Report Shows Florida AOB Abuse Worsening as Lawmakers Consider Reforms
The 2018 Florida Legislative Session is underway, and lawmakers have wasted no time taking up legislation to address the assignment of benefits crisis plaguing the state.
While they debate which reform option to back, stakeholders say the Florida Legislature must do something this year to keep an already bad situation from getting worse.
The insurance industry, regulators, and consumer groups have tried unsuccessfully for five years to convince Florida lawmakers to reform the policyholder benefit known as AOB, which allows an insured to sign over their insurance policy rights to a third-party. The insurance industry has continued to call out what they call abuse of AOBs by vendors and attorneys who use an AOB contract to take control of a homeowner’s policy, inflate a claim, then sue an insurance company that disputes the bill.
Evidence of that abuse is mounting in the form of increased litigation and insurance rates.
According to the Consumer Protection Coalition, a group of business leaders, consumer advocates, real estate agents, construction contractors, insurance agents and insurance trade groups fighting for reforms to AOB abuse, the number of lawsuits involving an AOB grew from 405 in 2006 to more than 28,000 in 2016 – an increase of more than 6,800 percent. Last year, 20,000 lawsuits were filed as of July.
But lawmakers have feuded with the industry over the right reforms to enact in previous years, and this year may not be any different.
AOB Data Call
The Florida Office of Insurance Regulation (OIR) has also repeatedly spoken up on the need for the Florida Legislature to enact reforms, and has highlighted its own evidence of AOB abuse, primarily fueled by attorneys, contractors, water mitigation firms and roofers. Now, OIR is saying that abuse is only getting worse.
In its most recent data call of water or roof damage homeowners claims closed between Jan. 1, 2015 and June 30, 2017 released last week, OIR found the frequency of water claims per 1,000 policies has increased 44 percent since 2015 and severity has increased by 18 percent. The report looked at detailed information for 144,983 water claims from the top 25 homeowners and dwelling fire writers as of 2015. However, the examination was open to response from all personal residential property writers.
OIR omitted information in the data call from Citizens Property Insurance Corp., which has borne the brunt of the abuse, stating the state-run insurer of last resort has submitted its own data that has already been examined and reported on.
OIR said Southeast Florida has the highest frequency of water losses, and the region experienced a 60 percent increase in water claims frequency during the two-year period. But the highest combined change in frequency and severity occurred in Central West Florida where there was a 35 percent increase in claim severity between 2015 and 2017, underscoring how the abuse has spread from South Florida to other parts of the state in the last few years. OIR noted that all regions of Florida experienced significant increases in water losses.
When these water loss claims are coupled with an AOB, the severity of a claim is generally at least 85 percent more, according to OIR’s data. Since 2015, OIR found the use of AOB’s has increased from 12.8 percent of water claims to 17 percent of water claims.
OIR concluded in its report that the increase in both the frequency and severity of water losses, the rising use of AOBs, and the acceleration of those trends over the last several years is “resulting in tangible consumer harm.” The report states the escalating trends are leading to premium increases for almost all Florida homeowners, and reducing consumer choice as insurers cease writing or begin nonrenewing policies in areas with high water losses.
“Absent any intervening changes in the way AOBs are being used today, it is expected that these trends will continue to deteriorate,” the report states. “This may cause availability issues as insurers struggle to control the rising costs and will result in higher homeowners premiums for all Florida homeowners.”
Florida Insurance Commissioner David Altmaier took the release of the data call report as an opportunity to stress the need for lawmakers to enact reform this year, saying the results show a “clear sign that Florida is seeing an aggressive rise in the number of water loss claims associated with an AOB…”
“Without a legislative remedy, this problem will lead to an increase in homeowners insurance premiums and lack of consumer choice as insurers stop writing or renewing policies in areas with high water losses,” he said.
Proposed Legislative Solutions
So far, lawmakers have shown reforming AOB is a priority, but their approach on how to do so differs greatly between the Florida House and Senate.
Which path lawmakers choose is a point of contention and concern for the insurance industry. Key stakeholders, including trade associations representing insurers and consumers, as well as OIR, are backing a bill that was introduced and passed last year by the Florida House, and which the House already passed again this year.
Stakeholders say of the bills receiving lawmaker support so far, House Bill 7015 would be the most effective because of provisions addressing Florida’s “one-way attorney fee” statute. The statute, designed to be a policyholder protection for those suing an insurance company, has been the main source of abuse, the industry says.
They claim the statute has been exploited by trial lawyers and vendors that obtain an AOB from a policyholder and litigate cases for substantial pay-outs because the statute mandates that attorney fees be paid by the insurer if a claim is found to have been underpaid by any amount.
HB 7015, would chip away at incentives for third parties to sue insurance companies by awarding fees under a formula based on the judgement obtained by the assignee and the pre-suit settlement offer. Under this formula, attorney fees could also be awarded to the insurer, or possibly no one, depending on the amount of the judgment.
Other key features of the bill, sponsored by Rep. Jay Trumbull, include:
- Allows a policyholder to rescind an assignment agreement for any reason within seven days of signing;
- Requires an assignee to provide a copy of the assignment agreement to the insurer within three business days after the assignment agreement is executed or the date of repair work begins;
- Requires an assignee to notify the policyholder and the insurer that litigation against the insurer will be filed;
- Requires an assignment agreement to contain a written, itemized, per-unit cost estimate of the services to be performed by the assignee. If the estimate includes a claim for water restoration services, it must also include proof that the assignee or subcontractor of the assignee possesses a valid certification from an entity that requires water remediation to be performed to a standard approved by the American National Standards Institute.
- Requires OIR to have insurers report data on trends in AOBs and related litigation.
The industry put its support behind HB 7015 once it became clear that the bill the industry backed in 2017 would not be a contender this year. The bill, drafted by OIR and other stakeholders last year and reintroduced for this session as Senate Bill 62, was not given a hearing before the 2018 session started, effectively eliminating its chances of being passed.
Now it’s up to the Florida Senate to decide if it will take up HB 7015, but many are not optimistic given that Senate lawmakers let the bill die last year.
The Florida Senate has shown preference for Senate Bill 1168 filed by Senator Greg Steube. That bill would not address the state’s one-way attorney fee statute and would prohibit insurers from passing the cost of litigation in the insurance rate.
The bill also limits an insurer’s ability to deny coverage because of fraud by an insurance applicant, and “further limit’s the insurer’s ability to properly adjust an AOB,” said a statement by the Personal Insurance Federation of Florida (PIFF).
“While the bill includes some very limited consumer protections, the overall effect of this legislation will be increased rates, as insurers avoid the risk of litigation,” said Michael Carlson, president of PIFF. “This will send a strong signal to the insurance marketplace that Florida is closed for business. Nothing could be worse for the average consumer.”
The bill was on the Senate Banking and Insurance Committee’s Jan. 16 agenda but wasn’t considered.
Logan McFaddin, Property Casualty Insurers Association of America (PCI) regional manager, said getting any meaningful reform passed will be difficult again this year as the trial bar will try to kill anything that alters the state’s one-way attorney fee statute.
“The bottom line is attorney fees are the number one issue,” she said.