FOCUS ON FLORIDA Florida Fraud Round-up Pros/Cons of Managed Repair Effects of Florida Med Mal Ruling
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July 24, 2017 • Vol. 95 No. 14 • Focus on Florida
Florida 6 Private Insurers Cautiously Dip Toes Into Florida Flood Market Waters 9 Florida Approves Nearly 20K Citizens Policies for August Takeouts 12 Commentary: Florida Supreme Court Med Mal Award Cap Ruling Ignores Market History 13 Sinkhole Swallows 2 Houses in Florida 14 Managed Repair Program: Opinion: Floridians Will Pay More for Less Under Citizens Managed Repair Program
12 COMMENTARY: FLORIDA 6
FLORIDA FLOOD MARKET: OPPORTUNITY OR RISK?
SUPREME COURT MED MAL AWARD CAP RULING IGNORES MARKET HISTORY
15 Managed Repair Program: Rebuttal: Florida’s Citizens CEO Gilway Responds to Claims About Managed Repair Program 16 Florida Insurers Place All Options on Table to Address AOB Abuse
14 MANAGED REPAIR PROGRAM
10 Florida Fraud Round-up • Florida Man Arrested for Running Shell Company Workers’ Comp Scam • Florida Man Arrested After Torching Business Complex for Insurance Money • Miami Insurance Agent Accused of Stealing Nearly $25K From Client
16 FLORIDA INSURERS PLACE ALL OPTIONS ON
TABLE TO ADDRESS AOB ABUSE
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Private Insurers Cautiously Dip Toes Into Florida Flood Market Waters By Amy O’Connor
lorida’s efforts in establishing a private flood insurance market have been hailed as a model by many other states looking to buff up their flood insurance offerings, as well as the National Flood Insurance Program (NFIP) to follow
as lawmakers hammer out its upcoming reauthorization. But some insurance companies are still standing on the sidelines of Florida’s flood market pool, saying it’s not a risk they are ready to write. At a recent flood insurance conference put on by the Florida Association for
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Insurance Reform (FAIR) in St. Petersburg, a panel of executives from four Floridabased companies and one national broker discussed their reasons for writing — or for not writing — flood insurance. “I have not seen a predictable flood model, and I have not seen predictable pricing in reinsurance coverage for that INSURANCEJOURNAL.COM
risk. If I don’t understand a peril — I can’t quantify it, know what my exposure is — I am just simply not going to write it,” said Bruce Lucas, CEO and chairman of Florida homeowners insurer Heritage Insurance. “I’ve got some fundamental principles I follow in the business world and I have to fully understand what I’m getting into to do it.” Locke Burt, chairman and president of Security First Insurance, another Floridabased homeowners insurer that doesn’t write flood coverage, said lack of demand from customers and regulatory hurdles make it difficult to do anything in the flood insurance space. “There is a reluctance to innovate in Florida. Most of the companies who have filed a product have simply copied the NFIP program,” he said. Florida’s high risk of storm surge, he said, is another challenge with flood because it is incredibly difficult for the private market to model and accurately price. He said storm surge is an example of why there will always be a role for a federal flood market. “That is a very unusual peril and you do have tremendous uncertainty,” he said. “The private market is not going to take that uncertainty; the reinsurers aren’t going to take that uncertainty and the rating agencies aren’t going to let you take that uncertainty.” He added that increasing competition in the private flood insurance market will depend on what happens in Washington, D.C. “If you slice and dice the NFIP losses, I think a significant portion of them are the repetitive losses. What the federal government has to decide is what do you do with those repetitive loss properties? Those will never be insured by the private market,” Burt said.
