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

This victory proves that Floridians, organized and united, can fight the insurance lobby and win.

Citizens board members proposed in July to raise sinkhole rates statewide by 430 percent on average to make them actuarially sound. In the Tampa Bay area -- nicknamed "sinkhole alley" because of insurers' losses on claims there – that would have translated to increases of 2,200 percent in coastal Pinellas County, and 2,400 percent in Tampa.

For the better part of a year, Policyholders of Florida and other consumer advocacy groups warned that insurers would seek these rate increases. It was only after overwhelming policyholder opposition that those in Tallahassee decided to listen.

Though there were some converts in the legislature, most backtracked because the people organized by consumer advocacy groups like Policyholders of Florida and the hard work of tireless consumer champions like Senator Mike Fasano, Representative Darryl Rouson, and Representative Rick Kriseman made them realize that the profits of a few could never justify tremendous financial strain for millions for Floridians. Our consumer champions made it clear that the proposed rate hikes would put some homeowners out of their homes and deliver yet another blow to our struggling economy.

What does all this mean in real terms?

Under the new rates, Pasco and Hernando counties will see average increases for sinkhole insurance of $300 to $400 as opposed to the $4,000 to $5,500 that Citizens had requested, according to State Sen. Mike Fasano, R-New Port Richey. Hillsborough will see increases of about $100 as opposed to the $3,200 increase that was requested, he said.

Though $400 is still a lot to stomach for many Floridians, it’s much more reasonable than the $5,500 hike sought by Citizens.

The Office of Insurance Regulation’s Order confirms what groups like Policyholders of Florida have argued all along: Citizens “provided no credible evidence” that it assessed the effects of SB 408 when making its rate-increase request.

Citizens merely assumed future sinkhole losses would parallel the frequency and severity of other types of losses, such as fire and water. The OIR disagrees.

The OIR is “unable to find that the upward trend for sinkhole losses that Citizens assumes is actuarially supported.”
 

Though I am certain the insurance industry and its lobbyists will continue to claim losses, consumer advocates across the state should sleep soundly knowing that their actions saved countless Floridians, many of whom live on modest fixed incomes, from losing their homes and their financial future.

For example, Florida's insurance commissioner, Kevin McCarty, analogized public adjusters who are looking to sign up sinkhole claims as playing the game "Whac-A- Mole." In response, Tim Zeak, of Florida Public Adjusting, blamed the increase of claims on development in known sinkhole prone areas.

The ability of the insurance industry to get this story into the mainstream media certainly raises the spector of significant change at the regulatory and legislative level. Those changes remain to be seen. It is certain, however, that we cannot continue to incur such frequent and severe losses without changes in coverage, if sinkhole coverage is to remain at all.

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?

The Florida legislature taught regulators a lesson through the Florida Public Service Commission--do what we want or lose your job. While I have no personal knowledge, many suspect that Kevin McCarty is calling for the Governor to sign this poor legislation because he is feeling that political heat.

Tomorrow, I will give some examples of why this law is so bad and how it would work to the detriment of Florida policyholders. As a teaser, there is even an exemption to testing required for adjusters if the adjuster belongs to a certain religious belief-based adjusting organization.

Sean Shaw went to Tallahassee Leon High School. He then went to Princeton, where many of our best and brightest get a chance. Is there any parent that would not be happy to have their child accepted to and educated at Princeton? He then came back home to Florida and went to law school in Gainesville. Alex Sink, a banker who became Florida's Chief Financial officer, appointed Sean Shaw as the Florida Insurance Consumer Advocate. We are lucky to have such a very smart, passionate and open minded person giving up private gain to step into this role.

I am always for the policyholders. These are my clients. It would come as no surprise that my candid response to any Florida leader supporting the aforementioned deregulation law would be, Do Florida Legislators Think We Are Stupid? It is so clear why this law hurts consumers, and I invite anybody to challenge this statement I made in that post:

Now, our legislators have claimed that rates will stay the same and not go up if there are no regulations limiting what insurance companies can charge. Gimme a break.

Insurance companies want the regulation to cease so they can, as a group, raise the rates as much as they can---especially after hurricanes, when insurers leave the market or use the hurricane losses as reasons to raise prices knowing customers have no choice. This is what happened in the 1990s following Hurricane Andrew and after the 2004 and 2005 hurricanes.

Then, we had leaders that stood up to the insurance industry. Now, many legislators in leadership receive significant support and constant lobbying from insurance companies. The result is this anti-consumer legislation.

The legislators supporting this bill say that there will be more competition. I say that the insurance rates are going to rise with greater competition because the insurers are exempt from anti-trust laws, and there is no open market in insurance.

Our legislators are simply deceitful when they suggest this bill will lower rates or keep them the same. For example, State Farm would be charging significantly more had the Office of Insurance Regulation not stopped the requested increase. Under this bill, State Farm and all the insurers as a group could charge as much as they want.

It makes no sense, and it is very disingenuous to suggest that rates will remain the same because of more competition. There will be more competition at significantly higher cost if this bill passes.

I am no rocket scientist, but I can figure out when the sales pitch is a bunch of bunk. This is what many of Florida's political leaders are trying to sell, hoping their supporters and constituents will not catch on that they have become closer and obligated to a more lucrative base---the insurance industry. I have made a promise to cite each politician supporting this bill so all Floridians can keep track. But, we need some "smarter" analysis from the man in the street common sense I subscribe to. And this is where Sean Shaw comes into the picture.

Sean Shaw and another consumer advocate, Bill Newton, of the Florida Consumer Action Network, recently wrote an opinion letter, Don't Deregulate Insurance: Consumers Only 'Choice' Would be Bad, to the Palm Beach Post which stated in part:

While these provisions are similar to the "consumer choice" bill introduced in 2009, this legislation would allow all authorized property insurers, not just a select few, to charge any rate.

Imagine walking into your insurance agent's office. Your agent places three policies in front of you. Two are with private insurers, and one is a Citizens policy. The private insurers' policies are close in price, but the Citizens' policy is significantly cheaper, for essentially the same coverage. Which would most consumers choose? The answer is obvious, especially in these tough economic times.

Sen. Bennett has stated that he filed this bill in response to the perception that Citizens' legislatively set rates are driving private property insurers from Florida. Unfortunately, this bill does nothing to address Citizens' rates. This legislation would only exacerbate the growth of Citizens by increasing the divide between Citizens' rates and what other companies can charge. Because Citizens is backed by all Florida taxpayers, many legislators have tried to limit the state's exposure by reducing Citizens. If private insurers can charge whatever they wish, Citizens is likely to see an increase in policyholders.

Finally, this proposal would allow all insurers to "cherry pick" customers, leaving many Floridians with nowhere else to turn but Citizens. South Floridians near the coast would see the largest increases in premiums, while Floridians who live more inland and in northern counties would see more favorable rates. When a hurricane hits, not only would Citizens have the majority of the losses, but its policyholders would have to pay that 15 percent assessment before any private insurance money was due.

