Capitol to Courthouse Florida Insurance Week In Review: March 22-26, 2010

Above:  State Representative Pat Patterson, right, confers with Florida House Speaker Larry Cretul in the Legislature.  Representative Patterson’s attempt to introduce a provision that would require insurance company owners to report their entire profits was voted down on March 25 by the House Insurance, Business and Financial Affairs Policy Committee (House photo by Meredith Geddings).

 

Following is a recap of insurance-related legislative and regulatory events during the week of March 22-26:

 

Amendment Adopted to Building Safety Bill Allows Home Inspectors To Sign, Verify Wind Mitigation Credit Inspection Form

CS/CS/HB 663, which would revise Florida laws relating to building safety, was amended on March 25 in the Florida House of Representatives General Government Policy Council with a strike-everything amendment by State Representative Gary Aubuchon.  The amendment added home inspectors to those persons who can sign and verify the Uniform Mitigation Verification Inspection Form (OIR-B1-1802) that insurers must accept as verification of windstorm mitigation credits.

As amended and passed by a vote of 12 to 1, the bill also would revise laws relating to home inspector and mold assessor licensure and regulation requirements as follows:

• Enforcement of home inspector and mold service licensure and regulation would be delayed until July 1, 2011.
• A requirement for businesses offering home inspections or mold services to attain a certificate of authorization would be removed.
• In relation to home inspector licensure, the bill requires applicants pass examination requirements and submit fingerprints for background checks conducted by the Florida Department of Law Enforcement. It also provides that failure to meet any standard of practice adopted by Rule constitutes grounds for disciplinary action.

 

MGA Regulation Amendment Language Filed To Florida Insurance Guaranty Association Bill

Language from an amendment filed on March 24 by Senator Mike Fasano to Senate Bill 2176 (relating to commercial deregulation by Senator Durell Peaden Jr.) was the basis for an amendment that was filed on March 25 by State Representative Pat Patterson to House Bill 159 relating to the Florida Insurance Guaranty Association. 

The amendment, which failed on a voice vote in the House Insurance, Business and Financial Affairs Policy Committee, would have provided that companies affiliated with a domestic insurer may not issue a dividend or distribute cash or other property to shareholders unless the dividend or distribution is from that part of the available and accumulated surplus funds derived from realized net operating profits on insurer business and net realized capital gains.

SB 2176 was not heard by the Senate Committee on Banking and Insurance on March 24, therefore the amendment was not heard, either.

 

Florida Senate Banking and Insurance Committee Passes Consumer Choice Bill Despite Governor’s Opposition; MGA Regulation Amendment Pre-Empted

Immediately after the Senate Committee on Banking and Insurance (“Committee”) meeting was called to order on March 24, Florida Governor Charlie Crist addressed the legislators and urged them not to pass Senate Bill 876, which is commonly known as the “consumer choice” property insurance bill.

In reference to SB 876, the Governor said, “I would encourage you not to pass it.  I just wanted to express my feelings. That’s it.”

Before SB 876 was debated, however, the following insurance-related bills were considered and acted upon during the meeting:

• Senate Bill 1364 relating to Life Insurance by Senator John Thrasher passed with limited discussion.
• Senate Bill 2046 relating to Insurance by Senator Garrett Richter amends laws relating to employee leasing companies. After being amended as a committee substitute, the bill was passed.
• Senate Bill 2190 relating to Residential Property Sales by Senator Thad Altman was passed. The bill, which has an identical House of Representatives companion, repeals a requirement that the results of windstorm inspections must be disclosed to home purchasers. The bill passed with minimal discussion.
• Senate Bill 2176 relating to Commercial Insurance Rates by Senator Durell Peaden Jr. was not considered because of time constraints. Senator Mike Fasano had been prepared to offer a late-filed amendment to SB 2176, however, neither it, nor the bill were considered because of Committee time constraints. Senator Fasano’s amendment would provide that companies affiliated with a domestic insurer may not issue a dividend or distribute cash or other property to shareholders unless the dividend or distribution is from that part of the available and accumulated surplus funds derived from realized net operating profits on insurer business and net realized capital gains.