Florida Flood Market History
While some insurers are hesitant to jump into the private flood market, Florida’s private insurance market has grown sigINSURANCEJOURNAL.COM
nificantly thanks to legislation passed by the Florida Legislature in 2014. At least nine Florida-based insurers now hold a flood certification from the Florida Office of Insurance Regulation (OIR), and several other private insurers offer some form of flood insurance as well. The legislation was designed to streamline the process for private insurers to offer coverage to encourage more flood insurance competition. It created a statutory framework that allows private insurers to offer four different types of flood coverage, including standard coverage, which mirrors current NFIP policies, as well as three other enhanced coverages. This year, the Florida Legislature passed a bill that builds on the law in several ways (see sidebar). Florida’s flood insurance market began to develop out of necessity. Florida homeowners in high-risk flood areas with a mortgage from a federally regulated or insured lender are required to purchase flood insurance from either the NFIP or a private flood insurer. But NFIP rates in the state have been exceptionally high, according to lawmakers. Currently Florida accounts for 37 percent of the NFIP’s policies but regulators and consumer advocates have argued for years that the state pays the most into the NFIP
and gets the least amount back in return. Former Florida Insurance Commissioner Kevin McCarty said last year that residents of Florida are paying “disproportionately higher rates” compared to the rest of the country. After the reauthorization of the NFIP several years ago, flood insurance rates climbed again and left Florida homeowners with flood coverage reeling at the expensive premiums. Florida’s coastal communities are at extreme risk of storm surge after a hurricane-type event, making flood insurance even more important to residents of the state. Lawmakers say that the state needs a robust private insurance market. “Flood insurance is critical [for those] living in Florida,” said former U.S. Representative Patrick Murphy (D-Florida), who worked on NFIP reform while in Congress with legislation that would have given state governments more control over the development of flood insurance regulations and allowed more involvement for the private sector. He said enabling the private sector to take on some of the risk gives taxpayers some relief, and often the private sector can do a better job than the government. “I think it’s critical the federal govern-
continued on page 8
Florida 2017 Flood Legislation
• Extends the time period during which private flood insurance rates may be established through an expedited rate filing to Oct. 1, 2025, from the same date in 2019. After that later date, insurers offering private flood insurance will be required to make a complete rate filing with OIRR as required by state law. • Extends the time period that a surplus lines agent may export a flood policy without diligent effort from July 1 of this year to the earlier of July 1, 2019, or the date the insurance commissioner determines that there is an adequate admitted market for flood insurance. • Changes requirements for agents to notify private flood policy applicants of the potential effect of leaving the NFIP on premiums and of later reapplying for the program. • Exempts excess flood insurance from rules that require insurers to notify OIR 30 days before writing flood insurance and to file with a plan of operation and financial projections with the office. • Requires the Florida Commission on Hurricane Loss Projection Methodology to revise flood loss projections at least every four years instead of the current every odd-numbered year. JULY 24, 2017 FOCUS ON FLORIDA | INSURANCE JOURNAL | 7
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| News & Markets
continued from page 7
ment and the private insurance market work together,” he said. Florida State Sen. Jeff Brandes, who sponsored the 2014 and 2017 flood bills passed by lawmakers, has said state legislators want to make the Florida flood market attractive and accommodating to private insurers, to encourage competition and provide some rate relief for consumers. “We want to create the most fertile ground for any admitted carrier or insurance company to do business in the state of Florida in the flood insurance space,” Brandes said back in 2015. Part of the difficulty in luring the private market into the flood space has come from the lack of transparency into ratemaking from the NFIP, which has said it is not allowed by law to share its data because of privacy reasons. Insurers have been able to partly overcome that obstacle recently through other modeling sources, said Nancy Watkins, a principal consulting actuary for Milliman, an actuarial consulting firm in Seattle. “Insurance companies for many years did not have that information, and they didn’t have any good way of measuring how risky a house was for flood peril. With catastrophe models over the last few years, and with a lot of big data sources coming available that didn’t used to be available, that problem has largely been reduced,” she said.
Insurers ‘Dip Their Toe’ in Flood Market
Even with its challenges, the insurance industry is not turning its back on the Florida flood market. Quite the contrary. There have been several new entrants to the state’s private flood market over the last 12 to 18 months, including TypTap, a flood insurance company formed by Florida-based Homeowners Choice Insurance (HCI) in 2016. TypTap recently expanded beyond Florida and into Arkansas, California, Maryland, North Carolina, New Jersey, Ohio, Pennsylvania, South Carolina and Texas. HCI said the TypTap’s website technology has been instrumental behind its success selling coverage. Potential customers
enter their address and answer three quick questions, then choose an agent from a dropdown menu to purchase the policy. “The technology is the big thing,” said Kevin Mitchell, HCI vice president for investor relations. “It really hit a chord with agents.” The newest entrant to the Florida flood market, American Integrity Insurance Co., began selling coverage in June. Bob Ritchie, president and CEO of the Florida-based insurer, said the timing was right for the company because of the significant need for flood capacity in the state. “The NFIP is a residual market — it is not manned by insurance professionals so it is always going to be subject to the political whims of the current administration and what the profit and losses are,” Ritchie said. “The private market should take more [policies] from the NFIP — and not just in Florida.” Ritchie said the amount of available reinsurance was a big factor behind the company’s decision to enter Florida’s flood market. It’s book is backed by $1 billion of catastrophe reinsurance. “Any insurance company thinking they can take on this risk themselves are ill-advised to do that. The growth and support of this market would not exist without the reinsurance market,” Ritchie said. “But I am confident the private market can support this market. There are a lot of reinsurers throughout the world ready to take it on and spread out their capacity with reinsurers across the world.” Even with that backing, he said it is still a market that needs to be entered carefully. American Integrity is selectively spreading its risk throughout the state and will not write in the highest-risk flood zones. “I describe it as we are putting our big toe in the market, not even our feet yet. You need to go slowly,” he said. Ritchie said there is plenty of opportunity in the space and consumers will welcome the support of private insurers after a large catastrophe event, which will also drive demand.
