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

The reason behind the investigation is something I cannot figure out from the story or response:

McCarty said the data will help his office learn more about the frequency, severity and location of claims to determine if any regulatory action is needed.

"We're going to try to take it out of the anecdotal realm and into the statistical realm," said Jack McDermott, a spokesman with the Florida Office of Insurance Regulation.

Can you imagine anybody admitting to doing something illegal when an official shows up to ask? That is what McDermott apparently thinks some will do or that he will get credible statistical information from simply asking:

McDermott said the state also is examining whether sinkhole damage payouts are being properly used to fix property and whether some homeowners are filing sinkhole claims for undamaged property just to get a "free and clear" bill of health from their insurer.

"Someone trying to sell a house, say, in Hernando County (could) file a claim with an insurance company, which investigates and says there is no (damage)," he said. "They could use it as a marketing piece."

I have heard this from insurance company officials for years. I suppose some policyholders are stupid enough to say, "Yep, I submitted a fraudulent insurance claim just to be able to sell my house." But, I would not count on those clever enough to do so to also admit it.

It is hard to believe this is not something of a witch hunt or outcome oriented investigation supported by innuendo from insurance companies. Since the government is now in the business of insurance and has a legislative affairs department at Citizens Property Insurance, it is not unrealistic to think the government will ask its other branches for support. Right now, except as to rates, there is a very cozy relationship between the Office of Insurance Regulation and the insurance companies it regulates.

When was the last time you saw a story about an insurance company adjuster acting wrongly and being subject to regulation?

Last Friday, Florida's Fifth District Court of Appeal reaffirmed Citizen’s immunity from first party bad faith lawsuits in Citizens Property Ins. v. La Mer Condominium Assoc., Inc., No. 5D09-3578, 35 Fla. L. Weekly D1468a (Fla. 5th DCA July 2, 2010). The opinion stated:

The petitioner, Citizens Property Insurance Corporation, seeks a writ of prohibition directed to the trial court to prevent the court from taking any further action with respect to a first-party bad faith claim brought by the respondent, La Mer Condominium Association. The identical issue was presented to this court in Citizens Property Insurance Corp. v. Garfinkel, 25 So. 3d 62 (Fla. 5th DCA 2009) (rehearing denied January 15, 2010), which was pending at the time the petition was filed in this case. That case has now been decided, holding that Citizens is immune from first-party bad faith claims pursuant to sections 627.351(6)(r)1. and 624.155(1)(b)1., Florida Statutes. Id. As such, prohibition is also granted in this case for the reasons set forth in Garfinkel. (emphasis added)

There is little reason for Citizens to adjust its policyholder’s claims timely or fairly because there are no causes of action which allow for the extra-contractual damages caused by Citizens. Until the Florida legislature allows Citizen’s to be placed on the same footing as private insurers through consumer protection laws, those insuring with Citizens should not expect that wrongful claims actions by Citizens can be addressed or that Citizens can be held accountable for breaking the laws that apply to all other insurers in Florida.

In Florida Guaranty Association, Inc. v. The Olympus Association, Inc., 34 So. 3d 791 (Fla. 4th DCA 2010), FIGA successfully argued to have a challenge to coverage following an appraisal award. Insurance coverage attorneys should read the case in its entirety because it is important. For everybody else, the holding is significant:

…we conclude that the trial court erred by entering final judgment in favor of Olympus and awarding it the amount set forth in the appraisal (less the deductibles), without first deciding the issue of coverage liability. When FIGA filed its affirmative defenses in response to Olympus's complaint, the trial court should have first decided FIGA's liability. As explained in Kennedy and supported by Fisher, FIGA could contest part of the liability without challenging coverage as a whole. The appraisal award itself indicated the amount could change as the award was made without consideration of the policy's provisions of coverage.

Accordingly, we reverse and remand for the trial court to determine FIGA's liability with regard to the contested claims, and then enter the appropriate amount based on the appraisal.

Appraisal used to be a quick and inexpensive method of resolving claims. FIGA now uses it as a first step before litigation begins in earnest to prevent, or slow, payment. Unlike other insurers that have to act in good faith, FIGA has no penalty for contesting claims. It can do so with impunity. And, based upon the number of inquiries from others, it is taking advantage of the law and doing so.

The Florida Legislature and the Office of Insurance Regulation need to address the issue of who is investigating the claims process at FIGA and how its claims operations are run. These are the same complaints that were being made about Citizens Property Insurance in the past which lead to claims reform at Citizens. It is bad enough that policyholders have their insurer go broke and have to wait for payment. They do not expect a claims catastrophe which they can do little about.

A recent Government Accounting Office (GAO) report of state sponsored catastrophe programs brought this to my attention. The report summary mentioned:

Officials from some state programs said that they limit participation in the reinsurance or ILS markets because the coverage they want is not available at a price they are willing or able to pay without significantly increasing premium rates charged to homeowners.

The result is that most state sponsored programs rely upon the luck of not having a catastrophe where they would have to call upon a state's general revenue obligations to pay for the debt. Alternatively, our state politicians hope the federal government will bail out the state's fiscal irresponsibility. The "bail out" nation mentality is alive and well in state sponsored insurance.

Claire Wilkinson's post at the Insurance Information Institute, State-Run Insurers Lack Risk-Based Pricing, brought this report to my attention. I agree with her observation and the finding of the GAO which concluded that "most state natural catastrophe programs do not charge premium rates that reflect the full risk of loss."

In Florida, I publicly commented on some of these issues while serving on the Citizens Property Insurance Mission Review Task Force, and noted some of them in Taking Tough Positions On Citizens Property Insurance Task Force. Citizen's is correcting this problem by allowing rates to rise gradually. In Texas, TWIA tries to enforce mitigation as a condition to get insurance and therefore lower severities of its expected losses.

When it comes to insurance and public policy, there are probably two concepts all should remember:

1. There is no free lunch.
2. We are all in this together.

Have a great weekend.

Before the change in Citizens’ policy, analysis of a requirement for an examination focused on the word “insured.” The insured is usually required to submit to an examination under oath when demanded. The term insured is usually defined in the policy, and this helps lawyers to determine who is required to give an EUO. A look at the case law shows that arguments have been made about how far the definition of insured can stretch with respect to commercial policies and commercial- residential policies. This debate has been going on for decades.

Recently, in Florida Gaming Corp. v. Affiliated FM Ins. Co., 502 F. Supp. 2d 1257 ( S.D. Fla. 2007), the U.S. District Court for the Southern District of Florida addressed issues regarding who is required to give an examination under oath under the Affiliated policy issued to Florida Gaming. It is important to remember that in Florida Gaming, the policy language was different than the policy considered in this blog. The facts of this case, like all cases, are unique.

In Florida Gaming, the Court considered who should be required to give an EUO. The Vice President of the company gave a lengthy EUO but could not answer all questions. He admitted that he had no personal knowledge relating to the amount of loss and relied on the public adjuster’s analysis and the contractor, who was hired by the public adjuster, to estimate the damages. The insurance company requested that the contractor be subject to an EUO. Based upon the policy and the facts, the Court declined the request, stating:

Affiliated argues that Florida Gaming must submit Al Paxton to an examination under oath because PCA performed the analysis upon which Florida Gaming has relied in its sworn proof of loss. Florida Gaming responds that the policy requires only that “the insured” submit to examinations under oath. The Court agrees with Florida Gaming, that given the language of the policy, which authorized the examination of “the insured,” an examination of the insured's adjuster (or its agents or representatives) does not appear to have been contemplated. The Court therefore applies the rule requiring that the policy be interpreted in favor of the insured, and finds as a matter of law that Al Paxton is not required to submit to an examination under oath.

The Court’s explains is important; the obligations of those involved were determined by the policy provisions and what was contemplated by the wording of the policy at the time of drafting. This is how insurance policies and other contracts are routinely interpreted, and it provides some guidance in interpreting the new Citizens policy.

Does the exact wording of the provision matter?

Yes.

In Florida Gaming, the Court also explained that when a policy of insurance is ambiguous, the ambiguity is resolved in favor of the insured. This may be an angle used to help public adjusters determine their responsibility with the Citizens policy. The language requesting the EUO does not say “public insurance adjuster,” it says “anyone you hire in connection with your claim.” Perhaps there is enough ambiguity here for a court to agree the policy is unclear and overly burdensome.

