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Home insurance benefits could shrink to head off the ‘spiral towards collapse’



Florida’s home insurance market is “spiraling toward collapse,” a newly released study warns. You can help it avoid that fate by starting to save money to pay a share of your next roof replacement.

To reduce financial incentives for lawyers to sue them and prevent consumer rates from skyrocketing further, insurers are pushing for changes to state laws that would include no longer being required to pay the full cost to replace damaged roofs.

Lawmakers are debating surprising new data that illustrates the price consumers are paying for rampant insurance litigation.

An average of $656 out of each premium paid by Florida’s 6.5 million property insurance customers in 2019 went to legal costs, according to an analysis of the state’s property insurance industry. In 2020, that average cost will be around $800.

Of $15 billion that went to litigated claims since 2015 — claims that resulted in lawsuits — only 8% was paid out to policyholders, the study found. Plaintiffs attorneys got 71%, and insurers spent 21% on defense attorneys.

Runaway litigation costs over roof claims and other damage are threatening the stability of not only Florida’s insurance market, but also its real estate marketplace, noted the study by Guy Fraker, owner of the consulting firm Cre8tfutures, which advises insurance companies, regulators, and others in the industry. He lives in the Florida Keys.

The study, titled Florida’s [Property & Casualty] Insurance Market: Spiraling Toward Collapse,” will soon be published by the James Madison Institute. It was commissioned by a political action committee called Floridians for Lawsuit Reform and spearheaded by state Sen. Jeff Brandes, a Tampa Bay-area Republican who supports the proposed legislative changes. But Fraker said in an interview that he was given free rein to look at the industry from the perspective of how it’s hurting consumers.

He found a combination of well-meaning court rulings and changes in state laws over the years created what he calls a “litigation economy” that provides financial incentives for attorneys to file lawsuits against insurers.

“It’s easy to get trapped in an insurers vs. lawyers mindset,” he said. “But this is people taking advantage of the rules of the game. Not in a bad way. It’s capitalism.”

Fraker said he conducted dozens of interviews with industry officials and analyzed reams of claims and litigation data from public sources and from numerous Florida insurance companies.

Among his other findings:

  • Of $12 billion Florida property owners spend each year on property insurance premiums, 35% is “a hidden tax” that covers costs of the additional litigation that occurs in Florida compared to other states.
  • Lawsuits filed against all Florida-based property insurers increased from 27,416 in 2016 to 60,328 over the first 10 months of 2020. A big reason is Florida’s generous system for awarding legal fees, often giving attorneys an incentive to file multiple lawsuits over damage to different areas of a single home.
  • Combined, Florida-based property insurers posted $929 million in net losses over the first three quarters of 2020. It will be the fifth-straight of multimillion-dollar losses for the industry.

Insurance costs have been steadily rising in Florida since Hurricane Irma struck in 2017. Over the past year, homeowners have seen their bills climb by up to 40% as insurers pass along the costs of settling ever-increasing numbers of lawsuits. If those costs are allowed to continue growing, the price of insurance could make the monthly cost of homeownership so expensive that fewer and fewer people will be qualified financially to buy a home, Fraker said.

If that happens, home values in Florida could stop appreciating or even decline, creating havoc in the real estate industry, he said.

Proposals filed in the state Senate in advance of the spring legislative session are focused primarily on removing financial incentives for attorneys to sue insurers. But they would affect homeowners by reducing what insurers would pay out for roof damage, providing less time for policyholders to report those losses, imposing a waiting period before they can sue over disputed claims, and reducing potential financial rewards that would induce attorneys to represent them.

A Senate bill that includes the proposals below was advanced out of the Banking and Insurance Committee and must still be debated by two other committees before it can get to the full Senate after March 1. A similar bill in the House still faces scrutiny by three committees. Lawmakers said they expect revisions as discussions proceed.

Those proposals are:

Roof replacement

Currently, if more than 25% of a roof is damaged in a storm or other covered event, Florida’s Building Code requires replacement of the entire roof. Insurers must pay for the replacement, minus any deductible.