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“When you have uncovered perils [like flood], good luck dealing with the federal government,” he said. “We don’t want anyone to have widespread suffering, but a major storm with surge and coastal flooding would be an opportunity to raise the bar on selling coverage.” Still, he doesn’t think that the market will boom overnight. “This market is not like the gold rush — I think it’s going to take decades for any meaningful penetration in terms of private market share.” With Florida’s available market of 6 million homeowner policies the market potential is huge, Florida Sen. Brandes told attendees of the FAIR conference in May. He said that consumer demand will be what ultimately entices the private industry to invest in the flood market. “Right now, it’s just time. At the end of the day we need NFIP rates to rise for the private market to make sense in many areas. So, to the extent that we can develop our private market here in Florida, we can have professionals who are competent and capable of writing private flood insurance. Then as other markets become available we can enter those markets with a competitive product,” he said. “There is no silver bullet here,” Brandes said. “The simple solution is have a great product, have the time it takes for the NFIP rates to continue to rise, and then be able to be competitive with your products.” The support from lawmakers and regulators will be critical to the industry’s success, and Florida Insurance Commissioner David Altmaier told Insurance Journal in December that OIR will continue to work to ease the flood insurance cost burden for Florida consumers. “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.”
‘I am confident the private market can support this market.’
FOCUS ON FLORIDA
| News & Markets
Florida Approves Nearly 20K Citizens Policies for August Takeouts
he Florida Office of Insurance Regulation has approved the following companies to participate in the August Citizens Property Insurance Corporation take-out period. For the Aug. 22, 2017, Personal Residential Take-Out Period: • National Specialty Insurance Company approved to remove up to 4,520 personal residential policies (Coastal Account) • Southern Oak Insurance Company approved to remove up to 15,000 personal residential policies (5,000 Personal Lines Account/10,000 Coastal Account) This approval brings the total number of potential personal and commercial residential policies approved for takeouts in 2017 to 89,244; the actual number of policies removed from Citizens so far in 2017 was 12,276 as of April 18. These take-outs are part of ongoing depopulation efforts to reduce the number of policies in state-created Citizens and transfer them back into the private insurance market. Policyholders who receive a take-out offer may choose to
remain covered by Citizens through the opt-out process. The companies approved to participate in a personal residential and/or
commercial residential take-out along with the number of policies approved for removal are available on the OIR webpage.
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7/7/17 7:14 PM
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| Fraud Round-up Florida Man Arrested After Torching Business Complex for Insurance Money
Florida Man Arrested for Running Shell Company Workers’ Comp Scam
A Florida man was arrested in May for allegedly operating a shell construction company for the sole purposes of selling the company’s workers’ compensation certificate, according to a statement from then Chief Financial Officer Jeff Atwater. Leon “Chuy” Jimenez, owner of Chuy Construction Inc. was arrested after a fraud investigation revealed that Jimenez was operating the shell construction company, which conducts no significant business operations and is used as vehicle to conduct fraudulent financial scams, such as workers’ compensation fraud. The Department of Financial Services’ Bureau of Insurance Fraud received a tip from the Florida Carpenter’s Union alleging that Jimenez might be engaged in illegal activity and launched an investigation. Investigators discovered that Jimenez had provided false information on the company’s workers’ compensation application, claiming that Chuy Construction employed 50 people who performed drywall and other basic construction services across Central Florida. However, between August 2014 and May
2015, investigators tracked more than $2 million in payroll that had been cashed by at least 140 employees. The Bureau’s investigation later revealed that Chuy Construction was not performing any construction work whatsoever but rather selling its workers’ compensation certificate to other subcontractors in exchange for payment. In doing so, subcontractors evaded the law and left employees vulnerable to costly medical expenses and lost wages in the event of on-the-job injuries. Also, as a result of the scam, Chuy Construction’s insurance company was defrauded of more than $160,000 between August 2014 and May 2015. Jimenez was arrested by fraud investigators in May, and later transported to the Orange County Jail. He has been charged with two counts of workers’ compensation fraud–failure to secure coverage, false document as proof of coverage, false or misleading statements to diminish/avoid premiums, concealing payroll, application fraud, and scheme to defraud. He has also has been charged with one count of grand theft. This case will be prosecuted by the Orlando Office of the Statewide Prosecutor. If convicted, Jimenez faces up to 30 years in prison.
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The owner of a business complex in Tallahassee, Fla., was arrested in June by arson investigators from the Florida Department of Financial Services on charges of arson and insurance fraud, according to a statement from DFS. Victor Herrera, owner of the Tharpe Street business complex, was arrested after an extensive investigation uncovered that he intentionally set his property on fire in order to collect insurance money. The business complex, located at 1109 Tharpe Street in Tallahassee, includes Debo’s Stereo Installations and Super Clean Auto Detailing & Mobile Services. Following a fire that took place on Jan. 12, 2017, the Tallahassee Fire Department requested the assistance of DFS’ Bureau of Fire and Arson Investigations (BFAI), to aid in determining the cause and origin of the incident. After an initial survey of the scene, BFAI investigators noted multiple points of origin and determined that the fire had been intentionally set. Insurance fraud investigators were also brought in to assist. DFS said investigators conducted multiple interviews as part of their subsequent arson investigation. They interviewed the owners of Debo’s Stereo Installations and Super Clean Auto, and spoke with Herrera on several occasions. Herrera was inconsistent with his version of events and his whereabouts on the night of the fire, leading investigators to become suspicious, according to DFS. An individual with evidence of the crime came forward claiming that Herrera had offered a payout in exchange for their silence, which solidified investigators’ suspicions. During the course of the investigation, Herrera recanted his story and abandoned his insurance claim. A warrant was issued, and Herrera was arrested without incident on May 25, 2017. He was transported to the Leon County Jail and has been charged with arson, tampering with witnesses, providing false official statements, burning to defraud and insurance fraud. The case will be prosecuted by the Office of State Attorney INSURANCEJOURNAL.COM
Jack Campbell, 2nd Judicial Circuit. If convicted, Herrera faces up to 30 years in prison.