SB 876

In explaining SB 876 to the Committee, Senator Bennett noted that his bill allows insurers to use rates different from those approved by the Florida Office of Insurance Regulation (“OIR”).

Two amendments had been filed to the bill.  The first, 247090, would cap related rate increases to five percent during the first year after SB 876 becomes law.  Rates during the subsequent year would be capped at 10 percent, and then at 15 percent during the third year and thereafter.

Senator Fasano expressed concern that the amendment does not cap rate increases, but rather, allows a statewide average increase.  Senator Ronda Storms echoed his concerns, however, the amendment was adopted. 

The second amendment, 445944, relating to the Citizens Property Insurance Corporate policyholder surcharge, was adopted without debate or discussion.

During public testimony, representatives from insurance agent associations spoke in support of SB 876.

Representatives from a statewide consumer advocate group spoke in opposition to the bill because of its potential to precipitate rate increases. 

Insurance company representatives spoke in support of the bill, arguing that it allows consumers the choice to remain with their own insurer. 

Senator Fasano continued to voice his opposition to SB 876, noting that even the mandate of sinkhole reforms has not been able to bring private insurers back to the Florida marketplace.

Senators Ring and Villalobos questioned how insurers could be unprofitable in a market that has not suffered any non-catastrophe losses.  Senator J.D. Alexander’s questions focused on reinsurance.

Florida Insurance Consumer Advocate Sean Shaw characterized the Florida marketplace as “distorted” one, in which deregulation would be inappropriate. Senator Alexander asked Mr. Shaw about whether he is concerned with the ability of insurers to pay their obligations.

An OIR official testified in opposition to SB 876, stating that insurers have given no indication that they would write new insurance business in Florida even if the bill passed. The OIR representative added that SB 2044 by Senator Richter addresses the problematic issues facing the Florida insurance industry.

Due to a passed motion for a time to vote certain, the Committee engaged in minimal debate on the bill, which was passed as amended by a vote of 6 to 4.

SB 876 must pass the Committee on General Government Appropriations and the Policy and Steering Committee on Ways and Means before being considered on the Senate floor.

  

Senator Fasano Files MGA Regulation Amendment to Commercial Insurance Deregulation Bill; Time Constraints Preclude Committee Consideration

During the Senate Committee on Banking and Insurance Committee meeting on March 24, 2010, Senator Mike Fasano was prepared to offer a late-filed amendment to Senate Bill 2176, which relates to the deregulation of commercial insurance. 

The amendment, which was not considered because of Committee time constraints, would provide that companies affiliated with a domestic insurer may not issue a dividend or distribute cash or other property to shareholders unless the dividend or distribution is from that part of the available and accumulated surplus funds derived from realized net operating profits on insurer business and net realized capital gains. 

An affiliate would include any company within the insurer’s holding company system having a contractual relation or other financial arrangement whereby a portion of the premium from the insurer is paid to the affiliate.  Certain parameters related to dividend payments now applicable only to insurers would be applicable to affiliates of the insurer (as defined above) under revised section 628.371, Florida Statutes. 

It would appear that this language would be broad enough to impose standards on affiliate managing general agencies (“MGAs”) that contract with affiliate insurers, and also upon any other affiliate entity that contracts or has another financial arrangement with the MGA or insurer and receives a portion of the insurer’s premium.  It also appears this would capture all dividends, even if the affiliated entity realized income from sources other than its affiliated insurer. 

In addition, one section of the holding company statutes would be amended under the provisions of this amendment, so as to require domestic and commercially domiciled insurers in a holding company system to file group financial statements, including financial information regarding all affiliates.

The statute would be further amended to require that certain transactions involving a domestic insurer and any person in its holding company system may not be entered, amended or terminated unless the Florida Office of Insurance Regulation (“OIR”) is given at least 60 days advance notice in writing and the OIR has not disapproved it within 30 days after receipt of the notice of the transaction. The types of transactions subject to this requirement include, without limitation, sales, loans and investments; reinsurance agreements; all management, service and cost-sharing arrangements; and any other transaction the OIR determines may adversely affect the interests of the insurer’s policyholders.  This provision essentially replicates language that already exists in a regulation applicable to domestic insurers, but expands the notice requirement to 60 days rather than the 30 days in existing regulation.

