Homeowner Insurance Abuse Needs to Be Addressed
Commentary by Christian R. Camara, Daily Business Review
June 9, 2017
As Gov. Rick Scott acts on legislation that was passed during the final weeks of this year's regular legislative session, there is one bill noticeably absent from his desk: House Bill 1421. Authored by state Reps. Jamie Grant, R-Tampa, and Rene Plasencia, R-Orlando, the bill would have addressed abuse of assignment of benefits, or AOBs, the driving cause behind the continuing rise of homeowner insurance rates across the state.
It has been over a decade since Floridians were impacted by a major hurricane, so naturally we have legitimate questions about why we continue to pay more every year to insure our properties — a line of questioning further justified by the fact that reinsurance rates are at historic lows and falling.
The principal reason many parts of Florida continue to experience property insurance rate increases rests squarely on the exploitation of laws governing so-called AOB agreements. An AOB permits a policyholder to assign their insurance benefits to a third-party vendor — such as a water remediation company, repair company or contractor — after a loss, allowing the vendor to charge the insurance company for its work directly.
While the arrangement is sensible in principle, it is problematic in practice. A loophole in state law allows vendors to whom benefits have been assigned to sue and have their legal fees paid by the insurer. The arrangement was originally intended as a protection for policyholders, but this "one-way" attorney fee provision has since incentivized unscrupulous vendors to overcharge for services and file frivolous lawsuits. This needless litigation increases the cost of even the smallest claim by thousands of dollars, which in turn is paid for through higher insurance rates.
The situation has become so absurd that many lawsuits are filed even before an insurance company has knowledge of a loss, much less has had time to process a claim. This means that even when an insurer chooses to settle, it must cover the vendor's legal fees.
Payday Scheme This grievously misaligned incentive has led to abuse that amounts to a payday scheme for unscrupulous vendors and their trial lawyers. Their gain is every Floridian's pain as policyholders are compelled to foot the bill for their superfluous legal actions via higher insurance rates.
The problem is only growing. The state Office of Insurance Regulation reported that in 2014, 63 percent of insurance companies filed, and were approved for, rate decreases. A mere two years later in 2016, 73 percent of insurers were approved for rate increases largely on account of the spike in AOB abuse.
Despite years of opposition from trial lawyer lobbyists, the Florida House finally passed a modest, bipartisan bill this session that would have preserved consumer flexibility while also addressing much of the abuse driving rate increases. H.B. 1421 was supported by consumer groups, Citizens Property Insurance Corp., the Office of Insurance Regulation, various business associations, insurance companies, Realtors and even the Wall Street Journal editorial board. Yet it stalled in the state Senate.
Tellingly, the Senate companion measure, Senate Bill 1038, never saw the light of day. It failed to receive a hearing in its first committee chaired, surprisingly, by Sen. Anitere Flores, R-Miami, whose district is ground zero for AOB abuse and, consequently, is experiencing among the largest insurance rate increases in the state.
In response to the AOB crisis, private insurers are pulling out of many South Florida ZIP codes and are nonrenewing policies. As insurers seek to limit their exposure, supply will become restricted. Predictably, as a result state insurance regulators are projecting continued statewide rate increases until the Legislature acts to address AOB abuse.
In 2017, the Florida House did its part. The Senate, not so much. Hopefully all policymakers will be more motivated to act in 2018 — an election year.
Christian R. Camara is a senior fellow with the R Street Institute in Washington.