Miami Insurance Agent Accused of Stealing Nearly $25K From Client
A Miami insurance agent accused of stealing insurance premium payments from a client and providing fake insurance documents was arrested in June, according to a statement from then Chief Financial Officer Jeff Atwater and MiamiDade State Attorney Katherine Fernandez Rundle. Diomari Diaz is alleged to have stolen insurance premium payments from her South Florida client and provided him with fake proof of insurance documents. She is also accused of stealing thousands in escrow funds from the Florida Trust Insurance Agency account. In total, Diaz allegedly misappropriated nearly $25,000, and insurance fraud investigators have reason to believe that additional individuals may have fallen victim to Diaz’s scams. DFS said a client contacted the Department of Financial Services’ Bureau of Insurance Fraud after he suspected that insurance documents provided by Diaz were fake. Investigators confirmed that although the client had paid nearly $4,000 in insurance premium payments, Diaz never actually purchased policies to cover his two South Florida properties. Instead, she created fake documents and used the money for personal purposes. Investigators later revealed that Diaz opened a corporate bank account and listed herself as the only authorized user. The account included overdraft protection and was set up to transfer funds from the company’s escrow account if overdrawn. DFS said by intentionally overdrafting the account, Diaz was able to divert more than $20,000 from the company’s escrow account, all of which was used for personal gain. Diaz was arrested and booked into the Turner Guilford Knight Correctional Facility. She has been charged with uttering a forged instrument, and misappropriation of insurance funds greater than
$20,000. Florida Trust Insurance Agency has since surrendered its agency license and Diaz is no longer authorized to sell insurance. This case will be prosecuted by the Miami-Dade State Attorney’s Office Insurance Fraud Unit and if convicted, Diaz faces up to 15 years in prison.
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The Department believes that additional individuals may have been defrauded, and investigators are encouraging anyone who has conducted business with Diaz or the Florida Trust Insurance Agency to contact the Department’s Fraud Tip Hotline by calling 1-800-378-0445.
6/30/17 10:35 AM
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FOCUS ON FLORIDA
| News & Markets
Commentary: Florida Supreme Court Med Mal Award Cap Ruling Ignores Market History
n its recent ruling that the cap on noneconomic damages for personal injury awards or settlements in medical negligence cases was unconstituBy Robert White tional, the Florida Supreme Court ignored why these caps were put into place — to ensure patients’ access to care and ability to receive quality care. On June 8, 2017, the court held that the cap violated the Equal Protection Clause of the Florida Constitution because it unreasonably and arbitrarily limited the right of recovery for those most grievously injured by medical negligence. The court went on to hold that arbitrary caps on personal injury noneconomic damages do not pass what is known as the “rational relationship test,” where a challenged law must be rationally related to a legitimate government interest. While disappointing, this ruling in North Broward Hospital District, et al v. Kalitan was not unexpected. In its opinion, the court heavily relied upon its 2014 ruling in The Estate of McCall v. USA, where it held that noneconomic damage caps were unconstitutional in wrongful death medical negligence cases. In reaching its decisions in McCall and Kalitan, the court ignored the fact that on Aug. 28, 2002, Governor Jeb Bush appointed the Select Task Force on Healthcare Professional Liability Insurance because of a looming crisis of skyrocketing malpractice insurance rates. This task force included the presidents of Florida A&M, University of Central Florida, and University of Miami; a past president of the University of Florida; and a board member of the University of South Florida. It undertook a comprehensive review of published studies and relevant literature and received extensive testimony during
several meetings. The task force produced a 345-page report and 13 volumes of supportive material, making recommendations in the areas of patient safety, tort reform and insurance reform. The Florida Legislature debated the matter throughout the 2003 session but could not agree on how to resolve the complex issues that created the crisis. Then-Governor Bush called them back into special session in the summer of 2003 three times before both houses of the legislature could finally agree on a solution. In the end, they found that Florida was in the midst of a medical malpractice insurance crisis of unprecedented magnitude that was causing physicians to retire early, move out of state and limit the types of procedures they performed. The crisis was also causing hospitals to close obstetrical wards. They found that the crisis was not only restricting access to care for Floridians but also impacting the quality of that care. The legislature based their findings that a crisis existed and action was needed on the following: • In 2002, the average premium per doctor in Florida was 55 percent higher than the national average. • In the preceding six years, the average increase in Florida insurance premiums was 64 percent compared to 26 percent for the rest of the country. • Premium increases were being driven by increases in payments to patients. • Noneconomic damages constituted 77 percent of total damages paid to claimants. The high cost of medical malpractice claims could be substantially alleviated by imposing a limit on noneconomic damages in medical malpractice actions.
