The Florida home insurance market has spent most of 2022 tumbling toward collapse, but recent legislation just might avert disaster. These laws, some of which go into effect in October and November of this year, aim to make Florida home insurance more affordable while ensuring there are enough reserve funds to pay for catastrophic losses. Will this plan work in time? Bankrate dug deep into the Florida insurance industry to identify systemic issues and help you understand your options if you receive a cancellation or nonrenewal notice on your homeowners insurance policy.
- Governor Ron DeSantis signed several new insurance reform bills into law during the 2022 and 2023 legislative sessions. Combined with earlier legislation, these new regulations aim to stabilize the spasming home insurance market.
- Florida accounts for only 9 percent of the country’s home insurance claims but 79 percent of its home insurance lawsuits, many of them fraudulent.
- Because of the fraudulent lawsuits and the high overall claim risk in Florida, insurance companies have faced two consecutive years with net underwriting losses over $1 billion.
- Florida has lost some form of home coverage from over 30 insurance providers in the past three years.
The crisis in the Florida insurance market
Florida has always been a complex home insurance market, but recent issues are pushing the state’s market to the point of collapse. Since 2017, eleven property and casualty companies that offered homeowners insurance in Florida liquidated. Five of those companies liquidated in 2022, and United Property & Casualty Insurance Company liquidated in 2023. Other insurance companies are voluntarily leaving the state. Even more are choosing to nonrenew swaths of home insurance policies, drastically tighten their policy eligibility requirements or request substantial rate increases.
For Florida homeowners, this is resulting in fewer home insurance companies and increased premiums. When a company goes insolvent, the Florida Insurance Guaranty Association (FIGA) takes on any claims that still need to be paid by that company. In late August, FIGA’s board and the Florida Office of Insurance Regulation (OIR) approved a .7 percent assessment to help cover the costs of open claims associated with the liquidated companies. That’s the second assessment this year, with a 1.3 percent assessment approved in March. Homeowners will pay these fees regardless of the insurance company they are with.
According to Logan McFaddin, vice president of state government relations at the American Property Casualty Insurance Association,
Florida’s property insurance market is in crisis as insurers grapple with out-of-control litigation costs and billions in losses from recent natural disasters.
Florida’s Insurance Consumer Advocate (ICA) Tasha Carter agrees, saying, “Homeowners insurance options in Florida have become more and more limited, and consumers are facing dire consequences.”
Why are home insurance companies leaving Florida?
Florida insurers are canceling policies, leaving the state or liquidating at a rapid pace. Why? What is behind these companies’ aversion to insuring Florida homes?
Florida has always presented a risky market to home insurance companies due to the high threat of widespread weather-related damage, but the current crisis is caused by a number of factors reaching a boiling point at the same time.
Insurance fraud in Florida
The biggest issue right now in Florida is home insurance fraud, driven by fraudulent roofing claims. A proclamation from the office of Governor Ron DeSantis notes that, although Florida only accounts for 9 percent of the country’s home insurance claims, it is home to 79 percent of the country’s home insurance lawsuits. Many of these lawsuits are fraudulent. ICA Carter explains how the scams generally work:
- First, roofers canvas neighborhoods and offer inspections to unsuspecting homeowners. These contractors inevitably “find damage” on the roof and often promise a “free roof” to the homeowner, claiming they can have the home insurance deductible waived.
- Homeowners are pressured to sign an assignment of benefits form, giving contractors the right to file an insurance claim on their behalf.
- A claims adjuster from the insurance company inspects the alleged damage. The adjuster either finds no damage or far more minimal damage than the contractor found, and the claim payout is less than what the contractor demanded.
- The contractor brings legal action against the insurance company, demanding a claim payout for the contractor’s original quote. Remember, the homeowner signed the benefits of the policy to the contractor, so the contractor doesn’t need the homeowner’s permission to do this.
- The insurance company now has a choice: it can pay the legal costs to fight the lawsuit or pay the costs to settle out of court. Either way, the insurance company loses money due to the legal action.
ICA Carter notes that “these schemes are real and are happening more frequently,” which puts more and more financial pressure on insurance companies, especially in a state with high claims costs due to weather-related events.
