FOCUS ON FLORIDA Industry’s Response to AOB What’s Next with Workers’ Comp Court Decision on Construction Defect Claims
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Contents
November 21, 2016 • Vol. 94 No. 22 • Focus on Florida
Florida
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WHAT’S NEXT FOR FLORIDA’S AOB ISSUE
6 How Insurers Can Use Litigation to Address Florida’s AOB Problem 8 Former Insurance Commissioner McCarty Recognized for Global Leadership 10 Fraud Round-up 11 A.M. Best: Damage from Hurricane Matthew Won’t Affect Most Insurer Ratings 11 Florida Hurricane Fund Still Strong Despite Storms 11 Florida Police Union Says Officers With Zika Entitled to Workers’ Comp 12 U.S. Supreme Court Declines to Review Challenge to Florida Workers’ Comp System 13 Top 5 Florida Insurance Stories of 2016 • Workers’ Comp Market in Turmoil • The AOB ‘Insurance Crisis’ • 2016 Storm Season, Hurricane Drought Ends • McCarty Resigns, Altmaier Takes Over as Commissioner • Florida’s Flood Market Efforts
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A.M. BEST: DAMAGE FROM HURRICANE
18 Construction Defect Claims and the Role of the Insurer in Early Proceedings
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TOP 5 FLORIDA INSURANCE STORIES OF 2016
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CONSTRUCTION DEFECT CLAIMS
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Florida
How Insurers Can Use Litigation to Address Florida’s AOB Problem
By Jason B. Wolf
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here’s a sign that hangs in some retail service storefronts. “Your crisis is not my emergency.” In the Florida first-party homeowners insurance sector, the issue of assignment of benefits is a crisis that has evolved into an emergency from legislative, legal
and actuarial perspectives. And while the state legislature has failed to find a legislative fix to the problem for four years running, insurers are now taking a different route through litigation in attempt to curb losses. Assignment of benefits (AOB) often occurs following a disaster or emergency situation that requires immediate service or treatment. Such situations can include a pipe burst and flood in a commercial property or residence, for example, or a hailstorm that requires roofing repair. While action is required immediately, the insured may soon need insurance proceeds to pay for the services, which don’t come until the claim is settled. By assigning benefits to a service provider, such as water remediation company or contractor, the insured gets immediate service. The provider then files for reimbursement against the
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insurance company. The scenario seems simple enough. Yet, in recent years across the country we’ve seen fraud rise as service providers seek unreasonably high claims. What’s more, and more financially costly to the insurance industry, attorneys who take these cases are able to collect fees atop the actual charges for services rendered by the service provider. In 2000, fewer than 300 assignment of benefits cases were filed in Florida. In 2014, more than 45,490 cases were served and accounted for about a third of all lawsuits filed against insurers during that period, according to the Florida Department of Financial Services. The result for insurers is rising litigation and higher costs of claims. While contingencies are tiny in comparison to other types of damage cases, Florida’s “one-way attorney fee statute” INSURANCEJOURNAL.COM
that’s part of Section 627.428 and the fee shifting it offers plaintiff attorneys has lured litigators who can bill for fees. Contingency fee multipliers, along with the sheer number of cases, made the hit to insurance companies untenable. Atop that, by coupling attorney’s fees and any contingencies with the threat of a bad faith claim against insurers and what’s emerged is a landscape where damages could rise markedly. For insurance companies, it is clear that these emergencies borne of existing laws on the books have become crises in need of attention by state lawmakers. In Florida, legislators and industry regulators alike have sought to pass laws that would reduce abuses to assignments of benefits, return to insureds the right to attorney’s fees, and bring about solutions that return a sense of equilibrium to the issue of insurance industry litigation. The Florida Legislature has tried several times to pass legislation to address the issue, most recently during the 2016 session. The measure was defeated by trial attorney and contractor lobbying. Will the Florida Legislature revisit this topic again in the 2017 legislative session? It’s unknown, as the legislative agenda has not yet been released, but this is expected to be a top priority for reform-minded legislators. The Florida Office of Insurance Regulation (OIR) indicated recently it will introduce a bill, according to Politico (see page 16). In the meantime, insurers are trying all sorts of options to bring frivolous lawsuits under control including through litigation. These range from suing water mitigation providers for nefarious tactics, to challenging their attorneys on fees, to consolidating the cases. For instance, in some Florida jurisdictions, lawsuits brought by water mitigation contractors are automatically consolidated with lawsuits brought by the insured plaintiffs. This is an exercise in judicial economy and allows insurers
to address the merits of the claim on one front, rather than fighting off two lawsuits.
