Florida Appeals Court, Regulator Reject Policy Language Aimed at Curbing AOB Abuse

By | January 10, 2018

A Florida appeals court has sided with the state’s insurance regulator in rejecting policy language filed by a Florida homeowners insurer to restrict the use of assignment of benefits.

The decision could have a significant impact on the Florida insurance market, as other insurers writing homeowners in the state using similar policy language may no longer be able to do so.

Insurer representatives say that the Fifth District Court of Appeal’s ruling upholding the state insurance commissioner’s decision is disappointing but not surprising. But what was surprising was that the Florida Office of Insurance Regulation (OIR) didn’t allow the insurer, Security First, to use the policy language in the first place given that the regulator has approved the use of similar language by other insurers.

OIR disputes that contention, maintaining it never formally approved the use of such language by other carriers.

Industry lawyers argue that the policy language would help stop ongoing assignment of benefits abuse that the industry says is leading to increased litigation and higher homeowners insurance rates in Florida.

Case Background

The decision stems from the case of Security First Insurance Co. vs. Florida Office of Insurance Regulation (OIR), in which Florida homeowners insurer Security First challenged OIR’s disapproval of its filing for endorsements and policy language changes regarding the use of an assignment of benefits.

Proposed Security First policy language rejected by OIR:

For any assignment of benefits
after a loss:

  1. You must disclose the assignment to us prior to the payment of any claim:
  2. You must comply with all of section I – Conditions, 4. Your Duties After Loss. We have no duty to provide coverage under this policy if you fail to comply with these duties.
    • No assignment of claim benefits, regardless of whether made before loss or after loss, shall be valid without the written consent of all “insureds”, all additional “insureds”, and all mortgagee(s) named in this policy.
    • If we deny your claim, that denial will be applied to a valid claim of any assignee(s) and/or any other third parties contracted by you to services rendered to you to repair or replace damaged property.
    • We will not be responsible for payment to any assignee or third parties for payments for services rendered that are not covered property losses under this policy.

The policy endorsements were first filed back in 2013 by Security First for its homeowners, tenant homeowners, condominium unit owners and dwelling fire insurance policies and included language designed to restrict policyholders from assigning post-loss benefits absent the consent of all insureds, all additional insureds and all mortgagees named in their policies. (See sidebar for actual proposed language)

The move by the insurer was an attempt to stem losses from the abuse of AOB’s by contractors and water mitigation firms, which has only escalated over the last several years. Several other insurers had filed similar language under “informational filings,” and had the language approved.

OIR disapproved Security First’s filing on the basis that the AOB language violated Florida law. Security First then requested an administrative review of OIR’s decision, but a hearing officer upheld it concluding that the policy language was prohibited under Florida law because it placed a “restriction on the right of a policyholder to freely assign [their] benefits.”

According to court documents, the Fifth DCA disagreed with Security First’s argument that Florida case law that holds an endorsement requiring an insurer’s consent for a post-loss assignment of benefits is not enforceable because it only applies to provisions requiring the insurer’s consent.

The court cited the 100-year-old case of West Florida Co. v. Teutonia Fire Insurance Co. that found “it is a well settled ruled that [anti-assignment provisions do] not apply to an assignment after loss” and said the Florida Supreme Court has “repeatedly adhered to this basic principle.”

The court also cited other cases that have followed the 1917 West Florida precedent-setting decision, including one involving Security First and One Call Prop. Services out of the Fourth District Court of Appeals in 2015. This ruling said that “even when an insurance policy contains a provision barring assignment of the policy, an insured may assign a post-loss claim.”

Ultimately the court said, “OIR did not interpret the law on this issue in error,” and affirmed the final order.

The court noted Security First’s other argument for reversal “based on several public policy concerns,” referring to the insurer’s argument that OIR’s rejecting the proposed policy language “actually harms other parties vested rights, ‘all of whom are entitled to an equal voice in such assignments to prevent impairing their interests.'”

The court said other courts have been asked to consider the legality of AOB’s by third-parties, but noted previous district courts have “refused these invitations, concluding that such considerations are for the Legislature to address.” The Fifth DCA agreed.

Case Impact

Insurance experts contend that OIR is being inconsistent in the use of AOB language by insurers.

“The provision that requires all insureds, including mortgagees, to approve the assignment does exist in other insurance company policies,” said attorney Michael Packer, who heads up the Florida insurance coverage and bad faith practice group for the law firm Marshall Dennehey Warner Coleman & Goggin in Fort Lauderdale, Fla.