Proponents of deregulation claim that it would bring new insurers to the market. However, no insurer has said publicly that it would enter Florida if the property market were deregulated. Deregulation also would strip out a huge layer of consumer protection for all Floridians. The average consumer does not have the resources to determine when a rate is excessive. The state has the resources to judge the fairness of insurance rates, and can provide a warranty of fairness to consumers. Deregulation would end this protection.

Another argument for deregulation is that it would end the subsidization of coastal properties by inland property owners. But significant state revenues are generated from coastal areas and flow inland. Any current subsidization of the coastal market helps the overall housing market in Florida. The issue of coastal property insurance rate subsidies has been successfully addressed in other states, such as Mississippi, and the answer has never been deregulation.

History has shown the problems deregulation can bring to Florida's insurance marketplace. In 1968, Florida politicians attempted to deregulate the auto insurance market, based on many of the arguments being submitted by Sen. Bennett and Rep. Proctor. After rate increases as high as 23 percent, the legislation was repealed. The auto insurance market has remained regulated since 1971.

As consumer advocates, we are always encouraged when any legislator or industry group proposes an idea that seeks to improve the insurance industry in Florida. However, this bill would not lead to any sort of improvement; instead it would significantly hurt Florida's consumers. If this legislation should pass, we urge Gov. Crist, as he did last year, to veto it.

Sean Shaw and Bill Newton have only the consumer interests in mind while making these public statements regarding how much you have to pay for rates and why this law is wrong. Guess what interests Senator Bennet and Representative Proctor are supporting when sponsoring laws to allow insurers to charge you whatever amount they want? Most of us are not that stupid that we cannot figure that out. I pointed this out in A Balanced Perspective Regarding the Politics of Insurance Legislation, where I made this observation of what we common types may find:

This Florida legislative session still leaves me troubled. I have difficulty understanding what so many of these hardworking, well-meaning representatives were thinking when voting for unregulated rates. Unregulated rates will result in rates higher than what the regulators would permit-even though the regulated rates give insurers a fair profit on their investment.

It sounds so stupid. Can you imagine this scenario:

“Edna, I am really excited about this new law. The old fair rate approved by the Office of Insurance Regulation has been wiped off the books by our genius Florida legislators. Next year, we will get the same insurance, and it will cost as much as our carrier wants to charge us. This is because our insurance carrier no longer has to worry about applying for a fair rate."

I should also emphasize that another person dedicated to the study of insurance rates and consumer issues opposes this measure, Kevin McCarty, as I posted in Kevin McCarty Battles for Consumers and Against Higher Rates. Yet, I do not understand why some of our politicians are so motivated to help raise rates for businesses and consumers just to help the property insurance industry. Maybe the property insurance industry has their ear and pocket? Otherwise, Florida seems to be the only state in the Union to accede to the insurance industry's goal of complete deregulation, collusion, and sky-high rates granted by ignorant state leadership. Nobody can be that dumb. Somebody has been bought off in one political way or another.

We need more of the Sean Shaw type of people's advocate and less of the insurance industry advocate in Tallahassee. We need to keep track of and hold those politicians in the insurance industry’s pocket accountable.

As the state insurance consumer advocate, Sean Shaw has a full plate as the 2010 legislative session looms just two months away. He will present regulators and legislators recommendations to improve the claims process for homeowners and possibly increase supervision for public adjusters. The recommendations are the product of several meetings of the Claims Resolution Roundtable, which Shaw hosted this summer and fall with insurers, contractors, adjusters and consumers.

The group has one more meeting the first week in January and recommendations to legislators have to be ready by the end of January.

I really do not know who the property insurance consumers were at the previous meetings. I do not know if there were any. It appeared to me that most participants in attendance were those from the insurance industry and their favored insurance restoration contractors. My impression was that the proceeding seemed more of a love fest for the insurance industry. It is not going to be that way at the January 6th Roundtable, although I expect the meeting will be quite constructive and enlightening.

Unlike many newspaper articles where reporters provide a spin to what is said, Garcia provided questions and the answers given by Shaw. I was troubled by the fact that Shaw sees contractors providing legal advice to policyholders:

Q: You headed the claims resolution roundtable. Did the group finalize its recommendations for the legislature?

A: That's what we're doing right now. We got a lot of suggestions. We're trying to separate the doable from the not-doable, the good from the bad.
Some of them don't require much legislation. Some might require some continuing education for adjusters or contractors. Some may require letting contractors know what is covered by an insurance policy. Others may require letting insurers know how contractors operate in the real world.

The benefit that can come from legislation or rulemaking is a uniform [claims] estimation system. I don't know what it would look like yet, but I believe that is one of the recommendations coming from the roundtable. We have another meeting coming Jan. 6.

Shaw's view of the contractor/insurer/policyholder relationship seems extraordinarily naive. I have legions of horror stories of contractors ripping off policyholders and giving wrong coverage opinions. Many of these policyholders are fairly sophisticated commercial clients. Certainly, if those policyholders are having problems, think about the residential insureds. The consumer protection laws developed to protect consumers from rip-off contractors were mandated because legions of examples were provided to demonstrate a basic need to protect consumers from the sales tactics and performance issues of contractors. Shaw seems to have public recognition of this concern as a consumer advocate. I have warned about insurance restoration contractors in Are Insurance Restoration Contractors Ripping Off Insurers and Policyholders? I even published a comment by a former restoration contractor warning of these problems in Former Restoration Insider Comes Out Swinging Against Florida's Limitation of Public Adjuster Solicitation.

Public adjusters will be a topic of conversation on January 6, as well. Here is what the Miami Herald story reported on Shaw's view of public insurance adjusters:

Q: Many insurers are calling for increased regulation of public adjusters, saying these adjusters are responsible for most of the re-opened Wilma claims. What's your take on public adjusters?

A: It's a very complicated transaction when you have a claim. The public adjusters serve a vital role in helping homeowners navigate through this process.

Insurance companies will argue -- and I don't want to make their argument for them -- that public adjusters are responsible for re-opening claims that are invalid or they're are soliciting in a way that invites fraud.

There are a few bad actors giving the entire public adjusting community a bad name. But you don't throw the baby out with the bath. We enforce regulations or come up with new ones to take care of the problem. You just don't say that public adjusters are a bad thing.

I am looking for the evidence regarding the invalid claims and the manner of solicitation that invites fraud. Insurance claims managers hate re-opened claims. For insurers with a mindset to pay as little as possible, there is only one way to go when a claim is re-opened. Those types of insurance claims managers will do or say anything to express displeasure if it is shown that their original adjustment resulted in underpayment as a result of an initial adjustment that was not thorough, or worse, outcome oriented to limit what a policyholder can recover.