What about the policyholder?

One of the common themes in the comments and the discussion about this provision relates to the policyholder. Suppose the insured has a loss and has problems or a complicated claim. The policyholder needs help and hires a public adjuster. The public adjuster’s contract is signed and the claim is presented to Citizens. Citizens demands examinations under oath and lawyers are hired. There is a dispute concerning the obligations of all involved, and the matter ends up in court. The matter is one of many pending on a very full docket. Meanwhile, the insured has to wait just to figure out what is required under the policy. The insured’s home or business is in limbo and the public adjuster is spending more and more time attempting to figure out how to help the client.

While the purpose of this blog is to have a discussion and evaluation of this issue, I also want to remind everyone that examinations under oath must be demanded. If there is no demand, there is no issue. Until an EUO of a public adjuster is demanded and the matter litigated, we will have no definitive guidance on the issue. While no one can predict the future and changes are always happening with property insurance, everyone should understand the policy provisions and be aware of new policy language that could affect your job and your clients’ claims. In the meantime, taking extra care to be prompt in communications and forthcoming with the claim presentation may save unnecessary headaches later.

The provision reads:

As often as we reasonably require:
1. Show us the damaged property
2. Provide us with records and documents we request and permit us to make copies
3. You or any "insured" under this policy MUST:
a. Submit to examinations under oath and recorded statements, while not in the presence of any other "insured"; and
b. Sign the same;
4. If you are an association, corporation, or other entity; any members, officers, directors, partners or similar representatives of the association must:
a. Submit to examinations under oath and recorded statements, while not in the presence of any other "insured"; and
b. Sign the same;
5. Anyone you hire in connection with your claim and anyone insured under this policy other than an "insured" in (3) or (4) above, must:
a. Submit to examinations under oath and recorded statements, while not in the presence of any other "insured"; and
b. Sign the same;

Keeping the discussion limited to public adjusters for this post, these are the questions I have received most frequently:

1. What happens if the PA refuses?
2. Is the PA always required to give an EUO?
3. Can the PA fill the shoes of the policyholder and give the only EUO?
4. How can the statements given by the PA during an EUO change a claim decision?

The answer is the same for each question. It depends. The first thing to consider is the policy. At this time, the Citizens form seems to be unique. The entire policy should be reviewed by a qualified lawyer to determine the obligations of the parties.

Generally, the parties to an insurance contract are the insurer and the insured. The public adjuster is not a party to the contract, however, the PA is paid based upon the claim and has an interest. In fact, the first thing most public adjusters do is notify the insurance company of their involvement and request to be listed as payee on the settlement proceeds. The assignment of the claim payments and actual payment afforded to the PA is done pursuant to another contract; the contract entered into between the policyholder and the public adjusting firm. The contract with the public adjuster may say something like this…

In consideration of the services rendered by XYZ Public Adjusters, we hereby assign and agree to pay XYZ Public Adjusters a certain percentage___ of the funds when recovered in connection with this claim.

The insurance policy will likely have three more important sections to consider. The first is the definition section. Under the definitions, the term “you” should be defined. Typically, the “you” in an insurance policy is the insured and those who are bound to perform the obligations under the policy. The “loss payment” clause should be considered too. Does the insurance policy state what has to happen for the payment to be made? This section may outline what each party needs to do for payment to be issued. Also, the concealment and fraud provisions should be considered to determine if and how the testimony of a PA might affect a policyholder’s claim.

After looking at the policy, the claim needs to be evaluated. The status of a claim can make all the difference in how an EUO demand is handled. One thing to look for is whether the demand for the EUO is timely. Did the insurance company waive the right to take the EUO? Has the claim been denied or has there been a material breach of the contract by the carrier? While each claim is different and providing claim information to the insurance company is necessary, these questions should be answered by a trained lawyer. Depending on the case, sometimes providing an EUO (even if there was waiver) may help a claim to be resolved more quickly and leave the insurance company one less defense to the payment. However, an EUO should not be given by anyone without a lawyer. The insurance company has hired a lawyer to represent it at the EUO and a policyholder should always retain counsel too. An EUO is not an opportunity for a policyholder to try out his or her Matlock skills. Remember, even lawyers hire lawyers and doctors see doctors.

When the policy is originally issued, the average policyholder did not consider provisions that may affect non-parties to the contract, nor did they consider who would end up being paid insurance benefits from a claim for damage. Thus, who is the PA in connection with the contract? Is the PA a third party beneficiary or a non-party? A public adjuster involved in a claim typically should not be considered an intended third-party beneficiary. However, the public adjuster receives a benefit only if obligations of the contract are carried out by both parties. If the policy in total supports such a requirement, the public adjuster may have an obligation to sit for an examination under oath. Again, this will depend on the specific policy language regarding EUO and the contract with the policyholder. Remember, looking at one portion of a policy without considering the whole contract is similar to applying sunscreen to just one arm and assuming you won’t get burned after a day at the beach.

This post will continue on Monday. In the meantime, if you have given an EUO and having been dealing with similar issues and would like to share your experience, please send me an email at nvinson@merlinlawgroup.com, call directly at 813-415-8758, or post your comment here.

This is the Examination Under Oath (EUO) requirement in the Citizens’ policy. The highlighted portion, lines 5 a-b, are new and controversial part:

FORM CIT HO-01 10

As often as we reasonably require:

1. Show us the damaged property

2. Provide us with records and documents we request and permit us to make copies

3. You or any "insured" under this policy MUST:

a. Submit to examinations under oath and recorded statements, while not in the presence of any other "insured"; and
b. Sign the same;

4. If you are an association, corporation, or other entity; any members, officers, directors, partners or similar representatives of the association must:

a. Submit to examinations under oath and recorded statements, while not in the presence of any other "insured"; and
b. Sign the same;

5. Anyone you hire in connection with your claim and anyone insured under this policy other than an "insured" in (3) or (4) above, must:

a. Submit to examinations under oath and recorded statements, while not in the presence of any other "insured;"and
b. Sign the same;

Generally, insurance policies contain a requirement that the insured must give both a recorded statement and an Examination Under Oath (EUO) in the “Conditions” section of a policy. A recorded statement may be used to gather information by insurance company at the onset of the claim. An EUO is a more in-depth interrogation by a lawyer for the insurance company. The requirements of policyholders in connection with an EUO depend on the policy language. Many policies require insureds to sit for an EUO, sign the recorded transcription, and give the EUO while not in the presence of any other insured. Essentially, an attorney for the insurance company asks a long series of questions while a court reporter records the whole thing. An EUO is more similar to a deposition than a simple recorded statement, except that the EUO is governed by the rules explained in the policy and not the Rules of Civil Procedure. EUOs are adversarial. Now, at least for Citizens claims, it seems public adjusters are subject to the same requirements.

The insurance company has many other ways to learn about a claim and the public adjuster’s involvement and evaluation of it. This series of posts will consider the implications of Citizens’ new policy language and will discuss what is happening now on the front lines.

-Nicole Vinson

Appraisals generated as part of a loan application process are not appropriate for insurance purposes. The “cost approach” section of a market value appraisal is based on a “new construction” rather than a “reconstruction” basis. While not appropriate for insurance, the “cost approach” is what you’ll commonly get from a real estate appraiser if you simply ask for the “replacement cost;” it’s what they’re most familiar with, and they don’t need to spend money on an additional software packages to do the job. If you see the term “replacement cost new,” or “RCN,” it’s not the right kind of estimate. When ordering an appraisal, you probably need to take the extra step to tell the appraiser: “This is for insurance purposes; an estimate based on replacement cost new will not be acceptable.” If the appraiser seems baffled by such a request, you need to find a different appraiser.

Any estimating software can be manipulated to generate an artificially low number. Citizens’ has identified a few of the variables commonly manipulated: area, construction type, and subjective quality adjustments. There are many other variables that can be manipulated; it is important for the insured to carefully review the detailed report to make sure the entries are valid.

The agent/broker working with the insured also needs to check the appraisal to make sure that additions and deductions are aligned with the policy coverages. If foundations are covered (recommended) then they shouldn’t be deducted from the appraisal; if driveways and sidewalks are excluded, then they shouldn’t be included in the estimate. It would be difficult for the insured to recognize if an appraiser has manipulated the standard factors for quality, architects fees, overhead & profit, and others; but the agents/brokers see enough of these that they should be able to identify these adjustments.

