Why should policyholders use an insurer’s contractor — or face a $10,000 cap? | Miami Herald

Earlier this year, the Florida Office of Insurance Regulation approved a rule change that is easily among the most anti-consumer and anti-business insurance measures in the country. The change, which mandates that Citizens Property Insurance policyholders use contractors that have been preapproved by the insurer or face an arbitrary $10,000 cap, has essentially codified a conflict of interest favoring the state-run insurer.

Unfortunately for the state’s commercial and residential property owners, if the past offers any guidance, now this practice will soon be approved and become the norm for all of Florida’s insurance carriers.

Beginning in February, Citizens will be able to force commercial and residential property policyholders who file claims for all non-weather water losses to use the company’s preapproved contractor or agree to limit their total payout to $10,000. This arbitrary figure is artificially low, as many claims involving water losses often cost much more to repair.

It is no surprise that Citizens and other insurance carriers would seek to impose such a measure in order to keep their claim payouts as low as possible. By forcing policyholders to use carrier-preferred contractors, insurers would be able to negotiate deeply discounted rates from their selected vendors, which will always be incentivized to acquiesce to the insurance companies in order to maintain their preferred status.

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Property owners with damages in excess of $10,000 will be unable to vet and select the contractor of their choice unless they are willing to pay the additional expenses. Those who have relationships with companies in the construction field will be unable to turn to their most trusted sources unless they agree to the $10,000 cap.

For the policyholders, the fact that the insurance company and the contractor’s goals for keeping costs as low as possible would be completely aligned will create a significant conflict of interest between them and the contractor. This naturally leads to issues involving shoddy work and construction, which could easily leave property owners with no other recourse but to resort to litigation.

Insurance companies have traditionally included an “option to repair” clause in their policies for commercial and residential properties to enable them to select and assign a contractor to conduct all of the necessary repairs in relation to a claim. However, the carriers that exercised their “option to repair” rights faced many lawsuits challenging the scope and quality of the work performed, as the contractors were beholden primarily to the insurers and not the policyholders.

In their zeal to gain control over repair contractors, the state’s property insurers will become willfully blind to the fact that this new rule will inevitably lead to more litigation. Contractors will cut corners in order to maintain their fruitful relationships with the insurers, and many policyholders will quickly turn to litigation immediately after it becomes evident that their interests and those of the contractor are not aligned. This will delay repairs for property owners, and the carriers will ultimately raise premiums to cover their increased litigation costs.

With the implementation of this new rule for Citizens that will certainly be duplicated by many, if not all, of the state’s private-sector carriers, Florida property insurers will reap significant financial benefits at the expense of their policyholders, who will continue to pay some of the highest property insurance rates in the country.

In response, the state’s lawmakers should enact legislation during next year’s session to ban caps for claims by policyholders who choose not to work with their insurer’s preferred contractor. The $10,000 damages cap will effectively green light the underpayment of water-loss claims in an effort to maximize insurers’ profits. Florida property owners should encourage their state senators and representatives to take legislative action against this onerous new insurance measure.