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

The Ocala Star Banner ran a story last week, "Insurers Say Sinkholes Impact Marion Market." The introduction in the first paragraph of the following exerpt is an exaggeration of our practice:

William “Chip” Merlin, president of Tampa-based Merlin Law Group, which specializes in sinkhole claims, said population growth and development is more to blame for rising sinkhole claims.

“Number one is population growth,” Merlin said. “We're seeing more structures in rural areas that are prone to sinkhole activity. Number two, we're seeing more in farm areas because of irrigation. With more development we're not going to see a decrease, we will continue to see an increase.

Another factor, Merlin said, is how difficult it is to deal with insurance companies when it comes to sinkhole claims. “Yes, we are seeing more claims,” Merlin said. “It's much more difficult to collect payment so more people are going to attorneys.”

The Merlin Law Group does not specialize in sinkhole claims. We represent policyholders with insurance disputes. A small portion of those claims involve sinkhole claims. Since most of our practice involves disputes with property insurance at issue, we represent many policyholders with sinkhole claims. Indeed, as I wrote this, two attorneys in our firm are in the third day of trial regarding a sinkhole loss that the insurance company has denied.

Floridians have a much more difficult burden to prove and collect for their sinkhole damaged properties than in the past. Several changes to the statutory laws limiting how, what and when the insurance companies pay their customers for sinkhole losses have passed the Florida legislature. The insurance industry wants even more burdens and restrictions for policyholders, even limiting representation. To justify this, they have lobbied the Florida Office of Insurance Regulation to find "data" to limit policyholder choices and opportunities when faced with a sinkhole claim.

I am writing this while embroiled in a two day mediation for a large Texas school district involving a Hurricane Ike loss. Some may consider a school district with dedicated legal counsel, architects and building construction employees to be a sophisticated client. The truth is that if these policyholders are having trouble collecting and are having to retain professionals such as us, policyholders with sinkhole damage need professional help even more, given the current complex state of the law.

In the interim, Hurricane Earl has a windspeed map that must be concerning to those living on the Eastern seaboard.
 

If Earl wobbles just a little to the west, you don't have to be a NASA rocket scientist to figure out somebody is going to be welcomed as a new member of the slabbed storm surge association.

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?

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.

Here is the important part of the Order showing the scheme:

SOUTHERN OAK has entered into an MGA agreement which the OFFICE finds
…to adversely affect the interests of policyholders by being both unfair and unreasonable. Since inception, the MGA agreement has generated approximately $35 million in profits while the insurance company has consistently generated underwriting losses. While the existing MGA agreement was initially approved based on projections of profitability of the insurance company, representations made to the OFFICE regarding the fee structure have not proven to be accurate.

…

SOUTHERN OAK shall show cause why it should not return the excessive profits in the amount of $10 million earned from the MGA agreement.

Yesterday, the insurance industry press picked up on this important story in Florida's Southern Oak Told to Correct Its Business Plan; Other Companies Are Being Examined. That story reported:

Florida's Southern Oak Insurance Co. has some explaining to do and several other of the state's property insurers may be soon to follow.

…

The OIR is reviewing annual financial statements of all companies and "is currently conducting examinations of a few companies, including the review of MGA agreements," said Brittany Benner, spokeswoman for the OIR, which "intends to conclude these examinations, taking corrective action if necessary…

Insurance companies wanting to raise rates may find a number of ingenious arguments and methods, as exemplified in State Farm's Freakoutnomics. Some reasons and concerns may be legitimate, such as the one raised by Florida Senate Banking and Insurance Chair Garrett Richter regarding the wind mitigation credits having no sound actuarial basis. Given this new revelation, many would suggest that our regulators and elected officials initiate a full investigation and require much greater financial transparency before trusting the Florida insurance industry’s arguments that rates have to go up while policyholder benefits disappear.

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.

Sometimes, the best course of action is to take simple steps to solve a problem rather than a radical departure. Tweaking a process may be the best course of action rather than setting in motion an entire new process that creates additional and often unforeseen adverse consequences. If I had to suggest one thing to Sean Shaw regarding his recommendations, it would be: “keep it simple.” There were so many new ideas being espoused at the roundtable without thorough thought as to all the consequences, that I am afraid he and others at the Office of Insurance Regulation could promote a new policy which could end up being more harmful than good.

