FOCUS ON FLORIDA Citizens Enacts Lobbyist Policy Are Florida Flood Writers Prepared? Survey: Hurricane Season Readiness
Contents
July 16, 2018 • Vol. 96 No. 14 • Focus on Florida
Florida 4 How Florida’s Insurance Industry Hopes to Rein in the AOB Crisis 6 CFO Estimates Savings of $20M for Florida Workers’ Comp Carriers in 2019 7 Citizens to Implement New Lobbyist Registration System Aug. 1 8 How Prepared is Florida’s Flood Insurance Industry? 10 Floridians Still Not Adequately Prepared for Hurricane Season
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HOW FLORIDA’S INSURANCE INDUSTRY HOPES TO REIN IN THE AOB CRISIS
Departments 11 Florida Fraud Round-Up • Florida Makes 3 Arrests in ‘Operation Rent-to-Burn’ Arson Crime Ring • Florida Man Gets 20 Years for Arson Scheme
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CITIZENS TO IMPLEMENT NEW LOBBYIST REGISTRATION SYSTEM AUG. 1
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OPINION: HOW PREPARED IS FLORIDA’S FLOOD INSURANCE INDUSTRY?
16 DECIPHERING ‘GOOD FAITH’ FOR INSURERS DEFENDING COBLENTZ 14 SURVEY: FLORIDIANS STILL NOT ADEQUATELY
AGREEMENTS IN FLORIDA PREPARED FOR HURRICANE SEASON
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Florida
How Florida’s Insurance Industry Hopes to Rein In the AOB Crisis By Amy O’Connor “
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think the number one thing the insurance industry can do is link AOB (assignment of benefits) to the impact that it’s having on the individual consumer and the huge impact it’s having on the premiums that the consumer’s paying,” Barry Gilway, president, CEO and executive director of Citizens Property Insurance Corp. told attendees in a recent Insurance Journal webinar on Florida AOB abuse. Education, education, education, Gilway said, will be critical to slowing the Florida AOB epidemic that is leading to higher insurance rates, reduced coverage and a potential Florida insurance market crisis. Gilway was one of a panel of four experts participating in the “Florida AOB Crisis: Where Does the Industry Go from Here?” webinar conducted by Insurance Journal on June 26. Logan McFaddin, regional representative for the Property Casualty Insurers Association (PCI), Paul Huszar, CEO of
remediation contracting company VetCor, and Patrick Wraight, director of the Insurance Journal Academy of Insurance, joined Gilway in discussing the AOB situation in Florida and ways to rein in what they all agreed is runaway abuse. The AOB problem in Florida stems from unlicensed water remediation and roofing contractors who have homeowners sign over their insurance policy rights in exchange for needed repairs to their homes. The contractors, typically working with an attorney, file inflated or fake claims, and then pursue lawsuits against insurers when those claims are disputed or denied. Because of Florida’s one-way attorney fee statute, insurers are left footing the bill for the claims and the attorney fees if the insurer is found to have underpaid the claim by any amount. Carriers across the state have seen an increase in litigation because of these inflated claims. According to the Florida Department of Financial Services, there were 405 AOB lawsuits across all 67 Florida
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counties in 2006, and by 2016, that number had risen to 28,200. But Citizens, the state-run insurer of last resort, has borne the brunt of the abuse. It reported in its 2019 rate hearing in June that it would spend $70 million this year defending AOB-related litigation – equal to 17 percent of its total premium. The problem has been the worst in the Tri-County region of South Florida for several years, but is now happening statewide. “Ultimately, these inflated and often fake claims and their corresponding lawsuits drive up the costs of home and auto insurance for consumers,” McFaddin said. The insurance industry has taken various measures to respond to the increased litigation, including instituting policy language changes and pulling back capacity in the areas where the abuse has been the worst, but its biggest defense has been and will continue to be to raise rates. “For the first time in my history – and I’ve been in the business 48 years – I’ve actually seen the Office of Insurance INSURANCEJOURNAL.COM
Regulation ask carriers to increase rates higher than they originally estimated. That happened three times last year,” Gilway said during the webinar. “And the reason is they have to protect the financial security of the insurance companies because this is getting so completely out of hand.” Citizens expects to file rate increases in 60 out of 67 Florida counties for 2019 thanks to AOB abuse. “The bottom line is it’s having an impact on everyone’s rates,” Gilway said.
