Why Is Florida's Homeowners Insurance Facing Such Turmoil?

Back in 2007, Florida's Governor at the time, Charlie Crist, left a message at the renowned “Wailing Wall” in Jerusalem, a sacred site for both Jews and Christians to pray. His message was simple: “Lord, shield Florida from storms and other challenges.”

No state has faced the wrath of storms as much as Florida has.

Don Griffin, a researcher for the American Property Casualty Insurance Association (APCIA), remarks, “Florida frequently finds itself at the mercy of Mother Nature.” Strategically located between the warm currents of the South Atlantic Ocean and the Caribbean Sea, Florida has been hit by six out of the 10 most devastating storms in U.S. history. Notably, three of these took place in a short span between 2004 and 2005.

Historically, storms have shown a particular inclination towards the Florida peninsula. This trend can be traced back to significant events like the Great Miami Hurricane of 1926, which occurred even before storms were officially named by the World Meteorological Organization. This hurricane significantly impacted Florida's burgeoning economy at the time.

However, Florida demonstrated resilience. Currently, over three-quarters of its 21.5 million inhabitants reside close to its dual coastlines. CoreLogic, a firm that assesses potential property damages, indicates that six major cities in the U.S. most vulnerable to storm surges—Miami, Jacksonville, Tampa, Bradenton, Fort Myers, and Naples—are all situated in Florida, where the force of the wind-driven waters can potentially uproot homes from their very foundations.

Following the significant damages from the hurricanes in 2004 and 2005, major insurance companies, including State Farm (the country's leading home insurer), informed Florida's authorities of their decision to reduce operations and cease providing property insurance to its residents. This move was echoed by other prominent insurance providers.

The Resulting Insurance Landscape for Floridians

Consequently, Floridian homeowners found themselves with limited choices. Their primary options were either the state-managed backup insurer, Citizens Property Insurance, or a handful of emerging companies primarily supported by private investments.

Several of these emerging companies face the risk of credit rating downgrades, potentially shedding policyholders. In fortunate scenarios, they might be acquired by more established competitors. Their solution? Proposing an increase in homeowners' insurance premiums, ranging from 12% to almost 40% in the upcoming year.

Capturing the sentiment, a headline from the South Florida Sun Sentinel read: “Insurance firms poised to tighten the financial grip this stormy season.”

Challenges Beyond Storms in Florida

However, storms are just one facet of the challenges. Echoing Crist's earlier sentiments, Florida grapples with "additional complexities." Regulatory authorities in the state point out problematic laws. These regulations permit contractors and attorneys to bill insurers up to three times the genuine value of certain claims, creating a legal morass. Such issues persist even in storm-free years.

Firstly, addressing the hurricane issue: Crist's heartfelt request seemed to be heeded for almost a decade post-2007. However, the tranquility was disrupted when Hurricane Irma struck in 2017, closely followed by Michael in 2018. Combined, these hurricanes inflicted damages amounting to $30 billion. Owing to insurance regulations granting Floridian policyholders a three-year window to file a claim, there was a delay of over a year before insurers began noticing the accumulating "loss creep."

Last fall, the state's insurance department began receiving a surge of rate increase filings from Florida homeowners' insurance providers, and the regulators found themselves unable to reject them. As highlighted by Citizens CEO Barry Gilway, while Florida insurance companies enjoyed a profit nearing $800 million in 2014, this figure plummeted to a net loss of $340 million by 2019.

The Market Gets Inundated with Non-Renewal Alerts

Subsequently, Florida home insurance policyholders perceived as high-risk began receiving non-renewal notifications.

Insurance agents, faced with clients losing their coverage, hustled to identify alternative options. However, Floridian property owners with coverage ranging from $300,000 to $399,999 found themselves paying an average premium of $2,350. This is significantly higher than the national average of $1,252 for equivalent coverage, as reported by the National Association of Insurance Commissioners.

State Insurance Commissioner David Altmaier cautions, “It's crucial to understand that the majority of homeowners' insurance policies don't encompass flood coverage.” Based on quotations from insurance-selling platforms, adding flood insurance might inflate the bill by an additional $1,500.

For certain homeowners, the only option might be to procure insurance directly from the state.

Locke Burt, CEO of Security First Insurance Co., highlighted in a June 2020 Sun Sentinel piece, “In Orlando, if a residence was built before 2010 and is valued below $300,000, it's unlikely any firm will provide insurance coverage.”

Florida's present-day insurance framework, somewhat unconventional, hinges on "reinsurance." This system safeguards insurers from significant losses, such as those from hurricanes. The state's property insurance providers, many of which emerged post the 2004-2005 disasters, lack the substantial capital reserves that larger, departed insurers once had to settle claims.