Insurers say this has been abused by roofing contractors who canvass neighborhoods and offer incentives to homeowners who let them inspect their roofs.

Under the proposal, full replacement coverage would be limited to roofs less than 10 years old.

For roofs 10 and older, policyholders would receive between 25% and 70% of the replacement cost, depending on the type of roof, minus their deductible. They would have to pay the remaining replacement cost out of their own pocket.

Sen. Jim Boyd, the bill’s sponsor, said policyholders with older roofs might have to “put a couple hundred dollars a year away” to be able to afford a new roof if theirs gets damaged and must be replaced.

“I get it that consumers think [roof replacement] should happen because it’s been happening,” Boyd said in a recent Senate Banking and Insurance Committee meeting. “But it’s gotten to the point where we have to take action to protect the insurance market.”

Insurers could still sell full roof replacement coverage to consumers if they wanted to, but currently the bill does not require them to offer the option.

The bill would require policies to spell out in large type that consumers are buying less than full roof coverage. That’s not enough of a warning, said Paul Handerhan, president of the Fort Lauderdale-based Federal Association for Insurance Reform, a consumer-focused watchdog group. He wants the bill to require that consumers be alerted of the change before they purchase coverage and receive their policies in the mail.

Hurricane claims

The statute of limitations for filing a claim for hurricane damages would be reduced from three to two years. Insurers say too many Hurricane Irma claims were filed in the third year after the storm, which increased costs of reinsurance — which is insurance insurers pay to ensure they can cover all claims after a catastrophe — and helped drive up this year’s premiums for policyholders.

Supporters of the change say there’s no reason homeowners should not be able to identify and file damage claims within two years. Most other coastal states at high risk for hurricanes require claims to be filed within a year or less. But Richie Kidwell, president of the Restoration Association of Florida, a repair contractors’ trade group, argued at the committee meeting that storm damage is often hidden under roofs or behind walls and are not always apparent until other repairs are underway.

Waiting period before suing

Policyholders would have to provide insurers with at least 60 days written notice before filing suit, and they would have to wait until the insurer makes a decision on whether or not to cover the loss, and if so, for what amount. Plaintiffs attorneys called the provision unfair, saying that insurers are allowed up to 90 days to make these initial decisions. If the policyholder contests the decision, the insurer would get another 90 days to respond, potentially forcing the policyholder to wait six months before filing suit.

Attorney fees

Attorneys would no longer be automatically allowed to bill insurers their full legal fees for any lawsuit settled for $1 or more over the insurer’s initial offer. Instead, fees would be determined according to the difference between the amount of money initially offered by an insurer and the amount demanded in the policyholder’s lawsuit.

Attorneys would only collect their full fees if the final payout is 80% or more of what the policyholder demands. If the settlement is more than 20% and less than 80% of what the lawsuit demands, the attorney will be allowed to collect that same percentage of his fee. If the settlement is less than 20% of the demand, attorneys would get no fee.

In addition, the law would restrict attorneys’ eligibility to collect multiple times their fee. What’s called a “contingency fee multiplier” exists in Florida to enable attorneys to collect additional money as a reward for being willing to take cases that policyholders would normally be unable to persuade an attorney to take.

Plaintiffs attorneys at the committee meeting argued that the changes would make it more difficult for policyholders to find attorneys to represent them. Matthew Collett, a Jacksonville attorney, said fee multipliers are rare because they require a hearing and judge’s order.

But Fraker said that the mere threat that an attorney will seek a hearing is enough to persuade insurers to give into attorneys’ demands for inflated fees.

Fraker’s report warns of what could happen if legislators fail to act: Wall Street investors will stop investing in Florida companies and begin suing insurers for wasting their investments. Stronger insurers will diversify away from Florida and reduce the number of Florida properties they are willing to insure. Real estate values will begin to “drain.”

But if meaningful reforms are enacted, investors will increase their Florida insurance holdings and earn healthy returns again. The number of lawsuits will decline, and, in turn, reinsurance rates will return to levels of other hurricane-prone southeastern states. Insurers will begin to make money again.

Those outcomes might even reduce insurance costs in Florida — and the financial pain of your next roof replacement.

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