Regarding the solicitation issue, the legislature has already limited the "sign with us and get a free television regardless of if you get anything" solicitation a few public adjusters were offering in Miami. I am curious if there are other solicitations that encourage policyholders to commit fraud and will certainly support such reforms if proven. My impression has been that those were already flushed out a couple years ago and that the insurers use the "fraud" card as a means to improperly classify public adjusters as a derogatory class when they should be more concerned with their own internal management memos which suggest methods to underpay claims.

If I had one suggestion for the consumer advocate, it would be to start asking for those internal memos. Remember how Allstate claimed that its highly criticized claims program, Claims Core Process Redesign, did not apply to homeowner claims until Kevin McCarty’s Office of Insurance Regulation demanded all the memos? Allstate’s lie was revealed when it posted those memos on its website as a result of that investigation. I guarantee that there would be a significant change in the management of claims if our regulators and Sean Shaw would start asking claims management for their internal claims handling memos and directives. Many well meaning field adjusters would applaud such requests that would prove their claims management says one thing publicly and another privately.

If insurance claims management has nothing to hide regarding their internal claims directives, why would they not endorse such requests by regulators? Competitors that cheat at claims would have a much higher chance of getting caught and the propensity to do so would be reduced because the risk of being caught would be much greater. That would be a meaningful suggestion and action by a true consumer advocate. Let's see if Sean Shaw has the type of courage and vision to really help policyholders get paid quickly and fully.

Increasing property insurance capacity in Florida is a significant public objective. Our governmental leaders should encourage this. Given the lack of a true open or free market as a result of limited capacity, many insurers attempt to charge rates which are unfair because there are no, or limited, alternatives to buyers. I disagree that complete rate deregulation of Florida's non-free insurance market, which some legislators and State Farm lobbyists were calling for last year, will cure the problem.

Dan Luby reported in Florida Insurance News that the Florida Office of Insurance Regulation has approved another form policy without the appraisal process.

On 11/16/2009 the Florida Office of Insurance Regulation (OIR) approved the elimination of the Appraisal Clause from the homeowners multi-peril policy for Liberty Mutual Fire Insurance Company (NAIC Company Code 23035) and The First Liberty Insurance Corporation (NAIC Company Code 33588). This change is effective 12/14/2009 for new business and 02/04/2010 for renewals.

This is a definite trend. Some claims executives have confided with me that they feel the process is unfair to them for several reasons.

First, they complain that many public adjusters use appraisal as a means to obtain a split between an outrageously high estimate and a "fair" estimate. They complain the appraisal panel, more often than not, simply splits the differences of the estimates.

Second, they feel that many coverage issues get intertwined with appraisal. Thus, they complain that uncovered causes of loss often wrongly get included into appraisal awards.

Third, the process becomes ripe with gamesmanship involving millions of dollars with larger claims. They complain that the informal nature of the appraisal process does not protect then from improper conduct and activities.

I am not going to comment on these complaints because I am not going to change any insurance company executive's perspective on this issue. From my perspective, policyholder's with professional representation at appraisals are doing much better than a decade ago, when they often went without professionals experienced in the appraisal process. My impression is that these higher awards are why some insurers no longer want to allow appraisal to continue.

The important aspect for the policyholder is that increasingly, there will no longer be a binding alternative dispute resolution process. Public adjusters may have to start preparing their work for litigation rather than appraisal. The exactness required in litigation is much higher than most appraisals because there will usually be greater critical analysis of the damage and coverage issues.

The bottom line is that I expect this trend to continue. Appraisals could become rare as more companies change their forms, removing the clause. Some policyholders may simply "give up" on a claim because litigation is a much more risky and demanding process than an informal appraisal of damages.

Dan Luby forwarded me an article, “State Farm Will Continue Homeowners Insurance in Florida, Insurance Commissioner Predicts,” which indicated that:

State Farm might not pull out of Florida's homeowners insurance market after all, Florida Insurance Commissioner Kevin McCarty said…

McCarty said he's "cautiously optimistic" that State Farm will keep at least some of its homeowners policyholders in Florida. Bloomington, Ill.-based State Farm is Florida's largest private insurer of homes, and it said in January that it would stop writing property policies in Florida, where it covers 700,000 homes.

"We've really been having intense negotiations with the company at very high levels," McCarty said.

This morning, the St. Petersburg Times similarly reported the findings in “State Farm May Stay for Florida Homeowners.” The on-line article provided some plausible reasons for the change:

State Farm's threat to pull out came after the state rejected its request for an average rate increase of 47 percent. Since then:

• Insurance regulators have approved numerous homeowners rate increases across the state. Universal Property and Casualty, the second-biggest private insurer behind State Farm, got the green light for an average 14.6 percent increase.

• Citizens Property Insurance, the state-run insurer for those who cannot find coverage in the open market, was approved for an average 5.4 percent rate hike for its base homeowners' policies and has a pending request for an average 7.7 percent increase for high-risk properties.

• Regulators said State Farm Florida could eliminate or reduce some discounts it offers its policyholders, effectively increasing premiums for homeowners as much as 28.4 percent. The decision will bring in $278 million in additional premiums for the company after all policies come up for renewals starting Dec. 1.

• There's a growing backlash against state-mandated mitigation credits that property insurers must give to those who take steps to shore up their homes against potential hurricane damage.

Insurers have criticized the program for depleting their premiums and say it is susceptible to fraud. Citizens Property recently approved a controversial $60 million "emergency plan" to inspect for cases of fraud among 400,000 policyholders who have received credits.

Arguably one of the most significant changes: Regulators have toned down their rhetoric against State Farm and other insurers. Despite another mild hurricane season, McCarty recently said he is sympathetic that property insurers deserve increases because they are receiving less in premiums and paying more for reinsurance.

State Farm spokesman Chris Neal said his company appreciates the attitude change.

"The tone has changed from last January when we filed our withdrawal," he said. "At least we're talking.

As I indicated awhile ago, State Farm Must Love the Clash because of its indecision regarding this matter. It is obvious that State Farm was bullying Florida’s government into giving higher rate hikes. It is also obvious that this has been a bluff game for a long time where a corporation of immense wealth wants to continue in Florida but not lose face in compromising its position. The recent newpaper articles seem to confirm my September post, McCarty Claims State Farm Trying to Work Out Deal and Expects Property Insurance Rates to Go Up. I hope they can work something out.

The good litigation news last week for State Farm was the verdict of zero punitive damages in the Bossier vs. State Farm Katrina case. I would not equate the verdict with indicating that State Farm did nothing wrong—it underpaid its policyholder’s contents claim and forced a lawsuit for those benefits to get paid. The jury did rule that no further dwelling benefits were to be paid. Slabbed reported on this case in “While today’s Bossier verdict is still a rumor, chew on this!” and “Slabbed Scoops the News: Bossier gets nothing in Phase 2.”

I was aware of the case before the trial started and we provided the Bossiers’ very able counsel, Judy Guice, with some information and depositions in other matters. Certainly, we will talk with Judy and study the case. We will try to determine where arguments and evidence can be presented in a different manner to help provide a different result. We were pleased that Judge Senter allowed the issue of punitive damages to be presented to the jury.

