Florida’s Citizens Property Insurance Board Mulls Downsizing, Approves Changes to Curb Water Damage Litigation ‘Tsunami’

 

With South Florida water damage claims generating an average of 800 litigated cases per month and similar volume expected to continue into 2016, Florida’s Citizens Property Insurance Corporation (“Citizens”) is facing a “future tsunami of lawsuits,” its Board of Governors (“Board”) was told at a meeting in Maitland yesterday, December 9, 2015.  Later on, the Board approved major changes to Citizens’ policy language designed to correct the problem.

With Citizens’ President and CEO Barry Gilway calling the amount of litigation “insane” and “out of control,” and Citizens’ Chief Risk Officer John Rollins warning it was “time to hit the panic button,” the Board approved the slate of policy changes intended to bolster water damage claims oversight, while still serving policyholders who need immediate emergency repairs.

Board members also discussed potential solutions to the growing problem of assignment of benefits, which was painted as a “pipeline of claims behind the dam waiting to burst” and the “accelerant to the problem with water damage.”  In a recent sample of not-yet litigated claims, an average of 43 percent of those evaluated already had an assignment in place.  In the South Florida tri-county area, that percentage rose to 46, but decreased to 36 percent throughout the rest of the state.

“This is not something Citizens can resolve on its own,” it was explained.  Rather, the Florida Legislature must intervene, Citizens’ staff members said. 

Listed below, the water damage policy changes adopted by the Board now must be approved by the Florida Office of Insurance Regulation (“OIR”).  The changes would:

• Limit initial payouts for emergency services and temporary repairs prior to a report of loss to Citizens (additional coverage for emergency services would be available subject to Citizens’ approval)
• Exclude coverage of permanent repairs completed prior to a Citizens inspection of the damage
• Require that claims be reported within 72 hours of when policyholder knew (or should have known) that a loss had occurred
• Set a limit for additional coverage to restore uniformity of appearance by matching repairs with adjacent undamaged areas
• Clarify language relating to the replacement of plumbing systems following collapse, blockage or deterioration

In 2014, it was reported that 39.2 percent of Citizens policyholders filing water loss claims in Palm Beach, Broward and Miami-Dade counties hired attorneys or public adjusters before filing their initial claim.  Elsewhere in the state, however, only 4.2 percent of policyholders retained attorneys or public adjusters before reporting claims.  More than 98 percent of all Citizens litigated water claims initiate in the tri-county South Florida region.

Costs of litigated claims are nearly three times higher than non-litigated claims, Citizens’ General Counsel Dan Sumner noted.  For example, the average litigated claim cost $27,631 in 2014, compared with $9,028 for non-litigated claims during that time period.  Those costs must be paid by premiums collected from all policyholders within the territory where the loss occurs.  It was estimated that each policyholder pays an average annual surcharge of $145 for Citizens’ litigation costs.

If approved by the OIR, the policy language changes would take effect in mid-2016 for new policies and existing Citizens policies when they come up for renewal.

During yesterday’s marathon meeting, Mr. Gilway gave the Board an in-depth review of Citizens’ progress to date, along with its 2016-2017 business strategies and projections, taking into account the State-run insurer’s changing complexion after the rapid depopulation of its policies into the private insurance market during the last several years.  With the takeout program’s success, Citizens could see an additional 25 percent decrease in storm risk before the start of the 2016 Hurricane Season, he said.  

“I can’t comprehend Citizens’ policies in force being below 400,000, but I’ve been surprised before,” he said.

To view his report, click here.

Mr. Gilway’s explained that the increase in depopulation indicates that the rate “glide path” has made a large number of policies more attractive to the private market–one of the factors that led Citizens to anticipate ceding nearly 249,395 policies in 2015. 

As Citizens yields the better risks back to the private market, the private market gets healthier, which conversely has a negative impact on Citizens’ financial metrics.  The result is Citizens’ return to its intended purpose of “insurer of last resort”–a role in which it is expected to continue to see increases in loss and loss adjustment expenses, and their resulting ratios.