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| News & Markets
Former Insurance Commissioner McCarty Recognized for Global Leadership
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he International Association of Insurance Supervisors (IAIS) has recognized former Florida Insurance Commissioner Kevin M. McCarty for his service to international insurance regulation. McCarty is a past president of the National Association of Insurance Commissioners (NAIC) and was nominated by the NAIC for recognition as an IAIS Distinguished Fellow. “We nominated Kevin to show our gratitude for his decades of work on behalf of U.S. consumers, regulators, and companies during international negotiations and dialogues,” said NAIC President and Missouri Insurance Director John M. Huff. “[McCarty] has been a staunch advocate for effective regulation and a common-sense approach to international standards during
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mitigation invoices is also an increasingly successful tactic. For instance, if a pressurized pipe breaks in a home in the middle of the night and water is raging throughout the home like an out-of-control firehose, this is undoubtedly an emergency, requiring the water mitigation contractor to mobilize his resources and get his crew to the house. In this example, an “emergency” fee is warranted. These days, however, brazen water mitigation contractors often insert an emergency fee in their invoice even when they come out to an
his service to both IAIS and NAIC.” The IAIS Distinguished Fellows program, established in 2004, recognizes former IAIS members for significant contributions to advance IAIS initiatives. McCarty was substantially involved with the IAIS starting in 2008 until his departure as commissioner of the Florida Office of Insurance Regulation this year. His service at the IAIS included nearly 10 years Kevin McCarty on the IAIS Executive and Wisconsin Insurance Committee, acting as co-vice Commissioner Ted Nickel chair for four years. He accepted the honor on was also a member of the McCarty’s behalf during the Technical and Financial IAIS annual conference in Stability committees, and Asuncion, Paraguay. served as a moderator and “In my nearly 30 years as an panelist at numerous IAIS insurance supervisor, I have conferences and global insurance events. been fortunate to have had NAIC President-Elect many wonderful experiences,”
said McCarty in a prepared statement. “I will say without hesitation, however, that my involvement with the IAIS has been a true career highlight. I have always enjoyed and appreciated my interaction with the talented and dedicated professionals who drive the work of the IAIS.” The IAIS is a voluntary membership organization of insurance supervisors and regulators from more than 200 jurisdictions in nearly 140 countries. Former IAIS distinguished fellows from the U.S. include Rob Esson, Terri Vaughan, Al Gross, Walter Bell, Alessandro Iuppa, Hanley Clark and David Walsh. NAIC is the U.S. standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories.
insured property several days – or even weeks, or months later – and expect the insurer to pay for it. This is the type of unreasonable charge that can be challenged in court. Likewise, less reputable water mitigation contractors will tack on all sorts of questionable or unnecessary charges. In the past two years, the number of AOB lawsuits has skyrocketed. Correspondingly, the number of potential solutions has also soared. The first step might be to review the failed 2016 bill.
revise[d] timeframes for an insurer to acknowledge communications, begin investigations, and pay or deny claims; authorize[d] insurer to limit scope of certain repairs; [and] revise[d] Homeowner Claims Bill of Rights to conform to changes made by act.” With that as a starting point, we might find an answer to this crisis-turned-emergency.
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As written, HB 1097 would have provided “requirements under property insurance policy for post-loss assignment of claims or policy provisions not related to liability coverage; provide[d] requirements for an agreement to assign such claims; provide[d] limitations on assignee’s rights to collect money from, sue, or claim lien on property of, policyholder; revise[d] timeframe for paying undisputed benefits owed under first-party property insurance policies; authorize[d] an insurer to require notice of loss within specified time;
Jason Wolf is lead partner, Property Insurance Defense Practice, at Koch Parafinczuk & Wolf, P.A., in Fort Lauderdale, Fla. His practice area focuses on first-party property insurance defense. INSURANCEJOURNAL.COM
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| Fraud Round-up followed by two years of probation. Rodriguez’s insurance agent’s license has been revoked and he is permanently barred from the insurance industry. This case was successfully prosecuted by the Miami-Dade County State Attorney’s Office, 11th Judicial Circuit.
