More than ten years have passed since Florida’s last hurricane, but inflated water damage claims have been pouring in at such high rates that one Florida insurer has finally said, “Enough is enough.”
After months of advancing the need for change, Citizens Property Insurance Corporation scored a big win recently that just might be an effective way to avoid increasing the backlog of litigation that’s been brimming with fraudulent third-party claims for “emergency repair” services. The problem stems from Assignment of Benefits (AOB) lawsuits, which have proliferated to the point where they have caused insurance rates to surge. The issue made headlines last summer when Citizens, a state-run insurer, requested a rate increase of 3.2 percent for all personal lines policyholders, citing the AOB misuse as a significant cost-driver in its 2016 rate filing.
According to recent data published by Citizens, AOB abuse has become increasingly rampant across the state since 2013, and it is most frequently connected with a claim involving water damage repair. An AOB arrangement typically works like this: A homeowner has water loss damage (caused by any number of issues, ranging from a pipe leak to an overflowed sink), which causes water damage within the home. The homeowner then calls a water remediation company to fix the problem and repair the damage. Before performing any work, the contractor presents the homeowner with an “Assignment of Benefits” agreement, in which the homeowner agrees to transfer their right to recover insurance proceeds for the repair to the contractor.
The practice has been criticized because contractors frequently send inflated invoices to the insurer after the work has been complete with no verification of the necessity or quality of the work they claim to have done. Lawsuits arise when the contractor’s claim is denied, because the losses claimed are frequently not covered by the homeowner’s insurance policy. The contractor then embarks on a voyage through the murky channels of property insurance litigation, using the “Assignment of Benefits” agreement as its life raft.
Insurance companies have a difficult time defending these lawsuits because the courts have held that AOB agreements are valid—even when the insurance policy forbids assignment for benefits accrued after the insured’s loss. Courts have pointed out that it is a question of public policy, rather than legal principle, as to whether Assignment of Benefits should be restricted under these circumstances. The Legislature, on the other hand, has been slow to respond to the problem.
For the last three Legislative Sessions, efforts to change the law were unsuccessful. This Session, Senator Dorothy Hukill (R-Port Orange) filed Senate Bill 596, which essentially provided that an assignment agreement that enforced post-loss benefits in a property insurance policy would be considered void. The bill also provided that a final invoice issued under an assignment agreement would not be enforceable if the invoice requested reimbursement for an amount that was not authorized by the insurer. The bill passed one Senate Committee in 2016, but stalled when it reached its second stop because the Chairman had concerns about the bill that were not resolved in time.
The lack of progress has left insurers with basically two choices: they could be patient and wait for the Florida Legislature to perform some “repair services” of its own in the future, or they could use regulatory measures to redirect the path of the litigation flood altogether.
Facing the prospect of wading through one more inflated claim after another while the Legislature is adjourned for almost a full year, Citizens pursued the more proactive course by drafting policy changes aimed at reducing fraudulent third-party claims and sending it to the Florida Office of Insurance Regulation (OIR) for approval. The efforts by Citizens followed the OIR’s recent data analysis that revealed a 46% increase in water loss claims over the last five years—and a 10% increase in assignment of benefits agreements associated with those claims. In light of the OIR’s shared concerns, it came as no surprise when the agency placed an emphatic stamp of approval on Citizens’ policy changes last week.
While the decision is exclusive to Citizens policies, it provides a glimmer of hope that the problem it remedies has gained enough widespread awareness to effectively drain policymakers of their tolerance for it. Until then, frivolous water damage claims will continue to rise—and so will insurance premiums.
The OIR-approved changes provide that for Citizens policyholders:
- Emergency remedial measures will only include what is reasonable and necessary to secure the home and prevent further damage; and
- The cost of repair may not exceed the greater of $3,000 or 1 percent of the policy limits, unless Citizens approves additional measures.
- To ensure that Citizens has the opportunity to inspect the damage and confirm coverage before the work is done by a contractor, the revised policy also gives Citizens the ability to deny coverage for permanent repairs where Citizens was not notified of the loss before repairs were made.
The changes will take effect on July 1, 2016.