Assuming that appraisal is a mandatory requirement in all property insurance policies, I still like what I proposed in my post, A Method for Keeping the Appraisal Clause in Property Insurance Policies Which Will Satisfy All Concerns. I have no problem saying that I may be persuaded with a better idea, but I heard none yesterday that provided a simple solution. After listening to others, I have changed my opinion regarding the licensing of appraisers. I think that there should be licensing of appraisers to help protect consumers from unregulated individuals giving legal and claim advice.

Policy should be reflected in law and regulation that promotes quick and full payment of property insurance claims. The implied performance duties of an insurer to adjust the claim are found nowhere in the insurance contract. Regulators and judges must understand that law and regulation are the only methods of placing adjusting performance claims duties contractually upon insurers. I agree with the insurance executive that spoke during the public comment portion of the session who said there needs to be accountability when those duties applied to the contract are violated. The Prompt Payment requirements championed by Senator Jeff Atwater should have greater teeth and the obligations of good faith claim handling should always have an aspect of accountability when breached.

The California law which requires disclosure of the insurer’s claims file to the insured upon request should be adopted in Florida. I raised this point in the session and nobody seemed to disagree. The first party claims file is the most relevant evidence of how the insurer is evaluating the claim. It seems to work in California and there should be no reason why it would not work here. Why shouldn’t an insurer be honest with its customer and honestly share how the claim is being handled? Only cheating adjusters would be afraid of honesty and transparency.

The individual largely responsible for this California law is Amy Bach, the executive director of United Policyholders. The California law provides:

The insurer shall notify every claimant that they may obtain, upon request, copies of claim-related documents. For purposes of this section, "claim-related documents" means all documents that relate to the evaluation of damages, including, but not limited to, repair and replacement estimates and bids, appraisals, scopes of loss,
drawings, plans, reports, third-party findings on the amount of loss, covered damages, and cost of repairs, and all other valuation, measurement, and loss adjustment calculations of the amount of loss, covered damage, and cost of repairs. However, attorney work product and attorney-client privileged documents, and documents that indicate fraud by the insured or that contain medically privileged
information, are excluded from the documents an insurer is required to provide pursuant to this section to a claimant. Within 15 calendar days after receiving a request from an insured for claim-related documents, the insurer shall provide the insured with copies of all claim-related documents, except those excluded by this section. Nothing in this section shall be construed to affect existing litigation discovery rights.

When I was speaking with Amy Bach about the Roundtable, she reminded me that California has optional appraisal where there has been a disaster. Either party may opt out. There, the insurers were abusing the process by outspending the policyholders and making the process so expensive for the consumer that it significantly lengthened the time to recovery and reduced the net payout because of the expense. Insurers leverage this fact with policyholders by threatening appraisal when negotiating settlements. As I pointed out yesterday, absent the obligations of good faith claims handling, the insurer often has no time pressure to pay claims quickly. Raising time and expense as a negative aspect to a consumer can provide insurers with enough leverage to achieve an underpaid claim result to the customer. Here is that portion of the California law:

Appraisal

In case the insured and this company shall fail to agree as to the actual cash value or the amount of loss, then, on the written request of either, each shall select a competent and disinterested appraiser and notify the other of the appraiser selected within 20 days of the request. Where the request is accepted, the appraisers shall first select a competent and disinterested umpire; and failing for 15 days to agree upon the umpire, then, on request of the insured or this company, the umpire shall be selected by a judge of a court of record in the state in which the property covered is located. Appraisal proceedings are informal unless the insured and this company mutually agree otherwise. For purposes of this section, "informal" means that no formal discovery shall be conducted, including depositions, interrogatories, requests for admission, or other forms of formal civil discovery, no formal rules of evidence shall be applied, and no court reporter shall be used for the proceedings. The appraisers shall then appraise the loss, stating separately actual cash value and loss to each item; and, failing to agree, shall submit their differences, only, to the umpire. An award in writing, so itemized, of any two when filed with this company
shall determine the amount of actual cash value and loss. Each appraiser shall be paid by the party selecting him or her and the expenses of appraisal and umpire shall be paid by the parties equally. In the event of a government-declared disaster, as defined in the Government Code, appraisal may be requested by either the
insured or this company but shall not be compelled.