11 Arrests Made in Florida Workers’ Comp, Unlicensed Contractor Sting
Miami Agent Sentenced to 2 Years for Issuing Fake Insurance Policies
A former insurance agent in Miami was convicted and sentenced to prison on multiple felony charges, including creating fake insurance documents for his clients. The Florida Department of Financial Services’ Division of Investigative and Forensic Services (DIFS) announced Mandy Rodriguez, 36, was convicted in July on multiple felonies, including insurance fraud, grand theft, and forgery following his attempt to create fake proof of insurance documents for his clients. He was sentenced to two years in state prison and ordered to pay more than $200,000 in restitution. Rodriguez’s arrest resulted from a case worked by the Department’s Division of Insurance Agent and Agency Services and the DIFS, which revealed that Rodriguez defrauded at least four clients by stealing their insurance premium payments and issuing them fake insurance policy documents. Citizens Property Insurance Corporation recognized the
alleged deceitful behavior and referred the matter to DIFS, which launched an investigation. The investigation revealed that Rodriguez prepared and provided fake insurance quotes, certificates of insurance, insurance declaration pages, and invoices to four consumers who believed they had purchased legitimate commercial or homeowner’s insurance policies. Rodriguez instructed these consumers to make their insurance premium payments to his personal corporation, Risk Management Agency Group, Inc. or RMAG, rather than to Citizens directly. Citizens and the owner of the insurance agency where Rodriguez was employed, Bentrust Insurance Group, LLC, both verified that the policies generated by Rodriquez were not legitimate. Furthermore, upon learning of Rodriguez’s misconduct, Bentrust’s owner fired Rodriguez, generated and paid for the appropriate insurance policies, which Citizens honored in good faith. In addition to paying $200,000 in restitution, Rodriguez was sentenced to serve two years in state prison,
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A multi-agency undercover workers’ compensation and unlicensed contracting sting conducted by the Florida Department of Financial Services’ Division of Investigative and Forensic Services (DIFS) led to the arrest of 11 individuals. The Manatee County individuals arrested in October were found to have advertised their ability to perform jobs such as plumbing and electrical work without the proper licensing or training, and without having workers’ compensation coverage to protect their employees in the event of an accident or injury. “When contractors knowingly neglect the law, a major liability risk is created for property owners,” said Florida Chief Financial Officer Jeff Atwater. “Not only are homeowners liable for any injuries that occur to uncovered workers on their property, but sub-par work performed by unlicensed and untrained contractors also creates a direct hazard for the property. This is a practice we, along with our local and state law enforcement partners, are working diligently to stop.” During the three-day operation, DIFS detectives, accompanied by logistical and tactical support from multiple agencies, established an undercover
sting across Manatee County in an effort to stop the illegal practice. Detectives responded to public advertisements, calling for contractors to perform services at a specified location in Manatee County. The arrested individuals included: • Johnny Lewis Harrison • Douglas Dan Wilson • Moises Gonzalez • Shawn Gandy • Joseph Alma • Kenneth Ellis Lohmann • James S. Civitello, Jr. • Donald Earl Beck • Shawn Anthony Ervin • Trang Thanh Tran • Tommy Minhtri Nguyen “Unlicensed activity threatens the livelihood of honest, hardworking professionals and can result in substantial physical or financial burdens to Florida consumers,” said DBPR Secretary Ken Lawson. Multiple agencies participated in the sting. These agencies include: The Manatee County Sheriff’s Office, Palmetto Police Department, DFS’ Bureau of Workers’ Compensation Compliance, the Department of Business and Professional Regulation, the Manatee County State Attorney’s Office and Manatee County Code Enforcement. The 11 individuals arrested were booked into Manatee County Jail on charges of workers’ compensation fraud and unlicensed contracting, and if convicted, they can face up to five years in prison or more if found to be a repeat offender. These cases will be prosecuted by the Office of Manatee County State Attorney Ed Brodsky. INSURANCEJOURNAL.COM
News & Markets |
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A.M. Best: Damage from Hurricane Matthew Won’t Affect Most Insurer Ratings
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.M. Best does not anticipate a significant number of rating actions related to Hurricane Matthew, as most rated insurance carriers have sufficient capital and appropriate reinsurance programs in place to effectively absorb this event, according to a briefing from the ratings company. Hurricane Matthew left a trail of wind and flood damage throughout U.S. southeastern coastal regions in early October 2016. The Best’s Briefing, titled, “Significant Damage From Hurricane Matthew Appears Manageable for Insurers,” notes that many top homeowners/farmowners and automobile writers in the affected states have diverse geographic footprints and
product profiles, in addition to possessing an appropriate level of risk-adjusted capitalization. A.M. Best said solid overall risk management profiles
and capabilities, inclusive of comprehensive reinsurance programs, should help ensure that these organizations are adequately protected from the potential losses to emanate from the storm. For these organizations, A.M. Best expects the impact is more likely to have a notable effect on fourth-quarter earnings
than on overall balance sheet strength. Conversely, for the smaller, more geographically concentrated property insurers with exposure in the affected areas, it may take more time for claims to be processed and classified. Due to the potentially large volume of claims reported, it most likely will take longer to determine the extent of the losses. It is possible that the impact to these smaller, more concentrated companies will adversely affect earnings and capitalization. Nevertheless, regardless of the size of the carrier, reinsurance coverage and risk concentration parameters will have a material influence on mitigating the impact of the hurricane losses. Initial indications
suggest that total losses will be within established catastrophe reinsurance limits for A.M. Best-rated entities. It had been more than a decade since a hurricane made landfall in Florida until Hurricane Hermine did so in early September 2016 (see page 16). The episodes of volatile weather as evidenced by Hurricane Hermine and now Hurricane Matthew are stark reminders of the damage to which property/casualty insurers can be exposed, the ratings company said. A.M. Best said it believes it also brings into focus the need for companies to continue employing prudent risk management practices that adjust as risk factors such as business profile and company retentions shift over time.
