Florida lawmakers can expect substantial pressure to tackle the assignment of benefits (AOB) and water loss claims crisis from the state’s insurer of last resort when Florida’s legislative session begins early next year.
At a governing board meeting Wednesday, leaders of Citizens stressed that rising water claims and “out of control” litigation are threatening the insurer’s long-term financial stability and will stifle efforts by Citizens to offer premium breaks to policyholders in 2017.
The company said that barring significant changes, including possible legislative action on assignment of benefits, non-hurricane losses will continue to chip away at Citizens‘ reserves and could result in policies returning to the state’s insurer of last resort as private insurers face similar challenges.
“Without significant reform, litigation, water claims and AOB pose a serious threat to the financial position of Citizens,” said Chris Gardner, chairman of the Board of Governors. “This is not a sustainable situation.”
Citizens plans to make AOB reform its 2017 legislative priority, the company said.
The percentage of nonweather related water claims – burst pipes, sudden dishwasher leaks, etc. – that head toward litigation has skyrocketed in recent years. According to Citizens data, each litigated case raises the average claim cost by at least $20,000, which will ultimately be passed on to Citizens policyholders.
Citizens said that between January and November 2016, 8,097 new lawsuits were filed against Citizens – a 30 percent increase from the same period in 2015. Meanwhile, Citizens’ policy count dropped by 26.3 percent between January 2015 and November 2016.
“While less than 15 percent of water-related claims resulted in litigation in 2011, nearly 50 percent did so in 2016,” said Barry Gilway, Citizens president, CEO and executive director. “The situation is really out of control.”
Contributing to this sharp increase is the fact that in many cases, Citizens is only made aware of a loss after repairs are made or the policyholder has hired an attorney or a public adjuster to represent them, the company said.
Another factor is the use of assignment of benefits, in which policyholders who suffer a loss sign over policy rights to a third party, such as a contractor, who then has control of the claim and deals directly with Citizens. Data from Citizens and the Florida Office of Insurance Regulation found that on average, AOB claims are more expensive and more likely to lead to litigation.
Under current conditions, contractors assume all the benefits afforded the policyholders but bear few of the responsibilities, such as cooperating with Citizens adjusters.
These losses are driving Citizens’ 2017 budget request, which was approved by the Board on Wednesday. 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 Florida Consumer Protection Coalition, formed earlier this year in response to rising AOB abuse, issued a statement in support of Citizens legislative priority.
“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.
Those reforms include eliminating one-way attorney fees, which create an incentive for bad guy vendors to sue insurance companies without facing any financial risk, the coalition said. It also supports requirements for written estimates for work, notifications for insurers and options to rescind an AOB.
“Citizens is on the right path to seeking better protections for consumers,” said Michael Carlson, president of the Personal Insurance Federation of Florida, which is a member of the coalition. “Consumers should not have to sign over control of their insurance policies they bought and paid for, and any vendor who insists upon on it should raise a red flag.”
The Consumer Protection Coalition said AOB reform will be its priority as well during the upcoming legislative session, saying that AOB abuse hurts homeowners, erodes Florida’s business-friendly environment and threatens the stability of the state’s insurance market.
“This problem is not limited to Citizens, and we encourage lawmakers to take notice of AOB abuse and get behind efforts to stop it before it impacts every homeowner in Florida with higher premiums,” Wilson said.
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