Making the appraisal optional by law is an option which may be considered. Under this view, the inexpensive informal mechanism can stay in place by agreement. A negative aspect of my proposal is that policyholders may be better off simply litigating the matter rather than going through a full blown arbitration.

The insurance industry wants to push mediation. It wants to do this to avoid the perceived negative results of appraisal and still provide an alternative to litigation. My impression is that the insurer’s financial desire to achieve a reduction in the amount of claims severity (the average amount an insurer pays out for claims) can be achieved through a negotiation process where the insured can be leveraged by the prospect of delay and expense. Insurers train adjusters how to negotiate and even a voluntary mediation process can be abused. A Biloxi television station ran a feature of clients we represented that twice went through the Mississippi Department of Insurance mediation program following Katrina:
 

The real issue is how to get these disputes prevented in the first place. And, when they arise, how to get them resolved quickly and fairly. While it is easy for me to say that, coming up with an alternative dispute resolution process that is fair, quick and inexpensive, in a one size fits all format, is a puzzle that nobody has a perfect answer for. The prevention of the dispute and fair treatment can be accomplished as I have suggested with strong laws, transparency and good faith claims practice obligations.

But what about good faith disputes between parties? I still strongly feel that the insurer’s request for fair process of binding claim resolution with transparency is inherently sound. Indeed, that is what consumer’s want. And, what is often not said is that the result for the consumer once the dispute arises is often the skill of the appraiser or if litigated, the attorney selected by the policyholder. For example, our clients in the above video were advised by the first attorneys they hired to accept less in settlement than what the insurer twice offered in mediation. The skill of the right appraiser is something I noted in, Appraisers, Umpires and Appraisals as Valid Substitutions for the Right to a Jury Trial Depend on Viewpoint.

Insurance Veteran made a point that everybody in the insurance business knows. There are certain policyholders who want much more than what is fairly owed, and they unrealistically believe they are entitled to the money. Some of these people go over the top and commit fraud. Others just want magic to happen, and the claims money to be paid regardless of any justification.

While I can certainly appreciate his comment, he may have missed part of the point of my post. Many policyholder appraisers do not fully understand how to win the appraisal for the policyholder. They do not comprehend that the appraisal is truly an alternative dispute process that binds the policyholder.

Some may suggest that I am wrong, and that the goal of appraisal is a fair number for both sides. But, my policyholder clients may have a very different view of what fair is. So, if the insurer wants to dispute the amount in an appraisal, I want as much as I can get for my clients. After all, if there were no appraisal, my client would be asking a jury of peers for justice. But the insurance companies were historically so afraid of juries and costs, that a hybrid dispute process became standard in form insurance policies. Guess who benefitted most from that process?

Accordingly, my warning to all policyholders and those working with them in appraisals is that it is binding and should be taken as seriously as a public trial. I want the mindset of policyholders faced with an appraisal to be:

There is no second chance.

I started writing a reply that I feel better explains my impressions on this topic. Some suggest that I am opposed to appraisals for a number of reasons, including the possible loss of litigation revenue. These people do not fully understand the consequences of appraisal. I have a hard time explaining the historical importance of a jury as a core concept of American democracy, but I believe that giving up the right to a jury trial is the most important consequence of appraisal. Justice comes from the values of one’s peers in the community, not experts or government deciding what is fair and just. This is a fundamental concept of American democracy and protected by our Constitution.

My impression is that the skills of consumers’ appraisers have become much better. There are now numerous seminars that provide knowledge to public adjusters which result in an understanding of how to obtain a fair settlement for the policyholder through the appraisal process. Indeed, there now seems to be a certain segment of public adjuster that cannot reach voluntary resolution and thus use appraisal as the actual adjustment of the claim. The response is that some insurers are now removing the clause. From their view, there is not first a good faith adjustment which is then subject to a process that has no rules and enough transparency for them to think it is fair. And, the most important reason insurers are removing the clause is that they losing.

