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

The financial statistics, if accurate, show the reason for my pessimism. Despite my belief that much of the report is propaganda without policyholder input, the statistics demonstrate that something has to be done because insuring this peril because it is not financially sustainable. For example, for Citizens Property Insurance Corporation during the years 2005 through 2009, the sinkhole peril had a premium earned of approximately $211 million. The reported indemnity paid for that period was approximately $442 million. That is a huge loss for a peril that happens on a repetitive basis.

The results are a little skewed because the Florida legislature, wrongly in my opinion and as demonstrated by the statistics, allowed Floridians to opt out of sinkhole coverage or purchase inferior coverage. There are fewer risks in the pool in the years the losses were incurred because many simply opted out. The population left is more prone to sinkhole loss and fewer premium dollars are earned before losses are incurred. Yet, this is trivial compared to the large underwriting loss for the sinkhole peril. If anybody else views the statistics in a light much more favorable to the policyholder, let me know because that is extraordinarily important.

One solution may be to require Citizens Property Insurance Corporation to write the sinkhole peril to an actuarially sound sinkhole rate—so it would have a chance to break even. This one change may allow other private insurers to compete with Citizens, if they desire, without having to worry about doing away with the rate regulation laws or other changes. There will be a huge uproar because the rates will go up a lot---but that might be a fair scenario for the risky population Citizens is forced to write because our regulators have allowed private insurers a form of geographic sinkhole redlining for the last decade. Citizens Property Insurance Corporation has the worst sinkhole prone structures because Florida allowed private insurers to leave those geographic markets.

The report explains that Citizens’ sinkhole operating loss will continue unless Florida law changes and that the losses are caused by Citizens having more policies in the worst sinkhole prone areas:

The actual premium that Citizens charges its policyholders, however, is only a small part of Citizens’ actual sinkhole costs. This deficiency in premiums is worsening because Florida law prohibits Citizens from increasing the rate of any policyholder by more than approximately 10 percent, even as losses continue to rise at a much faster pace. Thus, Citizens’ already deficient sinkhole premiums will fall even further behind its sinkhole losses. As a result, Citizens’ surplus continues to be eroded by the deficiency in sinkhole premiums. The deficiency in Citizens’ sinkhole premiums can be seen graphically on the following pages. Each of the four graphs displays the difference between the average pure premium (average loss per policyholder) for a defined geographic region and the actual premium that Citizens is allowed to collect in that region.

David Beasley, President of the Florida Association of Public Insurance Adjusters, also indicated the interim report was not hopeful or helpful to Florida's policyholders in Adjusters: Legislative Proposals on Sinkhole Insurance Harm Homeowners:

Proposed legislative changes in sinkhole insurance regulations would undermine consumers and unfairly benefit the industry, an adjusters' group charged Tuesday.

"While the recommendations for changes in the Florida Building Code have merit, the report as a whole lends great weight to insurance company interests at the expense of Florida homeowners," said David Beasley, president of the Florida Association of Public Insurance Adjusters.

Beasley said the call for a single-peril repair program includes "onerous conditions" that would force consumers who dispute a claim to do so with no representation by public adjusters or attorneys sworn to protect their interests.

"Further, the concept that insured consumers must put all claim payments toward repairs flies in the face of established precedent, and would require many homeowners to remain in homes that even after repairs would have drastically lower property values," Beasley contended.

"This new requirement, not found with water, fire or windstorm losses, would have a drastic impact on individual property rights," Beasley said of the staff recommendations by the Senate Committee on Banking and Insurance.

Beasley said the staff report "appears to be based heavily on unproven allegations by some insurers that the increase in sinkhole claims is somehow fraudulent."

But a November report by the Office of Insurance Regulation actually found a drastic decrease in claims reported for investigation, and the staff report acknowledged that neutral evaluators confirmed sinkhole losses in a majority of completed cases.

"It is our hope that the Florida Legislature puts consumer interests first when considering any future changes in sinkhole coverage. Putting the interests of insurance companies ahead of those of the Florida residents they are supposed to protect is unconscionable," Beasley said. (emphasis added)

In State Panel Makes Sinkhole Recommendations, the Miami Herald listed a good summary of the recommendations:

Among the committee's proposals for lawmakers to consider this spring:

• Create a state-run sinkhole repair program. Instead of homeowners getting checks based on their insurance claims, their houses would be fixed. Insurance companies have said many homeowners who file sinkhole claims do not use the money to fix their houses.

• Define what kind of damage sinkholes could cause. Most of the claims homeowners have filed aren't because a house was swallowed up by collapsing ground but for cracks in walls and other damage that is difficult to link directly to a sinkhole. The report also suggests limiting coverage to homes, leaving driveways, pools, decks and other structures without coverage.

• Require sinkhole claims to be filed within two or three years after damage surfaces.

• Allow insurance companies to not renew policies with sinkhole coverage or after paying a sinkhole claim.