According to Mark Friedlander, Director of Corporate Communications at the Insurance Information Institute, “Florida property insurers are projected to post a cumulative underwriting loss of $1.7 billion for 2021” due to these runaway litigation costs. The governor’s office reports that, for two consecutive years, net underwriting losses have exceeded $1 billion. It’s no wonder that so many companies are going insolvent or leaving the state before they reach that point.
On top of that, Florida also previously had a “one-way attorney fee” system. This meant that, when a court ruled in favor of the plaintiff (in this case, a home insurance policyholder or the third-party contractor who filed the claim), the defendant (in this case, the insurance company) was responsible for paying the plaintiff’s attorney fees. So not only were insurers paying for fraudulent lawsuits, they were also paying for the fraudster’s legal costs. Friedlander notes that the insurance reform bill passed in December 2022 “addresses the two root causes of Florida’s residential insurance crisis — litigation abuse and assignment of benefits (AOB) abuse…Eliminating both is necessary to slow down the mass volume of lawsuits being filed against Florida insurers.” Going forward, assignment of benefits forms are banned for home insurance losses and Florida will no longer operate a one-way attorney fee system.
How many home insurance companies have left Florida?
On July 13, 2023, AAA became the most recent insurance company to announce that it is limiting its risk in the state by nonrenewing policies with auto, home and umbrella bundles. The carrier is still writing new business in Florida for both auto and home but in areas with lower exposure. Earlier in July, Farmers Insurance announced that it is no longer offering new business or renewing any of its auto, home and umbrella policies in Florida.
In mid-2022, Bankers Insurance Company reported its exit from Florida, only to be followed by AIG and Lexington Insurance, a subsidiary of AIG. Lexington Insurance is a surplus lines carrier focused on high-value homes with replacement costs over $1 million — leaving an estimated 8,000 policyholders searching for specialized coverage in a limited market.
Between home insurance companies going insolvent, limiting their risk or leaving the state altogether, Florida has lost over 30 insurance providers — or some form of coverage from these providers — in the past three years.
Is anything being done to curb the crisis?
Yes, although the full effects of the measures have yet to be seen. Senate Bill 76 went into effect in July 2021 and included several provisions to curb fraudulent claims causing insurers so much strain. One such provision is aimed at reducing the solicitation tactics that fraudulent contractors often use at the start of a scam. While this legal measure may help solve the problem, Sean Harper, CEO of Kin Insurance, warns that “there will need to be additional action taken to restore the market to health.”
Florida lawmakers met for a special session from May 23 through May 27. The Legislature passed an insurance reform bill that includes several provisions to help slow the spiral of the market. The provisions included setting up the My Safe Florida Home Program, which provides grants to help Florida homeowners strengthen their homes against damage. Additionally, home insurance companies will not be able to deny coverage for homes solely based on roof age if a roof is less than 15 years old and still has five years of useful life left (older roofs may still be denied as they present a high risk of damage). Finally, lawyers will be restricted in the rates they can charge for property insurance claims cases, hopefully discouraging fraudulent lawsuits and decreasing litigation costs.
December Special Session yields promising reform legislation
Additional legislation was signed into law on December 16, 2022. Senate Bill 2-A. The bill has numerous provisions but focuses on one-way attorney fees and the assignment of benefits scam. Friedlander told Bankrate:
“This is the strongest insurance reform package we have ever seen passed in Florida. It shows Florida’s new legislative leaders understand the enormity of the state’s property insurance crisis and are initiating decisive actions to create a path toward stability of the market.”
Doing away with one-way attorney fees and assignment of benefit forms could potentially remove massive financial pressure from insurance companies and reduce the number of fraudulent lawsuits. The combination of actions included in Senate Bill 2-A will hopefully buoy the rapidly-sinking insurers in the Florida market.
However, Friedlander notes that change won’t happen overnight: “…it will take time to see positive impacts of the legislative reform. We expect home insurance rates in Florida to remain high in 2023 due to expenses associated with ongoing litigation, combined with soaring reinsurance rates and double-digit replacement cost increases driven by escalating prices of construction materials and labor.”