The reason Citizens’ memo specifies that the detailed report be submitted, rather than a summary report, is so that the underwriters can spot the adjustments. Most of the “creative” adjustments would not appear on a summary report.

The Citizens’ memo mentions two vendors of software appropriate for generating insurable value estimates (Marshall & Swift/Boeckh [MSB], and e2Value). This list is not complete, there are a few others. MSB’s RCT, RCT HV, BVS are used by the insurance industry, but be careful, the books published by Marshal & Swift (same company) and commonly referenced by real estate and tax appraisers are not appropriate for insurance purposes. Before hiring an appraiser, you should check with the agent/broker to see what software the insurers use and request that the appraiser use the same software, this should help in reducing the potential for co-insurance.

In closing, please be wary of any appraisal firm that promotes its services on the basis that they can generate a lower estimate than the insurance company. Likewise, be wary of any agent/broker that has a “friendly” appraiser who is willing to provide a favorable estimate. Neither the “friendly” appraiser nor the agent/broker will likely suffer any consequences of under-reporting the exposure values.

-John Nixon
President, Asperta, Ltd.

For those of us in the trenches of working for fair and efficient resolutions of disputes, the following comment published early this morning to my post, Impressions Following the Alternative Dispute Resolution Roundtable, should provide serious consideration about how mediation can be easily abused:

Chip:

I am writing this to express my experiences with alternative claims resolution processes using both the Florida Mediation Program and the appraisal provisions of the insurance policy.

Let me start by saying that I have a somewhat unique perspective on claims handling. I have spent my entire 35 year professional career in the claims handling industry in one form or another. The first 24 years of my career I worked on the insurer side in various positions including a 5 year stint as a regional claims manager for a property casualty insurance carrier and 13 years as an equity partner in a regional independent adjusting company. For the past 11 years I have owned my own public adjusting company. So I have had extensive experience in both mediation and appraisal advocating for both the insurer and the insured.

First let me address the Florida Mediation program. To put it bluntly it is, in my opinion, an abject failure. Perhaps the first and foremost reason that it is a failure is that my experience has shown that the insurer’s representative almost always goes into the mediation without having full settlement authority. Without having that authority the insurer’s representative is unwilling or unable to offer a fair settlement to the insured simply because they either do not have the dollar authority to do so and/or are unwilling to go back to their supervisor for my authority. I have also experienced cases where the insurer agreed to go to mediation with an insured but at mediation they did not move one dollar from the original position that drove the claim to mediation in the first place. I have had an impasse declared within 10 minutes of the start of mediation with the insurer never making an offer above the original adjuster’s offer.

However, perhaps the most insidious aspect of mediation is the way the insurance industry advocates to the insured to use the mediation process without the insured having any professional assistance with their presentation. The insurer’s representative at the mediation is a professional claims person who has been trained in the mediation process and negotiation tactics. An unrepresented insured almost never understands the process and certainly does not have the training of the insurer’s representative. In the words of one insurer representative that I know when an insured goes into mediation without professional help, 'it is like leading the lambs to slaughter.' It has reached a point now that I see no redeeming reason to recommend to my clients, even with my help, that they avail themselves to the mediation program as it currently exists.

Next, let me relate my experiences with the appraisal process. In my career, I have appraised claims on behalf of both insurers and insureds. I have also served as an umpire on over 50 appraisals. I appreciate the appraisal process because it does give some finality to a claim. It is quicker and less costly than litigation and absent any coverage issues a properly crafted appraisal award is almost always binding on both the insurer and insured. The appraisal also gives the insured a professional advocate in the decision making process. That cannot be said for many mediation hearings. I also like appraisals because there is no such thing as an impasse in appraisal. I have yet to see an appraisal I was involved with that did not have an ending where at least two of the three appraisal panel members were able to reach an agreement.

Now, let me speak to the appraisal process. I believe the appraisal process would be very well served if it had some guidelines on how the process was to be conducted, such as having utilizing the Florida Arbitration Code as a guide. I have issues with the conduct of insurers and their appraisers. I believe insurers have far too much influence on their appraisers when it comes to the selection of an umpire.

As indicated by Umpires at the Roundtable, it is a very poorly kept secret that insurers have lists of umpires that they instruct their appraisers to never use, even if their own appraiser feels the person on that list is qualified and would make a good umpire on their appraisal. I have run across another problem in my capacity as umpire. I have had appraisals where the appraisers advise me they are at an impasse and need my umpire services to settle their differences. When I meet with the 2 appraisers they inform me that they really do agree on an amount of loss but the insurer’s appraiser informs me that he doesn’t want to sign the award. He won’t sign the award, even though he agrees with it, because he is afraid if he does sign it the insurer will stop using him on their appraisals. As an umpire I should be happy with this situation because it means more business for me. However that is not the case. I can’t help but think about the poor insured who has had his claim settlement delayed and now that an agreement has finally been reached he has to pay 50% of an umpire’s bill when in reality the umpire was not really needed. That is just wrong.

As a former claims manager and a person very familiar with the industry, it is naive to think that insurers, including Citizens, do not keep statistics and track which umpires and appraisers provide lower awards and then deselect those that give awards higher than what those insurers think is acceptable.

Does the appraisal process have warts? Certainly it does. However, I believe any problems with the appraisal process are repairable. I do not feel the same way about the Florida Mediation program.

Thanks for all your efforts on behalf of the policyholder.

Sincerely,
Don
Donald A. Phillips

Insurers, or any party to a dispute, can abuse the mediation process by having people that do not have the complete authority settle after considering everything presented at the mediation. I have heard of insurers that intentionally provide limited dollar authority to the adjuster at mediation, no matter how compelling the evidence presented, at a state sponsored mediation, knowing that many policyholders will simply give up. Many policyholders are afraid of litigation or appraisal. Nobody buys an insurance policy thinking they will have to become professional negotiators or litigators. Insurance companies have professional litigators and train their adjusters how to negotiate with unrepresented policyholders and how to hold their own in negotiations with attorneys. Honestly, what chance does a lone policyholder have against an insurer that has a claims attitude to pay as little as possible? Why do you think insurance company executives and their lobbyists are pushing for a mediation system in Florida where policyholders come all by themselves? "Lambs to slaughter" sounds about right to me.

A public adjuster’s involvement also frequently increases the dollar amount of a policyholder’s final settlement. By some accounts, the average settlement rises by as much as 20 to 50 percent. See, Peter C. Beller, In the Wake of Disaster, Help for Hire, New York Times (Feb. 2, 2006); and Brian D. Mockenhaupt, For Public Adjusters, Disaster Means Business, Providence (R.I.) Journal-Bulletin (Jan. 18, 1998). The Florida Legislature’ own program policy analysis office has found that, in claims related to the 2005 hurricanes filed by policyholders of the state-run Citizens Property Insurance Corporation, settlements averaged 747 percent higher ...The same legislative report found a smaller but still significant increase – 574 percent -- in settlements when public adjusters represented Citizens policyholders in non-catastrophe claims.

I was amazed at the statistics found and published by Citizens. I think it is far overstated and policyholders should not expect that type of percentage increase unless they have a smaller claim. While I may criticize Citizens' claim handling, there is no way it is that bad and it underpays to that extent that often. If I were a public adjuster, I would advertise this statistic every time I talked with a prospective client. 

This lawsuit seems to be moving along quite a bit faster than a similar public adjuster lawsuit in Dade County which I noted in two earlier posts, Florida Public Adjusters File Lawsuit to Overturn 48 Hour Solicitation Ban and Fee Caps, and Public Adjuster Lawsuit Challenging State's Cap on Fees and Solicitation Ban Survives Venue Change. I expect that the summary judgment will be heard within the next sixty days. Pre-trial hearings are set and the judge seems to be moving this matter along pretty quickly.

A good example of this is found in a recent article, "Georgia Software Company Sues Citizens Property Insurance Over No-bid Deal." It was reported that:

A Georgia software company has sued Citizens Property Insurance Corp. saying it broke the law when it awarded a $60 million contract in late October without soliciting competitive bids.

