By Matthew Scarfone, Esq., Triple-I blog contributor and shareholder at Colodny Fass
Florida presents property insurance companies with a unique set of factors that affect the availability and affordability of insurance coverage. The state has the third largest population in America while enduring a higher than average amount of natural disasters. It̵7;s fair to say that running a home insurance company in the Sunshine State is not for the faint of heart.
What’s Behind the Growing Disaster in Florida’s Justice System?
But as damaging as the hurricanes can be, there is one man-made disaster that has contributed significantly to destabilizing the market to the following levels: abuse of the legal system. In practice, some people abuse the tools of the legal system to manipulate outcomes and get unexpected outcomes. Insurance companies have paid a heavy price in recent years due to the increased abuse of one-way attorney fees, bad faith claims and other unsustainable legal trends.
Exploitation of one-way attorney fees and bad faith statutes has been particularly prevalent. Until recently, if a policyholder or third party sued an insurer and received any monetary settlement, they were entitled to recover all attorneys’ fees incurred in the dispute. This practice may have encouraged people to dispute insurance claims, regardless of whether they were justified.
The problem was further exacerbated by the abusive assignment of benefits (AOB) agreements, which created an opportunity for contractors to increase costs. As a result, a modest homeowner’s insurance claim can lead to multiple lawsuits by different owners, each asserting a separate claim for attorney’s fees. Manipulating this loophole encouraged excessive claims and unreasonable demands, forcing insurers to choose between paying the exorbitant bill or risking a lengthy lawsuit where attorneys’ fees alone could exceed the amount of the claim. Beyond that, courts have had wide discretion to apply fee multipliers and can award 1.5-3 times the reasonable attorney’s fee.
Cases involving allegations of bad faith further exacerbate an insurer’s exposure because these cases can be costly to defend and involve intrusive discovery, amorphous damages and unpredictable juries. Bad faith cases are not ripe (ie, ready to potentially warrant legal intervention) until there has been a final determination of coverage and damages. Therefore, insurers regularly face the possibility of defending a bad faith case even after resolving the underlying dispute.
Florida courts did not help matters by holding that adjudication awards—tools designed to help resolve disputes—could lay the procedural foundation for bad faith actions. In other words, after resolving a claim through adjudication, insurers may still be left to defend a bad faith lawsuit. Some lawyers used this case law as a handbook to speed up claims in bad faith litigation by abusing the adjudication process.
The problem looks even worse when you quantify it. According to the Florida Office of Insurance Regulation (OIR), as of 2020, despite accounting for only 9% of all homeowner’s insurance claims in the nation, Florida accounted for 79% of all homeowner’s insurance litigation in the nation. Moreover, over the past decade, only 8% of the $51 billion paid out by insurance companies went to plaintiffs, but plaintiffs’ lawyers took home 71%. Meanwhile, eleven property insurance companies in Florida have gone into liquidation since 2017 — five of which occurred last year alone.
Lawmakers recognized the need for urgent action to help reduce the cost of insurance claims.
The Florida Legislature has responded to the growing crisis by passing several pieces of significant insurance reform, primarily addressing the problems of AOB, bad faith claims and excessive premiums. For example, the new laws eliminate one-way attorney fees in property insurance litigation, prohibit the use of appraisal awards to file a bad faith lawsuit, and prohibit providers from taking AOB under new policies. Despite criticism from the plaintiffs’ bar, these reforms are not all “one-sided.” 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 a sense of hope that these measures will reduce the volume of property insurance litigation and foster a more viable and stable home insurance market that allows greater access to consumers affordable coverage.
It may take time for these reforms to have a measurable effect on Florida’s property insurance market. Still, insurers and policyholders alike should be optimistic that the market is moving in a more sustainable direction.