Florida Hurricane Fund Still Strong Despite Storms
Florida Police Union Says Officers With Zika Entitled to Workers’ Comp
lorida’s streak of dodging hurricanes is over, but the state-created fund that helps private insurers pay out claims after a storm remains in strong financial shape. Anne Bert, the chief operating officer of the Florida Hurricane Catastrophe Fund, said preliminary estimates predict that the fund will pay out less than $200 million for Hurricane Matthew. Bert said it appears there will likely be only minimal payouts associated with
olice union officials want Florida lawmakers to extend workers’ compensation to first responders with Zika. Florida Fraternal Order of Police President Bobby Jenkins said that emergency responders should be covered if they contract an infectious disease while working. The union says Miami Beach refused workers’ compensation for a police sergeant and another first responder for Zika infections apparently acquired
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Hurricane Hermine. The fund’s advisory council approved new financial estimates in October that show the fund has roughly $17.5 billion available and could borrow $7.7 billion more if needed. The financial health of the fund is important because the state can impose a surcharge on most insurance policies to replenish it if the money runs out. Some critics have called the surcharge a “hurricane tax.’’ Copyright 2016 Associated Press.
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from mosquito bites in part of the city identified as an active transmission zone. Miami Beach spokeswoman Tonya Daniels said city employees were offered free Zika testing and mosquito repellent. Workers’ compensation requires proof of Zika exposure while working, but Daniels said the city would honor any changes legislators made to the law. Jenkins said the testing “does not mitigate the need for their coverage of the employees that they place at risk.’’ Copyright 2016 Associated Press.
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U.S. Supreme Court Declines to Review Challenge to Florida Workers’ Comp System By Amy O’Connor
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he United States Supreme Court has refused to review a Florida case challenging the state’s entire workers’ compensation system, which could be seen as the state’s only reprieve on workers’ comp this year. The Court’s Oct. 31 decision without comment was in response to the case of Daniel Stahl v. Hialeah Hospital, which made its way through the state courts until April when the Florida Supreme Court ruled it did not have jurisdiction in the case. The petitioners sought U.S. Supreme Court review in August. The Stahl case questioned whether Florida’s workers’ comp system is an adequate alternative for injured workers since its major overhaul in 2003. More specifically, the case challenged whether the elimination of a type of partial disability benefits by lawmakers is legal. The case stems from a back injury the petitioner, Stahl, suffered while working as a nurse for Hialeah Hospital in 2003, just a few months after the changes to the workers’ comp system went into effect. Stahl’s physician found in October 2005 that he had reached his maximum medical improvement (MMI) and his injury was later classified as career-ending because he could not return to work as a nurse. He was then entitled to impairment income benefits of 12 weeks and compensated $5,472 for his career-ending injury. It was later determined that Stahl did not meet the definition of permanent total disability (PTD) and his claim for PTD benefits was denied. Stahl claimed that the benefits available since Oct. 1, 2003, when Florida’s workers’ comp reforms went into effect, are “inadequate and therefore cannot be the exclusive remedy for on the job injuries,” and that the state’s workers’ comp law violates the U.S. Constitution.
Florida attorneys who are familiar with the case are not surprised the U.S. Supreme Court declined to hear the case. “The petition to the U.S. Supreme Court was a long shot at best by the petitioner seeking to have the U.S. Supreme Court determine a challenge of the constitutionality of the Florida’s workers’ compensation system,” said Allison Hartnett, senior partner for Florida firm Walton Lantaff Schroeder & Carson LLP. “The lack of action on the petition means that Mr. Stahl’s case is essentially over as to challenging the act as a whole,” “Essentially, Stahl was an indictment of the entire workers’ compensation law in Florida, and the 1st District Court of Appeal, the Florida Supreme Court, and the U.S. Supreme court have rejected that indictment,” said Justin Parafinczuk of insurance defense firm Koch Parafinczuk & Wolf P.A, in Florida. Parafinczuk added that the effort to eliminate the entire workers’ compensation law could have done much more harm to workers than good. “Under the current workers’ compensation law, there is no burden on the claimant to prove fault and no allocation of comparative fault — those are both huge advantages for workers. The only proof necessary to have a workers’ compensation claim is that the accident happened while the claimant was working within the scope of their employment — that’s it,” he said. However, other challenges to the state’s workers’ comp system were not so easily dismissed. The end of the Stahl
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challenge comes just a few months after the Florida Supreme Court overturned two other important workers’ comp cases that have had a dramatic effect on the state’s comp system (see page 14). The Florida high court ruled in April in the case of Castellanos v. Next Door Company that the mandatory attorney fee schedule is unconstitutional as a violation of due process under both the Florida and United States Constitutions. On June 9, the Florida Supreme Court ruled on Westphal v. City of St. Petersburg saying the 104-week statutory limitation on temporary total disability benefits is unconstitutional because it causes a statutory gap in benefits in violation of an injured worker’s constitutional right of access to courts. The Supreme Court reinstated the 260week limitation in effect prior to the 1994 law change. In response, the Florida Office of Insurance Regulation approved a 14.5 percent rate increase request to the National Council of Compensation Insurers on behalf of Florida insurers. Insurance experts expect that rate increase is only the tip of the iceberg if Florida doesn’t address the issue during its next legislative session. INSURANCEJOURNAL.COM
Special Report | SOUTHEAST
By Amy O’Connor
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t’s been a tumultuous year for the Florida insurance industry. It would seem the biggest story would be the end of Florida’s hurricane drought as the state got hit by not one, but two hurricanes this year, the first hurricanes for Florida since 2005. But those catastrophes weren’t the INSURANCEJOURNAL.COM
only storms Florida experienced in 2016. Florida Supreme Court decisions that upended the state’s workers’ comp system and subsequent rate hikes; the effect of ongoing abuse of assignment of benefits; the continuing battle over flood insurance rates; and the state’s first new insurance commissioner in 13 years, were all major headlines throughout the year. Those in the industry say each of these
stories will have a significant impact on the state going into 2017.