• Revise the Florida Building Code to require soil testing and foundation construction that would reduce sinkhole-related damage to buildings.

• Cap fees for public adjusters who work with homeowners on insurance claims and make it an unfair and deceptive trade practice if public adjusters make misleading statements.

Many of these proposals are not new. Most of them were noted two years ago in Late Reported Claims, Public Adjuster Fee Caps, And Sinkhole Coverage, where I noted that legislation proposed the following:

1. Place a two year limitation to report a claim.
2. Cap public adjuster fees to 10% of paid amounts.
3. Eliminate mandated sinkhole coverage.

This is the same scenario today. Change is going to have to happen because the loss ratio cannot be sustained if Citizens Property Insurance Corporation or any entity is to keep most sinkhole prone policies. The insurance industry may be entitled to higher rates for this peril. My impression is that something has to give. The question is how draconian will the change be.

As I indicated in that two year old blog post, if you are a concerned person there is a suggested course of action:

The lesson is that people do make a difference in government. The system works best when people, and I mean folks, show up, write a letter, write an email, or send in a video. Even one person can make a point which can stop the "bad guys" from their agenda. I witnessed it first hand with this Task Force. Anybody who thinks that one person cannot make a difference is far too pessimistic about our democracy. The last thing the "sneaky bad guys" want is for their customers to participate in a process to show how very bad they are.

Members of our law firm will do what we can for policyholders. We will encourage and organize others to help our leaders be educated fairly about these important insurance issues. I suggest those interested in the sinkhole and other insurance related issues likely to be raised in the Florida legislature contact Sean Shaw in our Tampa office at 813-229-1000 or sshaw@merlinlawgroup.com.

The three who wrote the letter are Sean M. Shaw, Florida's Insurance Consumer Advocate, Brad Ashwell, democracy and consumer advocate for the Florida Public Interest Research Group, and, Bill Newton, Executive Director of the Florida Consumer Action Network (FCAN). FCAN's Blog recently posted, Insurers Record "Stellar" Profits in 2009, which noted:

According to a news report in National Underwriter, "Panelists said the relative calm of the 2009 hurricane season, as well as some reserve releases, were seen as the key reasons p&c insurers’ net income after taxes totaled $16.2 billion during the first nine months of 2009, nearly quadruple the $4.4 billion in profits earned a year earlier."

Will we see price reductions in Florida now that insurers have banked another year's profits with no hurricanes?...

Despite the good times, the insurers keep crying. We need to see through their game and call their bluff as Insurance Commissioner Kevin McCarty did with State Farm (although later negotiations are questionable.)

Now insurers are saying that deregulation will lead to lower prices. Why should anyone believe them? Their track record is not one of truthfulness. They are exempt from anti-trust laws. If they are now making "stellar" profits, where's the fire?

Call your legislators to put a stop to these games.

I agree with that. This is not a law dreamed up by consumers looking to solve an insurance rate problem. It was devised by the insurance industry to free it from regulation in order to charge whatever the market will bear. I believe that most legislators truly want to make society better with laws they propose and pass. The truth is that insurance lobbyists have done a wonderful job for their clients, providing significant political contributions to key legislators. In return, it is only reasonable to assume they are asking for those legislators to support their agenda.

Yet, this law does nothing for insurance consumers and I said so when it was first introduced in Do Florida Legislators Think We Are Stupid? Similarly, the consumer advocates noted the following:

The sponsors of this legislation mistakenly call this bill the "Consumer Choice" insurance bill. However, the only choice that consumers are given is between higher premiums (based on recent rate filing requests of anywhere for 25 percent to 50 percent) or a move to Citizens' property insurance.

However, this bill does not accomplish any improvement - instead it would significantly hurt Florida's consumers. Deregulation of our property insurance industry rates would allow insurance companies to abuse consumers through excessive rate increases and would hurt Florida financially by overburdening Citizens. We also do not see any hard evidence this bill can achieve its stated goal of attracting new companies to the state.

We call on members of the Florida Legislature to vote against the proposed deregulation bill. If this legislation should pass, we urge Gov. Crist to again veto this type of proposal. We encourage the Legislature to choose what's in the best interest of the citizens of Florida.

Interestingly, the letter indicates what legislators will say regarding their support for the law and the false premise that it proponents sponsor:

Proponents of deregulation claim that it will bring new insurers to the market. However, no insurer has said publicly that they would enter Florida if the property insurance market were deregulated.

The truth is that if rates go through the roof because of this law, there will be more insurance available because many Floridians will not be able to afford to buy as much of it, if at all. Many will just go to another state to do business or live where it is less expensive.

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.

I have studied the issue and have a recommendation that will keep appraisal in the insurance contract, keep the possibility of an informal appraisal proceeding and satisfy the insurance industry's concerns of due process. I will post those tomorrow afternoon.

Here are the panelists:

Here is the agenda:

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.

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.