Education, Education, Education
With little movement toward change from the Florida Legislature, educating consumers is now key to stemming the AOB problem, McFaddin said. “That consumer awareness is really critical in preventing AOB abuse from happening in the future and to control these costs,” she said. “Our policyholders need to understand that when they sign on the dotted line of an AOB contract, they’re relinquishing their rights under their policy to a third party.” Citizens has taken a multi-faceted approach to combat abuse, including its educational “Call Citizens First” campaign to encourage policyholders to contact their agent or the insurer directly after a loss. It will also launch a new managed repair program Aug. 1 that incentivizes insureds to use Citizens-approved contractors. Gilway said thanks to policy language changes that it implemented about two years ago, AOB lawsuits in 2017 dropped to 7,600 from 10,000 the year before. Many Florida insurers are copying some of the changes Citizens has made. But panelists agreed the insurance industry needs to do a better job of getting the message out to consumers about what an AOB is and why they should avoid signing one. Huszar said there is no reason contractors need to use an AOB – his company will use a “direction to pay” agreement instead so they can be paid directly by the insurance company. “It’s that simple, but I don’t think any-
body’s made that compelling argument to counter the people who are trying to make it seem like you can’t do business without an AOB,” he said.
Unfortunately, Huszar said, consumers will not understand the severity of what is happening until their rates start going up.
continued on page 6
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FOCUS ON FLORIDA
| News & Markets
CFO Estimates Savings of $20M for Florida Workers’ Comp Carriers in 2019
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ost savings in two Florida funds paid into by workers’ compensation carriers are expected to equal a nearly $20 million reduction in expenses for insurers operating in the state next year, according to a statement from the Florida Department of Financial Services. The cost reductions are a direct result of the sound financial management of the Workers’ Compensation Administration Trust Fund (WCATF) and the Special Disability Trust Fund (SDTF), two funds that workers’ compensation carriers contribute to, DFS said. Florida Chief Financial Officer (CFO) Jimmy Patronis said the reductions in costs for insurers are expected to translate into savings for Florida businesses in 2019. “Reducing the cost of doing business for workers’ compensation carriers by $20 million means additional savings could
be passed on to Florida businesses, easing financial burdens,” Patronis said. Legislative changes in 1997 resulted in the SDTF being prospectively abolished and statutorily prohibited from accepting any new claims for dates of accident after Dec. 31, 1997. However, in accordance with Florida law, insurers and individual self-insured employers continue to be assessed to fund a small number of older claims. Further, fiscally responsible management of the WCATF has allowed for assessment rates to be reduced. The 2019 assessment rate reduction will be the seventh reduction for the WCATF, and the ninth for the SDTF. DFS said other factors that contribute to a healthy Workers’ Compensation Administration Trust Fund (WCATF) that enable the CFO to reduce the assessment
rate, include but are not limited to: • Division of Worker’s Compensation, Bureau of Compliance enforcement actions; • Increase of exemption applications processed due to a healthy economy; • Other regulatory fines, fees and infrequent wind-falls for the WCATF; • Decrease in COLA payments to seriously injured claimants.
better than the other side of the aisle at educating people.”
ly, so therefore I can’t do business without an AOB,’” he said. “That simply is not true, but we’ve got to do a more effective and efficient job of communicating that.” Gilway said the Florida House did pass a version of AOB reform that was never heard by the Senate in the last legislative session. With new Senate leadership coming in, he is hopeful the industry can get out its message on the long-term impact for consumers if nothing is done. “Again, it all comes down to communication and making sure these legislators and consumers understand the extent of the problem,” he said.