Workers Comp Market in Turmoil
The state’s workers’ compensation system was dealt two big blows this year
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that has since led to a huge rate increase for Florida businesses. The biggest blow came in April when the court ruled the attorney fee schedule passed in 2009 as part of state reforms is unconstitutional under both Florida’s and the U.S. Constitution as a violation of due process. The court ruling in the case of Castellanos v. Next Door Company, SC132082 said the schedule eliminates the right of a claimant to get a reasonable attorney’s fees — a “critical feature” of the workers’ compensation law. The court said the statute violates due process by installing an “irrebuttable presumption” that whatever fee the schedule comes up with is reasonable and by not providing any way for a claimant to refute the fee. The court said that “it is undeniable” that without the right to an attorney with a reasonable fee, the workers’ compensation law can no longer “assure the quick and efficient delivery of disability and medical benefits to an injured worker.” On the heels of that ruling, the court struck down the state’s statutory 104-week cap on temporary total disability benefits, saying it too is unconstitutional. The court’s decision came in the case of Bradley Westphal v. City of St. Petersburg. In the opinion, the justices said the limitation results in a statutory gap in benefits in violation of the constitutional right of access to court. The court opted to revive a previous limitation of temporary disability benefits, upping the limit to five years (260 weeks). The National Council of Compensation Insurers (NCCI), which files on behalf of Florida insurers, responded to the rulings with a rate increase request of 19.6 percent. The Florida Office of Insurance Regulation (OIR), however, denied its request saying it wasn’t justified and instead ordered NCCI to amend and refile its rate increase for 14.5 percent. That rate request was approved in October for
all policies effective as of Dec. 1, 2016. OIR said the individual rate impacts will include: • A 10.1 percent statewide average rate increase for the April 28 Florida Supreme Court decision in the case of Castellanos v. Next Door Company. • A 2.2 percent statewide average rate increase for the June 9 Florida Supreme Court decision in the case of Westphal v. City of St. Petersburg. • A 1.8 percent statewide average rate increase related to updates within the Florida Workers’ Compensation HCPR Manual per Senate Bill 1402. The manual became effective on July 1, 2016.
What’s Next
Insurance advocates in the state say it is imperative that the state come up with a fix for the workers’ compensation system that addresses the court rulings. “These rulings have left employers and employees potentially vulnerable to conditions that existed years ago when Florida businesses were burdened with some of the highest workers’ compensation costs in the nation,” said Logan McFaddin, PCI Florida regional manager for State Government Relations. “In December, workers’ compensation rates will jump 14.5 percent, which could hurt both small business owners and employers.” Many expected the Florida Legislature would address the issue in a special session in 2016, but that didn’t happen. McFaddin said PCI plans to work with state leaders on solutions to return Florida to a “vibrant workers’ compensation marketplace, meeting the needs of injured workers and controlling costs.” The Florida Association for Insurance Reform (FAIR) said the solution will entail taking a deeper look at how to best address the overall problems with the state’s workers’ comp system. “There is no real simple fix … the system needs a complete overall and we
“There is no real simple fix…the system needs a complete overall”
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have to look at it from top to bottom,” said Paul Handerhan, FAIR’s senior vice president, Public Policy. “There are a lot of different areas that can be focused on outside of addressing attorney’s fees that can bring costs down.”
