By Matthew Scarfone, Esq., Triple-I blog contributor and Colodny Fass shareholder
Florida presents property insurers with a unique set of factors that affect the availability and affordability of insurance coverage. The state has the third-largest population in the United States while also experiencing an above-average volume of natural disasters. It’s fair to say that operating a residential insurance company in the Sunshine State is not for the faint of heart.
What’s behind the growing catastrophe in Florida’s legal system?
But as damaging as hurricanes can be, there is one man-made disaster that has contributed significantly to destabilizing the market to worrying levels: abuse of the legal system. In practice, some people are misusing the tools of the justice system to manipulate outcomes for windfall gains. Insurance companies have paid a heavy price in recent years due to the rise in one-way attorney fee abuse, bad faith claims, and other untenable litigation trends.
The exploitation of one-way attorney fees and bad faith law has been especially prevalent. Until recently, if an insurer or a third party sued an insurer and obtained monetary compensation, the insurer was entitled to recover all attorneys’ fees incurred in the litigation. This practice may have given people an incentive to dispute insurance claims, regardless of whether they were justified.
The problem was further compounded by the abuse of allocation of benefits (AOB) agreements, which created an opportunity for contractors to inflate costs. As a result, a modest homeowners insurance claim could result in multiple lawsuits by different assignees, each filing a separate claim for attorneys’ fees. The manipulation of this loophole encouraged excessive claims and unreasonable demands, forcing insurers to choose between paying the inflated bill or risking a lengthy trial where attorneys’ fees alone could exceed the claim amount. On top of that, courts have had wide discretion to apply fee multipliers and can award between 1.5 and 3 times reasonable attorneys’ fees.
Cases involving allegations of bad faith further compound an insurer’s exposure because these cases can be expensive to defend and involve intrusive discovery, amorphous damages, and unpredictable juries. Bad faith cases are not mature (ie, ready to potentially warrant judicial intervention) until there is a final determination regarding coverage and amount of damage. Thus, insurers regularly face the prospect of defending a bad faith case even after the underlying dispute is resolved.
Florida courts did not help the matter by ruling that appraisal awards, tools designed to help resolve disputes, could set the stage for actions in bad faith. In other words, after settling a claim through appraisal, insurers may still be left to defend a bad faith claim. Some attorneys used this case law as a guide to expedite claims into bad faith litigation by misusing the appraisal process.
The problem looks even worse when you quantify it. According to the Florida Office of Insurance Regulation (OIR), as of 2020, even though Florida only accounts for 9% of all homeowners insurance claims in the country, it accounted for 79% of all litigation. of homeowners insurance nationwide. Also, over the past decade, only 8% of the $51 billion paid out by insurers went to plaintiffs, but plaintiffs’ lawyers took home 71%. Meanwhile, eleven Florida property insurers have gone into liquidation since 2017, five of which occurred in the past year alone.
Lawmakers recognized the need for urgent action to help reduce the costs of insurance claims.
The Florida Legislature has responded to the growing crisis by passing several important insurance reforms, primarily addressing issues with AOBs, bad faith claims, and excessive rates. For example, the new laws eliminate one-way attorney fees in property insurance disputes, prohibit the use of appraisal awards to bring a claim in bad faith, and prohibit providers from taking AOBs under the new policies. Despite criticism from the plaintiffs bar, these reforms are not all “one-sided.” The recently passed legislation also ensures transparency and efficiency in the claims process and encourages a more efficient and less expensive alternative to litigation.
While it is too early to know exactly how the recent reforms will improve the state’s insurance market, there is hope that these measures will reduce the volume of homeowners insurance litigation and foster a more viable and stable residential insurance market that will allow for a increased consumer access to affordable coverage.
It may take time for these reforms to have a measurable impact on Florida’s homeowners insurance market. Still, both insurers and policyholders should be optimistic that the market is heading in a more sustainable direction.