A handful of other insurers in Florida filed and began utilizing similar language back in 2013 when Security First filed its endorsements, according to filings obtained by Insurance Journal. Nationwide, Safe Harbor, ASI, People’s Trust, Tower Hill and Olympus currently have the exact or even more restrictive policy wording than what Security First requested be approved.

“It’s extremely disappointing,” Packer said of OIR’s disapproval of Security First’s filing and the court’s affirming of it. “I don’t think OIR should be regulating in that sense – I think they overstepped their bounds a bit, even though the district court agreed with them.”

Lisa Miller, former deputy insurance commissioner and consultant to Florida property insurers, including Security First, agreed.

“Policyholders insured with the handful of insurance companies that require mortgage company approval for a valid AOB are protected from unscrupulous vendors,” she said in an email to Insurance Journal. “It’s unfortunate that all policyholders cannot access this benefit because of regulatory, judicial and legislative limitations.”

These insurers may not have this “policyholder protection” for long. When asked why other carriers were approved for these changes but Security First was not, a representative from OIR said via e-mail the policy language was included in some form filings submitted to OIR as “informational filings.”

Karen Kees, OIR deputy director of communications, said between June 2012 and June 2013, OIR had a “historically high number of property and casualty forms being filed for review and approval,” so it issued a set of orders exempting certain forms from the standard personal lines property insurance form filing and review requirements. The orders temporarily permitted companies to voluntarily submit these filings as informational only to OIR, meaning OIR did not review or approve them prior to use.

“These informational filings, which are no longer being used for personal lines property insurance forms, were required to be accompanied by a notarized certification from specific individuals within the company stating they fully complied with current law,” Kees said.

Kees didn’t say if other companies using this language were non-compliant with Florida law in light of the court’s decision, but noted that “When the Office receives the mandate from the 5th DCA, we will take the appropriate action with other companies.”

Kees added that because the Fifth DCA ruled that “the right to recover under an insurance policy is freely assignable after loss,” similar language that violates this ruling would not be permissible if other insurers try to include it in homeowners policies going forward.

That is a mistake, says Scott Johnson, with Johnson Strategies in Florida, because allowing the proposed language by Security First in homeowners policies would go a long way to solving the AOB problem.

“Vendors/attorneys don’t like the language because they can’t get approval of an assignment from all named insureds – especially a bank,” he said. “In essence, the OIR’s decision allows AOB abuse to continue even though OIR is blaming AOB abuse for present – and future – rate increases.”

Packer says OIR fell back on the position that Florida law has prohibited insurance companies from trying to prohibit post loss assignments for 100 years, but he said he doesn’t personally think the proposed Security First provisions do that.

“[Security First] should have been allowed to amend the endorsement as claims arose, and then have the issue challenged in court,” he said.

Not Over Yet

Security First, which did not respond to requests for comment by Insurance Journal, isn’t giving up yet. The insurer has asked the Fifth DCA to rehear its argument.

In a motion for rehearing en banc filed on Dec. 18, Security First said it believes the court “overlooked or misapprehended the difference between case precedent addressing anti-assignment of an insurance policy or prohibitions on requiring insurer consent of an insured’s assignment of a claim with the actual language proposed by Security First which had no such insurer consent requirement, and was instead designed to protect the rights of the mortgagee and co-insureds.”

Security First stated in its motion to rehear that all Florida insurance policies and long-standing common law “require that the insurer protect the mortgagee’s interest in the insured property,” and without some form of protection for mortgagees and co-insureds under a property policy, AOB agreements create risks of improper transfer of their rights without their consent and expose Florida insurers to duplicative claims arising from the same property damage incident.

The insurer also pointed to another AOB policy language case – Bio Logic, Inc. vs. ASI Preferred Insurance Corp. – out of the Second District Court of Appeals in Florida where the court agreed the insurer’s policy language is “not an anti-assignment provision and was held valid and enforceable.”

In that case, an AOB lawsuit was dismissed because the assignee contractor was not in compliance with the insurance policy provisions regarding the mortgagee’s consent to the assigned claim, Security First’s motion says.

The insurer has also asked the Fifth DCA to certify several questions to the Florida Supreme Court related to AOB policy language, and the legality of an AOB lawsuit by third parties when all named insureds and their mortgage-holder have not consented.

The Fifth DCA has yet to respond to Security First’s requests.

Fifth DCA Decision: Security First Insurance Co. vs. Florida Office of Insurance Regulation

About Amy O'Connor

O'Connor is the Southeast editor for Insurance Journal and associate editor of MyNewMarkets.com. More from Amy O'Connor

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