These expected costs reductions come on the heels of the Florida Office of Insurance Regulation approving a 1.8 percent decrease in workers’ comp rates, effective June 1, 2018. The decrease, filed by the National Council on Compensation Insurance (NCCI), was attributed to a change in the profit and contingency factor thanks to the recently-passed Tax Cuts and Jobs act. DFS estimated the change could equal a $79.5 million savings for Florida businesses.
continued from page 5 “Once people start feeling it in their pocketbook and see rate increases, then the industry needs to explain why,” he said. Wraight said agents have a vital role to play and opportunity to educate insureds. “We live in a time when an agent can get a hold of their insureds by text message, by e-mail, by phone,” he said. “Without being obtrusive and without putting out a whole lot of work, an agent can provide continual drips of information to their insureds.” Including, Wraight added, warning them about contractors who want them to sign an AOB document and giving insureds info on who to call if they have a claim. “An agent can be very proactive in helping their insureds to understand that, number one, the insurance company is not their enemy. They are there to help them get back on their feet after the worst thing that could happen, happens,” he said. “Agents need to be as good if not
Hope for a Legislative Fix
Gilway said education of the seriousness of AOB abuse needs to extend to the Florida Legislature. “It’s really important that we do a much, much better job educating the population that this is having a bottom-line impact on their rates, their premiums. And in order to do something about it, we really have to do a better job of educating the legislature because we’re not getting the traction that we need there,” Gilway said. Huszar said from an outsider’s perspective, the trial bar and unscrupulous contractors have been more organized and convincing to lawmakers that the insurance industry is the enemy. “The story that’s being told to the legislators…is one that says, ‘Oh, the big, bad insurance companies don’t pay us prompt-
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Video Resource To hear the entire webinar or share with a colleague, please visit: IJMAG.COM/716HF
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FOCUS ON FLORIDA
Citizens to Implement New Lobbyist Registration System Aug. 1 By Amy O’Connor
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itizens Property Insurance Corp., the Florida state-run insurer of last resort, has enacted a new policy requiring lobbyists seeking to lobby the insurer to register via a new online registration system. The new corporate policy comes in response to a request by Florida Chief Financial Officer Jimmy Patronis, who sent a letter to Barry Gilway last month urging Citizens to update its internal Code of Ethics to include public documentation of entities that lobby the insurer. “Currently, lobbyists and private insurers are not statutorily required to disclose their efforts on behalf of clients and private interest they represent before Citizens Property Insurance Corporation,” Patronis wrote in his May 2 open letter to Gilway. Citing the need for transparency, Patronis said in the letter, “A public entity that provides insurance to more than 444,000 policyholders in Florida, and the potential financial impact that Citizens has for all Floridians’ insurance policies, should ensure all lobbying activities are conducted in the sunshine.” Patronis requested that Gilway attend the next meeting of the Florida Cabinet, which along with Patronis consists of Governor Rick Scott, Commissioner of Agriculture Adam Putnam and Attorney General Pam Bondi, to address the matter and the lack of a statutory requirement. Gilway instead presented the new policy and tracking system to cabinet members at the June 13 meeting, saying he was highly supportive of responding to Patronis’ request for the insurer to increase transparency. He told cabinet members the new online registration system would be up and running Aug. 1 and becomes effective as of Sept. 1. All current lobbyists will be notified of the new requirement INSURANCEJOURNAL.COM
and registration system. Lobbyist registrations will be made available to the public in a database housed on Citizens’ external website. Lobbyists will be required to register before communicating or contacting a Citizens employee or board of governors member, outside of a presentation on the record at a publicly noticed meeting. Citizens said employees and board members should refrain from responding to overtures by lobbyists attempting to lobby Citizens until their registration is complete. Lobbyist registration must include the following information provided under oath: • Name and business address of the lobbyist; • Name and business address of each principal represented; • Statement signed by each principal or principal’s representative stating that the lobbyist is authorized to represent the principal; • The main business of each principal; • The existence of any direct or indirect
business association, partnership, or financial relationship with any board member or employee of Citizens and the lobbyist. The policy will apply to all Citizens employees, not just those in senior management, but attorneys, agent adjusters or anyone actively representing a client with respect to an insurance claim are excluding from being required to register, Gilway said. “I am happy to be supportive [of the CFO’s request] and proud of our team for being so aggressive in getting a system up and running and available for lobbyists as quickly as they did,” he said. Patronis praised the Citizens team for implementing the system and for getting it done “ahead of schedule.” “Requiring those who lobby Citizens Property Insurance Corporation to disclose what they are doing just makes good sense. I applaud Barry Gilway, the entire Board and staff for developing a policy that puts transparency at the forefront,” Patronis said in a statement.
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FOCUS ON FLORIDA
| News & Markets
Opinion: How Prepared Is Florida’s Flood Insurance Industry?
