a spate of similar declarations on the part of national and state property and agent associations. But behind the victory laps being taken by insurers was a torturous process as lawmakers attempted to balance the needs of the industry with the demands by consumers. And even though lawmakers declared that passing a property bill was a top priority, at times it appeared it would meet the same fate as Citizens’ reforms which proved just too controversial for lawmakers to find common ground.

The final votes on CS/SB 408 reflected just how divisive the property issue remains in the state. The House approved the measure by an 80 to 35 vote and the Senate, 28 to 12.

“I think as companies review the bill in detail the more they are going to like,” said William Stander, vice president for the Property Casualty Insurers Association of America. “But make no mistake, despite lawmakers campaigning on a pro-business and free-market platform it still faced great difficulties.”

Florida Association of Insurance Agents President and CEO Jeff Grady said the market will be better off due to the bill’s passage. However, he said, he doubted the market would be transformed. “These are things desperately needed by private companies to give them a chance to catch their breath,” he said. “But as to the goal of attracting private capital to the state, I don’t think we are going to see a line-up of companies.”

Much of the bill is aimed at reducing sinkhole costs, which have exploded in recent years. Insurers early on attempted to remove a mandate that they cover sinkhole damage. But the specter of private companies’ non-renewing thousands of policies in sinkhole prone areas only to see them added to the rolls of Citizens’ 1.3 million policyholders proved too hard a sell.

Instead, lawmakers drew sharp limits on what constitutes a sinkhole loss. Namely, it only applies to the main building and no longer covers driveways, sidewalks, swimming pools, or separate structures. The bill also requires that sinkhole damage must be repaired in accordance with the insurer’s professional engineer’s recommended repairs.

But along with the technical provisions related to sinkholes, the industry succeeded in going after what they considered several causes of fraud. Number one, they placed a two-year statute of limitation on sinkhole claims, also including a three-year statute of limitation on hurricane and windstorm claims. Secondly, the modified the payment methodology by restoring a holdback on structural claims.

In 2007, Florida enacted a law that prevented insurers from holding back a portion of a claim payment which often meant that policyholders would receive a large check that insurers alleged many homeowners spent a portion of on other items. Under the current bill, insurers will pay a policyholder a down payment for structural damage, and once a contractor is hired the insurer will pay the contractor for the remaining work. The bill also allows insurers to offer a holdback policy on dwelling contents at a lower rate than policy without a holdback.

Florida Insurance Council Vice President Sam Miller said those provisions alone will help insurers’ rein in costs. “We’re going to see a lot less sinkhole claims than we would without the bill,” he said.

Miller also pointed to changes in public adjusters’ compensation, contracts, and advertising guidelines as other provisions promising to reduce sinkhole claims. The requirements and restrictions on public adjusters proved to be a running battle throughout the session, but the industry largely got what it wanted including a limit on public adjuster fees on reopened claims at 20 percent.

While insurers were successful in convincing lawmakers to adopt a large part of their agenda, the bill is also conspicuous for what it doesn’t include and at the top of the list is any provision that would increase Citizens’ rates. In a separate bill, lawmakers had proposed doing away with the current cap on Citizens’ rates at an annual rate of 10 percent and raising it to 20 percent. But lawmakers had 5.1 billion reasons not to make change, namely the amount of surplus currently accumulated by the insurer. But until the rate issue is addressed, the imbalance between Citizens and the private market will continue.

“Citizens remains competitive with the private market,” said Miller. “A major insurer would have filed for a 40 percent increase, but filed for zero percent because they were afraid they would lose all their business in Jacksonville.”

Lawmakers did make a few changes to Citizens, renaming the high-risk account to the coastal account. Also they called for a study to see if out-sourcing the insurer’s claims operations would be less expensive than doing them in house. They also repealed the so-called “choke-down,” provision, whereby the boundaries of the high-risk account were due to be reduced.

Lawmakers did respond to agent groups by inserting a provision that as of January 2012 will make applicants for Citizens sign a statement that noting that due to a potential deficit, the policy could be subject to surcharges as high as 45 percent of their premium. The statement reads that a Citizens policyholder could be subject to additional emergency assessments and that Citizens is not supported by the full faith and credit of the state of Florida.

“Agents will have a different conversation with their clients,” Grady said of the provision. “Agents will have a better shot to at least defensively sell against Citizens.”

Still, on the whole, insurers remained positive about the bill’s passage.

“Consumers and insurers have been anxiously awaiting comprehensive property insurance reform in Florida,” said Ray Farmer, southeast regional vice president for American Insurance Association. “The reforms contained in this package will help to promote a competitive and vibrant insurance market in the Sunshine State.”

Liz Reynolds, state affairs manager for the Southeast region for the National Association of Mutual Insurance Companies expressed a similar sentiment. “While this final bill does not include everything the property insurance industry needs, we are grateful that the Legislature recognized the importance of strengthening the Florida property insurance market.”