What to Expect from Florida’s AOB Reform Law Taking Effect July 1

June 18, 2019 by Amy O'Connor

The countdown is on for Florida assignment of benefits (AOB) reform that will take effect July 1, and the insurance industry is getting ready to respond to new requirements as a result of the law as well as evaluating how the changes will impact their books of business.

The industry says of most importance is that the bill is a consumer-friendly law that will bring relief to Florida policyholders.

“This is a consumer protection measure, not just in terms of impacting the overall premium they have to pay, but also giving them some protections that they didn’t have before,” said Barry Gilway, president and CEO of Florida’s Citizens Property Insurance Corp.

The industry is also preparing for what the next “scheme” will be as those who have profited off of AOB’s for many years look for ways around the new law.

Florida Governor Ron DeSantis signed House Bill 7065 on May 23, marking the end of a seven-year battle by the industry and reform advocates seeking a solution to escalating abuse of the policyholder benefit they say has led to less coverage and higher rates for Florida property owners.

“I thank the Florida Legislature for passing meaningful AOB reform, which has become a racket in recent years,” DeSantis said in a statement. “This legislation will protect Florida consumers from predatory insurance practices.”

The bill’s multiple provisions:

Define “assignment agreement” and establish requirements for the execution, validity and effect of agreements
Prohibit certain fees and alter policy provisions related to managed repairs in an assignment agreement
Transfer pre-lawsuit duties under the insurance contract to the assignee and shift the burden to the assignee to prove that any failure to carry out such duties has not limited the insurer’s ability to perform under the contract
Require each insurer to report specified data on claims paid in the prior year under assignment agreements by Jan. 30, 2022, and each year thereafter
Allow an insurer to make available a policy prohibiting assignment, in whole or in part, under certain conditions
Revise Florida’s one-way attorney fee statute to incorporate an attorney fee structure in determing the fee amount awarded in suits by an assignee against an insurer
Require service providers to give an insurer and the consumer prior written notice of at least 10 business days before filing suit on a claim

The Florida Office of Insurance Regulation told insurers in an informational memorandum released June 14 that no form or rate filings are required to comply with the new assignment agreement provisions in the bill because they do not relate to the terms of an insurance policy itself. Insurers can choose to notify their policyholders of the new assignment agreement provisions without filing a notice with OIR. However, OIR said if insurers chose to modify their policy forms “to provide, for instance, a designated location for the receipt of assignment agreements,” they must file the policy form change and have it approved. Insurers making rate changes will need to file with OIR, as is current standard practice.

The required data elements for the first insurer data call due in 2022 will be specified in a rule to be promulgated by the Financial Services Commission, OIR said, and must include data about claims adjustment and settlement timeframes and trends, grouped by whether litigated or not litigated and by loss adjustment expenses.

OIR said in an email to Insurance Journal it will issue a data call in February 2020, “to get an early look at the impact of the bill.” A data call template has been included for the industry.

“While we appreciate that nine months after the passage of the bill may not be sufficient time to recognize the full impact of the Act on rates and rate indications, collecting preliminary data to evaluate the potential impact of the Act is a valuable exercise,” the memo states.

The memo also notes the standards for policies to restrict an assignment, which the new law allows insurers to do so long as several requirements are met, including offering a comparable policy that does not restrict assignment and offering the restricted policy at a lower cost than an unrestricted policy.

Industry experts are mixed on whether insurers will utilize this provision. Trade association APCIA, which represents 54 Florida-domiciled insurers, said it anticipates its member companies will want to “utilize these tools for their products.”

Gilway said Citizens is looking into the possibility but that it’s a “decision we have not yet made. We’re going to wait and see what the overall reaction in the market is.”

OIR said in preliminary discussions, some insurers have indicated they may be interested in offering policies restricting assignment agreements in whole or in part, but no insurer has filed to as of yet.

Michael Carlson, president of the Personal Insurance Federation of Florida, an association representing Allstate, State Farm, Farmers and Progressive, said some companies are uncertain about how to price a non-assignable or limited assignment policy.

Citizens policyholders will see rate relief sooner rather than later thanks to the bill requiring that the expected savings from AOB litigation costs be passed along to its insureds. The company currently has about 425,000 policyholders.

Citizens has borne the brunt of the abuse, particularly in South Florida where AOB lawsuits have exploded over the last 10 years. Citizens filed for rate increases for 97 percent of its homeowners policyholders for this year to offset litigation costs, but the bill says the insurer may not implement rate changes unless the 2019 rate filing reflects projected rate savings from the new law.

The insurer will present a new rate filing at its Board of Governors meeting on June 19. Gilway said it anticipates the Citizens Board will approve the rate filing and it will then be sent to OIR.