2023 Legislative session introduces new laws impacting homeowners
Of the seven Florida bills passed in the first half of 2023, Senate Bill 1102 updated the claims process surrounding motor vehicle glass damage. The remaining six bills focus on insurer accountability, restructuring the claims process regarding public adjusters and multiple changes to property insurance. Some changes give more clarity to bills passed in the December session.
House Bill 799 for property insurance modifies rating factors and flood coverage requirements for different property types. Citizens policyholders insuring secondary homes are excluded from the rate cap, allowing rate increases up to 50 percent. Changes will impact new Citizens policyholders with policies starting after November 1, 2023.
All properties covered by Citizens now require flood coverage except for policies without wind damage coverage and condo policies. The state has set an enrollment deadline schedule based on structure replacement cost. The dwellings with the highest replacement cost, over $600,000, must secure flood coverage by January 1, 2027.
House Bill 881 extends the My Safe Florida Home Program to more properties, waiving the wind-born region requirement. Also, the insured value of the eligible homes increased to $700,000, and the low-income grant amount increased to $10,000.
Most changes from these new laws were in effect for policy renewals at the beginning of June and July. Hopefully, reinsurance companies feel that these measures have gone far enough to continue extending coverage to the insurers that have remained in Florida. If not, more providers may announce their retreat from Florida in the near future. In other words, relief may be coming, but it’ll likely take some time for homeowners and insurers to feel it.
Demotech responds to potential rating downgrades
Because many home insurance companies have been hit hard by the rampant and fraudulent litigation, they may no longer be as financially stable as they were. In late July 2022, financial strength rating company Demotech announced it was considering downgrading the financial strength ratings of 27 property insurance companies.
The situation is complex. While these carriers may no longer have the financial strength they used to, downgrading also causes issues. Downgrading financial ratings impacts homeowners with federally-backed mortgages — those from Fannie Mae and Freddie Mac — because these lenders require home insurance companies with Demotech ratings to maintain at least an ‘A’ level. Demotech has not released the names of the companies it is considering downgrading.
“Preliminary evaluations are just that — preliminary,” Demotech President Joe Petrelli told Bankrate. Some of the 27 could retain an ‘A’ or higher rating. But if these downgrades happen, homeowners whose coverage is with an affected company may need to find another insurance carrier in a market where options are already limited or expensive.
While a rating downgrade may present challenges for a company and its insureds, that hardship cannot, and does not, factor into our ratings, which are based on specific data and the objective application of our rating methodology.— Joe PetrelliPresident of Demotech
The Florida OIR established a reinsurance fund through its last-resort insurer, Citizens. This means that if an insurance company’s financial strength rating is downgraded below the ‘A’ level, the downgraded company could purchase coverage from Citizens to back it, similar to a co-signer backing a loan. Reinsurance through Citizens would allow the downgraded insurance company to meet Fannie Mae and Freddie Mac’s requirements. This is important because it would prevent policyholders from being required to find a new property insurer. However, a reinsurance solution further strains Citizens, which is already taking on substantial risk by insuring more policyholders in the state as other insurance companies exit Florida.
Florida seeks to replace Demotech
On September 9, the Florida legislature approved a $1.5 million plan to search for a financial strength rating company to replace Demotech. The state will hire a consultant to seek out alternatives that may include finding another company or creating a state-backed financial strength rating agency. Petrelli released a statement in response:
“Since 1996 in Florida, Demotech has provided neutral, unbiased ratings to property insurers, among the approximately 50,000 such ratings we have produced across the country. Our review and analysis process has remained consistent throughout this time. Currently, at least four rating organizations acceptable to the government-sponsored mortgage enterprises operate in Florida and countrywide, and a research effort on rating alternatives could be accomplished at no cost to the taxpayers by reviewing existing Freddie Mac and Fannie Mae sellers or servicer guides. Today’s action is an unnecessary response to a problem that does not exist. The reality is that when Hurricane Andrew devastated the state nearly 30 years ago, the rating agencies involved in Florida chose to step away — but Demotech stepped up.”
It remains to be seen if finding another ratings agency will produce meaningful results toward correcting the Florida home insurance crisis. These major changes to insurance laws came into play after Florida’s decision to replace Demotech. However, the president of Demotech applauds these changes calling them “an impressive series of meaningful reforms.” As always, Bankrate continues to monitor the situation.