I was thinking about these two different matters during the deposition because the catastrophe adjuster said that she could recall seeing only one structure in Mississippi that had any wind damage---even inland structures. She testified that she was instructed to determine the amount of pre-existing wind damage by going to the wind data for Bay St. Louis and Waveland to see if there were any strong gusts. She said she found no such data that suggested such strong wind speeds. So, she simply paid everything on flood claim which is under the National Flood Program and nothing for damage under the all-risk policy issued by State Farm.

Sounds crazy, right? Just about as crazy as thinking that State Farm really wanted to bankrupt its agents and stop doing business in Florida? I guess that reading about beating a customer’s punitive damage insurance claim in court and getting approval to raise customer rates in the newspapers is “good news” in the eyes of State Farm. And to most of us, I bet that sounds a little crazy as well.

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.

An article in today’s Insurance Journal, Florida Insurance Chief: Homeowners Rates Might Rise; State Farm Might Stay, suggests that State Farm is trying to reach an agreement with the Office of Insurance Regulation so that it will stay in Florida.

McCarty said the state is still negotiating with big insurer State Farm over its proposed withdrawal from the property market. The insurer wants to drop some 770,000 policies but the state and the insurer have not yet agreed upon a plan to do this. Until they do, State Farm is blocked from dropping its customers.

McCarty raised the possibility of State Farm remaining in the state but with a scaled down company.

"We would be better served if State Farm stayed to some degree," McCarty said. He suggested that the insurer's recent move, which the insurance department approved, to discontinue certain policyholder discounts is a step towards the insurer reducing its exposure in the state that could help its bottom line.

However, if State Farm does finally exit, he said the marketplace appears poised to absorb most of the policies it leaves behind. About 30 insurers -- with what McCarty said "appears to be enough capital" -- have expressed interest in taking on some of State Farm's business. Most of these carriers are established players with "superior ability to negotiate reinsurance contracts" and not the newer entries into the market, he stressed.

I agree that Florida is better served if State Farm remains in Florida. It would be fantastic if a deal could be reached. I do not agree that State Farm should get special political treatment. I do not agree that it should be able to charge whatever it wants. I do not agree that we should not investigate how it can claim that it is losing money in Florida when there have been no hurricanes.
 

Why does State Farm get such special political treatment? Many would suggest that one very powerful and persuasive politician, Florida State Senator J.D. Alexander, is a major reason. Senator Alexander does a tremendous job representing his biggest corporate client, State Farm, whose regional office is in Senator Alexander’s district. The News Service of Florida ran a story yesterday, ALEXANDER: TRUE MEASURE OF FLA FINANCES INCLUDES STORM SCENARIO demonstrating in part how Senator Alexander continually helps State Farm:

Senate budget chief J.D. Alexander cast a deeper shade of red ink over Florida's recession-battered finances Tuesday, with a stark assessment of what major hurricanes could do to the state treasury.

Alexander got the Legislative Budget Commission to embrace his demand that potential multi-billion dollar shortfalls in both the Florida Hurricane Catastrophe Fund and state-backed Citizens Property Insurance, Corp., be included in a long-range financial outlook adopted by the panel.

The financial outlook, which is required by law, shows the state faces at least a $1 billion shortfall next year to cover a stripped-down base budget, with the deficit potentially climbing to $2.6 billion when modest increases and traditionally funded state programs are included.

But the four-paragraphs added to the 117-page outlook by Alexander caused the biggest stir. The addition may also prove a swipe at Gov. Charlie Crist, who vetoed legislation in June that Alexander and other supporters said would have reduced the risk of hurricanes on the state treasury.
…
State Farm's planned exit has been challenged by state regulators, with an administrative hearing scheduled to begin next month. State Farm and some lawmakers have clamored to have the legislation retooled and added to a likely special session this fall - or at least be ready for next spring's session.

"State Farm's headquarters is in my district and I support that legislation," Alexander said. "There's lots of folks I represent as well as others that would like to have that as an option. If you don't, you can certainly go somewhere else, even Citizens. But I think we proposed good policy for the state."

Actually, State Farm’s headquarters are in Bloomington, Illinois. Nobody would suggest that State Farm Florida makes public policy without significant input from Bloomington.

Senator Alexander’s strong position as the Budget Chairperson cannot be overstated. Other Senators need his help to get matters through his committee. He is part of the Republican Leadership in the Florida Senate. When you happen to have a powerful and strategic politician in your favor, the way State Farm does with Senator Alexander, it is a significant political position. It is amazing that Florida, the fourth largest state in the Union, can have its public policy regarding insurance dictated to it by a company from the small city of Bloomington, Illinois. I suppose in Senator Alexander’s view and many of other politicians in Florida, what is good for the pockets of State Farm is good for Florida. 

I discussed the lifted shingle issue earlier this year in my posts, Internal Texas Windstorm Roofing Claims Memo Explains Damage is Not Covered, The TWIA Roof Damage Memo: Checking Basic References to Resolve Adjustment Questions, and Roof Repair Methods Prove TWIA is Wrongly Denying Roof Claims.

The Merlin Law Group will host a seminar in Houston, Texas, for public insurance adjusters this Friday, September 11th, Hurricane Ike – What a Difference a Year Makes? The lifted roof shingle issue will be one topic of discussion as well as a special analysis regarding TWIA practices. I look forward to seeing you there.
 

The Report that McCollum was referring to is the Emerging Florida Homeowners Property Marketplace. The report is full of operational information regarding many insurers. It also suggests that the surplus lines industry is participating much more than anticipated. Possibly, the Surplus Lines Legislation just passed is having a positive impact with new and increased surplus lines capacity coming into Florida.

Gary Fine outlined the nature of the antagonism between the two consumer advocates:

“McCarty made the presentation at the request of Sink, who was following up on complaints from lawmakers who pushed the insurance deregulation or a.k.a the "State Farm" bill. These lawmakers have contended that McCarty misled Crist before he vetoed the legislation and there remains a quiet effort to get the Legislature to pass a new version of the bill if there is a special session later this year. The bill in essence would allow large capitalized carriers to have unregulated rates. (Sink refused to say Tuesday whether Crist should have signed or vetoed this bill - saying that was "the governor's decision" to make.)

"McCarty for his part has refuted the suggestion he misled anyone, saying he and members of his office have been "candid" that a big chunk of new capital in Florida has come from unregulated surplus lines carriers which do not usually cover those in the residential homeowners market.

Sink on Tuesday morning chided McCarty for failing to get her the information she requested earlier, saying "it still stuns me" that his office was unable to get the information to her sooner.”

Hopefully, they will be able to get this behind them. I agree with Alex Sink that everybody has to have their performance reviewed. Contrary to the belief of those in the insurance industry and some in the Florida legislature listening to the industry rather than their constituents, Kevin McCarty has been doing a fantastic job for Florida policyholders.