  

Florida Hurricane Catastrophe Fund Contract Year Glitch Bill Passes House 115-0; Ready for Governor’s Signature

The Florida Hurricane Catastrophe Fund (“FHCF”) Contract Year will be returned to June 1 through May 31 beginning June 1, 2010 if Florida Governor Charlie Crist signs SB 1460, which was passed on March 22 in the Florida House of Representatives by a vote of 115-0. 

The FHCF Contract Year, after being legislatively curtailed in 2009, had created unintended negative financial consequences for insurers due to the way in which the cost of reinsurance is amortized on their financial statements.

Without passage of SB 1460, an insurer’s 2010 financial statement would show a larger-than-normal expense associated with the purchase of FHCF reinsurance. 

 

Commissioner McCarty Reviews Florida Insurance Market Cost Drivers, Solvency Issues at Cabinet Meeting

The Florida Cabinet met on March 23, 2010, during which Florida Insurance Commissioner Kevin McCarty reported on the State’s property insurance market. The report had been requested by Florida Chief Financial Officer Alex Sink at the previous Cabinet meeting on March 9.

Commissioner McCarty presented the report as part of the Florida Office of Insurance Regulation (“OIR”) agenda.  Based on Florida residential property writers’ 2009 annual surplus and results, it listed 206 insurers, 60 of which reported a loss in surplus and 100 of which had underwriting losses.  Many companies’ reports indicated underwriting losses combined with surplus gains.

Commissioner McCarty blamed the following Florida-specific cost drivers, along with the national economy, as the reason that insurers are struggling:

• Increasing reinsurance costs
• Claims-related replacement costs
• Fraud
• Mitigation-related premium discounts
• Sinkhole-related abuses

Commissioner McCarty noted that the provisions of SB 2044, Senator Garrett Richter’s omnibus property bill, would serve to address these cost drivers.

He also explained that re-opened claims, many of which have been initiated by public adjusters, are another cost driver.  Passage of SB 2264 and HB 1181, the pending public adjuster regulation-related bills, would result in statutory limitations being placed on these types of claims.

Strengthening of insurer surplus requirements to at least $15 million will assist in bolstering insurer solvency, according to McCarty.

He also addressed what he characterized as certain misinformation by clarifying that currently, only two Florida insurers are in receivership, while two others are under administrative supervision. Thus, insolvency impacts have been minimized, although they are seen as inevitable in a capitalistic system.

He also related that, after financial reviews, at least one insurer has been asked to return funds from its managing general agency (“MGA”) back to the company. 

The Florida Office of Insurance Regulation (“OIR”) will be supporting potential legislation that would afford greater regulatory authority over MGAs. 

Commissioner McCarty explained that the insurance industry is more transparent than other regulated industries such as banking, in which certain information must be confidential in order to prevent “runs” on the bank.

Florida domestic insurers, among which are many success stories, can provide a gateway for private capital to enter into the Florida market. National companies also play a major role.

Florida Chief Financial Officer Alex Sink asked about the availability of market capacity if more insurers fail, to which Commissioner McCarty acknowledged the existence of “some” capacity in the current system.  This could be increased with the passage of SB 2044.

Also in response to CFO Sink, Commissioner McCarty indicated there were certain circumstances in which it was appropriate for the OIR to regulate transactions between MGAs and insurers. 

While the OIR acknowledges that MGAs have an important role in the insurance industry, it considers greater oversight of MGA regulation to be a critical concern.  However, he said that a regulatory balance is necessary in order to preserve capital.

Florida Attorney General Bill McCollum questioned how much MGAs have profited based upon funding that was provided to insurance companies by the State of Florida under the Insurance Capital Build-Up Incentive Program (“Program”).  Florida Deputy Insurance Commissioner Belinda Miller explained that, while some of the insurers receiving funding under the Program are part of a holding company system that includes MGAs, the production of MGA fees related to the business generated by the State funds is acceptable, so long as the MGA fees paid by the insurance company are reasonable.