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By Jason Wolf
he clock is ticking: The National Flood Insurance Program expires on July 31, 2018; so what happens next? It is well documented that the NFIP is broken and has been in disarray for a long time. The NFIP’s primary deficiency is that it collects less money in premiums than it pays in claims. In other words, a government program that acts as the equivalent of an insurance company is losing money. In fact, reports show that the NFIP has managed to accrue approximately $24 billion in debt. Naturally, private insurance companies
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in Florida — and throughout the country — have stepped in to offer coverage. Private flood insurance is an untapped market, which some have estimated can be worth tens of billions of dollars annually, so it is no surprise that private insurers are salivating over the opportunity to add to their lines of business. After all, what’s better for a private company than stepping in where the government has proven unsuccessful? According to the Florida Office of Insurance Regulation, this year in Florida, 22 privately owned insurance companies are approved to write flood insurance INSURANCEJOURNAL.COM
policies, an increase from 10 at the end of 2016. There are actually 26 private companies involved in the flood insurance process, including excess carriers. Floridians have the ability to insure their homes or commercial properties through the NFIP. This all adds up to a dizzying and confusing system, which has not yet been tested as far as its ability to withstand a catastrophe. While other areas were hit hard by flooding, such as Houston during Hurricane Harvey last year, Florida is still waiting for a massive flood event. There is no doubt that the companies approved to write flood coverage have solid reserves on hand, because nearly all the insurers offering flood coverage are the same carriers that offer homeowners, dwelling and commercial coverage, and they have gone through a rigorous screening process via the Florida Office of Insurance Regulation. Having said that, one question that the major Florida private flood insurers may need to grapple with is whether they have fully adequate models about risk and pricing. Keep in mind that a generation ago, private companies refused to offer flood insurance policies because at the most rudimentary level, flooding is unpredictable. That initial refusal to expose themselves to flood risks was the reason the NFIP began in 1968. Technology and sophisticated modeling now give us a more precise understanding of risks, which allows carriers to set actuarily stable rates, acquire reinsurance and satisfy stakeholders. Unfortunately, here in Florida, these models have not been tested by the real world. After all, Mother Nature does not have to respect analytics and modeling data! In other words, when — not if — a major flood event occurs in Florida and policyholders start filing claims by the boatload, it remains to be seen whether carriers took in enough premiums to pay out all the losses. Insurance companies have reinsurance for this contingency, but after the first massive flood event is taken care of, what happens next if the models are proven not to be fully accurate? INSURANCEJOURNAL.COM
Flood Lawsuits
Another significant concern that Florida insurance companies have yet to address is the tide of frivolous lawsuits that will undoubtedly ensue when a flood event occurs. Private insurers already get sued for alleged underpayment of flood claims, but these lawsuits are in federal court and are predicated on a breach of the provisions in the NFIP’s policy. Private insurers are party to the lawsuits because they write and service what is known as a standard flood insurance policy. This private paradigm is part of the NFIP. But when private companies are issuing their own policies unrelated or unattached to the NFIP there is a key difference that is nearly certain to cause the current trickle of lawsuits to grow. Federal lawsuits based on the NFIP do not allow plaintiff’s lawyers to recover statutory attorney’s fees. Courts have been very clear on this issue, which means that plaintiff’s attorneys need to take these cases on contingencies or an hourly basis. Also, public adjusters and attorneys cannot be named on settlement or judgment checks in these lawsuits, which further decreases the appetite of PAs and lawyers to take on these suits. Lawsuits brought in state court, which only allege breaches of a private insurance company’s policy, on the other hand, can provide an award of attor-
ney’s fees for the plaintiff’s lawyer. History teaches us that any time a law allows attorneys to earn fees by prevailing, lawsuits increase. Not long ago, insurance companies were caught unprepared when assignment of benefits (AOB) lawsuits emerged. Crafty public adjusters and plaintiff’s lawyers took advantage of certain nuances in Florida law to dramatically increase the number of claims and lawsuits, costing insurance companies a ton of money to stave off the frivolous ones. Many lawsuits were brought because nobody had to pay the lawyers to sue. Instead, they got paid by insurance companies. Now, nearly a decade after the AOB crisis fully emerged, courts continue to allow AOB lawsuits to flow unabated and the Florida Legislature still refuses to place any meaningful limits on lawsuits. Will the same problems bedevil insurers when public adjusters start adjusting flood insurance claims in state courts? That remains to be seen. Ultimately, the future of flood insurance in Florida is a question mark. Jason B. Wolf is managing partner of Koch Parafinczuk Wolf Susen, P.A., where he chairs the firm’s property insurance group, which handles all manner of property insurance suits and claims, including flood insurance. He can be reached at: wolf@kpwlaw. com.