The St. Peterburg Times and Florida Today have written highly critical editorials regarding State Farm's announcement that it would cease all discounts for policies issued in Florida. The Times editorial stated in part:

"...Now the state's largest private property insurer wants to pick the pockets of its customers one last time as it flees the state. Florida Insurance Commissioner Kevin McCarty should not allow that to happen.

The Florida subsidiary of Illinois-based State Farm informed regulators Friday that it wants to trim nearly all of its discounts for homeowners insurance. The changes would eliminate discounts for customers with multiple policies, for those who have hardened homes against hurricanes and even for customers who have been claim-free for years. State Farm's message: We don't care if you have been loyal or invested thousands of dollars to mitigate hurricane losses after the state required premium discounts in return. Just give us more money before we drop you."

Florida Today points out how customers cannot trust State Farm to hold a promise for a small decrease in rates once they harden their homes at great financial cost:

"Reducing or eliminating discounts for homeowners who mitigate against potential storm damage such as by hardening garage doors or installing shutters. The giant insurer was one of the biggest backers of mitigation discounts as one way to ease the insurance crisis in the state after the bad storms of 2004-05.

State Farm also wants to gut longstanding discounts for multiple policies, installing burglar alarms or never having filed a claim."

It also called the recent rates requests by State Farm a rip off:

 "Keep in mind State Farm is a lucrative operation, pocketing $5.5 billion in profits last year.

And that, despite being granted a 52 percent premium rate increase in 2006, it’s threatening to leave Florida, dumping 1.2 million policies statewide if regulators don’t allow more huge and unwarranted hikes.

Insurance Commissioner Kevin McCarty should make sure this latest shady tactic to rip off consumers is rejected too.

For its part, State Farm should drop plans to abandon faithful clients and start playing by the rules. That means submitting reasonable rate increase requests based on independently verifiable risk models, not rigged numbers."

I have to give State Farm credit for its "never give up" attitude. Some, like Slabbed, may suggest what this insurer has failed to give up is an unwavering attitude to generate as much revenue as possible for a product that expenses as little as possible. As I indicated in an earlier Post, this may be a company that has simply forgotten that the insurance business is unique in that its purpose is to serve the public trust rather than private gain.

According to the article, Insurance Commissioner McCarty "feels" State Farm may stay, or try to stay, one way or another:

"State Farm, the largest private property insurer in Florida, may decide not to leave the state, Insurance Commissioner Kevin McCarty said Thursday.

"I don't know that they're going to stay," McCarty said. "Part of it is a gut feeling."

...

State Farm hopes for an override of the veto, McCarty said. That would require a special session of the legislature this year, which is considered unlikely."

With that information, Clash fans and State Farm employees are probably thinking of these lyrics:

"This indecision's bugging me."

One of the sad realities about elected legislators is that some are simply not able to understand issues. Like deer in headlights, some have agendas but little ability to logically comprehend competing issues and analyze the crucial impact laws will have if not drafted precisely. Happily, Mike Fasano is not one of those legislators.

You should never pre-judge a person's ability to reason by the lack of formal education. Mike Fasano did not graduate from a traditional high school, due to problems after the death of his father. His very humble background is apparent in his concern for those that are less affluent. Many of his constituents are retired and on fixed incomes. When you consider his background and the demographics of his electorate, it is no wonder his primary insurance concern is that it is affordable and not a sham—meaningful insurance is necessary for the elderly and disenfranchised.

Fasano told me of a couple that had worked hard to pay off their mortgage. Unfortunately, they let their insurance lapse and their house suffered a severe uninsured loss. I told him that I have seen that scenario many times and that there is some value to the mortgage escrow requirements which require property owners to pay for insurance and property taxes. Some simply lose the premium or tax notices or forget to pay bills. It happens a lot more after some reach that goal of paying off the mortgage.

My impression is Senator Fasano could have been a priest or involved in some other charitable endeavor for his fellow brother and sister. He never mentioned any concern other than for the working class, the elderly, the retired, and how others in business or government could help protect them. While I have seen his contempt for others in some public hearings, in my interview with him, he expressed only interest in helping our State and its citizens and without a harsh word.

After meeting and spending time with Senator Fasano, I can appreciate why his constituents vote for him. He is dedicated to helping them and experienced enough to understand how he can help them. In the future, I expect Mike Fasano will find some other noble means to help people rather than use his talents for personal financial fortune or fame.

As am I, he is a strong supporter of Governor Charlie Crist, Senate President Jeff Atwater, and Insurance Commissioner Kevin McCarty. It would not surprise me to find him working in Washington, D.C. someday. Until then, I will try to provide him my understanding of insurance as he battles through those various complex issues. At least he appreciates and understands the difficulty of these issues which some of his elected colleagues simply do not.

Bennett sponsored the bill that became HB 1171, which will raise insurance rates. Bennett and State Farm lobbied for this bill, claiming it would give consumers "choice." McCarty wrote a letter to Governor Christ indicating that Bennett's bill would help the insurance industry, not Florida insurance consumers, and that Crist should veto it. Bennett was publicly embarrassed, and published a letter trying to explain why McCarty should get terminated. Now, Florida Senate leader Mike Fasano and Governor Charlie Crist, past champions of policyholders crying for reduced rates, have come out supporting McCarty against Bennett's very personal attack.

The Miami Herald reported Governor Crist's view:

"Gov. Charlie Crist had nothing but praise for Insurance Commissioner Kevin McCarty, despite Sen. Mike Bennett's call for him to resign.

"I don't agree with that,'' Crist said."I think the commissioner has done a great job, and I have enormous respect for him...I haven't reached a final conclusion on (the insurance rate legislation)."

Senator Mike Fasano's view was reported by Tampabay.com in a story titled, Fasano clashes with Bennett, backs McCarty:

"Republican Sen. Mike Fasano of New Port Richey has rushed to the defense of state Insurance Commissioner, whose resignation was demanded by Sen. Mike Bennett of Bradenton in a letter to Gov. Charlie Crist.

"He is one of the most highly qualified and experienced individuals to hold this important post," Fasano said in a statement issued Friday from a legislative aide's BlackBerry. "Florida needs his steady hand to steer through the unique insurance challenges that continue to be part of Florida's landscape."

Fasano's statement did not mention Bennett by name, but he got his point across by ending this: "In a town in which insurance companies wield so much power, he (McCarty) has been a voice of reason and stability. During the many years I have worked with him he has never hidden his deep desire to make sure that consumer-friendly legislation and policy were his top priorities."