SagoTec Group is challenging Citizens' agreement with Inspection Depot to reinspect policyholders' homes that have wind mitigation credits.

Citizens says there is an emergency need to verify such credits because they account for $700 million in premium discounts annually for the state-run insurer. If a re-inspection shows the credit is undeserved, Citizens, the state's largest insurer, could recoup substantial revenues.

The issue of wind mitigation credits and how it impacts rates was never a secret or an "emergency." It was a normal operational issue that should have been developed and bid upon. Successful or not, I applaud the lawsuit because it will force Citizens management to act as a governmental entity and comply with the law. The Citizens Board of Directors should make its own determination of this issue as well, regardless of whether it means there is accountability for breaking the law.

The issue of accountability is fundamental to most of us. Why have rules if they can be broken without consequence or accountability? Currently, Citizens has no financial accountability for delayed and intentionally wrong claim handling as private insurance companies do. See my earlier post, Citizens Property Insurance Corporation is Shielded by Sovereign Immunity from Bad Faith Claims.

Our legislature should follow the lead of State Senator Don Gaetz and correct this. It is simply wrong for Citizens claims managers to have no accountability. It already has an unfair advantage in the marketplace with private insurers on the rate structures, it should not have an economic incentive to break the law and promote abusive claims practices against its own customers.
 

The most significant reasoning for this finding is in the following legal discussion:

The reason why first-party bad faith claims are not considered to be willful torts is best explained by examining the history of this cause of action. A third-party bad faith action (that is, a claim against one's own insurer for failing in good faith to settle a third-party's claim, thus exposing the insured to liability in excess of the available insurance coverage), was recognized in Florida as part of the common law as early as 1938. The foundation for this claim is found in the fiduciary nature of the insurance carrier's relationship with the insured. The carrier was required to act in good faith to negotiate a settlement for the benefit of its insured, and not to protect its own interest alone. Opperman v. Nationwide Mut. Fire Ins. Co., 515 So. 2d 263, 265 (Fla. 5th DCA 1987), review denied, 523 So. 2d 579 (Fla. 1988). Because of the perceived absence of the fiduciary relationship, however, there was no first-party bad faith action by an insured against the insurer recognized at common law. See Allstate Indem. Co. v. Ruiz, 899 So. 2d 1121 (Fla. 2005); State Farm Mut. Auto. Ins. Co. v. Laforet, 658 So. 2d 55, 58-59 (Fla. 1995); Baxter v. Royal Indem. Co., 285 So. 2d 652 (Fla. 1st DCA 1973); cert. discharged, 317 So. 2d 725 (Fla. 1975). Thus, unless the insured could allege an independent tort such as fraud, the only relief available on a first-party claim was a cause of action for breach of contract. Butchikas v. Travelers Indem. Co., 343 So. 2d 816 (Fla. 1976); Rubio v. State Farm Fire & Cas. Co., 662 So. 2d 956, 957 (Fla. 3d DCA 1995), review denied, 669 So. 2d 252 (Fla. 1996); Opperman; Allstate Ins. Co. v. Kelley, 481 So. 2d 989 (Fla. 5th DCA 1986).

The Legislature addressed this issue in 1982 by the adoption of section 624.155, Florida Statutes. As our Supreme Court has indicated, “[t]hrough this statute, the Legislature created a first-party bad faith cause of action. . . .” Laforet, 658 So. 2d at 59. Thus, first-party bad faith causes of action now exist in Florida not because they are torts, but because they are a statutory cause of action. Accordingly, a first-party bad faith claim cannot be wedged into the statutory exception for willful torts because it is not a tort of any variety. (emphasis added)

Most treatises will be amended to reflect that Florida’s current first party wrongful claim practice scheme is not a tort, but strictly a statutory action. Of course, that may change because of the a case pending before the Florida Supreme Court as I posted in A Common Law Remedy For Lack Of Good Faith And Fair Dealing Is Before The Florida Supreme Court. Stayed tuned- the law is a creature subject to change depending on the facts and issues brought before the Courts.

I was amazed. I expected all rates to go up somewhat and did not expect any to drop. I also expected the overall Statewide rate to go up approximately 10% based on the legislation and my work with the Citizens Mission Review Task Force.

Instead, the overall statewide rate will go up only 5.4%. I imagine the private carriers are not happy the rates are rasing so slow by Citizens. But, they must really be miffed that a governmental entity is lowering rates on average 9.3% in St. Petersburg and 8.6% in Hillsborough.

In Associated Industries and Private Insurers Want Florida Policyholders to Pay as Much as Possible for Property Insurance,  I gave Barney Bishop a lot of grief for suggesting that each policy would have its rate raised by 10%. Still, I thought the overall average rate on a statewide basis would have increased by an amount much closer to 10%.

I do not think that it should be Florida's public policy to allow Citizens to compete with private insurers unless it is truly an insurer of last resort. When rates drop and Citizens is an active seller of insurance at prices that are competitive with private insurance rather than an insurer of last resort, it kind of smacks of socialism.

There are also all kinds of problems with Citizens executives lobbying our elected representatives to derail consumer protections. When a governmental entity is in a private business, as is Citizens, there are many activites that the government will undertake which are not in the consumer's or private enterprise's long term interest. Manipulation of rates for various purposes, especially political, could be one of the interests not helpful in the long-term to consumers or private insurers.

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.

State Farm Florida Withdrawal Hearing Moved to December
Chad Hemenway
TALLAHASSEE, Fla., Sep 29, 2009 (A. M. Best via COMTEX)

In a joint filing with the Florida Division of Administrative Hearings, the Office of Insurance Regulation and State Farm Florida again moved to push a hearing to address the insurer's desire to leave the property insurance market back another 30 days.

 

The order from DOAH states, "the parties are hopeful that their continued discussions will allow them to arrive at an acceptable resolution. Such a resolution would obviate the need for a final hearing in this matter."

 

The new date for the hearing is Dec. 17. A hearing was rescheduled recently from October to Nov. 17. The DOAH order says the OIR and State Farm Florida each said they would need to begin the discovery process of the proceeding now in order to meet the Nov. 17 date and that "the expense, distraction and adversary nature of such discovery would interfere with the parties' settlement efforts."

 

Recently, Florida Insurance Commissioner Kevin McCarty told members of the Florida Cabinet that it was possible State Farm Florida could remain part of the property insurance market in some capacity. The insurer and regulators each say they continue to talk about all possibilities.

 

State Farm Florida filed a withdrawal plan at the end of January that called for its last nonrenewal at the end of 2011. Under current conditions, the insurer said it would be insolvent around the same time. State Farm Florida plans to continue to write automobile insurance. McCarty approved State Farm Florida's two-year plan but he wants to bar State Farm from penalizing policyholders for terminating their contracts early and from preventing its agents from working with other companies. McCarty also had concerns that the company had no plan to transfer its policies to the private market instead of state-run Citizens Property Insurance Corp. Furthermore, the OIR immediately wants State Farm's certificate to write insurance, but the company wants to hold it during the course of its exit from the market (BestWire, Feb. 13, 2009).

 

A.M. Best Co. in June downgraded the financial strength rating to B (Fair) from B+ (Good) and issuer credit rating to bb from bbb- of State Farm Florida Insurance Co. The outlook was revised to negative from stable. This was based on State Farm Florida's recent "significant deterioration in earnings and risk-adjusted capitalization and the expectation that this deterioration will continue over the near to intermediate term," A.M. Best said (BestWire, June 18, 2009).

 

The top five writers of homeowners multiperil in Florida, according to 2008 A.M. Best Co. state/line product information based on direct premiums written, were: State Farm Group, with a 17.7% market share; Citizens Property Insurance Corp., with 16.2%; Universal P&C Insurance Co., with 7.2%; USAA Group, with 5.1%; and Tower Hill Group, with 4.5%.

 

(By Chad Hemenway, associate editor, BestWeek: Chad.Hemenway@ambest.com)

You can read the article as it was posted by clicking here.

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.

My longstanding view is that “hardening” of structures is important public policy for coastal states. It should be encouraged and reflected in rate regulation, building codes, and taxation policy. The best loss is one that does not happen. The second best loss is one which is less severe as a result of preventative measures.