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FOCUS ON FLORIDA
| News & Markets
Survey: Floridians Still Not Adequately Prepared For Hurricane Season
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ust six months after the punishing 2017 season battered the Sunshine State, most Floridians are still not prepared for the potential assault of another hurricane season, according to a survey by the FAIR Foundation. The recently released survey, conducted just days after Subtropical Storm Alberto hit on Memorial Day weekend, found that more than three-quarters of Floridians expressed concern about potential hurricanes this year — yet only half have reviewed their home insurance policies to be sure they’re covered. The survey was conducted June 1 through June 4 using responses from a random sample of registered Florida voters through the Florida Voter File. The survey of 1,000 Floridians found that 76 percent feel very or somewhat concerned about the new hurricane season. Only 5 percent said they are not at all concerned. Among Florida voters who own their homes, 50 percent have reviewed their homeowners insurance policy since last hurricane season and about 21 percent had updated it. Thirty percent of respondents said they had done neither. “Hurricanes Irma and Maria last year should have been enough to convince every Floridian of the vital importance of preparing for the worst — but it doesn’t seem that’s really happened,” said FAIR Foundation Executive Director Guy McClurkan. “The 2018 hurricane season is already off to a fast start, so it’s crucial that everyone review their family’s safety and evacuation plans, check their insurance coverage and consider purchasing separate flood insurance, since floods aren’t covered by a typical homeowners policy.” The most recent survey also found that Floridians are more focused on their safe-
ty and comfort at home following a significant storm event, further emphasizing the need for home hardening and other preparations. Asked which conveniences they would choose to have in the four days following a hurricane, most chose a refrigerator (74 percent) over a fully charged cell phone (26 percent) and air conditioning (77 percent) over a fully charged cell phone (23 percent). An even larger majority — 83 percent — would prefer internet access rather than cable television access (17 percent). That sentiment was echoed through all age groups, from 92 percent among millennials to 88 percent among those ages 35 to 54 and 74 percent among those ages 55 and older. The FAIR Foundation said it urges Florida residents to prepare well in advance for the unknown. The Floridabased organization said a separate survey it commissioned in December for the National Hurricane Survival Initiative
“Even though hurricane season has already begun, it’s not too late to get ready and get yourself, your family, and your home protected”
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found that 64 percent of those who attempted to purchase flood insurance as Hurricane Irma headed for Florida were unable to do so. “You simply can’t wait until the last minute as the storm approaches — not to prepare your home, and not to secure flood insurance to cover losses your regular homeowners policy won’t,” McClurkan said. “Even though hurricane season has already begun, it’s not too late to get ready and get yourself, your family, and your home protected.” FAIR Foundation has launched Get Ready, Florida! — an ongoing statewide initiative to spur awareness, involvement, and action by Floridians targeting hurricane-safety. The campaign features hurricane safety checklists and a television special with information for Floridians. The FAIR Foundation, an affiliate of the Florida Association for Insurance Reform (FAIR), is a 501(c)3 non-profit organization educates consumers on the risks of water, wind and other natural disasters, promoting wind and flood mitigation and reducing uninsured risk. INSURANCEJOURNAL.COM
Fraud Round-up | FOCUS ON FLORIDA
Florida Makes 3 Arrests in ‘Operation Rent-to-Burn’ Arson Crime Ring
