Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

My impression is that a major reason for the loss is wind mitigation credits. I noticed the severe impact such credits had on net premiums when serving on the Citizens Property Insurance Mission Review Task Force. I could never figure out any actuarial or scientific basis for such credits in return for mitigation expenses. While there should be some break in premiums for a building "hardened" against wind loss, it seemed like the premium breaks were very high.

I may give the insurance industry criticism for a number of activities, but my impression is that it may have a point on this topic. Florida needs profitable insurers. If they are not making underwriting profits now, something is amiss or the books are being distorted, as in the case of State Farm charging itself for re-insurance expense.

The October 19 issue of BestWeek had a couple of articles on this point. It noted:

Mitigation credits in Florida have been widely criticized by the industry. Insurers say the credits are not calculated correctly, and there have also been allegations of fraud involving building inspectors who dole out the credits. In the end, insurers say they are unable to get the premium they need. The credits can 'take as much as 90% of the wind premium away.....

The bottom line to policyholders is that everybody is predicting that rates are going up. Assuming the books are being accurately reported, there is simply no way so many carriers can be reporting underwriting losses unless the actuarial expectancy is wrong or the net rate after mitigation credits is not actuarially sound. My impression is the mitigation credits, with little scientific basis to support such premium reductions, have caused many carriers to report more severe losses than expected. I do not think the Florida insurance industry is making an inappropriate objection. This needs to get corrected.

From a social standpoint, tax reductions to rich and poor who spend money solely on targeted building improvements to mitigate from wind damage in coastal areas is something we should encourage. Everybody benefits when a loss is prevented or mitigated.

The work is written by two University of Pennsylvania Professors, Howard Kunreuther and Erwann Michel-Kerjan. My son, Chase, is a student at Penn and has been excited to find brilliant and internationally recognized educators that teach in understandable language with deeply reasoned analysis. This book is similar and does not require a rocket-scientist mind to understand the significant implications to our society from their findings.

This book highlights how we mitigate, insure against, and finance recovery from weather related natural disasters in the United States. The authors have collected an amazing amount of data which I found quite surprising. For instance, one would think that State Farm has been denied rate increases by the Florida Office of Insurance Regulation for quite some time, given the rhetoric of its lobbyists and agents as I indicated in State Farm's, Allstate's and Nationwide's Concerted Agenda To Stop Competition And Insure Profits and State Farm's Freakoutnomics. This work noted the rate history of State Farm Florida Insurance Company from 1997 through 2006:

Every time State Farm asked for a rate increase during that time frame, one was eventually obtained, usually for what was requested. Certainly, State Farm and other major insurers changed their perceptions about the adequacy of their rates and exposure to weather risks as a result of the four 2004 hurricanes, followed by Hurricane Wilma in 2005. Still, it was not as if Florida regulators were not approving most of what State Farm demanded until July 2008, when State Farm asked for another 47% rate increase, followed by a demand for a 67% increase in December 2008.

When State Farm announced it would leave the Florida homeowner's market following the insurance commissioner’s denial of those rate requests, State Farm lobbyists and agents started the "free choice" concept where no insurance rate regulation would apply, and this was adopted by many in the Florida Legislature. This unique concept of insurance deregulation is not practiced anywhere in the United States except Wyoming.

Assuming State Farm and the State of Florida do not come to some agreement, this issue will still be a raging political debate in Florida next spring. If enacted into law, it represents a complete turnaround in Florida public policy from 2006. Then, Florida’s Legislature attempted to keep insurance rates low. Today, many legislative leaders sadly want to pass legislation allowing some insurers to charge whatever they can obtain--even if gouging-- in a market where demand clearly exceeds private supply.

In yesterday's afternoon post, Associated Industries and Private Insurers Want Florida Policyholders to Pay as Much as Possible for Property Insurance, I noted the rhetoric by insurance lobbyists calling for higher rates is starting already, now that the next legislative session is only six months away. Could you imagine the outcry if those same lobbyists and politicians influenced by them told the truth to the electorate about what consumers could expect if insurers could price gouge on premiums after a year where hurricanes hit, similar to what was going on in 2006?