The AOB ‘Insurance Crisis’ Assignment of benefits abuse has become such a well-known problem in the state of Florida this year that it now just goes by the nickname “AOB.” The issue with AOB comes from when a policyholder suffers a loss, such as water damage to their home, and then signs over their insurance policy to the person repairing the damage. Repair contractors utilizing the AOB on behalf of the insured often work with attorneys who then sue the insurance company over the claim. Florida’s one-way attorney fee statute has encouraged these suits because the insurance company is typically left paying the attorney fees. In many cases, policyholders don’t know the lawsuit has even been filed. Florida’s state-run insurer Citizens has been the most affected by this abuse. Citizens CEO and Executive Director Barry Gilway says that the negative impact on the pricing of property insurance and availability of coverage in Florida is getting worse. Gilway said while the gross misuse of the AOB form is a major component of the issue, the problem has really become a litigation issue relating to all non-wind water claims. “The situation is deteriorating even further at Citizens,” Gilway told Insurance Journal. “Despite a book of business that has stabilized at around 490,000 policies, we are now projecting the number of lawsuits received each month will grow from 900 this year to over 1,000 in 2017. And yes, it is the same 10-15 firms that continue to be responsible for 60 percent of the litigation across the state.” At the beginning of the year, Citizens released an analysis in response to a data call from OIR that found claims utilizing INSURANCEJOURNAL.COM
an AOB were almost twice as expensive on average and more likely to lead to litigation. The abuse has been the most rampant in Southern Florida, specifically in the TriCounty region of Miami-Dade, Broward and Palm Beach, and it isn’t just specific to Citizens. “All companies, particularly those with any relevant market share in the TriCounty area, are experiencing the same result,” Gilway said. The abuse has led Citizens to raise rates by an average of 6.8 percent statewide in 2017. Many other homeowners insurers in the state are raising rates because of AOB. The industry, frustrated that the legislature failed to tackle the issue for the fourth year in a row in the 2016 session, have taken matters into their own hands. In addition to raising rates, Citizens and other insurers have filed policy form
changes with OIR to clarify policy wording regarding loss reporting, use of emergency services and the nature of permanent repairs, at the department’s encouragement. Some companies are also limiting the number of policies they will write in the Tri-County region. In its third quarter conference call on Nov. 9, Heritage Insurance, one of the largest take-out companies of Citizens, indicated it will be much more selective on what policies it will look at in this area. “There are just wholesale areas in TriCounty on a personal lines basis that we think are at this point in time uninsurable,” Bruce Lucas, CEO of Heritage said. “And so therefore we have really curbed that voluntary production down there quite significantly for I’d say the last six months. Until we see a fix on the legislative level to the assignment of benefit uses taking place down there, we’re really
not interested in doubling down [in] TriCounty at this point in time.” Heritage also had a damage cap of $10,000 for water damage claims not caused by storms for homes at least 40 years old approved by OIR.
What’s Next
Citizens’ Gilway said the solutions private market companies are applying will help to “to stop the bleeding” in the short term for a few companies. But, he said, the long term solution must include changes to Florida’s one-way attorney fee statute, consumer protection changes needed to the AOB form itself, and restrictions on the referral fees paid that are fueling the crisis. “As I have stated many times, without these legislative changes OIR will be forced to dramatically increase rates and
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approve more draconian policy changes to protect the financial solvency of the private market,” Gilway said. According to Politico, OIR has indicated that addressing AOB is a top priority. Politico reported Oct. 26 that OIR’s director of Government Affairs Caitlin Murray said the office will issue an assignment of benefits package and plans to meet with stakeholders to fine-tune its proposal. Jay Neal, executive director of FAIR, said without a fix, “rates will double in 5 years … it’s unsustainable.” He is optimistic that the legislature gets it now and will be more supportive if OIR puts forth a bill. “Everyone will fall in line behind [OIR],” he said. “We are confident that people are aware there is a serious problem. We are hopeful and expect a legislative solution.”
2016 Storm Season, Hurricane Drought Ends In September, Hurricane Hermine broke the state’s hurricane drought that had lasted since 2005. The category 1 storm hit the Florida Panhandle, bringing significant storm surge to the Tampa Bay area before slowly traveling up the Eastern Seaboard. The storm weakened to a tropical storm as it moved inland in Florida, with winds topping 70 miles per hour, according to the U.S. National Hurricane Center, but it was still enough to cause widespread damage and power outages. Toppled trees in Tallahassee left some residents without power for a week. “This was a very typical CAT 1 hurricane,” said Karen Clark, CEO of catastrophe risk management firm Karen Clark & Co. (KCC). “The biggest losses [were] from trees falling on houses. There was a lot of damage in Tallahassee … there were some commercial losses, but really, the wind speeds weren’t enough to create structural damage unless a tree fell.” Cat modeling firms, such as KCC, pegged the damage in the $1 billion range and said the claims from the storm were nothing insurers couldn’t handle.
Then in October, Hurricane Matthew hit. The storm was classified as a category 3 with winds of 120 miles per hour.