Kevin McCarty wrote a letter explaining why Bennett's legislation was not in the best interest of Florida consumers. This letter embarrassed Bennett because it is true--the bill unnecessarily raises insurance rates of Bennett's constituents, but Bennett was not counting on McCarty to say that. McCarty's letter probably worries every legislator who voted for it:

Impact on Consumers
As a result of the unprecedented storm seasons of 2004 and 2005, Floridians were hit with dramatic increases in their homeowners insurance rates. Realizing that families across our state were struggling to afford these premium increases, you led the effort to pass HB lA in January 2007, which yielded rate decreases on the average of 15.9% statewide. Since that time, rates have remained relatively stable for most of our residents.

HB 1171 will reverse the trend begun by HB 1A by exempting certain insurers from a
determination that their rates are "excessive or unfairly discriminatory." These
companies will be permitted to charge a rate that is substantially higher than the
actuarially sound rate approved by the Office. The result will likely be significant and
unpredictable rate increases that, during these difficult economic times, people can
simply not afford.

Impact on the Insurance Marketplace
Florida has added 40 new property insurance writers with more than $4 billion in capital since 2006. The Legislature invested $250 million to attract new capital for companies committed to the Florida marketplace. Largely because of this new capital, more than 400,000 policies were taken out of the state-run Citizens Property Insurance Corporation in 2008, reducing its exposure by more than twenty percent.

HB 1171 will disrupt the effort to build an increasingly competitive insurance
marketplace and treat certain insurers differently than emerging Florida domestic
companies. This has the potential to harm consumers and investors who have worked in good faith to create a competitive marketplace that has benefited all Floridians.

Impact on State Farm's Withdrawal Plan
State Farm would have Floridians believe that because of its failure to obtain a rate
increase it was forced to present a plan to exit the state. State Farm's rate filing was
woefully unsupported. The Office's disapproval of the rate filing was subsequently
upheld by an independent administrative law judge. It appears State Farm used this as an exit strategy rather than taking responsibility for abandoning its agents and policyholders.

Moreover, State Farm is overexposed in the homeowners market and will likely not offer coverage to many of its policyholders irrespective of its freedom to charge an excessive rate. In fact, State Farm and other companies may actually use excessive rates to effectively non-renew policyholders under the ruse of consumer choice.

It is important to remember that in 2002, the former Department of Insurance allowed State Farm to write condominium insurance at an unregulated rate. The results were not beneficial for Floridians. This company dramatically increased rates over several years and shortly thereafter non-renewed every policy in the state. There is no reason to believe that this proposal will result in anything different.

It is unfortunate that this bill is being presented to you as an effort to promote "consumer Choice.” I believe the bill sponsors attempted to pass legislation that would allow State Farm policyholders to continue to secure coverage from that company in the future. This legislation is more far-reaching than is necessary. Current laws already allow insurers to offer two options at higher than approved rates. Insurers may offer policies on a consent to rate basis or on a surplus and excess basis.

I believe this legislation has negative consequences both for the people of this state and for the insurance industry as a whole. As always, I am available to answer any
questions.

Sincerely,

Kevin M. McCarty
Commissioner

In A Balanced Perspective Regarding the Politics of Insurance Legislation, I noted how well meaning politicians, like Senator Mike Bennett, may get bamboozled by insurance lobbyists. State Farm lobbyist, Mark Delagal is sharp and very persuasive, but his only concern is pleasing State Farm--not their policyholders or customers. Another insurance lobbyist told me this week that State Farm is pulling out all the stops and has hired heavy Republican lobbyists Mac Stapanovich and Jim Magill to sway Governor Crist into breaking his campaign promise to not raise rates.

In that post, I commented on a scenario of what Bennett's constituents will say if this law is passed:

"Edna, I am really excited about this new law. The old fair rate approved by the Office of Insurance Regulation has been wiped off the books by our genius Florida legislators. Next year, we will get the same insurance, and it will cost as much as our carrier wants to charge us. This is because our insurance carrier no longer has to worry about applying for a fair rate."

I find it curious that State Farm, a mutual insurance company, can use money for lobbyists to help make laws that harm its own owners/customers. State Farm has ten lobbyists registered on its behalf. It has a public relations effort trying to place comments into newspapers and a full time "independent" agent force working on this effort. It has the rest of the big players in insurance now working on this as well. 

Florida insurance consumers must understand that the insurance industry has numerous full time employees and lobbyists working on their behalf attempting to persuade the government to make laws that "game" the outcome of rates, profits, and claims to favor the insurance company. For example, Sam Miller of the Florida Insurance Council is a masterful strategist and lobbyist for the insurance industry. He works with insurance company employees and lobbyists to get Florida elected officials to safeguard the interests of insurers by making laws that favor insurers versus those that help the policyholders. Next week at the Destin Hilton, his group will host legislators at its 2009 Summer Insurance Symposium and talk with them regarding insurance company legislative interests. As far as I know, the public is not invited, and certainly yours truly is not getting an invite. But, the following State legislators are invited:

Golf Tournament Honorary Host Senator Garrett Richter
Fishing Tournament Honorary Host Representative Pat Patterson
Rep. Janet Long
Rep. Marti Coley
Rep. Brad Drake
Rep. Clay Ford
Rep. Dave Murzin
Rep. Jimmy Patronis

None of this is illegal to my knowledge. Indeed, insurance is an important business in Florida. Unlike private services or manufactured goods, it is a uniquely important social product upon which we are mutually dependent. The issue is whether our elected officials are more like Kevin McCarty and looking out for the consumer first or whether our elected officials are discussing and looking for something else behind closed doors with insurance executives. I strongly suggest all Floridians find out and let your voice be heard as to what you find. We need to support those champions of policyholders.

Is this a tell-tale indication of the current administration’s stand on federal programs for insurance? The Obama administration reportedly is taking a somewhat quiet but strong stand opposing federal wind insurance legislation that would permit homeowners to purchase wind coverage at actuarially set rates (in addition to the already debt-ridden federal national flood insurance program).

Meanwhile, consumer advocate and former insurance regulator J. Robert Hunter provided congressional testimony that the federal government should take over capital, surplus and solvency regulation of insurance, but should be coupled with removing the antitrust exemption enjoyed by the insurance industry. He also reconfirmed his opposition to a Federal Charter for insurance.

And now Florida’s insurance agents are unsure on which side their bread is buttered the best with SB 1171, the measure before Governor Crist that allows large insurers to raise premiums without the approval of the state regulator. Yesterday, the FAIA (Florida Association of Insurance Agents) declined to take an official position on whether Crist should sign the legislation. Backers of the bill say that it would allow policyholders to retain the familiarity of their insurance company, and that some people would rather “keep a well-capitalized insurer they know and pay a little more for it,” than change insurance companies. Sounds to me a little like the old adage of keeping your friends close but your enemies closer.

Question is, will State Farm leave Florida if the measure isn’t signed by Crist? We’ve just learned that State Farm and Florida insurance regulators have decided to continue negotiating over how the giant insurer can conduct an orderly withdrawal from Florida's property insurance market, rather than proceeding to court.

