Changing Tides: Florida’s latest property insurance bill builds on a series of recent reforms

by Matthew Scarfone, Shareholder
(originally published by CLM)

Property insurers in Florida must account for a wide variety of natural risks, including hurricanes, tornadoes, floods, and sinkholes. However, growing losses and drastic rate increases are not solely the result of natural causes. Draconian legislation, expanded further by judicial interpretation, has made Florida a hotbed for abuse and created a crisis in the property insurance market.

 The Florida Legislature has enacted several reforms during the past three years and convened two special legislative sessions in 2022. On Dec. 16, 2022, Gov. Ron DeSantis signed Senate Bill 2-A, a sweeping reform act that promises to curb litigation abuses and breathe new life into Florida’s struggling property insurance market. With new reform comes new hope, but how did we get here?

One-Way Right to Attorney’s Fees

Until recently, if an insured sued his insurer and obtained any recovery, the insured was entitled to recover all attorney’s fees incurred in the litigation under 627.428, Florida Statutes. After an insured filed suit, the insurer could do little to avoid a fee claim. Even a voluntary payment made after a lawsuit was filed generally entitled the insured to fees under the confession of judgment doctrine. This rule encouraged insureds and their attorneys to race to the courthouse even if the dispute could have been resolved without litigation.

Attorney’s fee awards may be enhanced through the application of contingency risk multipliers, which allow courts to award 1.5 to three times the reasonable attorney’s fee, based on a variety of factors. Multipliers were intended for cases involving novel or complex legal issues, or where it is difficult for a party to find representation. In most property insurance lawsuits, the issues are not particularly novel or complex and insureds have (or had) a statutory right to attorney’s fees. It is usually not difficult for an insured to find a lawyer willing to take the case. Nonetheless, attorney’s fee multipliers have become increasingly prevalent and have exponentially increased insurers’ exposure to attorney’s fees.

This right to attorney’s fees became a hot commodity. Service providers hired to mitigate or repair damage began insisting that, in exchange for their services, insureds must assign the right to recover insurance benefits, and, with it, the right to attorney’s fees. Assignment of benefits agreements (AOBs) were appealing to insureds, who were not required to pay for the services upfront. AOBs were also appealing to service providers, who could collect from the deep pockets of the insurance company and acquire a new right to recover their attorney’s fees.

As a result, a single run-of-the-mill homeowners insurance claim could give rise to several lawsuits by different assignees, each asserting a separate claim for attorney’s fees. Assignees were emboldened to issue excessive invoices and make unreasonable demands, forcing insurers to choose between paying the bill or facing a growing claim for attorney’s fees that often exceeded the underlying invoice. AOBs exacerbated the problem created by the one-way attorney’s fee statute.

Abuse of Bad Faith 

Florida recognizes a statutory claim for insurer bad faith through section 624.155, Florida Statutes. Bad faith cases often turn on the insurer’s motive or intent—factual issues that usually require a jury trial. The Florida Supreme Court has explained the damages available in first-party bad faith cases are the “natural, proximate, probable, or direct consequence of the insurer’s bad faith” and may include interest, court costs, and reasonable attorney’s fees. [Continental Insurance Company v. Jones, 592 So. 2d 240 (Fla. 1992), citing McLeod v. Continental Insurance Co., 591 So. 2d 621 (Fla. 1992)]. Punitive damages are available where an insured can prove, among other things, that the insurer’s actions were part of a general business practice.

Unlike in first-party breach of contract cases, Florida law permits discovery of an insurer’s claim file, underwriting file, and claims handling guidelines in bad faith cases. This intrusive discovery is another significant element of the insurer’s exposure in bad faith litigation, in addition to extra-contractual damages and attorney’s fees.

As a prerequisite to filing a first-party bad faith lawsuit, an insured must file a Civil Remedy Notice (CRN) outlining the alleged bad faith, and the insurer has 60 days to cure the alleged bad faith. Further, before a bad faith case is ripe, the insured must obtain a determination of coverage and damages—a favorable resolution of the claim. This concept of a favorable resolution was initially understood to mean a judgment, but it has been expanded by the courts.

Historically, Florida insurers often sought to resolve disputed claims through appraisal to avoid litigation. However, courts have held that an appraisal award—the result of a contractual process to set the value of the loss—satisfies the requirement of a favorable resolution and permits the insured to sue for bad faith. This led to many attorneys following the same blueprint: filing a CRN; requesting appraisal; and, if the appraisal award was issued more than 60 days later, filing a lawsuit for bad faith. Appraisal became a tactic to fast-track a claim into bad faith litigation rather than a process to avoid litigation.

Unsustainable Litigation Trends 

Abusive practices resulted in a glut of litigation. The numbers are staggering: The Florida Office of Insurance Regulation (OIR) reported that, in 2016, Florida accounted for 64% of all homeowners insurance litigation in the country, and that number has grown every year. According to OIR, Florida now accounts for only 9% of all homeowners insurance claims in the country, but an astounding 79% of all homeowners insurance litigation nationwide. OIR also reported that, in the last 10 years, $51 billion has been paid by insurers, of which 71% went to attorney’s fees and public adjusters while only 8% went to claimants.