On Thursday, the Florida Office of Insurance Regulation issued a letter responding to State Farm’s requests for the elimination of certain discounts. It approved many, but also called for State Farm to provide greater information regarding the issue of eliminating or reducing rates for those who “hardened” buildings in return for lower premiums:

“The changes to State Farm Florida’s mitigation credits contained in this file are not approved. As discussed on prior occasions, an alternate mitigation credit is allowable under Florida regulations; however, such credits must be supported by a “detailed study” pursuant to Section 69O-170.017, Florida Administrative Code and other pertinent regulations. If State Farm Florida chooses to file alternate mitigation credits in accordance with the rule, the study of the alternate credits may best be performed by the proprietor of the model to ensure explicit documentation as provided in the current approved ARA study. Some items of significance that should be addressed in the study, if one is conducted, include but are not limited to:

1. Explicit documentation with respect to the reflection of all code wind speeds.

2. Explicit support for the selected base structure. This should include an explanation of how it complies with Section 627.0629, Florida Statutes and the following data:

a. The expected hurricane losses in total
b. The expected hurricane losses for each group of discount features
c. The expected hurricane losses for policyholders receiving no discount

3. Discounts must reflect all features that reduce windstorm loss. Further, areas with a higher resistance to wind speed must reflect higher discounts.

4. Include detailed support to show base rates are consistent with the base risk that is not receiving mitigation discounts.”

The important thing for everybody to notice in the Miami Herald article is that State Farm is not the only insurance company behind this. A number of elected officials who cater to the insurance industry and Citizens Property Insurance Corporation (which is part of the Florida Government) obviously conspired with others to break the promises made to Floridians:

“…more than 700,000 other Florida consumers who spent big money to fortify their homes -- could see their ``wind mitigation'' discounts dramatically reduced.

Insurers, led by State Farm Florida, are complaining that the discounts for installing shutters and other protections have become so popular that they are undercutting the industry's bottom line.

Last year, citing the cost of the discounts, State Farm asked for a 47.1 percent rate increase. The state said no, but the Legislature agreed to review how the discounts are tallied. The first public hearing is Wednesday in Tallahassee.

Bressner thinks it is ``counter-intuitive'' for insurers to want to strip away incentives that encourage policyholders to make their homes better able to withstand a windstorm.

State Sen. Mike Fasano, R-New Port Richey, who serves on the Senate's banking and insurance committee, recalled State Farm's president testifying on behalf of the discounts.

``This is what they wanted and this is what they got,'' Fasano said. ``Now they want to take away [the discounts] from homeowners. That's a promise they've broken.''

Still, lawmakers are willing to listen to the industry.

``We want to be sure that the discounts we're offering are right,'' said State Rep. Bryan Nelson, the Apopka Republican who sponsored the law mandating the review.

``We're reducing premiums every year,'' said Carol Everhart, a member of the governing board with Citizens Property Insurance, the state's largest insurer. ``But what we're doing isn't based on a valid study.''

If our elected officials and those regulating our insurance industry in Florida want to know what the insurance industry hopes to gain from this new maneuver, now and in the future, they should request records from Citizens Property Insurance Corporation, which is a governmental-not private-entity. They should ask for Citizens’ officers and managerial employees to explain all their discourse with other insurers, legislators and lobbyists regarding this topic for the past several years.

We should also applaud all the elected representatives that stand up to the insurance companies. Before the next election cycle, I plan to draft a detailed outline for everyone to review that delineates which elected officials in Tallahassee are really for policyholders versus those who work for the insurance industry. The advertisements by some politicians were completely fraudulent on this last year. It’s about time that the local electorates understand who really works for them and who works for Big Insurance.

After yesterday's post, I received a number of private questions as well as a public comment from Eric Hyman, an experienced public adjuster. I replied to his comment:

Eric,

I really have no idea how they go about classifying what you have stated. I have no idea how much Citizens pays in attorney’s fees to defend its cases nor how much it pays policyholders for attorney’s fees when it loses. Do you have any evidence to support your allegations? Send it to me, and I would be more than happy to share it.

I appreciate that you are upset that the manner in which you resolve cases with Citizens may no longer be available. You have told me that most of your cases go to appraisal because Citizens never comes close to agreeing with amounts you provide. And, you get significantly more money back for the policyholder.

Indeed, I predict there will be considerable "push back" because a cottage industry of appraisers for each side and umpires may no longer be making fees from the number one source of appraisal--Citizens.

Still, the process is inherently flawed. There is no due process. I have said that since there are no rules, the only rule is to be honest, but do everything you can to win.

In Florida, when the appraisal result is unfair, there is little either party can do about it. Unfairness may occur in arbitration or litigation, but I can assure everyone that they will be able to present their case, subject the opposing view to critical review, and submit the matter to a somewhat independent panel or jury. All of this guaranteed by the due process clauses of the United States and Florida Constitutions.

The other truth is that Citizens management may feel that the appraisal process results in unjust awards favoring policyholders. If so, they should explain why and how the appraisal process favors policyholders over insurers.

My impression is that the cases going to appraisal now have a policyholder who knows to get evidence and make a presentation to show the validity of the claim amount. In the past, insurers would run over policyholders, thinking their appraiser would do all this work. The appraisal process is no longer a "winning" proposition for insurers as it was in the past, and now some insurers are seeking other ways to game the system to lower claims payments to customers.

Citizens makes several valid points in its report, although I disagree with its publicly stated motive for requesting eliminating the appraisal clause.

Given that public adjusters are obtaining more money for policyholders through appraisal and that so many others, such as appraisers and umpires, have made careers in the appraisal process, you can bet those individuals with such significant financial interests oppose Citizens’ move. This is a normal reaction to the possibility significant change.

My opinion of appraisal has not changed much over the past fifteen years since I chaired a sub-committee of the American Bar Association's Property Loss Insurance Committee involving a study of the fairness and procedures of the appraisal clause. The procedures vary by state. Many states have noted the due process concerns and have required the process to be more of an arbitration. Florida's procedure for appraisal is what I call the wild west method. There are no rules. Shoot 'em out, and you better be standing when the smoke clears because there are no second chances for the dead.

I essentially said this when I was asked to be on a Keynote Panel regarding the appraisal process at the Windstorm Conference. While various attorneys, umpires, appraisers, and insurers have tried to set rules through a "Memorandum of Appraisal," that is not required under the terms in insurance policies, statute, or common law.

As an attorney, I always point out that the United States has long held many informal methods unconstitutional. One of the great protections to individuals is a right to have a jury decide controversies. This is a fundamental right with a longstanding history. Alternative methods to resolve controversies must satisfy due process safeguards. I have questioned how a system with no rules does this. Some States, like Florida, allow the informality without addressing constitutional concerns.

Dan Luby, of Precision Adivisors, sent me a private follow-up. It is pertinent to this issue:

"I read your blog today concerning the changes to the Citizens Appraisal clause. I appreciate the attribution.

As a follow up, attached is an excerpt from a recent Citizens filing with the OIR that details the proposed changes to the Appraisal clause in the ‘Homeowners 4 Contents Wind Only Form.’

Appraisal will now be an option available to either party provided that both parties agree to the “terms of a written agreement” to be determined at a later date.

I read this to mean a negotiated ‘Memorandum of Appraisal’ detailing what would be submitted to appraisal, how the appraisal would be conducted and the form of the award. Either party is not obligated to accept a “request” for appraisal.

Scroll down to page 10 of 12 in the policy form. While this filing deals with only one policy form, I would speculate that all of the Citizens policies will be similarly amended.

The complete filing (No. 09-11984) is available at http://www.floir.com/edms/temp1/SessionsPDFs/OnlyOrig09-11984.PDF

Additionally, this new form would require that “any one you hire in connection with your claim” must submit to an EUO if requested. I assume this is targeted towards public adjusters."

This is an important issue and will likely significantly change the way many claims are handled and resolved. I will try to keep everyone informed of these changes.

Of course, that is not how Citizens’ in-house attorneys and management try to spin what they are doing by removing the appraisal clause from their property insurance policies. After all, if the Board of Governors really wanted to know why Citizens loses at appraisal, it would not make an in-house inquiry. The claims managers would just make excuses for losing. If the Board of Governors wanted to know the embarrassing truth, they would ask their opponents, “why are our claims handlers losing these appraisals?”

