The propriety of Florida Specialty Insurance Company’s insolvency should be investigated by the media and other Florida leaders. The Florida Department of Financial Services filed what appears to be a spurious motion to disqualify a very reputable insurance company law firm, Cozen O’Connor, that filed a motion, which if correct, shows that a simple accounting error lead to a false claim that Florida Specialty Insurance Company was insolvent.

What caught my attention is that the DFS is trying to disqualify Cozen O’Connor and escape timeframes that are harming 91,000 policyholders facing non-renewals within the next 30 days. The disqualification seems absurd because nobody reading or understanding the issues would ever think that Cozen O’Connor represented the Department of Financial Services who has an army of its own lawyers. No contract of representation was entered into between the State of Florida and Cozen O’Connor.

What is the basis of the accounting mistake? In the unique response of Florida Specialty Insurance Company to the insolvency notice, Florida Specialty pointed out that the Office of Insurance Regulation wrongfully deducted approximately $8.5 million of monies which is disputably owed by surplus lines carrier AIG/Lexington over disputed premiums. Florida Specialty never included this amount as an asset but the Office of Insurance Regulation nevertheless mistakenly deducted the amount—which is a pretty big mistake if true—to make the Florida Specialty appear insolvent. Indeed, the mistake is a $17m book change to surplus in the eyes of the Florida OIR if it corrects its alleged mistake and the obligation is collected upon and counted as an asset.

What makes this an even more disastrous mistake is that rather than continue a planned run-off where 91,000 polices can be sold by agents in an orderly manner to other insurers, these policies are set to be cancelled within the next 30 days. Here is a discussion about the practical problem of a fire sale non-renewal at the October 16 Banking and Insurance Committee meeting:

Mr. Chair, My question was to be what recommendations would you have to the committee to fix this situation, to make sure that all 91,000 individuals that were insured continue to get new insurance elsewhere.“

Mr. Gilway:

‘The situation as it stands today is that all policyholders had been notified already by DFS that their policies, being cancelled as of the November 1 day. So they’re aware that the policies are being cancelled. We’re reaching out to all of these policy holders to make sure that they understand they have an election to come with citizens insurance as an alternative if their agent doesn’t replace that business. The only conceivable answer to me is some kind of a verification process. We’re all 89,000 customers are identified and confirmed relative to the placement of the business. And that might be a suggestion that we pursue to ensure that all 89,000 have been contacted, and that they’ve been provided with an opportunity that doesn’t exist within the current process.’

Woman with Gilway (Toma):

‘The scenario that we just described, would mean that we continue to follow the policy holder which we don’t in liquidation. So we don’t follow up with the policy holder to see if they were able to place their coverage somewhere else, if that’s the scenario then there will have to be a requirement and that will be an added additional expense on the state rights are fixed at the date of liquidation so it’s on the policyholder the agent to find new coverage so it doesn’t impact their mortgage.’

Rep. Caruso:

‘I just think it’s an important situation that we’re concerned about our citizens of Florida, and their coverage. I hear that they’ve been notified. You’re telling me they’ve been sent a letter that doesn’t mean they’ve been notified. They’ve been put on notice, but not notified necessarily because unless they open the letter or email or however you distribute it, unless they’ve read it and understand that they haven’t been notified.’

Woman with Gilway (Toma):

‘We’re statutorily obligated to notify the agent who was then obligated to contact that policy holder and help them find new coverage in a liquidation.’

Over the past month I have been studying how Florida, unlike any other state, separates the regulation of its insurance into two different agencies: the Office of Insurance Regulation and the Department of Financial Services. I am not saying if this is wrong or right, but nobody else is doing it this way. This split approach can lead to a lot of errors if communication is not perfect between the two state agencies.

In this case, the Florida OIR and DFS need to state whether a simple accounting mistake occurred. To me, unless Cozen O’Connor cannot do simple accounting arithmetic, they would not have filed such a detailed pleading explaining the mistake. Florida’s answer should not be silence about its alleged mistake with a motion to disqualify the informing lawyers, but to admit or deny the mistake. If it is a mistake, we should not be having insurance agents scrambling to find new carriers for 91,000 policyholders of a company that is not insolvent.

Thought For The Day

Mistakes are always forgivable, if one has the courage to admit them.
—Bruce Lee

  • shirley heflin

    Dear Chip:

    What a nightmare and undue hardship for the innocent policyholders in this situation! Once again, you have people that have paid their premiums and instead of getting what they’ve paid for, they’re getting “kicked out ” of their insurance company entirely!

    Also, I note that the State makes a big deal of advising that they’ve notified “all the insurance agents” to notify the policyholders of the cancellation, however, not everyone has an agent. What about the people that buy their insurance off the internet or walk into the insurance company’s office alone? My point is that not everyone has an insurance agent.

    Respectfully,
    SHIRLEY HEFLIN
    Tampa, FL

    • Chip Merlin

      Shirley,
      Thanks for your comment.
      I think most of these were with agents. It is not an easy deal to just go find a replacement insurance company. Even getting notice to the policyholders in time is not easy.
      Many will end up with forced placed coverage.

  • Jake Peters

    Why did the state’s attorneys and the company’s attorneys spend hundreds of hours on legal posturing, when a decent accountant could have solved the “he said, she said” in about Two hours? The policyholders deserve to know who is right and what is going on!

    • wmerlin

      Jake,

      I read the insurance company’s response and the letters between the OIR and the company—it seemed pretty simple to me but the OIR would not listen.

  • rogerpoe

    Approximately what number of Hurricane Michael Insureds account for the 91,000 policyholders?

    • wmerlin

      Roger,

      That is a very good question. I do not know.