An Ohio insurance-rating company has warned that recent court rulings and skyrocketing losses from water-damage claims have created an “uncertain operating environment” for Florida’s property insurers and said that it will downgrade the financial stability of 10 to 15 Florida-based companies, potentially threatening the solvency of thousands of homeowner policies.
Demotech Inc., a company that rates the financial strength of 400 companies nationwide including 57 in Florida, said Tuesday that the company is likely to reduce the financial stability rating of the Florida-based companies from A to B — below the level needed for federally backed mortgages — beginning in March.
The decision could put the mortgages of thousands of homeowners in jeopardy because mortgages backed by Fannie Mae and Freddie Mac require property insurance to be A-rated or the policies could be in default.
“My concern is these companies will not be able to write insurance on federally backed mortgages — which is the vast majority of property bought and sold in Florida,” said Sen. Jeff Brandes, R-St. Petersburg, chairman of the Appropriations Subcommittee on Transportation, Tourism and Economic Development.
The driving factor behind the changing market conditions, Demotech said, is the widespread abuse of assignment of benefits, the practice in which policyholders who need repairs to their homes may assign their rights to seek reimbursement from the insurance companies to third-party contractors.
Under the practice that began in South Florida and is now used widely in the Orlando and Tampa markets, contractors persuade homeowners whose pipes or appliances have ruptured to assign over the benefits (AOB) and, working with attorneys, file lawsuits against the insurer if the claims are denied or payments are reduced.
Attorneys reap fees from the claims and contractors must get reimbursed by the insurance company, sometimes without the insurer even knowing about the claim until the work is done.
Brandes said that 20 percent to 30 percent of Florida’s market could be affected by the ratings downgrade, forcing some ZIP codes “to go from three to four insurers to one or two and lead to the repopulation of Citizens,” the state-run insurer of last resort.
“This slaps the Legislature across the face and wakes us up to the problem of assignment of benefits — which is bleeding money out of these companies,” Brandes said.
He said he recently received a solicitation hanging on the front door of his St. Petersburg home promising that he could “get a free roof for the cost of your deductible!”
The promotion said “we are repairing homes in your area due to recent storms” and provided a number for him to call.
The number of AOB lawsuits in Florida exploded from 405 in 2006 to 28,000 in 2016, according to Chief Financial Officer Jeff Atwater.
Citizens Property Insurance Corp., the state-run insurer of last resort that is the largest insurer in Florida, predicts that the cost of assignment of benefits has soared from $367 per Citizens multi-peril homeowner policy in 2011 to a projected $2,083 in 2017.
Demotech said that no companies are in danger of failing, but it is advising companies to make sure they are adequately capitalized to handle the uncertain operating environment.
“Insurance companies are doing all they can to ensure their financial stability, but as we have discussed in our publications and public statements, it is challenging to do so given the changes in Florida’s operating environment,” Demotech President Joseph Petrelli said on Tuesday.
Petrelli said that companies with less than $25 million in surplus capital are especially vulnerable because some of them “will not have the leeway to navigate their business models,” he told the Herald/Times.
“The smaller the surplus of a company, any company in any state, the less catastrophe risk they can take on and the more catastrophe reinsurance they must purchase.”
Buying smaller amounts of re-insurance can be expensive for smaller companies, he said, thereby weakening their financial stability even more.
Demotech has been warning for two years that unless the state halts the abuse of the assignment of benefits in a way that leads to fewer insurance losses, Florida-based companies that have helped rebuild the state’s property insurance market could be downgraded.
“The result would be the withdrawal or downgrade of dozens of carriers based upon a fundamental change in the operating environment of these insurers,” Petrelli wrote to the chairman of the Senate Judiciary Committee in 2015, former Sen. Miguel Diaz de la Portilla.
But in spite of the calls for reform, and a pushback from lawyers who earn attorneys fees from the claims, Florida lawmakers have refused to change the law.
“We need a full-court press against assignment of benefits,” Brandes said Tuesday. “It has metastasized and is starting to spread across the state like a pandemic.”
This story has been updated to say that the number of AOB lawsuits, not claims, has risen dramatically and that the source of that information is Florida CFO Jeff Atwater, not the Office of Insurance Regulation.