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Besides the impact on patient care, the elimination of the cap on noneconomic damages because of the Florida Supreme Court’s ruling is expected to increase the frequency and cost (severity) of claims. This could drive up premiums and ultimately the cost of healthcare.
Make-Up of Court’s Impact on Caps
The only good news in the Kalitan decision is that it was decided on a 4-3 vote while McCall was decided on a 5-2 vote, because Justice C. Alan Lawson was appointed by Gov. Rick Scott earlier this year to replace retired Justice James E.C. Perry. The dissenting opinions in both of these cases argue that the court’s majority violated the separation of power rule by infringing upon the legislature’s role to make policy under the Florida Constitution. Of the four justices who voted to find the cap unconstitutional, three — Barbara J. Pariente, R. Fred Lewis, and Peggy A. Quince — are facing mandatory retirement in January 2019. A supreme court more favorable to caps may exist in the future and the battle over the philosophical bent of the future court has already begun. Robert E. White, Jr. is senior vice president and regional operating officer for The Doctors Company. White is located in Jacksonville, Fla. and is responsible for The Doctors Company’s Southeast Region. The Doctors Company is the largest insurer of healthcare providers in Florida, insuring over 14,000 healthcare providers in the state. White has 48 years of experience in the insurance industry, including managing the claims and loss prevention departments of several commercial and doctor owned insurance companies before coming to The Doctors Company in an administrative capacity 15 years ago. He served as president of the Insurance Operations of FPIC Insurance Group from 2002 to 2011 and has played a role in the legislative process in Florida’s tort reform battles since 1982. INSURANCEJOURNAL.COM
Sinkhole Swallows 2 Houses in Florida
sinkhole swallowed a boat and destroyed two homes in the community of Land O’ Lakes, Florida. The hole, which opened up July 14, was 250 feet wide and 50 feet deep, according to Kevin Guthrie, Pasco County’s assistant administrator for public safety. It was the largest in three decades in the county, which has a history of sinkholes. Dramatic video showed the home north of Tampa collapsing into the hole. It quickly engulfed one home and a boat and then consumed about 80 percent of another home. Guthrie said 11 homes in all were affected. A third home lost about 45 feet of driveway and a septic tank. Of the other nine evacuated homes, residents were allowed to return to four of them the next day. Guthrie said that all three homeowners
had insurance. No injuries were reported. Records also show a sinkhole was sta The scene was considered a hazardous bilized at the partially destroyed home in materials incident because of possible sep2007. tic tank issues and building debris. Guthrie Copyright 2017 Associated Press. said that chemicals from at least three septic tanks were in the sinkhole. Cleanup was expected to take weeks and repairs to the road and damaged lots will take months. County property records show there was a sinkhole at the property where the first house was swallowed up, and that it was stabilized in 2014. The home In this aerial photo, debris is strewn about after a sinkhole damwas sold in 2015. aged two homes in Land O’ Lakes, Fla. on Friday, July 14, 2017. Sinkholes are stabilized by The sinkhole started out the size of a small swimming pool and boring holes into the ground and continued to grow, swallowing a home in Florida and severely damaging another. (Luis Santana/Tampa Bay Times via AP) injecting concrete.
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Managed Repair Program
Opinion: Floridians Will Pay More for Less Under Citizens Managed Repair Program •
By Donald Phillips
lorida is famous for its catastrophic hurricanes, however, we also have our fair share of daily claims such as fire, vandalism and water losses. Florida is now becoming known for what is referred to as the “Assignment of Benefit (AOB) crisis.” AOBs are typically a tool used by water dryout and remediation companies. These entities are not licensed or regulated so the state has a hard time cracking down on any reports of perceived fraud and abuse. Everyone has been calling for a legislative fix that would not create unnecessary burdens for policyholders with legitimate claims. Florida has been attempting, unsuccessfully, to get that “fix” passed for nearly five years and there appears to be no end in sight. In the summer of 2016, Florida’s Insurance Consumer Advocate, Sha’Ron James, held a public forum with interested stakeholders in an attempt to find solutions. Everyone agreed on five key points that would go a long way toward solving the problem: • Licensing and regulation of
all water remediation, restoration and other entities that engage in insurance claim repairs and/or restoration. Prevent financial inducements relating to insurance claims with a strict limitation or ban on referral fees paid by contractors, etc. Require contractors to provide policyholders with an estimate before they can enter into an AOB agreement. Provide policyholders with a right to rescission to give them a chance to step back and make sound financial decisions. Limiting scope of AOBs to work actually performed by the party receiving the AOB.