Citizens is a part of Florida’s government. So how embarrassing would it be for our elected representatives and our appointed Board of Governors if the media reported that Citizens lost so many appraisals because it severely underpays claims and battles its policyholders regarding how much is owed? What if the media reported that this is the true reason that Citizens wants to end appraisal?

Citizens usually loses badly in appraisal because its adjustments are not correct and reflect a bias to underpay policyholders. It delays claims and battles policyholders rather than engaging in a dialogue about resolution and why a dispute occurs.

For example, I have invited Citizens senior management to speak on a multi-million dollar claim that has been pending for several years with another attorney in our firm. They refused to even speak with us, cancelled settlement meetings, refused the less expensive alternative of appraisal, and forced us to file a lawsuit to force a resolution. All this, despite our client’s hope that the matter could be resolved amicably, without a lawsuit. When claims managers refuse to talk and discuss differences, lawsuits are the only option. Citizens customers must wait and then fight for money that is rightfully theirs.

Many of Citizens’ claims are handled so poorly that almost anybody reviewing a closed claim can find significant amounts that were not paid. I hear this all the time. It is the major reason Citizens has re-opened claims--it underpays the initial adjustment.

Still, appraisal is not a “right” for policyholders. Citizens management and in-house attorneys made an excellent point that appraisal has no written rules and is subject to abuse. I am surprised that the Florida Supreme Court has allowed appraisal, an informal process, to bind parties. I have long felt that an informal process of binding resolution violates due process. At one time, Florida Courts ruled that the appraisal process was subject to the Arbitration Code. This is no longer the case, and Citizens correctly pointed to the deficiencies of appraisal in its report to the Board of Governors.

Citizens did not report to its Board of Governors the true reason management wants to change the rules and take appraisal out of the policy. Somebody on the Board of Governors should question whether Citizens management is being truthful and the media should start an inquiry. Everybody in the business knows that the true reason for removing appraisal from the policy is because Citizens underpays many claims, and appraisals embarrassingly prove it.

Dan Luby of Precision Advisors forwarded me the following story of Citizens’ change to eliminate the appraisal clause:

It would appear that Citizens Property Insurance Corporation is changing their previous position on amending the Appraisal process and is now recommending the elimination of the Appraisal process.

 The following are the minutes from the Citizens ‘Actuarial and Underwriting Committee Meeting’ held on May 11, 2009:

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

 DISPUTED CLAIMS/APPRAISAL – POLICY FORM CHANGES

MAY 11, 2009

 EXECUTIVE SUMMARY

 Staff seeks approval to amend Citizens’ policy forms (1) to eliminate appraisal as a mechanism to resolve disputed property claims, and (2) to improve certain claims adjusting processes. The elimination of appraisal is a change from the recommendation made last year to reform appraisal policy language. See minutes of Actuarial & Underwriting Committee, May 29, 2008; Board of Governors, June 19, 2008.

Background

Citizens’ property policies generally provide that, in the event of a dispute related to the “amount” of a loss, either Citizens or the policyholder may demand an appraisal of the loss. Citizens’ policies currently use industry standard language. The principal advantages of a disputed claims appraisal are that it generally resolves claims disputes more quickly and with less expense and fees than litigation. But its advantages are overshadowed by its disadvantages.

Notwithstanding significant and meaningful operational reforms that Citizens and its Litigation & Disputed Claims Unit (“LDCU”) have instituted, appraisal remains very flawed and subject to abuse by third-party stakeholders. The standard language used by Citizens and the industry is problematic because it provides virtually no rules for the process. As a result, insurers (including Citizens) are legally required to pay damages that may not be covered by the policy form, nor caused by a covered peril, nor supported by substantial evidence, and without recourse to meaningful judicial review. The process is so problematic that some carriers have eliminated appraisal from their policy forms (and some others are in the process of doing so).

In its January 2009 report on Citizens, the Auditor General recognized the flaws of the appraisal process and the challenges of third-party stakeholders, and further encouraged Citizens to complete its work on this issue, by stating: “Citizens’ staff is reconsidering whether to move forward with these amendments or, instead, whether it should eliminate appraisal from its policy forms (in which case these disputes would be resolved through litigation). . . We recommend that Citizens continue to evaluate its options . . . and select an option which ensures the fair treatment of policyholders and full disclosure of all decisions made relative to the claim amounts ultimately paid.”

Recommendations

Staff recommends the following changes to its various property policy forms, as applicable: 

• Eliminate the provision for appraisal of disputed property claims. 

• Provide Citizens with the option to require examination under oath and recorded statements for all property claims. When the insured is an association or corporation, require that certain representatives must submit to examination under oath and recorded statements.

• In multi-peril policies, conform the “duties after a loss” provisions to those in wind-only policies; and modify the “duties after a loss” provisions of all policies to improve the claims adjusting process.

 Staff recommends elimination of the appraisal provision principally for the following reasons: 

• Citizens has more confidence in the judicial system than in the appraisal process. Litigation has known rules and procedures. Whereas appraisers and umpires are essentially unregulated, opposing attorneys and judges are subject to the Florida Code of Professional Responsibility (essentially, an enforceable code of ethics and rules of compliance), as well as supervision by The Florida Bar Association and the Florida courts (including discipline by the Florida Supreme Court).

• Alternative dispute resolution (ADR) is important from consumer perspective, but stakeholders are skipping statutory mediation and filing appraisals as the ADR of choice. By eliminating appraisal, statutory mediation favored by the Florida Legislature will again be the ADR of choice. Should Appraisal be eliminated, there will remain multiple opportunities for mediation and early settlement. Citizens may institute other ADR if the insured agrees.

• For policyholders, appraisal is a secretive process, with the basis of the award outside the scrutiny of the policyholder and the insurer. Like Citizens, policyholders have virtually no way to seek judicial review of an appraisal award. In litigation, a policyholder is able to recover its attorney fees, while its appraisal expenses generally come out of the award. 

• Elimination of appraisal meets the objectives suggested by the Auditor General’s office (fair treatment of policyholders and full disclosure of all decisions) because the courts are very attentive to policyholder rights, and because judicial decisions and jury verdicts are fully disclosed.

RECOMMENDATION

Citizens’ staff requests that this Committee recommend to the Board of Governors that Citizens amend its policy forms and submit appropriate filings to the Office of Insurance Regulation to: (1) eliminate disputed claims appraisal, and (2) improve claims adjusting as described in this Executive Summary.

"The first question presented is whether an insured may prosecute a common law claim for breach of the covenant of good faith and fair dealing by an insurer based on the alleged failure of the insurer to investigate and assess the insured's claim within a reasonable time. Such a claim is alleged by the homeowners to be an independent basis for recovery, one distinguishable from a statutory bad faith claim under Section 624.155(1)(b), Florida Statutes (2008). Citizens maintains that the “breach of the covenant of good faith and fair dealing” claim is merely a “disguised” statutory bad faith claim and that no such common law claim is recognized in Florida."

Later in the opinion, the Court noted the issues raised are currently before the Florida Supreme Court in another matter:

"[T]he United States Court of Appeals for the Eleventh Circuit has certified these questions to the Supreme Court of Florida pursuant to Florida Rule of Appellate Procedure 9.150(a). See Chalfonte Condo. Apartment Ass'n. v. QBE Ins. Corp., No. 08-10009, 2009 WL 580775, at *7 (11th Cir. Mar. 9, 2009) [21 Fla. L. Weekly Fed. C1627a]. The Supreme Court has docketed the certified questions as QBE Insurance Corp. v. Chalfonte Condominium Apartment Ass'n., Case No. SC09-441."

QBE Insurance Corp. v. Chalfonte Condominium Apartment Ass'n., will be a landmark case in Florida. Mary Fortson and I have been working on an amicus brief on behalf of United Policyholders. My opinion is that it would not make sense for Florida law to not recognize the duty of good faith when every adjuster is trained from day one that insurers have such a duty. The duty of good faith and fair dealing is accepted as the most basic principal of an insurance company's primary obligation in the insurance industry.

Why in the world would a judge say that a good faith duty does not exist? To do so would not only be legally wrong, it would be factually wrong as well.

We will file our amicus brief and post in here in a couple of weeks. The decision in this case and the Corban case in Mississsippi are going to be very significant to the rights of policyholders.