These trends have had a crippling effect on the market. Eleven Florida property and casualty insurers have been placed in liquidation since 2017—five of those occurred in 2022. As more domestic insurance carriers go belly-up, Citizens Property Insurance Corporation—the state-run insurer of last resort—continues to grow. From January through November 2021, Citizens’ policy count grew by 37.7%. In January 2022, Citizens announced rate increases of 11-12% over the next year. The market was on a crash course for disaster.

Recent Reforms

In 2019, the Florida Legislature passed significant insurance reforms. House Bill 7065 established laws governing AOBs. Any AOB that does not comply with those laws is invalid and unenforceable. The law also provided that, depending on the amounts offered in pre-suit negotiations and the result obtained, attorney’s fees could be awarded to the plaintiff(s), the insurer, or neither party. Under the new law, attorney’s fees in AOB cases became a two-way street. While it addressed some major issues, the new law did not prevent the abuse of AOBs.

House Bill 301 sought to curb the misuse of appraisal as an inroad to bad faith. The bill amended 624.155, Florida Statutes, and provided that an insured may not file a CRN within 60 days after either party invokes appraisal. This was a step in the right direction, but savvy attorneys simply tweaked their strategy: filing the CRN first, then invoking appraisal, and following the same blueprint.

In 2021, the Florida Legislature passed more comprehensive property insurance reform through Senate Bill 76, which created section 627.70152, Florida Statutes. The new law established a pre-suit notice and negotiation process and replaced the prior attorney’s fee statute with a sliding scale based on a calculation comparing the amount recovered to the pre-suit demand and offer. The law intended to prevent excessive fee awards when an insured recovers nominal damages or refuses reasonable offers, but it did not eliminate the one-way nature of the right to attorney’s fees.

In April 2022, DeSantis called for the Florida Legislature to convene a special session to consider further reforms. The May 2022 special session resulted in Senate Bill 2-D, which contained measures aimed at fixing the appraisal loophole to bad faith and limiting application of the contingency risk multiplier, among other things.

The bill created section 624.1551, Florida Statutes, which requires an insured to establish a breach of contract to prevail on a bad faith claim. An appraisal award would no longer suffice. The bill also amended section 627.70152, Florida Statutes, to create a presumption that attorney’s fee awards should be based on the lodestar method: the reasonable hourly rate times the reasonable number of hours expended. This legislation was intended to curtail the rampant application of contingency risk multipliers, which has resulted in excessive attorney’s fee awards.

Senate Bill 2-A

In December 2022, the Florida Legislature called another special session on property insurance reform. Senate Bill 2-A was signed into law on Dec. 16, 2022. The bill enacts some of the most sweeping and significant property insurance reforms to date.

Perhaps most importantly, Senate Bill 2-A eliminates the one-way right to attorney’s fees in property insurance litigation. The one-way attorney’s fee statute was widely believed to be the single greatest driver of property insurance litigation in Florida. It encouraged lawsuits, rewarded over-litigation, incentivized unreasonable demands, and ultimately led to higher insurance premiums. The end of the one-way attorney’s fee statute signals new hope for a troubled industry.

Senate Bill 2-A also clarifies that the insured must obtain a judgment for breach of contract before filing a bad faith claim. An insured may not use a settlement or appraisal award as a catalyst to initiate bad faith litigation. Without a final judgment for breach of contract, the insured cannot file a bad faith lawsuit.

Amendments to section 768.79, Florida Statutes, authorize insurers to serve joint offers of judgment. An offer of judgment is a statutory settlement offer, which entitles the offering party to its attorney’s fees if the opposing party does not recover at least a certain percentage of the amount offered, or beat the offer. Until now, in cases with multiple plaintiffs, an offer of judgment was not enforceable unless each plaintiff could independently accept or reject the offer. In property insurance litigation, there are often multiple property owners, which made it difficult or impossible for insurers to meaningfully use offers of judgment. This amendment should enable insurers to effectively use offers of judgment in those cases, which could encourage settlements and avoid unnecessary litigation.

A new statute, section 627.70154, Florida Statutes, authorizes insurers to offer policies that require mandatory binding arbitration, provided they follow certain requirements and also offer policies that do not require arbitration as an alternative. Arbitration is intended to be a more efficient and less costly alternative to litigation.

The bill includes other provisions intended to ensure transparency and efficiency in the claims process and avoid unnecessary claim delays. It shortens the timeframes for insurers to investigate claims, inspect properties, and provide estimates; and provides for increased oversight of insurers.

The reforms also seek to promote the depopulation of Citizens Property Insurance Corporation, encourage new carriers to enter the market, create competition, and decrease rates.

While the effect of Senate Bill 2-A remains to be seen, it is expected to decrease the volume of property insurance litigation that has flooded Florida’s courts, and to create competition, lower insurance premiums, and foster a more viable and stable property insurance market. Change will not come overnight, but these legislative reforms provide hope for the future of Florida’s property insurance market at a critical time.