These insurance entities lean heavily on private investments, such as hedge funds, which contribute billions, betting on infrequent hurricane occurrences to ensure profitability. However, should their gamble not pay off, they're poised to hike their rates. In fact, Florida's reinsurers anticipate rate increases ranging from 25% to 45%, as cited by Artemis.

While hurricanes pose a significant threat, they aren't the sole challenge. Even in hurricane-free years, insurers found themselves inundated with a deluge of legal cases. Florida's legal framework inherently favors policyholders compelled to lodge claims against their insurers. However, state authorities believe that the pendulum has swung excessively in that direction.

One such regulation is termed the "assignment of benefits" or AOB. This provision empowers homeowners, even with commonplace property claims—such as damage from a malfunctioning rooftop air conditioner during their absence—to delegate the insurance claim process to a contractor rather than directly settling with the insurance provider.

As a result, the expenses associated with these claims nearly tripled in South Florida. Contractors, seizing the opportunity, escalated the costs, as reported by the Florida Consumer Protection Coalition.

James Graganella, CEO of Capitol Preferred Insurance Co., a local state insurance provider, noted that between 2016 and 2019, there was a staggering 700% surge in the number of lawsuits.

Last year, Florida's Governor Ron DeSantis remarked that AOB "has essentially devolved into a scheme," urging legislators to introduce necessary reforms.

"Address One Issue, Another Emerges"

In Spring 2019, the state enacted a reform package targeting the misuse of the "assignment of benefits." However, skeptics question its efficacy, especially when prominent law firms in the state stand to gain from the existing system.

Lynne McChristian, the Director of Insurance Research at the University of Illinois, observes, "Each time the industry, lawmakers, and regulators address a concern, a new challenge surfaces."

Compounding the challenges for insurers is a state regulation termed "one-way attorney fees." Designed to protect policyholders from legal expenses when challenging insurers over unpaid or undervalued claims, this law, when combined with AOB, has proven lucrative for both contractors and attorneys. This perspective is shared by Mark Friedlander, a representative of the Insurance Information Institute in Florida, an organization representing property insurers. Contractors have the leeway to initiate substantial insurance claim lawsuits without bearing any legal expenses. Concurrently, attorneys can keep inflating their charges until a settlement is reached with the insurer. Ironically, even if the insurance entity emerges victorious in court, the accrued legal expenses might overshadow the value of their win.

Friedlander mentioned that an attempt to introduce a tort reform package didn't pass muster in the 2020 legislative session.

The Burden Often Falls on the Florida Home Insurance Holder

Invariably, the expenses associated with claims are transferred to the policyholders in Florida. The story doesn't end there. Ross Nottingham, North America's chair for Hiscox Reinsurance, cautions that while reinsurers are witnessing substantial premium hikes, these could be offset by the genuine risk costs in Florida. This encompasses the escalating claim payments stemming from "loss creep," primarily attributed to fraudulent claims.

Compounding the issue, critics allege that Florida's home insurance firms are now concealing their financial challenges under the guise of "trade secrets." This is despite sharing such data with rating entities like Demotech, which has subsequently downgraded a few. As per the Sun Sentinel, concealed data includes active policy counts, total claim payouts, and any reports of illicit activities.

Information regarding average premiums can be sourced from the homeowner’s insurance report by the National Association of Insurance Commissioners. Additionally, Florida's insurance department offers a rate comparison tool, assisting homeowners in identifying more cost-effective insurance providers.

Furthermore, the Florida Insurance Department has introduced a rate comparison tool, aiding homeowners in finding more affordable insurance options.

However, prominent law firms in the state seem to benefit from the current setup. Lynne McChristian, the Director of Insurance Research at the University of Illinois, comments, "Whenever the industry, lawmakers, and regulators address one issue, another challenge emerges." Further complicating matters for insurers is a state regulation termed "one-way attorney fees." This law aims to protect policyholders from legal charges when they decide to challenge insurers over unpaid or undervalued claims.

However, when combined with AOB, this regulation has turned into a goldmine for both contractors and attorneys, as highlighted by Mark Friedlander, a representative from the Insurance Information Institute in Florida, an entity representing property insurers.

Contractors have the latitude to initiate substantial insurance-related lawsuits without bearing any legal expenses. Simultaneously, attorneys can keep escalating their charges until an agreement is reached with the insurer. In situations where the insurance firm secures a court victory, the accumulated legal costs might still surpass the monetary value of their win.

Friedlander pointed out that an attempt to introduce a tort reform package fell through in the 2020 legislative assembly.

The Financial Onus Often Lies with the Florida Home Insurance Holder

In the end, the expenses tied to claims predominantly fall on the shoulders of Florida's home insurance policyholders. The situation remains fluid. Ross Nottingham, North America's chair for Hiscox Reinsurance, signals that while reinsurers are experiencing significant premium hikes, these could be negated by the genuine risk-associated costs in Florida. This encompasses the uptick in claim payments, primarily driven by "loss creep" resulting from fraudulent claims.