Everyone agreed with these common sense fixes but when it came time to bring these solutions to lawmakers, the insurance industry consistently attempted to add additional anti-consumer language to proposed bills. This caused unnecessary disputes that resulted in another failure to pass meaningful legislation this year. Meanwhile rates continue to increase while coverage decreases and Floridians are paying the price. Last month, Citizens Property Insurance Board of Governors, citing AOB abuse as the reason, approved a form change to their policies that restricts coverage for policyholders who have a non-weather related water loss. If approved by the Florida Office of Insurance Regulation this change would allow Citizens to
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place an artificially low cap of $10,000 on water losses, unless the policyholder agrees to allow Citizens to use their own contractors to make repairs. It’s a classic bait and switch. Policyholders will think they have purchased conventional homeowners insurance but will learn the truth only when they suffer a water loss. The traditional concept of indemnity for Citizens policyholders would no longer exist if this measure is approved by OIR. Policyholders would no longer have a say in what repairs are being made in their own homes nor in who is doing those repairs. If a policyholder decides they feel more comfortable using their own trusted contractor, Citizens will penalize them with an artificially low coverage limit that they were not expecting. Citizens CEO Barry Gilway confirmed in a recent letter published in the South Florida Sun-Sentinel that this policy change would leave 25 percent of Citizens policyholders inadequately covered. Surprisingly, Gilway was also quoted as saying that these changes will “in no way fix the assignment of benefits cost-driver that must be addressed by statute.” Why then would it be good public policy for Citizens to request these additional burdens and limitations on policyholders with legitimate claims? Citizens has referred to their proposed managed repair program on these water losses as “voluntary.” If Citizens truly wants to
make their program voluntary they should not be restricting coverage that their policyholders have paid for simply because the policyholder wants to choose who is going to repair their home. Sadly, if this flawed policy change is approved, Citizens policyholders won’t know they’ve been led down the primrose path until it’s too late. Phillips is president of the Florida Association of Public Insurance Adjusters and has more than 40 years of experience as an insurance claim professional. Phillips has served policyholders as a licensed public adjuster for 16 years and before that, worked as a staff claims manager and then an owner of a regional adjusting company. He is a past president of the Florida Association of Independent Adjusters and a guest lecturer for the Florida Advisory Committee on Arson Prevention. He can be reached at 954-942-0201 at or by e-mail at email@example.com.
Managed Repair Program
Rebuttal: Florida’s Citizens CEO Gilway Responds to Claims About Managed Repair Program
By Barry Gilway
he following letter to the editor was written by Citizens Property Insurance Corp. President, CEO and Executive Director Barry Gilway in response to the opinion piece from the Florida Association of Public Insurance Adjusters. Starting this month, Citizens Property Insurance Corporation will begin offering its customers the choice of a
new program that will take the hassle out of water loss repairs while protecting them from holding the bag following a nonweather water loss. Unfortunately, a recent opinion piece “Opinion: Floridians will pay more for less under Citizens Managed Repair Program” contains a number of mischaracterizations and inaccuracies regarding Citizens Managed Repair Program that need to be addressed. The two-stage program will provide Citizens policyholders with free water extraction and drying services following a nonweather water loss – broken pipe, a leaking water heater – regardless of whether the underlying loss is covered. It’s a free service, pure and simple. After the water’s gone, Citizens has partnered with Contractor Connection to provide a network of licensed,
qualified, and credentialed contractors to perform permanent repairs based on nationally recognized estimates and quality standards that ensure the damage is repaired to preloss condition. The repairs are guaranteed for a minimum of three years. This is a voluntary program. Customers who choose not to participate have the option to hire their own contractor to do permanent repairs. If state regulators approve, reimbursement for such repairs would be limited to $10,000 starting in 2018. This sub-limit would adequately cover three out of four policyholders who file a nonweather-related water claim. Repairs made under the managed repair program would not be subject to such caps. As your readers are well aware, Citizens and other
property insurers have grappled over the last several years with skyrocketing water losses, assignment of benefit abuse and runaway litigation that have forced higher premiums on our customers. Without statutory reforms that include changes to Florida’s one-way attorney fee statute, many of our policyholders will be hit by these rate increases for years to come. We will continue to work for such meaningful reforms. In the meantime, however, we can’t sit back and do nothing while we dip deeper into reserves. As Florida’s insurer of last resort, we need a sustainable model to ensure that policyholders who can’t find coverage in the private market have somewhere to turn to protect themselves and their families. These new initiatives will allow us to be there for our customers when they need us most while helping to lower costs for all our policyholders and the people of Florida. The bottom line is that policyholders who Call Citizens First after a water loss can be assured prompt, hassle-free emergency services at no cost, and warrantied permanent repairs to get them quickly back on their feet. Gilway is president, CEO and executive director of Citizens Property Insurance Corporation, Florida’s state-run insurer of last resort. He has been an executive in the insurance industry for more than 42 years including as CEO of Zurich Canada. He has led Citizens since 2012.