While Citizens’ 2016 losses incurred are budgeted to decrease from 2015 projections, the trend nevertheless reflects an increasing loss ratio since 2013 that is expected to continue in 2016.  Meanwhile, loss adjustment expenses have decreased as depopulation continues.  However, the loss adjustment expense ratio (as a percent of premium, or as a percentage of losses incurred) has recently increased, also due to significant water claim and sinkhole litigation. 

As of October 2015, Citizens had 858 litigated sinkhole claims pending, 4,914 litigated water claims pending and 6,239 non-sinkhole litigated claims pending.  Additionally, Citizens has received 10,428 non-weather, water claims through October 2015. 

To view the Loss Adjustment Expense report, click here.  To read the Sinkhole Analysis as of September 30, 2015, click here.

Administrative and other underwriting expenses have also trended downward as policies have returned to the private market.  However, Citizens’ expense ratio has increased over time and is expected to be 27 percent in 2016, primarily due to the significant decrease in direct written premium, Mr. Gilway explained.

With higher levels of depopulation in 2015, higher post-assumption opt-outs are expected throughout 2015 from Citizens’ traditional rates of approximately 20 percent.  In 2015, the post-assumption opt-out rate has increased to approximately 30 percent.  Year-end projections have been adjusted accordingly.  

While Citizens’ takeout activity will continue, it will do so at a slower rate than the past five years, with an estimated 119,597 policies slated for depopulation in 2016.  This reduction of depopulated policies is expected to be offset by a lower rate of new and renewal business, mainly due to Citizens’ Clearinghouse Program. 

To read the Clearinghouse update, click here.

Overall, Citizens’ revenue reductions are expected due to a significant decrease of policies in force, although part of the reduction is expected to be offset by the continuation of the “glide path” rate increases.  Policies in force reductions will continue to impact Citizens’ variable expenses favorably.  As expected, budget reductions will be reflected in producer commissions, taxes and assessments, printing, postage, and servicing carrier fees.

Mr. Gilway’s review of Citizens operating budget also noted the importance of Citizens remaining “scalable,” meaning that it must not only be prepared to expand and contract based upon market conditions, but also have the scalability to respond to multiple catastrophe events for all policy count scenarios, even though non-catastrophe claim counts will continue to decrease in 2016 because of depopulation.

The Board approved Citizens’ Operating Budget and Strategic Annual Plan.  To read the entire Operating Budget commentary, click here.  

In addition to approving a flooring valuation services provider, the Board authorized three appraisal firms to handle anticipated daily appraisal volume.  Four contingent vendors will be utilized in case of attrition or increased need due to market activity or catastrophe events.  

A process for enhanced data collection for commercial risks pursuant to the Florida Hurricane Catastrophe Fund (“FHCF”) Reimbursement Contract was also approved.  Currently, Citizens collects commercial occupancy information at the building level in a single Eligibility Occupancy reporting table that is used to determine rating and whether the residential occupancy for the building is sufficient for FHCF eligibility. 

It was explained that Citizens’ commercial eligibility rules and definitions governing residential occupancy have evolved over time, as have the rules and definitions used in the FHCF Reimbursement Contract.  Because these changes have not always been aligned, data mapping and translation to ensure accurate reporting has been required. 

Subject to OIR approval, in order to ensure accurate FHCF reporting Citizens will now:

• Clarify the current Eligibility Occupancy Table definitions to effectively distinguish Citizens rating and program eligibility data from that used for FHCF reporting and, 
• Create a separate FHCF Reporting Table to capture detailed information to be used solely to improve the data reported to the FHCF.  The new FHCF Reporting Table will be required for all commercial residential risks and nonresidential mixed-occupancy buildings currently identified as containing any residential occupancy. 

To view additional materials from yesterday’s Board meeting, click here.

To view the video replay, click here for Part 1 and here for Part 2.

At the conclusion of the meeting, the Board reconvened as the Florida Market Assistance Program (“FMAP”) and approved that entity’s Budget and Annual Report. 

To view the FMAP meeting materials, click here. 

 

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