‘From a technical perspective Florida still hasn’t had a major hurricane since 2005.’ The consensus from the insurance industry was this storm also could have been a lot worse and that the state had dodged a bullet, as the destruction left behind by Matthew wasn’t as bad as what was originally anticipated. Storm experts say that’s because the storm didn’t hit land as the category 4 hurricane that impacted Haiti just a few days earlier. “When Matthew was nearing Florida, there was a large amount of uncertainty of whether there would be more wind and storm surge or less so because the storm was paralleling so close to the coast,” said Tom Sabbatelli, RMS Hurricane Risk Expert based in the UK. Sabbatelli said since Matthew stayed about 50 miles off the coast and the hurricane force winds remained around the center of eye the state was spared from extreme devastation. “Florida avoided the strongest of the winds,” he said. Cat modeling firms have estimated Matthew damage at $10 billion, but, “there isn’t any concern of [Matthew] affecting the stability of the marketplace,” said William Stander, executive director for the Florida Property & Casualty Association (FPCA). CEO and Executive Director of Citizens, Barry Gilway, said the company had more than 10 years to prepare and its efforts paid off when it came to responding to these events. “The 2016 hurricanes, Hermine and Matthew, were a real test for Citizens and for many of the new ‘untested’ companies in Florida,” Gilway said. “My view is that our claims organization responded very effectively but more importantly the feedback we received from our customers and our agents was all very positive.” Furthermore, he said, it addressed concerns as to whether Florida take-out
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companies, which had not experienced an event such as Matthew, could handle a large influx of claims. “Those questions were answered with a resounding ‘Yes,’” Gilway said. “These companies all performed exceptionally well, clearly showing their customers they were more than prepared.” The hurricanes, while not as destructive as they could have been, did serve to remind residents of the perils the catastrophic-prone state faces. “Florida had two hurricanes this year … but from a purely technical perspective, they didn’t make landfall in Florida though they came close,” Sabbatelli said. “But, from a technical perspective Florida still hasn’t had a major hurricane since 2005. There is definitely the potential for worse.”
McCarty Resigns, Altmaier Takes Over as Commisioner Kevin McCarty’s decision to resign as Florida’s insurance commissioner at the beginning of the year after 13 years in the position rocked the state’s insurance world. It also set the stage for a political battle between Florida Gov. Rick Scott and Chief Financial Officer Jeff Atwater over his replacement. McCarty alerted the Florida Cabinet, which consists of Scott, Atwater, Commissioner of Agriculture Adam Putnam and Attorney General Pam Bondi, in January that he would step down on May 2, 2016. McCarty cited his desire to pursue other job opportunities as the reason for his departure. Rumored names of his successor began flying and an online application was opened to fill the position. After weeding through the 50-plus applications, the Cabinet interviewed Florida State Rep. Bill Hager and former Terrorism Risk Insurance Program Director Jeffrey Bragg in March. But the governor and CFO couldn’t agree and instead reopened the application and interviewed several more candidates. INSURANCEJOURNAL.COM
In a special emergency meeting on April 29, the Cabinet appointed OIR’s Deputy Insurance Commissioner for Property Casualty David Altmaier as the new commissioner with the caveat that McCarty would remain for a two month transition. Altmaier, 34-yearsold at the time of his appointment, is the youngest insurance Kevin McCarty commissioner in the country. He has been with the Florida OIR since 2008, spearheading the development of tools to monitor the resiliency of the state’s property insurance market in light of its exposure David Altmaier to catastrophic hurricanes. He is a Kentucky native and a 2004 graduate of Western Kentucky University where he majored in mathematics. He spent two years working in a Tallahassee insurance agency, the Peggy Browning Insurance Agency, in customer service before joining the Florida OIR in September 2008 as an examiner in the property/casualty financial oversight unit. He rose in the ranks in that department to become chief analyst in 2012 and director in 2014. In 2015 he was named OIR’s deputy commissioner for P/C. Altmaier said in his cover letter he has developed “a deep appreciation for the role insurance plays in the daily lives of Floridians.”
What’s Next
Altmaier has tackled several major Florida insurance issues already since taking office, and he said there is plenty of work ahead. “Since being appointed Florida’s insurance commissioner the summer and early fall has been filled with significant developments across many lines of insurINSURANCEJOURNAL.COM
ance. In addition to responding to the first hurricanes to affect Florida in several years, we’ve also faced supreme court decisions which will change the dynamics of our workers’ compensation market, challenges in our health insurance market, and rising property insurance rates,” Altmaier told Insurance Journal. “These issues have helped frame our priorities for the rest of this year as well as for 2017. I’m looking forward to addressing these topics with the many interested stakeholders in our state, while continuing to make Florida a leader in consumer protection and market stability.”
Florida’s Flood Market Efforts Before McCarty announced his decision to leave office, he initiated dialogue with the Federal Emergency Management Agency (FEMA) over the National Flood Insurance Program’s rate making. Citing the fact that the flood insurance rates Floridians pay are the highest in the nation, McCarty said the rates are unfairly discriminatory. Florida accounts for 37 percent of the NFIP’s policies, mainly because of a requirement by lenders that residents have flood insurance, but McCarty said the state has paid out “far more than what we have gotten in return,” and pays disproportionately higher rates than the rest of the country. Florida faces a significant flooding and storm surge risk. According to CoreLogic’s 2016 storm surge report, Florida ranks first in the country with 2.7 million homes at risk to storm surge flooding. The state has worked on developing a more substantial private flood insurance market so residents can adequately address their risk at more affordable premiums. Legislation enacted by the state in 2014 that streamlines the process for private insurers to offer flood coverage has led to a growing private market. This year, companies like Tower Hill and Assurant launched private flood options. HCI Insurance started a flood
company called TypTap that only writes standalone admitted flood coverage.