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

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

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

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

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

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

Voters are not stupid, and McCarty is calling out those that are supporting this anti-consumer legislation with a published comment on the matter. I found this especially significant to the debate:

"When I pointedly ask industry representatives how much more business they would write if they could get any rate they wanted, the serious answers I get back range from marginally more to none. Again, because of the moderate to severe hurricane risk across the entire state of Florida, the risk of ruin from catastrophic loss outweighs any potential premium income in their management models.

That said, we continue to look into this issue. Proponents of complete rate deregulation assert that it would provide a better competitive outcome. Following basic economic theory, therefore, markets with rate deregulation should exhibit lower prices and a lower degree of market concentration, all else being equal. These are easily verifiable empirical results, and there is plenty of data available with which to test this hypothesis. I would encourage the competitive market advocates to undertake such an analysis. Our own internal looks at the potential effects of market deregulation have not found support for the proposition.

Prior to Florida's legislative changes of 2007, the rate review process for property insurance was identical to the process used for all other property/casualty lines of business -- about which there is no industry outcry. The biggest difference, yet again, is the pricing of the catastrophic component of hurricane risk embodied in property insurance. This component of pricing is what makes underwriting hurricane exposed property such a challenge for insurers, regulators and the public."

Julie Patel of the Sun Sentinel followed up with this in a story, Home insurance rates to rise, top regulator says. She noted that when the Sun Sentinel inquired from several insurers whether they would sell more insurance if their rates were allowed to be raised, none of them indicated in the affirmative.

State Farm is not only behind trying to get Florida legislators to pass laws allowing for unregulated rate increases, it is battling the State of Florida in the administrative courts as well. The St. Petersburg Times reported Thursday that McCarty has reached an impasse with State Farm over its withdrawal from Florida, and he has referred the matter to the administrative courts for a hearing on the matter.

Eventually, the large corporate giant known as State Farm may prevail through hardball litigation or significant lobbying and propaganda. What human could get away with such treatment or have such resources to even try to change the rules of the game?

Some may start to question whether such business entities should be allowed to legally wield such power. The people reviewing State Farm's arguments have indicated that its justification for the rate increase was not factually sound. The Florida Insurance Commissioner has questioned State Farm’s fitness to operate in Florida. It appears that State Farm may have found Florida's soft underbelly in some of Florida's legislators.

At the same time, State Farm’s lawyers are fighting with the Florida Office of Insurance Regulation over the terms of its withdrawal from Florida's property insurance market. Is State Farm using the threat of leaving to compel legislators to pass the very anti-consumer legislation? Will State Farm withdraw its plan to leave if the bill is passed?

To remind everyone, State Farm lost in an administrative hearing against the Florida Office of Insurance Regulation in which it asked approval to increase its rates . The judge made a number of findings that State Farm was not losing money in Florida and it noted State Farm's absurd argument that it claimed to be losing money in Florida through "expenses" that the company paid to itself.

In response to the order, State Farm decided to stop providing property insurance in Florida altogether. My thoughts on this are found in a post, State Farm's Power Play And Propaganda Ploy. In hockey terms, State Farm's power play lead to an unexpected short handed goal by its opponent, Florida's Insurance Commissioner, Kevin McCarty, who placed conditions on the withdrawal and did it in a very pointed manner:

"State Farm’s cited reasons in the Withdrawal Plan are both disingenuous and misleading to the Office and policyholders they seek to abandon. State Farm created its current “crisis” by failing to pursue the opportunities that were available to reduce its expenses and mitigate its decrease in premium volume. Instead, it chose to attempt to raise rates in order to reduce savings to its policyholders its mitigation discounts provided [sic.] and to seek a profit that was excessive and unreasonable in the current economic conditions while certifying that its rate filing reflected all premium savings that resulted from legislative enactments. State Farm’s actions raise serious questions regarding the fitness and trustworthiness of its officers and directors to engage in the business of insurance."

State Farm has now challenged McCarty’s findings and conditions in a Petition for an Administrative Hearing on the matter. Their Petition claims that Florida acted "arbitrarily and capriciously.” I guess State Farm can now relate to its customers in Mississippi that it mistreated during the Katrina litigation.

In the meantime, lawyer Mark Delegal, a State Farm lobbyist, is heading a group of insurance industry lobbyists who are trying to overturn the longstanding practice of Florida regulating insurance rates. There is a good reason why insurance rates are regulated by the states--federal anti-trust laws do not apply to insurance company rate making. (I wonder if Florida legislators supporting this measure have a clue about that and its implications for the types of rates consumers may have to pay.) An article by Julie Patel in the Sun-Sentinal, Florida Home Insurance Legislation Mainly Favors the Insurers, noted that insurance industry lobbyists are pressing the Florida legislators with numerous pro-insurer bills which will result in increased rates and lower consumer protections. Delegal, State Farm, and other insurance industry insiders seem to be winning this battle---they have an army of attorneys and use their own customers' premiums to fund their fights for laws that would actually harm their customers.

Thank God the Florida people have elected a person of courage to stand up to large corporate interests and these lobbyists. The Sarasota Herald reported that Florida Governor Charlie Crist will stop these anti-consumer measures in its article, Crist Warming up the Veto Penfor Insurance Bill. Crist, a former Attorney General, is well aware that the insurance industry is exempt from criminal and civil penalties of federal anti-trust laws, specifically in return for those companies agreeing to be subject to state regulation. He was quoted:

“My hope is that some provisions that in my view are detrimental will fall away before they come to me,” he said. “I’m a free market guy first and foremost so long as the free market can protect the consumer.

“If it can’t because an industry is so powerful and so unwieldy, then there’s an appropriate role for government to assist the consumer. This one concerns me because it’s ‘Katie bar the door’ for their rates and that’s not good.”

Crist compared insurance rates to the prices at gas stations; as soon as one station raises its prices, the other inevitably follows.

“In that industry,” Crist said of property insurance, “there seems to be a swarm mentality.”

It will be interesting to see how State Farm’s lawyers try to get it out of this mess. The lawyers are very clever, bright and persuasive types. In my battles, I never underestimate them. But it sure looks like they have some tough going to get State Farm out of its fight with the State of Florida.

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

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

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

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

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

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

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

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

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

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

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

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

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

In my recent post, What is State Farm's Agenda?, I noted one possible reason for State Farm’s announcement that it plans to leave Florida:

State Farm and others in the old guard property insurance oligopoly want to shock the government into implementing a federal catastrophe reinsurance program whereby the old guard oligopoly will not lose business to new start up companies that will compete for their auto business.

One comment to that post referred to Allstate leaving the coastal markets. Another comment by a Slabbed author noted that State Farm and Allstate are having problems with reinsurance catastrophe bond investments, which have lead to significant losses to the surplus of both companies. Given that Allstate and State Farm are underwriting fewer coastal risks where hurricanes hit, I think it is more than happenstance that each share a common political agenda to protect market share losses as they pull away from Coastal America and try to avoid financial losses that occur from hedging the catastrophe risk themselves.

