Top Florida Stories of 2016: The AOB ‘Insurance Crisis’

Assignment of benefits abuse has become such a well-known problem in the state of Florida this year that it now just goes by the nickname “AOB.”

The issue with AOB comes from when a policyholder suffers a loss, such as water damage to their home, and then signs over their insurance policy to the person repairing the damage. Repair contractors utilizing the AOB on behalf of the insured often work with attorneys who then sue the insurance company over the claim.

Florida’s one-way attorney fee statute has encouraged these suits because the insurance company is typically left paying the attorney fees. In many cases, policyholders don’t know the lawsuit has even been filed.

Florida’s state-run insurer Citizens has been the most affected by this abuse. Citizens CEO and Executive Director Barry Gilway says that the negative impact on the pricing of property insurance and availability of coverage in Florida is getting worse. Gilway said while the gross misuse of the AOB form is a major component of the issue, the problem has really become a litigation issue relating to all non-wind water claims.

“The situation is deteriorating even further at Citizens,” Gilway told Insurance Journal. “Despite a book of business that has stabilized at around 490,000 policies, we are now projecting the number of lawsuits received each month will grow from 900 this year to over 1,000 in 2017. And yes, it is the same 10-15 firms that continue to be responsible for 60 percent of the litigation across the state.”

At the beginning of the year, Citizens released an analysis in response to a data call from OIR that found claims utilizing an AOB were almost twice as expensive on average and more likely to lead to litigation.

The abuse has been the most rampant in Southern Florida, specifically in the Tri-County region of Miami-Dade, Broward and Palm Beach, and it isn’t just specific to Citizens.

“All companies, particularly those with any relevant market share in the Tri-County area, are experiencing the same result,” Gilway said.

These losses are driving Citizens’ 2017 budget request, which was approved by the Citizens Board of Governors Dec. 7. For 2017, Citizens has estimated net operating losses of $100 million in its inland residential policy lines, with losses concentrated in Miami-Dade and Broward Counties, where the bulk of litigated and AOB claims originate.

The abuse has also led Citizens to raise homeowners rates by an average of 6.4 percent statewide in 2017. Many other homeowners insurers in the state are raising rates because of AOB.

The industry, frustrated that the Florida Legislature failed to tackle the issue for the fourth year in a row in the 2016 session, have taken matters into their own hands.

In addition to raising rates, Citizens and other insurers have filed policy form changes with OIR to clarify policy wording regarding loss reporting, use of emergency services and the nature of permanent repairs, at the department’s encouragement.

Some companies are also limiting the number of policies they will write in the Tri-County region.

In its third quarter conference call on Nov. 9, Heritage Insurance, one of the largest take-out companies of Citizens, indicated it will be much more selective on what policies it will look at in this area.

“There are just wholesale areas in Tri-County on a personal lines basis that we think are at this point in time uninsurable,” Bruce Lucas, CEO of Heritage said. “And so therefore we have really curbed that voluntary production down there quite significantly for I’d say the last six months. Until we see a fix on the legislative level to the assignment of benefit uses taking place down there, we’re really not interested in doubling down [in] Tri- County at this point in time.”

Heritage also had a damage cap of $10,000 for water damage claims not caused by storms for homes at least 40 years old approved by OIR.

Citizens’ Gilway said the solutions private market companies are applying will help to “to stop the bleeding” in the short term for a few companies. But, he said, the long term solution must include changes to Florida’s one-way attorney fee statute, consumer protection changes needed to the AOB form itself, and restrictions on the referral fees paid that are fueling the crisis.

“As I have stated many times, without these legislative changes OIR will be forced to dramatically increase rates and approve more draconian policy changes to protect the financial solvency of the private market,” Gilway said.

Citizens said at its Dec. 7 Board of Governor’s meeting that it plans to make AOB reform its 2017 legislative priority. The Consumer Protection Coalition, formed earlier this year in response to the rising AOB abuse, said it will support Citizens in its efforts.

“The Consumer Protection Coalition joins Citizens in supporting commonsense reforms to protect homeowners against unscrupulous vendors who use AOB to pad their profits,” the coalition said.

The coalition said reforms should include eliminating one-way attorney fees, which create an incentive for bad guy vendors to sue insurance companies without facing any financial risk. It also supports requirements for written estimates for work, notifications for insurers and options to rescind an AOB.

According to Politico, OIR has indicated that addressing AOB is a top priority. Politico reported Oct. 26 that OIR’s director of Government Affairs Caitlin Murray said the office will issue an assignment of benefits package and plans to meet with stakeholders to fine-tune its proposal.

Jay Neal, executive director of the Florida Association for Insurance Reform (FAIR), said without a fix, “rates will double in 5 years … it’s unsustainable.”

He is optimistic that the legislature gets it now and will be more supportive if OIR puts forth a bill. “Everyone will fall in line behind [OIR],” he said. “We are confident that people are aware there is a serious problem. We are hopeful and expect a legislative solution.”

Each top Florida insurance topic of 2016 will be highlighted this week. Check back Wednesday for a recap of the state’s 2016 storm season and it’s impact on the Florida insurance market.

Related:

• Top Florida Stories of 2016: Workers’ Comp Market in Turmoil