To put this in proper context, my roots are in the entertainment industry which I thought was as far away from insurance as the East is from the West. Little did I know that the stories I would hear and the characters I would meet would rival even the most gripping Grisham novel or a Steven King thriller. My opinion may also have a little to do with my perception that the insurance industry was filled with unexciting, low-energy people and was a rather boring subject. This isn’t a far-fetched conclusion for people like me who tend to view life like a golden retriever in a world full of tennis balls.

On December sixth and seventh, 2008, everything changed! Merlin Law Group held a “Meet ‘N Greet” event that was targeted toward the Hispanic community. As a company we were growing more and more annoyed with the rumors we were hearing regarding abusive treatment dished out by the insurance companies to a particular demographic. We decided to see first hand what was really going on. I can tell you with absolute conviction that the stories I heard from this fantastic community made me appreciate and become interested in insurance… almost immediately!

The massive impact that insurance has on individuals, communities, economies and world governments should not be underestimated. With companies like AIG dominating headlines, we have learned how far and wide insurance companies’ tentacles reach. And this is where insurance becomes exciting. I am drawn to the human-interest stories that are plentiful in this dramatic theatre of property and casualty loss. Stories like the 92 years young woman that has paid her homeowner’s insurance for more than 60 years and lost almost everything. She is now living in a one room dwelling and cooking on a hot plate. The non-English speaking family with a total value policy of $30K that lost their roof and received a check for $46.00. These stories move me!

I find it mind boggling how legislators and states are controlling organizations like Texas Windstorm Insurance Association (TWIA) and Citizens Property Insurance Corporation. It’s intriguing how some of these individuals manage political careers while the people who elected them sift through their rubble, hoping to salvage a photograph. It’s dramatic to meet with people that are hurting and hear the lip service offered by the very insurance company that excitedly sold them a promise and now goes to great lengths to avoid honoring that commitment.

I suggest that insurance isn’t a boring subject at all. When you peel back the layers, it is based on all the elements of great theatre- deceit, destruction, conflict, good guys, bad guys, winners and losers. I’m confident that policyholders will ultimately prevail and even more hopeful that the opinion leaders and politicians will recognize their responsibility toward their constituents and get engaged in the fight for people’s rights. I admire the public insurance adjusters and attorneys who play a recurring role.

Insurance is about people, promises and profits and frankly, I think that’s very interesting!

- Frank Chimento

In a reply to State Farm Has Agents Spread Propaganda and Bullies North Carolina, I wrote in part:

“State Farm has many bright and dedicated managers running its operation. It is reflected in the extensive training and operations of the organization. It hires very effective outside consultants, lobbyists, and attorneys.

So, it comes as no surprise to me that they have set up a "decision tree" with alternatives which generally end up as a win-win for State Farm.

It can play the game of business as a "bully" or provide the appearance of being a long time supporter of Obama and a Good Corporate Citizen like it did with a full page ad in BusinessWeek just before the inauguration. It is now trying to show that it can be friends and supporters of the new federal government which it is lobbying.

State Farm is very, very good at getting what it wants in the long term. Just ask its competitors.”

State Farm executives certainly knew their announcement of its intent to leave Florida could have several different results. It would be hard to imagine that such bright business games players would not try to time the departure announcement for maximum effect and gain. Certainly, these executives contemplated the current scenario where Florida officials would not stop it from leaving. Whether they thought that Commissioner Kevin McCarty would prevent them from allowing their policies to be dumped into Citizens and having other restrictions mandated in the public interest is debatable. It will be interesting to see how this battle will play out over the coming weeks and months.

Nevertheless, shopping for homeowners insurance in Florida is not as easy as shopping for automobile insurance. State Farm may be hoping its spurned policyholders listen to its version of reality and complain to their elected officials. State Farm may be using its large customer base as leverage to cut a better deal.

State Farm's management may applaud and support articles similar to the Tampa Tribune’s. They can use such stories to show regulators in other states what happens when State Farm’s demands are not met. The hysteria and media exposure can help promote an alleged need for federal legislation and regulation that will be more favorable towards State Farm.

State Farm’s stated reason for leaving is a “sham,” according to the administrative law judge who presided over the rate request case. Its decision to leave is problematic only because it still carries so many policies. Possibly, State Farm knew that the timing of the announcement would carry more weight and cause more hysteria while it still held a large market share. If it left slowly and over a longer period of time, the impact of the announcement would not have caused as much of an uproar.

Exactly what the executives at State Farm want to achieve from all this and how they want the insurance market to operate is known by those at State Farm headquarters in Bloomington, Illinois. Floridians can only deal with the reality of State Farm’s hardball tactics and learn that they should never be vulnerable to this type of breach of the public trust.

In the long term, if we can encourage competitors to gain sufficient capacity, many of these problems will go away. The crisis State Farm is causing is one of timing---what are we going to do in the short term? So long as McCarty can mandate that State Farm disposes of its customers’ policies over several years and not force them to Citizens, Florida will get by this current crisis. However, if a massive hurricane or several moderate ones strike while this current financial crisis continues, an insurance crisis caused by an unfunded Catastrophe Fund will be upon us. Possibly, that is why State Farm executives decided to leave Florida---they do not want to be stuck holding the bag in the event the big one hits and the Catastrophe Fund has no money to reimburse it and other carriers. If the "big one" hits this hurricane season, Governor Crist will have many, including State Farm, in Washington asking for the Catastrophe Fund to access the Stimulus monies.

As we are getting closer to the summer months, I feel Floridians are on a runaway train and nobody has a plan to safely stop it. The only thing left to do is pray for a very long and clear track.

The number of building policies affected is estimated to be between 800,000 and 950,000. Only Citizens Property Insurance Corporation insures more structures in Florida. Approximately 1.2 million total policies will be phased out by State Farm over two years. Under Florida law, State Farm has to file a plan to remove itself from Florida. Kevin McCarty, of the Office of Insurance Regulation, will then step into the picture to evaluate and investigate State Farm's actions.

McCarty has taken a very calm 'wait and see' attitude. Very smart. He knows that State Farm does not just announce leaving a market without a strategic plan in place to help its overall position throughout the country and in Florida.

State Farm is an extremely effective propagandist. State Farm's internal manuals make clear that it uses employees and agents to influence politicians and media representatives. It places snippets of information, some truthful facts and quotes with the media, trying to influence what it wants to be read and heard. It uses lobbyists and politicians favorable towards it to influence other leaders.

State Farm's business plan involves government action. It seeks regulations and laws favorable to it and which often support common interests with other insurers (Allstate and Nationwide) in the property and casualty business.

The people at State Farm in Bloomington -- not Florida -- that made this decision think about the ramifications of these important decisions in a very global context. They want State Farm to remain the dominant player in the personal lines insurance market, and use propagandists and lobbyists to make it so.   When subtle propaganda does not work, it can also be a bully. It uses shock and threatening actions against those not in agreement.

McCarty should thoroughly investigate State Farm's true agenda and strategic desires through his ability to analyze the removal plan. A detailed investigation by his office may reveal the truth of State Farm's long term goals and uncover how it orchestrated this last action in the press and in Tallahassee. If State Farm truly has honest information in its internal memos and plans for its latest actions which suggest that it is in peril, it should have no problem allowing Florida to scan its computers verifying those facts.

Until then, we will hear sob stories about the Sate Farm agents and employees who are being hurt. We will hear stories about the poor policyholders (I am one of them) that will be forced to look for insurance. We will hear cries that Florida regulators forced this decision because they are unfair. We will hear every excuse in the world through a stream of public relations media ploys that are simply propaganda intended to convince us to accept the power of State Farm.

It has a lot of power because it has an army of people it financially supports to carry out this mission.

Corporations only exist because humans allow them to. These fictitious entities, by law, are generally under state charters requiring them to promote social welfare as well as profit. Because they never die, these fictitious entities can accumulate vast wealth which can then be used to influence how government and society should be run.

Power is vested in State Farm because laws exist which allow fictitious, non-voting entities to contribute to politicians and lobby human leaders. State Farm is openly challenging our leaders at this very moment through its announcement. It will use all its power and propaganda to get what it wants regardless of whether it is in the best interests of policyholders, agents, employees and people in general.