It is obvious that State Farm, Allstate, and Nationwide have agreed to promote a federal agenda to keep their smaller and newer competitors from taking over market share of their cherished automobile and other insurance businesses by lobbying the federal government to enact legislation to indirectly insure property these three companies consider too risky to insure themselves.

One of the insurance industry's major trade, lobbying and propaganda organizations is the American Insurance Association. It has over 350 insurance companies as members. Conspicuously, State Farm, Allstate, and Nationwide are not members. The American Insurance Association is opposed to federal legislation which creates a federal catastrophe reinsurance plan, while Allstate, State Farm, and Nationwide lobby for such a program. The AIA web site states:

"Among the proposals of some policymakers are federal catastrophe funds (also known as “Cat Funds”). While those mechanisms may offer short-term rate relief, they also promote unwise and unsafe property development, and leave problematic cost-drivers for insurers and policyholders unresolved."

In a press release opposing the Federal Catastrophe Legislation, the AIA states:

"This legislation continues to cause serious concerns for AIA and its more than 350 member companies, who do not want to see Congress go down the road of incenting the creation of more state mechanisms that would interfere with the private market.

While we appreciate the efforts of Congressmen Klein and Mahoney to address homeowners’ insurance issues, the private insurance system continues to be well-positioned to manage natural catastrophe risk, and we believe the best course is to improve, not displace, the private sector’s ability to serve homeowners and businesses that could face losses from natural catastrophes.

We urge Congress to proceed cautiously and deliberately as it takes on homeowners’ insurance challenges, and to look toward durable, long-term, market-oriented solutions."

It is no wonder members of the AIA oppose the legislation. All the legislation does is help State Farm, Allstate, and Nationwide, the major holders of the personal lines market share business, as they try to reduce their risk of exposure to hurricanes. These three competitors want the federal government to protect them from losing profits if they leave the coastal markets. Otherwise, as they leave or write less business, their other competitors will take that business and then start taking other business, such as automobile coverage, from the other lines of insurance they sell.

Propaganda organizations cannot just announce, "We are formed by corporations to help make laws that protect them and make them money at taxpayers, and their competitors, expense." They would not be effective with that truth. Instead, corporations like Allstate and State Farm form propaganda organizations that have great sound bites, which make it appear they exist for the public good rather than private gain.

The propaganda organization formed by Allstate and promoted by State Farm to advocate laws that protect their coastal insurance markets and ancillary lines of insurance business is ProtectingAmerica.org. Essentially, protectingamerica.org promotes protecting the profits of the insurance carriers that have the largest losses along coastal areas. The organization should honestly be called ProtectingBigInsurance.org, but that would not have so much appeal. Honesty is not the best policy when it comes to politics or advance requests for bailouts at taxpayer expense. So, the publicists at Allstate and State Farm have to sell the program in a different light, especially if some dumb consumer advocate were to point out that these two entities were largely responsible for the coastal insurance crisis in the first place.

The best line of insurance to be in is one where you never have a loss. Some may suggest that is not insurance, but think about a system of business that is sold as property insurance, but in the event of a large disaster, the government pays for your losses. That is exactly what State Farm, Allstate, and Nationwide are lobbying for. Protectingamerica.org, a/k/a protectingbiginsurance.org, was formed to make laws which accomplish this very lucrative economic scenario.

This is how it is spun to our elected leaders and the public:

"That bill would create a national catastrophe fund to stand behind privately funded state programs that would provide a financial backstop in the event of a large scale natural catastrophe and, through the state programs, would help fund first responder programs, mitigation efforts and homeowner education programs that are all designed to reduce the loss of life and property resulting from catastrophes."

Nationwide even supports a new business model that eliminates states’ rights to regulate insurance:

"1. A stable and consistent regulatory environment, with a uniform set of rules applied to named wind coverage for coastal zones from Texas to Maine. This portion of the homeowner policy would be regulated by an independent federal body, with the remainder of the policy still regulated by the states.

2. Transparency in calculating insurance premiums, with risk-based, actuarially sound rates using approved standards and wind risk models, and a rating calculation mechanism to be applied if models and actual experience become misaligned over time.

3. Federal reinsurance mechanism for extreme events (such as hurricanes causing losses several times greater than those arising out of Hurricane Katrina), with the reinsurance made available to insurers at cost so there would be no taxpayer subsidy, and the savings passed directly to customers.

4. Encouraging stronger homes through federal guidelines for appropriate building codes and land use planning, with incentives for state and local adoption, plus enhanced construction technology and meaningful premium credits for customers who make their homes less vulnerable to wind damage."

Sounds as good as apple pie. And, since the federal government pays for all this rather than you paying for it today in premiums, who cares? State Farm, Allstate, and Nationwide get certain profits and no new competition. In states like Florida, where these three have largely created the coastal insurance crisis, their problems are solved by the federal government. The rest of the program even funds efforts to mitigate and educate those who are largely the customers of those three carriers. They finally get free from Kevin McCarty and other "unfair" state regulators. There is no discussion about losing any anti-trust exemptions as well.

I wonder if those three companies would support the legislation if they had no economic interest in doing so?

The truth is that they have significant economic incentive to conspire to make these laws or bully states to release them from an economic situation which they no longer wish to be a part of. Remember the childhood friend who took his ball home because he did not like how the outcome of the game was going? These three insurance players are all grown up with significant resources to change the rules of the game whether we like it or not. We better understand how they view the world--they are determined to control it for their financial benefit.

In America, insurance companies cannot be elected to office or even vote. Yet, these corporations can give money to the people running for office and corporations can have people make laws that largely benefit these non-living entities. For those of faith, I wonder what the Almighty will ask us about this system where we allow make believe entities to control so much of the existence provided for us.

Perhaps, the Honorable Howard Baker's idea about campaign finance should be considered. Baker had the notion that the only entities that could give money to a politician would be ones that could actually vote. Since corporations cannot vote or hold office, why should these paper entities be allowed to contribute? Why are we subordinating our God given inalienable rights to non-living entities for their economic gain?

As a result much experience, I know State Farm may believe it has a very legitimate basis for withdrawing from Florida’s property insurance market. State Farm believes withdrawing from the market is the right thing to do, and that something has gone terribly wrong in Florida.

So what exactly made State Farm executives make this announcement?

I suggest that those wishing to understand this read "The Detailed Reasons" starting on page 8 of State Farm's Plan for withdrawal. Then, read the January 12, 2009, Final Order denying the rate increase.

I will ponder these myself and try to better ascertain and explain State Farm's position in this weekend’s post. While consumers and I may not agree with it, I believe that State Farm’s position should not be dismissed without study.

Kevin McCarty has thrown a softball start to the investigation, apparently just asking for mundane policy information.

Unlike Governor Crist and others, I do not think that it is in Florida's short term best interest for State Farm to leave. However, State Farm cannot bully Floridians in response to a negative ruling by regulators and a judge.

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.