Saying that he felt this area has great potential for fraud, Attorney General McCollum emphasized his concern that MGAs are profiting, while their affiliate corporate insurers are not. Further, Attorney General McCollum cited additional concerns with how many small companies would survive after underwriting losses from a catastrophic storm.

OIR Director of Property and Casualty Financial Oversight Robin Westcott explained that, in determining solvency, an insurer’s existing reinsurance contract must be evaluated.

Florida Governor Charlie Crist asked how an insurance company can lose money without storm-precipitated claims.  McCarty cited the shifting of monies to MGAS, increases in fraud and issues relating to mitigation credits as contributing factors to insurer losses.

It was agreed that transparency is critical to regulating the insurance industry.  Governor Crist added that he supports legislation that would improve this process. 

To access the complete transcript of Commissioner McCarty’s prepared remarks delivered at the March 23 Cabinet meeting, click here. 

Additionally, the following insurance-related items on the agenda were approved with no discussion:

• Request for approval for publication of proposed Rule 69O-149.303; Cover Florida Plan Disclosure Form
  • This proposed Rule would adopt the standard disclosure form required by the Cover Florida Health Care Access Program established by law. The form is required to be provided to consumers who purchase Cover Florida Plan coverage and provides disclosures concerning terms of renewal, termination of coverage, portability, grace period, reinstatement, premium changes, pre-existing conditions and cost sharing requirements. It also provides specific plan exclusions and a schedule of services that are not covered.
• Request for approval for publication of proposed Rules relating to Florida’s insurance premium tax and corporate income tax credits for contributions to non-profit scholarship funding organizations.
  • The proposed Rules would implement recent statutory changes relating to the tax credits for the Florida Alternative Minimum Tax and contributions to non-profit scholarship funding organizations.

The next Cabinet meeting is scheduled for April 13, 2010. 

 

Citizens Board of Governors Meeting Report:  March 18, 2010

The Citizens Property Insurance Corporation (“Citizens”) Board of Governors (“Board”) met on March 18, 2010, during which it reviewed reports from various Citizens committees and acted upon their recommendations.    To view the agenda and complete meeting documentation, click here.

Dan Sumner Approved as Citizens General Counsel

The recommendation of Dan Sumner as Senior Vice-President and General Counsel of Citizens by Citizens’ President Scott Wallace was approved by the Board.

2010 Legislative Guiding Principals Adopted  

Prompted by discussion during its December 2009 meeting about the need to provide the Board with a mechanism to clearly and concisely communicate its priorities to the 2010 Florida Legislature, Citizens has created a document entitled “2010 Legislative Guiding Principles.” 

The Board voted to approve this document, which will be formally transmitted by Chairman Jim Malone to Florida’s legislative leadership, as well as to the Chairmen of the standing legislative committees with jurisdiction over insurance.  The Principles are written in broad language to enable their application to different proposals.

Mr. Wallace advised that, also pursuant to previous discussion, each Board member would be provided with weekly legislative updates until the conclusion of the 2010 Florida Legislative Session in May.  

No Citizens 2010 Private Reinsurance Purchase

In her report, Citizens’ CFO Sharon Binnun reiterated the Finance and Investment Committee’s recommendation that Citizens purchase only the Mandatory Layer of Florida Hurricane Catastrophe Fund (“FHCF”) coverage for the 2010 hurricane season, not the optional FHCF Temporary Increase in Coverage Limits (“TICL”) coverage. 

Mandatory FHCF coverage is estimated at approximately $5.8 billion at 90 percent of covered losses after retention, yielding a premium of approximately $371 million.  FHCF reinsurance is only available for residential coverages (personal and commercial residential lines).  Commercial non-residential policies are not covered by the FHCF.

Ms. Binnun explained that, primarily because of Citizens’ inability to recoup private reinsurance costs resulting from the implementation of the mandated rate “glide-path” for the 2010 hurricane season, it was not recommended that Citizens purchase private reinsurance.  It was reported that there is a relatively low probability in 2010 that a storm of sufficient size to trigger TICL will occur, and if TICL is not purchased, emergency assessments would not be required until losses in the High-Risk Account (“HRA”) are over $8 billion.