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Florida Insurers Place All Options on Table to Address AOB Abuse By Amy O’Connor
lorida’s home insurers hope the public doesn’t blame them as they implement rate increases, initiate coverage changes and nonrenew policies. They say they have no choice after the Florida Legislature for the fifth year in a row failed to address the crisis in water damage claims abuse. “We keep saying help us try to solve this problem,” said Michael Carlson, president of the Personal Insurance Federation of Florida. Since lawmakers reneged on enacting reforms, insurance carriers are now taking matters into their own hands and the state’s regulator is warning consumers to be prepared. “We will continue to see homeowners’
insurance companies raise their rates for our consumers in a best-case scenario, and in a worst case scenario just simply stop offering their products in certain regions of the state,” Insurance Commissioner David Altmaier told the Florida Cabinet last month. Altmaier said that worst-case scenario has the potential to “undo a lot of the great work” that has been done in depopulating the state-run insurer of last resort, Citizens, which has taken the brunt of the abuse, particularly in South Florida. “This remains one of our number one priorities on the property and casualty side,” Altmaier said. He was referring to escalating assignment of benefits (AOB) abuse from unlicensed water remediation and roofing contractors working with attorneys to cash
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in on a homeowners’ insurance policy for water damage claims. The problem has begun to spread to other segments of insurance, with auto glass claims using AOBs also on the rise. The Florida Department of Financial Services has stepped up its abuse investigations. Former Florida CFO Atwater told Insurance Journal in May before he left office that the DFS is counting on the industry to alert it to any abuse it sees happening. “This is a real financial crime. These people are making money off of these really exploited AOB claims –it is just sophisticated robbery from thousands of people who are having to embed that cost in their next premium payment. It is real,” Atwater said. Insurance carriers say the marketplace INSURANCEJOURNAL.COM
has no choice but to respond by moving to cover the costs. They are raising rates for homeowners’ policies across the state but say that is not enough after several years of the unchecked AOB abuse. So they are also appealing to the Florida Office of Insurance Regulation (OIR) to be able to do more. “AOB will ultimately be addressed by the marketplace if lawmakers don’t do anything. The question is how harmful is that to a policyholder that isn’t out to cheat an insurance company – and it is harmful,” said Scott Johnson, who has worked on insurance issues for 40 years and currently runs his own consulting firm, Johnson Strategies. “AOB is the worst crisis I have seen.” Citizens led the pack in lobbying for reform this past session, warning Florida lawmakers that without it the insurer’s policy count will start to climb again after years of depopulation efforts, and that homeowners could expect to see statutorily allowed rate increases of up to 10 percent for the foreseeable future. Last month the warning became a reality when Citizens announced it would seek an overall statewide rate increase again this year, citing AOB as the reason. Citizens also said it would submit a series of policy changes to the OIR that it hopes will reduce claims costs for nonweather water losses. Among the major policy changes is a $10,000 cap on water loss repairs for customers who decide not to participate in Citizens’ Managed Repair Program. Other policy changes include expanding obligations to third parties that accept an assignment of benefits. Currently, contractors who accept an assignment are not bound by the same obligations, including allowing Citizens adjusters to inspect a claim in a timely manner or providing proof that a loss has occurred. “We were hoping for legislative change and a surgical solution,” said Barry Gilway, Citizens president/CEO and executive director. “Given that this did not occur in 2017, we cannot wait for the trends to worsen and take no corrective action.” Commissioner Altmaier told the Cabinet INSURANCEJOURNAL.COM
that OIR is discussing changes to policy forms “in an attempt to curb what we believe are an unacceptable rise in costs in this market.” Many insurers in the state are watching and waiting to see what happens with Citizens proposals, and will base their own requests to OIR on what is approved for Citizens. “We will see further rate increases being filed [by insurers]. But as far as doing their due diligence as an insurance company, they will pursue whatever avenue they can get,” said Logan McFaddin, regional director for the Property Casualty Insurers Association of America (PCI).
