Hefty Citizens surcharges a threat

Homeowners covered by the state-run insurer could face multiple double-digit assessments on their policies if lawmakers don’t make certain changes in the legislative session that starts Tuesday.

BY BEATRICE E. GARCIA
Miami Herald--Feb. 29, 2008

Assessments could be more onerous for business owners, owners of second homes and snowbirds with vacation homes insured by Citizens Property Insurance. Assessments are added to premiums if Citizens runs out of money to pay claims after a storm.

The most dire scenario after a catastrophic hurricane: Citizens could surcharge owners of nonhomesteaded property up to three times, totaling as much as 90 percent of their premiums. Owners of homesteaded properties could be assessed twice, adding up to as much as 60 percent of their premiums.

The little-publicized change in assessments was part of the 2006 insurance law. The law change was designed to make Citizens policyholders bear the brunt of paying off any Citizens deficit. It became effective in January after lawmakers deferred it for one year as part of the 2007 insurance reform bill. Until now, nearly every policyholder in the state was assessed equally.

Lawmakers seem to be most focused on how best to reduce the state’s exposure to storm risk in the Florida Hurricane Catastrophe Fund, so cutting Citizens policyholders another break might not be in the cards this session. Senate President Ken Pruitt said he wants to continue ”insurance reforms,” but he doesn’t expect major revamps this year. Other lawmakers think there is a chance the assessment change could be deferred again.

Knowing that these huge assessments could be a reality, Associated Industries of Florida, which represents small and medium-sized businesses throughout the state, is telling members to shop around for policies.

Avoid Citizens if you can, advises Barney Bishop, the trade group’s CEO.

With Citizens’ exposure at $485 billion, ”it’s the fifth-largest insurance company in the country and the largest in the state. Yet it has just $8 billion or $9 billion in the bank. You know it can’t cover all its losses” after a major storm, he adds.

But even the possibility of assessments after smaller storms has agents worried.

”The assessments are coming. They are going to be huge, and they will hit the nonhomestead homeowners first,” says Dulce SuarezResnick, an agent with HBA Insurance in Miami.

In dollars and cents, how bad can these assessments be?

Each assessment could be as much as 30 percent of policy premium. That means up to $900 on a $3,000 policy. That’s if Citizens runs out of money to pay claims.

Using the $3,000 policy example, a deficit for Citizens that could require two or three more surcharges on its policyholders could add up to a maximum of $1,800 for homesteaded properties or $2,700 for everyone else.

This worst-case scenario would most likely follow a huge hurricane — the proverbial Category 5 — hitting a densely developed area like South Florida or the Tampa-St. Petersburg region. Of course, assessments could be much smaller than these for a less-intense storm or a series of smaller storms.

The first surcharge would go to nonhomesteaded policies. If that doesn’t cover the deficit, Citizens then can tap all its policyholders — including homesteaded properties — up to two more times. If all those surcharges still don’t cover the deficit, Citizens can then assess all the insurance policies in the state for the remainder, except workers comp and medical malpractice policies.

When the law change was made in 2006, lawmakers reasoned that Citizens’ own policyholders should be the first ones on the hook for any deficit because they’re the ones that benefit from Citizens’ coverage.

At that time, the Legislature also made the distinction between homesteaded properties — mainly those that qualify for the state’s homestead exemption on their property taxes because the homes are primary residences — and nonhomestead ones. These are often vacation homes or investor-owned properties.

”The thinking was that these out-of-towners are benefiting from the state-run insurance company and they should pay more if there is a shortfall,” says Jeff Grady, president of the Florida Association of Insurance Agents.

Condominium associations are considered homesteaded properties.

However, businesses fall into the nonhomesteaded category. Nearly 1,700 commercial properties have windstorm coverage through Citizens.

Suarez points out that there’s another group of nonhomesteaded properties — and many are in South Florida. Those homes owned by recent immigrants who are waiting for resident status, or foreigners who legally live in Florida, don’t qualify for the homestead exemption. If those homeowners insure a home through Citizens, they could see up to three assessments as well.

In all, Citizens estimates it covers 450,000 nonhomesteaded properties of more than 1.3 million homes, condos and apartments throughout the state, with nearly half its policies in South Florida.

Susanne Murphy, Citizens’ executive vice president, says the insurer has been making legislators and agents aware of the coming change in how these surcharges are applied. But it’s not asking lawmakers to defer this change for another year.

”That is a policy decision for the Legislature,” Murphy wrote in an e-mail responding to The Miami Herald’s questions.

Citizens discussed the assessment change at an agent seminar in South Florida last week. It mentioned the change at a House council meeting earlier this month.

But now agents and lawmakers are realizing the multiple assessments could be a huge burden for Floridians.

”Citizens policies should have a warning right on the front page in bold type” to alert consumers about the assessments, says Scott Johnson, also with the Florida Association of Insurance Agents.

The group put out a white paper, available on its website, to explain to agents how the assessments are tacked on to policies.

Grady said the agents’ group won’t lobby lawmakers to defer the assessment change. The key issue now is to be sure Citizens policyholders know about it and how it will affect them.

Sen. Bill Posey, the Republican from Rockledge who chairs the Senate’s Banking and Insurance committee, said interest is emerging in Tallahassee to postpone this assessment change at least another year.

Sen. Steve Geller, a Democrat from Cooper City, also said it’s possible the assessment change could be deferred for another year, along with an extention on Citizens’ rate freeze. Last year’s insurance bill froze rates for two years, ending Dec. 31.

Florida Chief Financial Officer Alex Sink remains focused on seeing the Legislature work to reduce the state’s exposure to hurricane risk in the Florida Hurricane Catastrophe Fund.

Citizens’ overall financial condition is on Sink’s radar, but she would like to see Citizens be actuarially sound. That would mean setting rates at a level that brings in enough cash to cover potential future claims.