Ms. Binnun reported that an audit of Citizens is currently in progress, the interim figures of which show that the insurer has $4 billion in surplus for claims paying capacity and $8 billion in consolidated assets. 

The impact of wind mitigation credits on loss ratios was noted, after which Ms. Binnun added that Citizens’ loss ratios are increasing for a variety of reasons that are being analyzed for a determination of cause.   She explained that costs associated with loss tend to increase correlative to repair costs. 

After Ms. Binnun’s report, the Board voted to approve the Finance and Investment Committee’s recommendation to purchase the FHCF Mandatory Layer of coverage.  A revised Citizens investment policy for operating funds and tax-exempt pre-event bond proceeds also was approved.  

Purchasing Review Committee Policy Revisions Approved

The Board approved all recommendations made by the Purchasing Review Committee, which recently was created to review Citizens’ procurement process and related timelines.  Headed by Board Member Carlos Lacasa, the Committee recommended substantive changes to Citizens’ procurement policy, as well as quarterly reporting to the Board on Citizens’ competitive solicitation activities.  These reports will include the procurement of contracts on an emergency or sole-source basis.  Continuing efforts to streamline and reduce Citizens’ procurement cycle timeline also were approved. 

Claims Committee Report

In addition to reviewing operations-related and administrative items, Claims Committee Chairman Earl Horton requested Board approval of a statewide multi-year contract with several vendors to handle the demolition and removal of Citizens-insured mobile home units that have been declared a total loss in claims processes.  Subject to local regulations, Citizens is responsible for the salvage or demolition and removal of these units.   

The request was later approved by the Board as part of the Consent Agenda.  To view the mobile home salvage contract summary and vendors, click here.

Actuarial and Underwriting Committee Report

Wind-Only Boundary Legislative Recommendation Adopted

After the Actuarial and Underwriting Committee had discussed section 627.351(6)(o), Florida Statutes, which mandates the reduction of Citizens’ wind-only map boundaries on December 1, 2010 if the 100-year probable maximum loss does not reflect a reduction of at least 25 percent from a benchmark set in 2001, the Board adopted a recommendation to the Legislature calling for the statute to be amended to provide for the boundary reduction only after Citizens achieves actuarially sound rates. 

Citizens’ Staff is in the process of analyzing the changes to the HRA-eligible boundaries that would be necessary to achieve the mandated reduction

Minimum Appraisal Standards Approved

Mr. Horton noted that it is imperative for Citizens to ensure that an appraisal submitted to substantiate building limits includes an accurate replacement cost valuation, especially since Citizens’ Staff is seeing a marked increase in varying quality and completeness of submitted appraisals.  The goal of this recommendation is to establish standards for appraisals and stop unacceptable practices.  

The Board approved the Actuarial and Underwriting Committee’s recommended appraisal procedures,  which include implementing minimum requirements for all appraisals submitted to Citizens, such as:  appraiser’s name, year built, total square footage, number of stories and construction type. 

Chinese Drywall

In regard to the presence of Chinese drywall in properties covered by Citizens, Mr. Horton reported that the basic recommendation of the Actuarial and Underwriting Committee is to take no action based on these claims, because defective and/or improperly manufactured materials are not covered under any Citizens policy.  

To date, there has been no adverse underwriting action based solely on Chinese drywall.  As noted, over 30 claims have been submitted to Citizens alleging damage from Chinese drywall.  However, no related covered cause of loss has been identified in any claims investigation.   Further, any causal relationship between the presence of Chinese drywall and any covered losses such as water or fire is unknown.  

Citizens policyholders have the ability to continue their coverage if a covered property is temporarily vacated for the purpose of remediation.  Homes that are permanently vacated or abandoned are ineligible for coverage.  

Rate Analysis and Implementation Update

Recently approved Citizens rates were implemented for new and renewal policies with effective dates as follows:

• January 1, 2010 for multi-peril (not including commercial non-residential multi-peril)
• February 1, 2010 for wind-only

Along with the new rates, Citizens Board also approved the implementation of a new rating structure for all personal residential policies, which is being applied as part of Citizens on-going efforts to improve risk-based premium calculations.