He could not say what the rate filing requests since it had not yet been approved by the Citizens Board, but he noted that “from a premiums standpoint, a substantial number of individuals that would have received an increase will now receive a decrease.”

Citizens said in a statement after the passage of the bill that its actuaries estimated reforms would reduce the statewide average rate need from 25.2% to 10.1% for homeowners policyholders. In South Florida, the average rate need would drop from 30.4% to 12.8%. Update: Citizens released its 2019 rate kit June 18 indicating the overall statewide rate need for homeowners multiperil policies was reduced from 25.2 to 7.2%. The capped rate change for all personal lines business was reduced to 4.7% from the previous filing of 8.2%. Nearly 44,000 more policyholders will receive rate decreases. In total, about 67,000 policyholders will receive rate decreases in this filing.

Other insurers have said they expect rate reductions thanks to the new law, but they aren’t required to file for lower rates like Citizens. What those actual rate decreases will be is still uncertain.

“The new law is expected to reduce costs by reducing the amount of litigation, however, three active hurricane seasons in a row also impact insurers costs, especially as it relates to reinsurance rates, which are also increasing,” said Logan McFaddin, Southeast regional director for APCIA.

Reinsurance rates were up an average 10 to 20% in Florida this year, according to KBW.

Jeff Grady, president of the Florida Association of Insurance Agents, said he is hopeful both for agents and consumers that insurers will bring capacity back to areas where they pulled out of because of the abuse, such as in South Florida. He expects there will be a gradual improvement in the Florida property insurance market, but rate changes will not happen “overnight.”

“If we really did patch the hole in the dam, it should bring back interest in our market and it should result in lower rates. Of course, that takes a while. You have to file for those rates and implement those rates,” he said.

Gilway said it will “be interesting to see” how private market insurers react to the legislation and how their appetite changes. He said for most companies, particularly those with heavy exposures in southeast Florida, the reduction in litigation coming from AOB should outpace the impact of reinsurance rate increases.

Still, he said, “I don’t think anything will happen for the next 12 months. Frankly, I think people are going to wait and see what the overall impact of this bill is.”

Regulators and lawmakers will hold the insurance industry accountable both for implementation of reforms and for rate changes that reflect a reduction in costs, said PIFF’s Carlson.

“I know that [Commissioner David Altmaier] will expect that after all this time and effort, the bill will have a positive effect on consumers,” he said. “Our members have pledged to work collaboratively … and hopefully the market will reflect positive changes and we’ll see changes to benefit consumers. That’s the whole purpose of this effort.”

OIR said it anticipates it will take some time for the provisions of the new law to be reflected in losses and insurer loss adjustment expenses and rate indications.

Consumer Education

Carriers say they will need agents and brokers to help them communicate the various changes in the new law to customers, especially its consumer protections.

“There’s a huge communication role for our agents relative to advising our consumers about what their rights are and what the opportunities are for them relative to an AOB,” Gilway said of Citizens, which has 7,000 appointed agents in Florida.

Citizens and agent associations like FAIA are already working on trainings and seminars on what agents need to know.

Phil Visali, president of We Insure, an independent agency franchise with 94 locations throughout Florida, said the company has included education on the new bill during its monthly trainings.

“It’s on us, the insurance agent, insurance professional, to educate the homeowner,” he said.

Michael Packer, a Florida insurance defense attorney and shareholder with Marshall Dennehey Warner Coleman & Goggin, said agents and brokers should read the bill’s statutes and speak to an attorney they trust so they know what’s going on and the current state of the law.

Onto the Next Scheme

Though the industry is celebrating this legislative victory, it is well aware that another insurance-related scheme is just around the corner.

“We have a whole team looking at what’s next because Florida is a whack-a-mole state … we know that attorneys are already working on how they can circumvent the new legislation,” said Gilway.

Lead Florida AOB attorney Harvey Cohen posted a video within days of the reform’s passage declaring the AOB “dead” and urged vendors to submit their AOB agreements before the bill takes effect on July 1. In response, lawmakers added a provision to another bill making the effective date for the attorney fee provision the date the governor signed the AOB bill.

Packer said while he thinks this bill will have an impact on stemming AOB lawsuits and could lead to a reduction in the usage of AOB agreements, he isn’t as optimistic about a long-term reduction in litigation. “Lawyers on both sides of the fence always come up with different, new and better ways to get around or use these types of statutory provisions to their benefit.”

Carlson also emphasized not to “forget about auto glass” — a similar AOB scheme in the auto market that has led to an explosion in windshield claims. “This may be the next fertile ground for abuse now that we’ve kind of put some limits around AOB property abuse,” he said.

This story has been updated from a previous version to include information from Citizens planned 2019 rate filing.

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