Many Florida legislators do not want honesty and transparency about their change of public policy explained to their electorate. They do not want to warn of that practical result of the proposed law if they have already made promises to support the insurance industry in return for other political favors. Most politicians and informed electorate know why the insurance industry has to "spin" their side of reality rather than explain the honest truth about the issues involved—they want to keep insurance industry voting legislators in office to voting against the consumer’s interest.

My point is that complex issues of a serious nature deserve significant study and reflection from academic works such as this rather than bought and paid for policy --which is my impression of what is happening in Tallahassee when it comes to insurance legislation. Some of our well meaning legislators, to curry favor and gain influence under the current system, appease certain powerful leaders in the legislature. To help promote their own agenda, many of our legislators vote against the interests of their electorate and for the interests of those political leaders.

This current legislative system is not illegal or immoral--it is Florida democracy in action. And, it has nothing to do with making policy and law based upon the soundness of reason.

The remaining peril and risk issues facing those of us living in coastal areas are very difficult. The answers demand tough decisions with straightforward discussion of the long term implications if we fail to make law and regulations which mitigate the impact of disaster. Those needed mitigation costs have to be incurred at some time. The current insurance market mechanisms are simply not working in coastal areas because the markets are fragile and the supply is limited. There is nothing close to a free insurance market along the coastal areas of the United States because of very many unique aspects of the modern insurance system as explained in this work.

The authors’ conclusion as to the long term answer is not much different than mine. I hope that we can find leaders with enough character to explain and make policy that will start demanding mitigation efforts for those of us living and working along the coastal areas of the United States:

We typically think of a war as combat against a particular enemy. However, for most global risks, the battlefield and the warriors are not clearly defined. Natural hazards have always been part of our environment. But we often choose to ignore these hazards, or believe we are immune from them. In fact, one of the main reasons why the war against the weather has escalated is the desire of many people to reside in high-risk areas. The economic development of Florida highlights this point: the population of the state by 2010 will have grown by 600 percent since 1950. Most of this development has taken place in coastal areas subject to hurricane risk because property owners enjoy the sun and shore and disregard the dangers they face from an extreme event. As Peter Bernstein wrote in his seminal book Against the Gods, we believe that “Lady Luck will interpose herself between us and the fates (or the odds) to bring victory to our side” (pp. 11-12).

The paradox in waging a war against the weather and other extreme events is that we might very well be our own worst enemy. As individuals, we may decide to build in risky areas. As entrepreneurs in the private sector, we may decide to locate our businesses in these hazard-prone regions. As decision makers in the public sector, we may permit millions of people to reside and businesses to operate in these areas without requiring them to adopt appropriate risk reduction measures. In refusing to take steps in a proactive manner to reduce our vulnerabilities, the sees for future disasters are created that will affect our future well-being and social welfare. The same can certainly be said of the many extreme events that have unfolded in the past few years. Fortune cannot aid those who do nothing.

The article quoted Barney Bishop, the Executive Director for Associated Industries of Florida as advocating the following:

Florida insurance regulators are failing in their duties if they don't make the state-backed Citizens Property Insurance Corp. raise property insurance rates by 10 percent across the board, a business group lobbyist said Tuesday.

Barney Bishop III, president of Associated Industries of Florida, said it's ''astonishing'' that the state-backed insurer would not increase rates on all policies by 10 percent.

''It is our position that every rate should go up,'' Bishop told representatives from the Office of Insurance Regulation. ''The rates haven't been actuarially sound for the last five years.'

In response, Belinda Miller of the Florida Office of Insurance Regulation disagreed:

Miller argued the 10 percent was a cap set by lawmakers and not intended to be applied equally to all Citizens' policy holders.