Components of the new rating structure, which is currently being reviewed by the Florida Office of Insurance Regulation, include:

• Splitting base rates by category of peril
• Applying premium credits as multiplicative and not additive
• Consistency for wind rates between wind-only and multi-peril policies

Development of the new rate analysis and subsequent filings to be made in 2010 has begun.  By law, the annual filings must be made on or after July 15, 2010.  Approved rates will then be scheduled for implementation on January 1, 2011 for multi-peril policies and February 1, 2011 for wind-only policies.

Citizens Inspection and Outreach Program

It was reported that Citizens is moving forward with the development and implementation of its wind mitigation credit re-inspection program, while simultaneously preparing a solicitation for ongoing inspection management services.

Consent Agenda

Contracts approved by the Board in its adoption of the Consent Agenda included:

• Mobile Home Demolition
• Actuarial Services
  • Extends seven-month contract with the Insurance Services Office for actuarial services related to Citizens’ 2011 rate filings
• Reinsurance
  • One-year contract for FHCF reinsurance

The next Board and Committee meetings will be held on May 26 – 27, 2010.

 

Immediate, Continual Updates at www.newsserviceflorida.com

SENATE PASSES FLURRY OF TORT BILLS

By MICHAEL PELTIER
THE NEWS SERVICE OF FLORIDA

THE CAPITAL, TALLAHASSEE, March 25, 2010…..Following through on promises made, the Republican-led Legislature passed a flurry of tort reform bills Thursday that shield businesses while also putting restrictions on the next attorney general on how much can be spent on hired guns.

In separate votes, the Florida Senate approved a bill that shifts the burden of proof in slip and fall cases while capping at $50 million the amount that can be spent on contingency fees when the state goes after a big fish in the civil courts. Those bills are on their way to the governor’s desk.
 
The chamber also approved a compromise measure setting new legal standards when parents sign liability waivers for their children and another proposal giving local governments a bigger checkbook when dealing with civil lawsuits. Those bills now travel to the House.

Business groups lauded the measures, saying they will provide relief during a tough economic period.
 
“We applaud the swift action taken by both the House and the Senate, particularly on the slip and fall legislation,” said David Daniel, vice president of government affairs for the Florida Chamber of Commerce. “The speed in which they did that is testament to the desire to get many of these important issues off the table quickly.”

The bill to prevent attorneys general from spending lots of money on outside attorneys was criticized by one of the Democrats who hopes to succeed the current attorney general, Bill McCollum.
 
Sen. Dave Aronberg, D-Greenacres, said the attorney general already has the authority to cap contingency fees. Further a statutory restriction could inhibit future attorneys general faced with huge civil litigation such as the landmark tobacco settlement that used a team of private lawyers who were awarded $3.4 billion in fees paid by tobacco companies.
 
“This bill will not protect consumers,” Aronberg said. “It will protect the big polluters, the big companies.”
 
The slip and fall legislation requires injured persons to prove that the business had knowledge of the condition and should have fixed it. The Florida Supreme Court in 2002 ruled in a case against Publix Super Markets Inc. that the business needed to prove that all precautions had been taken to avoid the accident. Businesses said the ruling has resulted in frivolous lawsuits against deep pocket defendants.
 
The Senate also passed measures that now travel to the House. Following a compromise reached between plaintiff’s attorneys and business groups, the Senate passed SB 2440, which sets standards for liability waivers for children in some risky activities.
 
The bill would validate waivers signed for inherent risks of an activity, say falling while ice skating, while allowing parents or guardians to sue if something unforeseen happens, such as the collapse of the skating rink. Its House companion, HB 285, is now pending before the House Civil & Criminal Justice Policy Council.
 
Finally, the Senate passed SB 2060. The proposal, sponsored by Sen. Mike Bennett, R-Bradenton, lifts caps last changed in 1981 on the amount local governments can pay in civil cases without having to get legislative approval.
 
The bill increases individual caps on sovereign immunity cases from $100,000 to $200,000 and collective caps from $200,000 to $300,000. Backers hope the increase will reduce the number of claims bills brought to the Legislature. 
 

 

Should you have any comments or questions, please contact Colodny Fass.

 

To unsubscribe from this newsletter, please send an email to bellis@cftlaw.com.