Finally, I applaud Sean Shaw. I would love to participate and listen to the views of the insurance industry. I have a warning about the comment from the lobbyist from the insurance trade association. But, that is for another day.

Again, keep it simple.

This is the legislation I will recommend to the Florida Insurance Consumer Advocate Sean Shaw and the Office of Insurance Regulation tomorrow:

(1)  In the event parties to an insurance contract enter into an appraisal, either party may demand that the procedures set forth in the Florida Arbitration Code (Section 682.02 et seq.) shall control in the appraisal process except as to the selection of the appraisers and appointment of the umpire.

(2)  If mutually agreed to in writing, the parties may modify the procedures set forth in the Florida Arbitration Code.

The practicality of this law is that it recognizes claims are not all the same. There is a huge difference between a $500 automobile claim dispute (automobile policies have appraisal clauses as well) and a $150 million commercial property damage claim with business interruption issues. When the stakes are high and the parties really want to make certain that the process is fair and each has its opportunity to be fully heard on the merits, the Florida Arbitration Code has long been recognized as providing such procedures.

But what about a far more common dispute involving $25,000? In that case, the parties may want to conduct the appraisal in much the same manner as is commonly done today--with little or no rules to save money and time for all. This suggested law allows the parties to modify the arbitration procedures regarding discovery, to afford savings in costs through mutual agreement.

My suggested method for resolving the current trend of insurers eliminating appraisal has come about through a number of observations.

1.  Florida law does not mandate the appraisal clause to be in property insurance policies because the Standard 165 line policy is no longer mandated in Florida. As a result of laws requiring policies to be easy to read, Florida, unlike many other states, dropped laws requiring property insurance policies to have minimum protections found in the 165 Line Standard Fire policy.

2.  Insurers are increasingly changing property insurance policies to vary from standard forms. Whether our Office of Insurance Regulation is doing a proper job is of concern to all because such changes can harm consumers through reductions of coverage and give competitive advantages to insurers that play "word games" with the products they sell. Deleting the appraisal clause is another example of this increasing trend by Florida insurers when they do not like the results the more standard forms in use throughout the country would otherwise require.

3.  Policyholders and insurers benefit by having alternative dispute methods which are quick and inexpensive. However, both desire fairness. The smaller the dispute, the greater the need for less costly methods. The greater the dispute, the greater the need for a method of fairness that ensures transparency and a result that is not based on gamesmanship.

4.  The Florida Supreme Court has mandated that appraisal is an informal process. In doing so, it overruled a lower appellate court ruling indicating that arbitration was the procedure that had to be followed in appraisals. In the past, many parties asked whether the appraisal would be conducted "formally," meaning following the arbitration code, or "informally" with the panel to make their own rules. Today, the panel makes their own rules based on the Florida Supreme Court decision.

5.  A cottage industry of appraisers and umpires has emerged over the past decade. The use of appraisal has become more common as an alternative to voluntary agreement through adjustment. Recognizing that informal appraisal may lead to gamesmanship and unfairness, at least one organization of considerable influence in Florida, the Windstorm Network, has educational classes on appraisal and the role of the Umpire. The Windstorm Network has a Certification course for Umpires and promulgated a set of ethical requirements for "Certified" umpires to follow. In doing so, the Windstorm Network recognized that umpires wield considerable influence in process and ultimate determination of the result.

6.  Appraisal, unlike mediation, is binding. Like arbitration, it is a true alternative to litigation. To suggest that mediation is an alternative to appraisal is incorrect and disingenuous. Without a binding method to litigation, insurers with the money can threaten a policyholder with expensive and time consuming litigation to gain negotiation leverage over the policyholder. Mediation is simply a more formal means to reach a voluntary adjustment of damage with a professional facilitating a compromise.

As an experienced attorney limiting my practice to policyholders with disputes, I cannot say that policyholders are better off resolving their disputes through appraisal, even with arbitration procedures available, versus litigating the matters. Litigation can raise a number of consumer protection statutes that benefit policyholders when insurers unreasonably underpay or delay payment. These rights cannot be raised by public adjusters or contractors because it involves the practice of law. Unless a policyholdere is very well educated in insurance law, an attorney is almost always necessary to successfully litigate these rights.