''We don't want to increase rates too quickly because people would have a hard time paying for it.'' Miller said. ''Nor do we want to have a rate that is not adequate to pay their claims. Our concern is to make sure that this strikes the appropriate balance.''

This is a topic that Belinda Miller knows very well. She served with me on the Citizens Property Insurance Mission Review Task Force. I wrote about this issue last January in Headlines And Reality. There, I wrote:

The Citizens Mission Review Task Force made a significant recommendation at its meeting on Tuesday. Prior testimony was that the average Florida rate hike, which would be approved by the Office of Insurance Regulation, would almost certainly be higher than 30%. We recommended to the Florida Legislature that they to pass a statute to cap that rate increase at 10%. Without this law, the rate would probably go up over 30% on a statewide basis.

So, what do you think a proper headline would be in a newspaper article reporting on this outcome? Panel Votes to Cap Rates. 10% Maximum Rate Increase Proposed. How about, Panel Says No to Unlimited Rate Increases?

By Jingo, no way! Newspaper editors must think they need headlines full of sensationalism and fear to catch a reader’s attention. These were some of the headlines I found on a Google search Wednesday morning:

• Citizens Property Insurance Plans to Increase Rates
• State Panel Backs Rate Hike of up to 20 Percent for Citizens Insurance
• Citizens Should Hike Insurance Rates, Task Force Says
• Hike Citizens Property Insurance Corp's Premiums, Florida Panel Urges

We never found that the rates should be hiked. Instead, a bunch of experts explained why they thought a "fair" rate was going to result in a huge increase because Citizens has been charging an amount of premium that is not "sound." Even the Florida Office of Insurance Regulation indicated that a fair rate for Citizens was one that could have an increase above 30%.

In 2006, the Florida Legislature froze Citizens rates to combat skyrocketing premiums. The Legislature then passed a law mandating that Citizens had to charge "actuarial sound rates" by January 1, 2010.

I never voted to raise rates. I advocated and then argued for the cap because I felt it was going to make insurance unaffordable for many if the rates jumped overnight.

It is obvious that Belinda Miller is correct and Barney Bishop is spewing the propaganda of the insurance industry that is a big supporter of Associated Industries. The entire debate and method contemplated that overall rates would go up, but it would vary.

What is happening is that lobbying organizations supporting the insurance industry have already paid significant monies to the leaders in the Florida legislature. Now, they have to start raising the issues important to them for the next legislative session. Those lobbyists cannot come out and say, “hey, we paid you all this money to have dinner with you, go to golf and raise money for your next campaign, so vote our way.” That would be stupid because those legislators would be any “easy mark” for being in the pocket of those lobbyists. Then, what would they say to their electorate?

The smart way to do it is to have people like Barney Bishop say that the problem is Citizens not charging enough. Public relations experts have people like Barney Bishop also change the debate to one of “free choice” so that State Farm and others will no longer have to worry about getting approval for a fair rate. It is all part of the charade to allow many bought and paid for legislators to vote in a demanded manner by the insurance industry.

It is fortunate that some leaders in Florida, like Governor Crist, remember the public promises they make to the people are far more important than privately taking excessive amounts of campaign money from huge insurance corporations knowing that clandestine public relations campaigns will be run by those corporations to mask the private “deal” made with the devil.

I am going to propose to United Policyholders or other consumer groups that we try to find out who is taking the money and disclose which politicians have switched their votes since 2006 to allow rates to go up. They might as well be honest about it the next time election time rolls around.

I have recently noted the concern that some insurance restoration contractors are acting as surrogate public adjusters and not in the best interests of the policyholder in my posts, Are Insurance Restoration Contractors Ripping Off Insurers and Policyholders? and Former Restoration Insider Comes Out Swinging Against Florida's Limitation of Public Adjuster Solicitation.