Managed Repair, Preferred Vendors, Premium Discounts
Citizens is already employing one strategy – a managed repair program that provides its policyholders with free water extraction and drying services if they have a nonweather-related water loss. The Citizens Managed Repair Program also includes access to a network of licensed contractors through Contractor Connection. Policyholders can use the network to find a contractor to repair damage to its pre-loss condition with repairs guaranteed for a minimum of three years (see page 15). Citizens policyholders who do not want to use the program can hire their own contractors to do permanent repairs, but reimbursement may be limited to $10,000 starting in 2018, if approved by Florida regulators. Other companies are exploring managed repair or preferred vendor programs as well. Castle Key Insurance Co. and Castle Key Indemnity Co., Allstate Insurance subsidiaries that write about 2 percent of Florida’s homeowners market, offer preferred vendors to customers in the event of a claim. “Who the customer chooses to work with on repairs is entirely their decision, however we do make vendors available if the customer does not have a contractor of choice,” said Cathy Mayo, Allstate Florida
Region’s Field Corporate Relations manager. “Preferred vendor programs are definitely helpful because an insurer is not going to use a vendor that turns around and sues them – it gets rid of that motivation to have an attorney enter the agreement,” said PCI’s McFaddin. “Other insurers could follow what Citizens does if they can make headway with OIR.” In a statement to Insurance Journal, OIR said it wouldn’t comment on the Citizens filing, but anticipates that a public hearing will be held for Citizens annual rate filings, “where this issue may be presented in more detail by the company.” OIR did say that it has approved some managed repair programs for other carriers in the past as allowed under Florida statutes, but hasn’t seen any new filings recently. Those outside the industry – including public adjusters and law firms – have voiced opposition to such programs, saying they restrict policyholder rights (see page 14). Johnson says that response is not surprising. “Guess I would say that too if I was a public adjuster or trial attorney. What is fair to them is something that inflates the claim by at least 20 percent because that’s how they get paid. What’s fair to an attorney is if there is a controversy. They need the conflict because that’s how they make their fees,” Johnson said. He noted that more than half of water losses have been handled by firms that don’t use an AOB and there have not been consumer complaints on the work done. Preferred vendor programs are a tool for carriers to minimize their AOB losses, he said. “Insurance companies are responding to the crisis by doing what they can to guide people to providers that don’t use AOBs,” he said. Tampa-based VetCor, which provides restoration services for residential and
“AOB will ultimately be addressed by the marketplace if lawmakers don’t do anything”
continued on page 18
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commercial properties throughout the state, works with 17 carriers as a preferred vendor and said it has never used an AOB on more than 2,200 jobs in its three years in business. “There are disreputable contractors saying they can’t perform work because of big bad insurance carriers. That is accurate if you are going beyond the scope of needed work. These contractors are creating an adversarial relationship,” said Paul Huszar, president, VetCor LLC, which provides new careers for military veterans no longer on active duty. Huszar said his business relies on referrals from carriers, which he said are “usually legitimate claims from people who need help.” He said his company has found itself becoming an advocate against AOB abuse, including letting carriers know if they see abuse taking place. “There have been a few incidents where we have been called to put a tarp on a roof and we get out there and there is no damage. The customer says, ‘someone told me to put a claim in and I’ll get a new roof.’ If we see that we call the insurance company and let them know something smells funny. We represent consumers if we think it’s fraud and we represent carriers if they are getting screwed,” he said. Huszar said all affected parties need to work together in fighting AOB abuse, and managed repair and preferred vendor programs are just one option until lawmakers take up the issue. “The companies have to do something to combat uncontrollable rising claim costs from AOB,” he said. “But frankly, without legislation this problem is not going to be solved.” Companies are also looking at premium discounts for customers who take proactive measures to protect against water damage, such as outfitting their homes with water damage protection systems. Neil Schwartzman is the owner of the Coral Gables, Fla.-based company H20 protection, which sells PipeBurst Pro water damage prevention technology. The Whole Home Water Detection product works by detecting when a pipe bursts
and shutting off the main water supply almost immediately to prevent water damage. Schwartzman said there has been increased interest from carriers in the last several months as they try to find new ways to reduce AOB losses. He said several dozen, mostly high-value homeowner carriers, already offer incentives to have this type of a program. He is currently working with several Florida insurance carriers seeking approval from regulators to offer premium discounts when a system is installed. “If the [water damage protection] discount was available to all in Florida, then systems would be installed [and] the number of water damage claims would be reduced significantly,” Schwartzman said.
What Comes Next?
The industry and regulators agree that substantial progress has been made in educating on the abuse. Commissioner Altmaier said this year’s visibility and media attention has put his office in a good position for proposals to be heard during the 2018 legislative session. McFaddin said the industry did an “impeccable job” staying on message this session and supporting the OIR and Citizens proposal, which died shortly after being introduced in a Senate committee. Even though the reforms failed, McFaddin said the industry learned that working together is an effective strategy and that needs to continue. McFaddin added that at least next year the industry won’t have to “waste time educating the legislature” about the abuse because it is now widely known and watched. “Will we get something done for sure, 100 percent?” she asked. “I can’t say that, but I am hopeful – optimistically hopeful.” Former CFO Atwater said the industry did a better job of getting its message out this session, but there is still “tremendous rate sensitivity” among consumers. The industry, he said, has not effectively
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communicated why AOB abuse is translating into higher rates and, until then, consumers will not support legislative efforts. “I think consumers believe that the rates come [because] the insurance company just wants more rates and the government just keeps giving it to them. I don’t think that most consumers understand that these losses are required to be built into the rate filing. And they’re going to be granted,” he said. He urged the industry to share with the public “the actual evidence that it has in its databases” on the magnitude of the losses that are being built into rates. PIFF’s Carlson said carriers’ data is out there through OIR’s data call done in 2016, and Citizens plethora of public information on rising losses, claims and litigation. He said some lawmakers have accused the industry of not being transparent to avoid fixing the issue. “What else do you need us to give you that you don’t have? I fear that is a political request and not a policy request,” he said. Until the next session, the industry and regulators say all they can do is continue to beat the drum about AOB abuse and take steps to protect company solvency and their policyholders. “I do believe there is light at the end of the tunnel,” Altmaier told Florida Cabinet members. “I do believe there are ideas on the table that not only maintain consumer protections and their ability to have their claims paid, but also protects their ability to pay affordable insurance rates and shop insurance products across a wide range of carriers.” INSURANCEJOURNAL.COM
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