God bless Kevin McCarty and other strong leaders caring for us. State Farm does not worry about God because, unlike the rest of us, it is never going to heaven or hell.

Last week, the Citizens Property Insurance Corporation's General and Assistant General Counsel met with me regarding a number of claims topics. At the time, I knew my blog regarding recent complaints about Citizens and TWIA was about to be published. I told them about the complaints. They seemed bewildered. They explained their belief that the recent change in claims management had been very positive and a good move towards improving Citizens. I promised to send them examples of our findings so we could determine if what I was hearing from others is accurate.

The point is that my views are largely shaped by an upset or wronged policyholder's view. My livelihood is made representing them. My most significant daily activities are trying to figure out how to prove that insurance companies act in bad faith and why our firm's clients are entitled to more money.

Comments to this blog, are often "atta boy" cheers from policyholders and colleagues when I write about or expose instances of insurance company misconduct. Sometimes, my colleagues criticize my comments regarding the good business of insurers or when I empathize with an insurer point of view. I am certain that these cheers and jeers have some impact upon my view.

I am writing this at the 2009 Windstorm Insurance Conference. It is the most diverse claims conference in the country because the 1,300 plus attendees represent both sides of the claims process. The debates and viewpoints regarding claims handling and insurance coverage interpretation are fascinating because the panelists and attendees are policyholder representatives and the insurance industry. To the extent possible, the ability to share different views makes the Windstorm Conference a fair and balanced opportunity to learn and share information about windstorm coverage and claims.

My viewpoint is not so balanced. If you make your living from insurance companies, you probably will never admit it is fair--at least not publicly. I receive plenty of private "atta boy" praise from insurance adjusters and attorneys for writing and saying what some are afraid to say. Many insurance company adjusters, attorneys and vendors will not be seen with me or acting friendly towards me because they fear retribution by their insurance company clients. Some insurance executives view the claims world as an "us versus them" scenario; the customer with a claim problem and the customer's attorney is "them."

So, similar to Bill O'Reilly, I am making a fair and balanced report on the world of insurance. If the insurance industry would show more instances of good faith claims conduct for me to write about, I am certain it would seem more balanced. Perhaps the executives running the insurance companies should adopt my view and see things from the view of their customers. What a novel approach to running an insurance enterprise that would be.

Citizens was investigated in 2007 regarding its claims handling. The Citizens claims management explained how they went from an inept claims organization to one which maintained standards at least as good as any in Florida. While that was debatable, I agreed that Citizens responded better to the 2007 storms than it did in 2004.

Five months ago, there was a major change in the Citizens claims organization. Within the last month, we have received complaints regarding hardball, deceitful, and bad faith claims handling by Citizens with the full support of the new Citizens claims management. While Citizens publicizes that its intent is to provide "fast, fair, honest and accurate claims service," recent examples provided to me indicate that mission statement is false.

Insurance adjusters have to investigate coverage and evaluate damages. They are ethically bound to do this promptly, honestly, and in good faith. This is required of every adjuster as part of their license with the state of Florida. Today, Citizens adjusters are being told by its managers not to provide Citizens' estimate of damage to the policyholder or policyholders representatives. At the Florida Association of Public Insurance Adjusters Winter Conference last week, many public adjusters told me that Citizens refuses to provide its estimate of damage, claiming that it is "work product."

How a policyholder knows whether Citizens' payment is accurate without an estimate of how Citizens evaluates the damage is beyond me. It would be like getting an IRS refund and the IRS refusing to tell you how it figured the number. Or, imagine a scenario where a butcher takes the steak you select, tells you to give $20, weighs the steak, and then gives you back $2.02 in change, but refuses to tell you how much the steak cost per pound and its weight. Some may consider this a possible theft, yet this is what Citizens is doing to Floridians every day.

What is worse is that TWIA has been doing the same to its policyholders with a slight twist. It paid most slab claimants approximately 10% of the face value of the policy. It generally provided no estimate for this, but has indicated it was investigating. We have received dozens of calls from potential clients asking how long TWIA can take to investigate and not provide an estimate. Texas public adjusters are calling in furious because TWIA adjusters make up excuses for not providing any of its estimates.

The worst example is a Citizens policyholder now represented by Nancy Dominguez of Florida Adjusting Services Team, Inc. The policyholder was sent a check and complete release without an estimate. Citizens sent these, obviously hoping the client would take the check and sign the release. Nancy learned of this  and demanded an appraisal to resolve the amount of the loss because the check amount was far lower than the amount she estimated. In the appraisal proceeding, the Citizens estimate was finally turned over, and it was for an amount higher than the payment check it sent to the policyholder. The appraisal resulted in an award almost double Citizens' "hidden" estimate and about three times the amount of the fraudulent check.

Insurance adjusters should be prosecuted for this conduct. It is an attempt at insurance fraud.

Maybe our law firm should not complain. Our phones are ringing off the hook. Yet, while insurer bad faith is good for business, it is terrible when it is obvious these practices harm those who are already in desperate need of fair and honest treatment.

Senator Mike Fasano reportedly is drafting a bill that will prevent Citizens from raising rates. Given that his constituents are from an area along the coast and plagued with sinkholes so that Citizens insures many of them, I appreciate his desire to be seen as a "rate champion" for those policyholders--even if it is unfair to his other constituents not insured by Citizens.

Barney Bishop, of Associated Industries of Florida, has a special letter on his web site calling for no caps on rates. Since the insurance industry is heavily involved with the propaganda of that lobbying organization, I can understand his position as well. I am also curious as to what he tells  businessmen who are members of his group regarding the increased cost of rates if there were no cap on increases,contrary to the Task Force's reccomendation.

Is there ever a common middle ground? Or, is the middle just a place to get shot at by zealots from either side of a controversy?

The January edition of the Florida Underwriter has an editorial by Joan Collier entitled, "The SEC, Secrets, and Citizens." She notes that the SEC started an investigation of Citizens in June. Curiously, nobody reported this to its Board of Governors or the public until December 12. So much for Government in the Sunshine.

And nobody has explained where the claims money is going to come from if another Hurricane Andrew, Katrina, or Ike strike Dade, Broward, or Tampa Bay. While we can argue about rates, the role of Citizens, and whether or not the public should be informed of a federal government investigation of its operations, we surely cannot play a child's game of make believe when we face a possible catastrophic financial situation if such a hurricane struck.

Floridians have a right to know where they stand. Most of my clients want to know how I objectively see their case rather than a best case scenario. One of the hardest, but most important, actions a leader can take is to provide disappointing information in a calm and accurate manner.

Americans can accept bad news. We can understand why sacrifice is necessary. What we cannot afford is political grandstanding which implies action is not needed when the risk our State will be devestated is so dire.

Right now, the Texas Windstorm Insurance Association (TWIA) is nearly bankrupt. Many of our Hurricane Ike clients are speculating that payments are delayed or partial because TWIA is running out of cash. 

The TWIA financial problem will be nothing compared to Florida's if a major hurricane strikes later this year and our financial situation remains the same as today.

Krugman makes the case that health insurance is becoming so expensive that common folks simply cannot afford it or have to go to the "Wal-Mart" version of health insurance with very limited coverage. Thus, a National Health Plan is all but inevitable because only the wealthy are going to be insured in the future.

Similarly, affordability and availability of property insurance is becoming an ever more significant topic. The larger and mature insurance oligopoly is leaving any geographic area where catastrophes occur on a repeat basis. They want to avoid the peaks and valley of profitability--unless they can get a rate which is simply too good to refuse.

The response to this is no surprise because it is just like the health insurance crisis---let the government sponsor a program because the free market is not working. In Florida and Louisiana, the public insurance companies are named Citizens. In Mississippi, it is the Mississippi Windstorm Underwriting Association (usually referred to as Mississippi Windpool). In Texas, it is the Texas Windstorm Insurance Association (TWIA). Congress is now sponsoring bills which call for a national program for property insurance. What will happen is anybody's guess, but there is a definite trend towards government involvement in insurance where the basic needs (demand) cannot be met by private industry at an affordable price.

In the long term, I am not certain that it is in anybody's best interest to let the government run a business so important. As we are currently witnessing in the economy, government cannot even regulate the shenanigans that go on in private business, much less be expected to run it. I thought we learned those lessons through Russia's experiment with socialism. Yet, if there is no alternative....