Florida has had no major hurricanes in more than a decade. Matthew came close recently as a category 4 but the worst winds and the eye of the storm remained offshore. So what are homeowner writers doing with all of the surplus growth they’ve experienced over that period? Wait, there hasn’t been meaningful surplus growth? How can that be?
The last major hurricane to make landfall in Florida was Wilma on October 24, 2005. If Florida homeowner writers on average reserve about 20 cents of every premium dollar collected for future hurricanes one would expect that they’ve experienced a nice windfall over that period. For some insurers this is not the case. The saving is being offset by a catastrophe provision in Florida law that has the potential to hit insurers every month of every year called Assignment of Benefits (AOB).
Assignment of Benefits (AOB) is a post claim legal transfer of the rights under an insurance policy from the policyholder to a remediation company. AOB losses often involve water damage but can also involve roof claims. An insured who suffers a water related loss from a leaking pipe or overflowing sink or toilet calls a plumber to fix the leak and then calls a water remediation company to help mitigate the loss and do any necessary repairs. The remediation company jumps into action by quickly removing carpeting, flooring, baseboards, running fans around the clock etc. The remediation company also alleviates the need for the insured to submit an insurance claim. The insured is happy to sign an AOB so that the remediation company will work directly with the insurance company to get reimbursed. What the insured doesn't realize is that in some cases, the remediation company is doing unnecessary, excessive repairs in order to artificially boost the insurance claim. The insured also doesn't know that the remediation company has the legal right to sue the insurance company if it feels it hasn't been paid in a fair and timely manner. Assignment of Benefits often result in claims that are multiples of what they should be. The remediation companies also know that insurance companies will likely settle most claim disputes in order to avoid expensive legal fees and bad faith claims.
The 20 cents per dollar saved by Florida insurance companies in non-hurricane years may not be enough to pay for AOB claims. Last year Citizens announced that for every dollar in premium it was collecting in Florida it was paying about 30 cents in water damage claims. In Miami-Dade County alone, Citizens paid out 51 cents of every dollar on water claims. Citizens reports that water related claims have increased 45% in the past 5 years, due to rising severity and frequency.
What to do?
Post claim Assignment of Benefits is legal in Florida and many other states. The Florida AOB provisions may only be changed if legislation is passed to amend the law. Efforts to amend the law over the past few years have been unsuccessful, but the insurance industry is likely to pursue legislation again in 2017. Citizens has obtained approval from the State Insurance Department to add policy language that limits the extent to which emergency work can be done on someone's home without the company’s knowledge. The language also requires 72 hours notice to Citizens before non-emergency work is done. This gives Citizens ample time to inspect the premises and grant approval for any work planned. This language took effect on July 1, 2016 and it’s not yet known to what extent it will reduce the insurer’s exposure. Private insurers may take a similar approach.
In combination with the steps taken by Citizens via policy language, companies can further mitigate the exposure to AOB losses by conducting thorough investigations. An insurer who documents its file with the appropriate scope of damages, photographs and estimates can justify its position in arbitration or in court. Insurers should also put their best adjusters on these claims. They can also offer premium discounts if policyholders agree in advance to use only preferred remediation vendors.
Issues related to AOB have been largely limited to Florida but could spread to other states that don't prohibit the use of post claim assignments. Ultimately, the consumer will pay for this heightened exposure in the form of rate increases if fraudulent use of AOB is not in some mitigated in some manner.
Category: Climate/natural disasters: Disaster risk, Other