The 48 hour solicitation ban was a coup of the insurance companies and Citizens Property Insurance Corporation. I attended the Citizen’s Claims Review Task Force meetings. It was obvious that Citizens claims managers and executives blamed many of their controversial claims delays and underpayments on the involvement of public insurance adjusters. The insurance industry used the Task Force as a vehicle to place before legislators a few examples of how public adjusters solicit for business following a disaster. Door hangers and the lining up of a dozen public insurance adjusters were suggested as being “unsavory’ by many. I guess the connotation is that those that get paid for professional help following a catastrophe must be taking advantage of victims. From the insurance industry’s perspective, it was a “perfect storm” to reduce the retention of pubic adjusters.

The 48 hour solicitation ban states:

A public adjuster may not directly or indirectly though any other person or entity initiate contact or engage in face-to-face or telephonic solicitation or enter into a contract with any insured or claimant under an insurance policy until at least 48 hours after the occurrence of an event that may be the subject of a claim under the insurance policy unless contact is initiated by the insured or claimant.

The lawsuit emphasizes the constitutional aspect of one’s freedom to speak and to contract.

8. By prohibiting the Plaintiffs from directly or indirectly initiating contact or engaging in face-to-face or telephonic solicitation with any insured or claimant, or entering into a contract with an insured or claimant in the first 48 hours after an event that has not been declared an emergency, subsection 626.854(6) constitutes a prior restraint on protected speech in violation of the First Amendment to the United States Constitutions and Article 1, Section 4 of the Florida Constitution.

It also points out some of the practical reasons why the laws are objectionable:

39. Subsection 626.854(6) is not narrowly tailored to further a significant government interest, and other less intrusive means are available to control or prevent any practices of public adjusters which might be needed to adequately protect the public

40. Subsection 626.854(6) is overbroad, in that it restricts the speech of all public adjusters, including Plaintiffs, who are competent, scrupulous, honest, and professional in their dealings with the public

41. Subsection 626.854(6) denies significant business opportunities for Plaintiffs and other public adjusters by denying property owners the services of a licensed public adjuster at the time they are in most distress and have the greatest need.

42. By preventing public adjusters from contacting property owners immediately following a natural disaster, subsection 626.854(6) prevents public adjusters from having any contact with the most severely damaged property owners at the only time they can be located before moving to an unknown address.

43. Section 626.854(6) amounts to an impermissible restriction on the time, place, and manner of conducting the business of public adjusting, and unduly restricts Plaintiffs' freedom of speech.

Pat Catania has done an excellent job assembling a great legal team and getting a case stated clearly. Using a Shakespearean phrase, he told me yesterday that “if they [the insurance industry] want a war, I’ll show them the war.” Pat is not a part of FAPIA or NAPIA. He is creative, bright, energetic, and I find him fun. I believe the lawsuit has a good chance of success. He asked me to let other public adjusters know that he would like to include others as plaintiffs in the lawsuit.

Catania is also a fantastic marketer and entrepreneur. He started two web sites, MySmartClaims.com and SmartClaimsPro.com which help policyholders and professionals regarding the estimating and submittal of property insurance claims. He is a passionate consumer advocate and tireless opponent. I predict he will prevail and many public adjusters will be thanking him for his efforts.

Catania also told me that his dream is to submit the final proof of loss State Farm will pay on before it leaves Florida. He considers State Farm completely unworthy to be in the insurance business because he asserts that most State Farm policyholders are not treated properly regarding claims. He has some inside information on that issue--his wife worked as a property insurance claims adjuster for State Farm.

In an earlier post on this topic, I noted:

"The argument that Florida should allow insurers to charge whatever they want because they will sell more insurance is ignorant. Studies have shown more insurance will not be the result. There is a limited amount of insurance coverage at any price in Florida. It is not a free market. Most people simply have not studied the literature and reports on this issue and assume that if insurers can make more money on higher premiums, more insurers will sell insurance in Florida. These studied findings were made to the Citizens Mission Review Task Force which I was part of. No legislators were there to listen and learn.