Three additional people were arrested in May for their various roles in an arson-forprofit scheme that took place over seven years in three Florida counties, according to a statement from Chief Financial Officer (CFO) and State Fire Marshal Jimmy Patronis. Yamina Grafal, Walther Avila Lainez and Gennie Avila Lainez were arrested following a joint investigation conducted by the Miami-Dade Police Department’s Economic Crimes Bureau Arson Squad and CFO Patronis’ Bureau of Fire and Arson Investigations. Members of the crime ring allegedly played various roles when conducting an arson-for-profit scheme, fraudulently collecting at least $187,000 in insurance payouts by setting seven residential structures on fire between 2009-2016 in Miami-Dade, Lee and Collier County. The investigation was initiated after authorities received information from Citizens Property Insurance Corp. regarding falsified receipts in support of an insurance claim for a fire loss. This investigation revealed that multiple individuals had conspired to rent residential properties, and after obtaining renter’s insurance, intentionally set the homes on fire for economic gain. The fires were set in a way that responding fire departments did not suspect criminal activity, the statement said. The investigation revealed the following locations were intentionally set on fire: • Oct. 11, 2009 - Residential fire at 2161 41 INSURANCEJOURNAL.COM
Street SW, Naples • Feb. 16, 2010 Residential fire at 3116 NE 7th Place, Cape Coral • June 28, 2012 Residential fire at 3415 SW 13th Terrace, Miami • Oct. 31, 2014 Residential fire at 901 NW 50th Street, Miami • Dec. 28, 2014 Residential fire at 674 Pine Cone Lane, Naples • April 4, 2015 Residential fire at 5621 NW 10th Avenue, Miami • Dec. 13, 2016 - Planned residential fire at 1850 NW 112th Terrace, Miami. The following have been arrested in connection with the crime spree: • Gennie Avila Lainez – arrested May 17, 2018: Racketeering/Rico, Racketeer/ Conspire To, Insurance Claims/False, Arson 1st Degree • Walther Avila Lainez – arrested in Tennessee May 17, 2018: Racketeering/ Rico, Racketeer/Conspire To, (3) Insurance Claims/False, Arson 1st Degree, Grand Theft 1st Degree, Grand Theft 2nd Degree • Yamina Grafal – arrested May 18, 2018: Racketeering/Rico, Racketeer/ Conspire To, (2) Insurance Claims/False/ Fraudulent • Vicente Olana – arrested July 8, 2016: Grand Theft 1st Degree, (2) Insurance Claims/False, Arson 1st Degree, Grand Theft 2nd Degree • Kenia Martinez-Rosales – arrested Dec. 15, 2016: Insurance Claims/False/ Fraudulent • Luis Rosales – arrested Sept. 30, 2015: Grand Theft
Florida Man Gets 20 Years for Arson Scheme
A Florida man was sentenced to 20 years in prison for his role in an arson insurance fraud scheme that spanned multiple Florida counties and was ordered to pay $1.9 million towards restitution to the
more than 14 carriers affected, according to a statement from the Miami-Dade State Attorney Katherine Fernandez Rundle’s office. Jorge Fausto Espinosa Sr., owner of the public adjuster company Nationwide Adjusters LLC, pled guilty to racketeering, racketeering conspiracy, organized scheme to defraud, and more than 28 counts of arson as well as multiple counts of insurance fraud and grand theft. He was sentenced by Judge Mark Blumstein to 20 years in state prison in addition to paying $1.9 million towards restitution. Fausto Espinosa Sr. was one of many defendants originally charged in a series of collaborative investigations by the MiamiDade State Attorney’s Office, State Fire Marshal Jimmy Patronis’ Bureau of Fire and Arson Investigations, and the MiamiDade Police Department called Operation Flames and Flood I and Operation Flames and Flood II. The investigations found that Espinosa intentionally set multiple homes on fire as well as caused water damage to other homes with the sole purpose of filing false and fraudulent insurance claims. The homeowners were recruited by Espinosa as part of his “Arson for Hire Scheme” involving homes in Miami-Dade, Lee and Collier County. More than 14 insurance carriers, including Citizens, Tower Hill and United Property and Casualty, were impacted by the 50-plus false claims that cost insurers and policyholders more than $14 million in losses. Representatives from the various defrauded insurance visited the state attorney’s office in Miami on May 29 to thank law enforcement and prosecutors for their work to bring down Espinosa’s fraudulent schemes and attend a ceremonial check presentation. “Insurance policyholders were Espinosa’s real victims. Insurance fraud has never been a victimless crime since each policy holder pays the scammers via increased insurance premiums. Getting this restitution hits these criminals in a very sensitive spot, their wallet,” Fernandez Rundle said.
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