What’s Next
Industry experts say until FEMA provides its ratemaking data Florida cannot establish a competitive private market. “These carriers have to get reinsurance but they need the data from the NFIP to do so,” FAIR’s Handerhan said. “We need that data for the industry to develop.” FEMA has declined to provide the data citing privacy concerns for its policyholders as the main reason, but critics have dismissed that answer saying there are ways to give the data without releasing personally identifiable information. At an OIR industry conference in October, Roy Wright, head of the NFIP and deputy associate administrator for insurance and mitigation at FEMA, said the program has failed to put customers first. According to the website Floridapolitics. com, Wright said the NFIP has focused on the companies and “lost track of the 5.1 million policyholders we’re here to serve.” How that translates into addressing Florida’s high flood insurance rates remains to be seen, but Floridapolitics. com noted Wright said he has initiated a thorough review of the NFIP’s operations, which has so far found that “rates change without sufficient explanation to policyholders.” In a statement to Insurance Journal, Commissioner Altmaier said OIR will keep working with FEMA and private insurers to ease the flood insurance burden on residents. “The Florida Office of Insurance Regulation remains committed to fostering the development of a private flood insurance market to provide options and choice for Floridians,” Altmaier said. “To that end, we are continuing to work collaboratively with other state insurance regulators and the NFIP to evaluate available data and identify barriers to the facilitation of a private flood insurance market.”
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Idea Exchange
The Duty to Defend
Construction Defect Claims and the Role of the Insurer in Early Proceedings
By Lindsay G. McCormick
M
any construction attorneys will tell you: the issues of liability and coverage are too closely connected for anyone to completely practice in only one of these areas. And, when it comes to construction defect lawsuits, experience in both these realms is required to properly represent the client and insurer. Most insurance litigators know this expertise is needed even at the very early stages of a claim. Under Florida law, before a claim for construction defect can be pursued in litigation, the property owner must serve the contractors with a Chapter 558 compliant notice. This statutorily required notice has specific requirements according to Florida Statute 558.004, including: a description of the nature of the alleged defect with detail that is sufficient to enable the recipient to determine the general nature of the claim; notice that includes a description of the alleged damage or resulting loss; and the opportunity to inspect and poten-
tially cure the defect. Because the 558 Notice is a pre-requisite to filing a lawsuit in Florida, property owners routinely fulfill their obligations. Once obtained, it is in the contractor’s best interest to provide the notice to its insurance carrier for investigation. However, by providing the 558 Notice prior to litigation being filed, it raises the issue of what the carrier’s role is so early in the proceedings. This very issue was addressed in the recent case of Altman Contractors, Inc. v. Crum & Forster Specialty Ins. Co., 124 F.Supp. 3d 1272 (S.D. Fla. 2015). When Altman Contractors Inc. was served in 2012 with a Chapter 558 Compliant Notice from the owner of a recently completed Fort Lauderdale condominium tower, its executives forwarded the document to its insurer, Crum & Forster Specialty Insurance Co., along with a demand letter. In response thereto, Crum & Forster declined to defend at that stage. Dissatisfied with that response, Altman sued in the U.S. Southern District of Florida for declaratory judgment action against Crum & Forster seeking a determination that the insurer had a duty to defend and indemnify relative to the 558 Notice. While considering opposing motions for summary judgment, the court focused on the rules for insurance contract interpretation and policy language. The court found no ambiguity with the terms at issue and relied on their plain
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language. Specifically, the Crum and Forster policy included an obligation to pay damages and to defend against any “suit” seeking those damages. The term “suit” was defined in the policy as a “civil proceeding,” so the court focused on the plain meaning of those words. In looking at sources in place at the time of the ruling and at the time of applicable policies, the judge determined that a civil proceeding must include a forum or the involvement of a decision-maker, such as litigation or arbitration. The court determined that a 558 Notice of Claim does not constitute a “suit” and therefore Crum & Forster had no obligation to Altman. Insurers and contractors should heed the implications of the court’s decision. So long as the policy has similar terminology, a 558 Notice does not require a carrier to defend and indemnify an insured. However, under the terms
of many policies, the carrier must still investigate the claims even if no suit has been filed. Because of this, it is still likely in the best interest of the carrier, as well as the insured, for the carrier to retain counsel to fulfill its investigation duties, even presuit. Such a practice allows for efficient early investigation, analysis and potential resolution without lengthy litigation. The 558 Notice and associated action is an important aspect of construction defect claims and litigation, and with proper representation, can lead to a much more efficient and effective handling of claims. Lindsay G. McCormick is an associate attorney in the Tampa office of Marshall Dennehey Warner Coleman & Goggin, a civil defense litigation law firm. As a member of the firm’s Professional Liability Department, she focuses her practice on construction defect litigation and general professional liability defense. She may be reached at (813) 898-1837 or LGMccormick@ mdwcg.com. INSURANCEJOURNAL.COM
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