Many proponents of rate deregulation (including our legislators) make uninformed decisions on the issue, and then offer ignorant opinions and answers to a difficult issue. Other leaders supporting this issue are probably just pandering to State Farm and the insurance industry. "

The Herald noted what most, except those in the insurance industry and masochists wishing for higher premiums, think of the proposed legislation:

'Those who object to the bill, such as leaders of the Florida Consumer Action Network, among the state’s largest consumer groups, said it is really an insurance company choice, not a consumer’s choice. They said big companies can choose to charge higher rates with unpredictable consequences and potential disruption of the market.

“We advise people currently in Citizens to stay there,” said Bill Newton, executive director of the network. “If you can go to one of the smaller companies in the market, you should go. They’re backed up by the state, protected, completely safe in my opinion. We need to foster more competition, you can’t have a market dominated by the big four or five.”

Sometimes, the insurance industry obtains anti-consumer legislation, such as the Surplus Lines Law that we warned about yesterday, because few understand the implications or take notice. I am happy that others realize this proposed law does nothing but help insurance companies -- to the detriment of their customers.

I have yet to hear or see any economically valid reason to allow admitted insurance companies to set rates in an unregulated manner. Federal legislation passed in the 1940's exempted the insurance industry from federal anti-trust regulations so insurers could share and access loss information. In return, to prevent the insurance industry from conspiring to set rates and determine market areas of competition, the insurance industry agreed to state regulated rates. Thus, Departments of Insurance in every state regulate the insurance rates therein. In most states, the insurance industry gets an "industry insider" appointed to a regulatory position and allegedly pro-consumer regulation is often a facade. This is not the case with Florida’s Kevin McCarty.

Rate regulation by the Florida Office of Insurance Regulation worked in Florida until the major oligopoly of Allstate, State Farm, and Nationwide decided to reduce their "exposure" to hurricane and sinkhole risks, and started selling significantly less insurance in Florida. This trend started after Hurricane Andrew, in 1992, and accelerated in this decade. Now, the total supply of insurance offered in Florida is consumed, and even exhausted, by the demand for insurance. Accordingly, Florida allowed Citizens, previously an insurer of last resort, to pick up this demand and provide a market for residential and business insurance.

The argument that Florida should allow insurers to charge whatever they want because they will sell more insurance is ignorant. Studies have shown more insurance will not be the result. There is a limited amount of insurance coverage at any price in Florida. It is not a free market. Most people simply have not studied the literature and reports on this issue and assume that if insurers can make more money on higher premiums, more insurers will sell insurance in Florida. These studied findings were made to the Citizens Mission Review Task Force which I was part of. No legislators were there to listen and learn.

Many proponents of rate deregulation (including our legislators) make uninformed decisions on the issue, and then offer ignorant opinions and answers to a difficult issue. Other leaders supporting this issue are probably just pandering to State Farm and the insurance industry.

Governor Crist should veto the bill that deregulates the insurance industry. It makes no economic sense. It is what the insurance industry bargained for in the 1940's. Did Florida’s legislators even know why Florida can and should regulate rates before they chose to give up that right?.

Why shouldn't we hold State Farm and other insurers to a deal they bargained for?

The views are extremely varied. One guest columnist categorized State Farm's actions as a "divorce." She wrote that Charlie Crist is acting like a "scorned spouse" and that the State Farm agents are part of the "family" affected by the situation.

Florida's newly appointed insurance consumer advocate, Sean Shaw, wrote a fairly optimistic piece in the Miami Herald. Significantly, he noted that "cheaper" insurance may be cheaper because it provides fewer benefits.

Best Wire ran a story, State Farm Agents, Policyholders "Hold Tight" Together. The star of this article is a State Farm agent, Craig Dewhurst. State Farm agents are very good salespeople. A few showed up at the last Citizens Mission Review Task Force Meeting and made public comments. They introduced themselves as "independent agents" which is legally true, but not entirely accurate because they are independent agents that can only sell State Farm policies. I am certain that State Farm lobbyists and public affairs types had them show up and introduce themselves in this semi-deceptive manner.