Indeed, the policyholder successful in appraisal has to pay for his costs of the appraisal and half the umpire's costs. In litigation, the successful policyholder can often recover all those costs along with interest for the unpaid sums.

While I have long been a critic of appraisal because it is a binding process with no rules, I can appreciate that the cost to reach a binding amount owed can be much less, and costs may be an overriding concern to all in claims where the amount in dispute is not great.

My suggested change to the law is merely a practical recognition that insurers do not, and should not, have to remove the appraisal clause from property insurance policies.

I appreciate all the comments and viewpoints which many of you have shared with me on this blog over the past month. I will provide my thoughts of the Roundtable discussion on Thursday.

According to a press release by the OIR, State Farm will be allowed to non-renew no more than 125,000 of its 810,416 homeowner policies and will be granted a 14.8% rate increase.

You can read details in the OIR press release here, and read the Consent Order here.

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

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

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

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

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

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

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

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

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

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

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

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

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

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. 

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.

Most insurance company and independent adjusters log far more hours in training, classes, and supervised situations than most public insurance adjusters. This needs to change.

Policyholders deserve superior adjustment work by trained and skilled public insurance adjusters. FAPIA's leadership discussed mandating standards far higher than those imposed by the State of Florida for membership as well as encouraging the Legislature and Department of Financial Services to go even further regarding testing of new public adjusters.

One of the chief complaints from adjusters and claims managers in the insurance industry is the sloppy estimating and measurement practices by some public insurance adjusters. They imply that the sloppiness is fraudulent rather than accidental. To the extent that is true, it should not be tolerated.

Insurance company and independent adjusters should be able to bring this type of conduct, whether sloppy or fraudulent, to the Office of Insurance Regulation. It is about time that public insurance adjusters are subject to market conduct examinations the same way insurance companies are subject to such examinations. This one regulatory action may help the many professional and honest public adjusters rid the industry of problem public adjusters. I am certain insurers would support public adjusters having the same minimum training requirements their adjusters have. From the policyholder’s perspective, there is no downside.

Over the next several months, I am going to encourage ideas and support for higher standards of professionalism and ethical conduct for public adjusters in Florida.

Policyholders need these skilled professionals immediately following a loss so that evidence can be collected and assistance provided to help soften the financial blow of a catastrophe. I have found that if retained within hours of a loss, skilled public adjusters make the insurance product work far better for the insured and there are far fewer re-opened claims because the claim is adjusted right the first time. But this only happens if the public adjuster is trained, skilled, motivated and has sufficient resources to get the job done right.

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.

For example, People's Trust Insurance Company is running full page newspaper advertisements with a headline:

"Has Your Insurer Skipped Town?"

It then lists rates which suggest that the average savings to a State Farm policyholder that switches to People’s Choice will be a whopping 53%! The ad pokes fun at State Farm by saying:

"So, say goodbye to the other insurance companies and the outrageously high premiums that will leave with them. Now is the time to make the switch to an insurance company that is proud to serve the people of Florida."

Given that People's Choice can charge approved rates much lower than State Farm's, one has to consider this as an additional indication that State Farm’s request for a 67% rate increase was based on sham economics, as found by the Office of Insurance Regulation and the administrative law judge who reviewed the matter.

State Farm is being ridiculed by those in its own industry. While State Farm may have anticipated that its policyholders, regulators, media, and consumer advocates, like me, would be critical of its decision, the overwhelming criticism by those in its own industry suggests that the OIR’s view is correct.

In my earlier post, What Is State Farm's Agenda?, I noted that State Farm could honestly believe a 67% rate increase is necessary. Indeed, just because the Administrative Judge and OIR found differently does not absolutely disprove State Farm's position. Given the long term implications, Florida should conduct a thorough analysis of State Farm’s motives, agendas, and internal decision making process.

The last thing we need in the long term is to find State Farm had a legitimate point and that all of its competitors are charging rates that are far too low. Rates too low will eventually result in massive bankruptcies of these insurers. I doubt that is the case, but that is the implication of State Farm's actions. Florida should conduct a complete study.

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.