- December 14, 2022
This opinion piece has been updated to correct a name.
You can say we were guilty of media hyperbole and doomsday-ing, but we’ll categorize it as a story that is still unfolding.
About this time last year, we wrote that “rising property insurance rates are on the verge of popping Florida’s housing bubble and the economy — all because of lawsuits.”
We quoted an insurance analyst who spent six months studying Florida’s property insurance industry, saying: “Florida’s P&C market is in a free-fall collapse. This market is going to fail.” We quoted a judge who tried thousands of insurance cases and told us: “The sky is falling. It is a financial crisis.”
And we made a list of predictions of what would occur if Senate Bill 76 did not pass. We predicted:
As it turned out, much of SB 76 passed, and some of its provisions have had some positive effects, albeit not much. Sen. Jim Boyd, author of last year’s bill, says a few insurers have reported that the way legal fees are now regulated and calculated has curtailed the filing of insurance lawsuits.
But for the most part, the condition of Florida’s homeowner insurance market continues to worsen. Sen. Jeff Brandes, R-St. Petersburg, one of the Senate’s leading advocates for reforms that would create a rational insurance market, told us this week: “It won’t be long before Floridians’ annual insurance premiums will be more than their mortgage payments.”
Overall, the state of property insurance in Florida is much like the aftermath of a hurricane: a chaotic, costly mess.
A partner of one of the leading insurance agencies in Sarasota told a group of CEOs recently that last summer his firm received notice from one of the state’s property and casualty insurance carriers that it would not renew 2,000 of his agency’s customers’ homeowner policies. That triggered a mad scramble to notify and secure new policies — in the height of hurricane season. To make the news worse, the new rates were running 30% to 40% higher than what the customers were paying. And that was on top of 10% to 30% increases in 2020.
Insurance carriers, meanwhile, continue to lose massive amounts of money, largely because of lawsuit-driven insurance claims.
There hasn’t been a major hurricane in Florida since 2017. Nonetheless, the state’s 52 Florida-based insurers reported aggregate losses from 2017 to 2020 of $1.32 billion. In 2020 and 2021, they will have lost nearly $2 billion, a record loss of more than $1 billion in 2021.
What’s driving the losses? The lawsuits. They’re expected to reach a record 100,000 for 2021, a 25% increase over 2020. For perspective on the scope of Florida’s insurance litigation problem, consider: In 2013, there were only 27,000 insurance-claim lawsuits. What’s more, while Florida accounts for 8% of P&C insurance claims nationally, it accounts for 76% of P&C lawsuits.
That tells you how out of whack the situation is.
Guy Fraker, founder and owner of Key West-based Build Any Future Advisory, who has tracked the state’s P&C industry for more than two years, describes Florida this way: “We don’t have an insurance market in Florida. We have a litigation market.”
In a 110-page report titled “The Dark Side of Insurance Innovation: Florida’s P&C Litigation Economy,” Fraker wrote: “Florida’s litigation economy has grown to an annual revenue stream exceeding $5 billion for the benefit of fewer than 100 people. The funds come through insurers, but not from insurers. This revenue stream is taken from insurance company investors and 9 million Floridians on an involuntary basis.”
Contractors and trial lawyers essentially have been collaborating since 2018 in a scheme in which contractors comb neighborhoods affected by storms, advertising to inspect homeowners’ roofs for damage. If they find evidence of even a small leak or a few broken tiles, they’ll parlay that into an insurance claim and lawsuit that will result in insurers paying for the full replacement of roofs, plus substantial legal fees.
Read the text from a Brandon contractor in the sidebar above. It is typical of the methodology.
“The carriers are getting crushed with water damage suits in South Florida, roofs in Orlando and lead pipe damage in older homes all over Florida,” Brandes says.
And while SB 76 has provisions that help avoid lawsuits and bring rational calculations to the awarding of legal fees and thereby reduce the incentive to file lawsuits, Fraker told us some trial lawyers now have a new tactic to extract large amounts of money from insurers: condominiums.
“They found a replacement for what they lost from (the new) fee multipliers,” he said.
Fraker has researched multiple instances of lawyers filing insurance-claim lawsuits on behalf of condo associations. These suits are referred to as “supplemental condo association claims” — essentially reopening closed cases based on the discovery of previously undetermined damage.
Find one condo building in a large complex with evidence of damage or a leak, then leverage that into requiring the insurance carrier to replace roofs on the entire complex.
As you can imagine, the dollars involved are much greater than a roof on one home.
Altogether, Florida’s dysfunctional property insurance market has costly consequences for Florida homeowners and all taxpayers.
For one, as the number of investor-owned, Florida-based insurance carriers shrinks and continues to weaken financially, the supply of property insurance will continue to shrink. As supply shrinks, the cost goes up.
“We’re in for a couple more years of paying more for property insurance,” Brandes says.
Which also means housing affordability — already a problem — will continue to grow increasingly worse. Apartment dwellers are seeing 30% increases driven by inflation and rising insurance rates.
A second adverse effect of Florida’s dysfunctional insurance market is how it affects Citizens Property Insurance Co., now the largest property insurer in the state. If you can’t buy property insurance in the private market, Citizens is your last resort.
But there is a big catch that most Floridians don’t realize: The more policies Citizens takes on, the greater the risk for Floridians. If a Category 5 hurricane destroys much of South Florida, where Citizens insures 33% of the 1.5 million residential properties, and if Citizens doesn’t have enough surplus and reinsurance to cover the losses, all Floridians will be taxed to cover the difference.
In other words, it’s totally not in Floridians’ interest to see Citizens Property Insurance grow. It is in Floridians’ interests to see it shrink.
But that is not happening. In December, Barry Gilway, CEO of Citizens, told his board that because of the shrinking supply of insurers, their reluctance to renew and write new policies and the continuation of lawsuits, Citizens is taking on 5,000 new policies a week.
He projects Citizens will grow from 775,431 policyholders at the end of 2021 to 1,064,220 in 2022, a 37% increase.
Brandes is not optimistic that the Legislature has the will to fix Florida’s property insurance market. The trial bar exerts too much influence over the Legislature, and contractors have their own vested interests in the status quo.
“Because of the Legislature, insurers cannot write profitable business in Florida,” he says.
His fix would be dramatic: “a surplus lines market.” In essence, an unregulated, buyer-beware market that would not have Florida taxpayers serving as a backstop. Homeowners would have to become far more dependent on themselves and from whom they’re buying their policies and no longer rely on other taxpayers to bail them out.
That’s the way it should be.