This article notes that "State Farm agents are independent contractors who only sell State Farm policies." Given how much control State Farm exerts over its agents, I am surprised Florida has not questioned the status of these agents as "independent contractors." State Farm changed the status of their agents years ago as another money saving mechanism--passing down selling costs to captive agents under the guise they are independent contractors.

Dewhurst claims to tell his customers that "we're in this together." For what it is worth, I agree with him. The reason why we are in this together is largely the fault of his employer.

Dewhurst and 800 State Farm agents are fighting for economic survival. I imagine they will spin this crisis as the fault of the legislature, the Office of Insurance Regulation, and the Governor--anybody other than State Farm's management in Bloomington. He admits this is what the agents are doing:

"They are mad at us at first but once we educate them on the facts, they want to write the governor and insurance commissioner." 

Dewhurst better hope his customers do not read the facts in this blog or the findings of the Administrative Law Judge that State Farm engages in "sham" economic transactions. Kevin McCarty and the Florida legislature should ask for the scripts State Farm has disseminated to it agents regarding these issues. State Farm has a legal obligation to be completely honest with its customers when explaining this situation.

I also indicated in an earlier post, What Is State Farm’s Agenda, that State Farm may have made the Florida announcement as leverage in other states. North Carolina is fighting an insurance rate crisis similar to Florida's. Its legislators are contemplating passing laws capping or blocking significant rate increases against the recommendation of the North Carolina insurance commissioner.

What is State Farm's position? An article quotes State Farm's threatening position which uses the Florida announcement as proof it is not afraid of government:

"Russ Dubisky with State Farm Insurance says his company left Florida because it couldn't get the increase it wanted.......’we're confident, given the leadership of the department that we are going to move forward and come out of this with a resolution that's beneficial to consumers and to insurers.’"

Maybe North Carolina legislators need to read some facts about State Farm as well.

Being in business with a bully means having knowing that the bully will take his ball home when the rules of the game are not to his liking. The bully will claim the reason he will not play is because the other players are not fair. While it is regretful, I agree with Sean Shaw, it is time to start looking for new players and help them get into the game of insurance.

Insurance actuarial studies get pretty nerdy.

The St. Petersburg Times ran a story on the progress of the Task Force. While the work of the Task Force is ongoing and no votes have yet to be taken, there is one thing we have to do with Citizens before it is too late--reduce the financial exposure to catastrophic loss. Florida simply cannot afford it. If a major hurricane struck Dade or Broward county, Florida could not efficiently raise the money to pay the claims.

Rates for Citizens will go up. I support annualized caps on any rate hike so the increases will not be shocking. Citizens is depopulating policies, and we need to encourage that as well. I do not agree with a moratorium to prevent Citizens from insuring new construction because some areas of Florida would be subjected to extortionist rates following strong hurricane seasons. In some areas, Citizens is the only insurer to write coverage.

I have learned quite a bit about Florida's insurance marketplace. Many of my colleagues on this Task Force are very experienced and have been working on these issues for over a decade. There are no simple and easy answers without harsh ramifications for some. I have learned why some ideas were tried before with unintended consequences.

Trying to resolve the best policy for Citizens is a lot like pushing on a box to make it square--as you try to push in two ends, the other ends pop out. There can be a lot of frustration trying to get it right. People who offer knee jerk solutions are simply ignorant of the situation or grandstanding for the media.

The good news is that rates have come down in many cases. By imposing a cap on Citizens rates, people could afford coverage while the insurance market corrected itself following the 2004 and 2005 hurricanes. As well, many new insurance companies are selling insurance so that a market exists. The impact from lifting the freeze on Citizens' rates will be felt less because there are other insurers that will compete for the business.