March 23, 2019 - 9:00am
Over the last several years, Florida’s property insurance consumers have experienced some of the largest rate hikes of any group in the country, and it’s not because of extreme hurricanes or floods. Indeed, from 2006 to 2016 Mother Nature gave the Sunshine State a remarkable reprieve from weather-related catastrophes.
So what’s driving up premiums, and how do we fix it?
The problem stems from the abuse of something called assignment of benefits (or AOB), which allows an insurance policyholder to transfer the right to collect benefits to a third party, such as a home repair contractor, who then bills the insurer directly for services. The purpose of an AOB is to streamline the billing process and make it more convenient for the policyholder, but AOBs are increasingly being exploited by unscrupulous contractors.
Homeowners seeking emergency repairs are often emotionally vulnerable and want to expedite the process -- and a growing number are being victimized by dishonest contractors, especially water mitigation companies. Once an AOB is signed, contractors have been caught leaving repairs unfinished, performing shoddy work, and even duping homeowners into paying for the repairs upfront, leaving the contractor to pocket the settlement from the insurance claim.
AOB abuse is fueled by Florida’s unique one-way attorney’s fees statute, which requires carriers to cover the legal costs of plaintiffs (including third-parties acting under an AOB) who prevail in an insurance claim dispute. The insurer is on the hook for the plaintiff’s legal fees even if the lawsuit is settled before judgment is rendered. However, if the insurer prevails, the plaintiff has no obligation to pay the insurer’s legal costs.
Though the Florida Supreme Court has made clear that the original intent behind one-way attorney’s fees was “to ‘level the playing field’ between the economically-advantaged and sophisticated insurance companies and the individual citizen,” lower courts have expanded this narrow interpretation of the statute and opened the door to widespread abuse.
One-way attorney's fees practically invite contractors to submit inflated repair bills to insurers. When the claim is rejected, the AOB allows the contractor to sue the insurance company -- often without the policyholder’s knowledge or consent. If the court awards the contractor more than the insurer’s initial settlement offer, even by just $1, the insurer is saddled with all of the contractor’s attorney’s fees, potentially totaling tens of thousands of dollars.
This structure gives insurers a powerful incentive to avoid a lawsuit and pay even inflated claims. And some contractors are having a field day. A small water leak under a kitchen cabinet can turn into a $30,000 remodel; one company was caught charging $18,000 to put a tarp on a roof. AOB abuse has become so lucrative that some contractors collect handsome referral fees, as high as $1,000, from subcontractors eager to obtain their own AOB from the homeowner so they can sue the insurance company.
Around the state, attorneys are brazen about recruiting contractors and training them on how to exploit the AOB loophole. Slick marketing materials brag that an AOB allows contractors “to stand in the shoes of the insured” and even highlight that pursuing an insurer for bad faith ”becomes an option.”
The AOB crisis has rapidly spun out of control. In 2000, there were just 1,300 AOB lawsuits statewide. But by 2013, that number had grown to more than 79,000, and to nearly 135,000 through November 2018, an increase of 70 percent in a mere five years. Today, AOB lawsuits are still increasing much faster than losses.
Data from Citizens Property Insurance Corporation, the government-backed insurer of last resort, shows that the average non-weather water claim without litigation or an AOB cost $4,430, compared to $29,889 for a litigated AOB claim. From 2013 to 2018, the number of AOB lawsuits against Citizens went up 56,000, costing the insurer $1.4 billion more than if the amount of AOB litigation had remained constant.
As insurance companies face rising legal expenses and excessive settlements, the costs are being passed on to Florida’s consumers. AOB abuse amounts to a hidden tax. A report by the Insurance Information Institute calculated that if the legal costs of homeowners and auto insurers (where AOB abuse is concentrated) had kept pace with nationwide averages, consumers would have saved approximately $2.5 billion -- $120 for every man, woman, and child in the state.
A simple change in the law would go a long way in curbing this abuse. Two bills are under consideration, SB 122 and HB 7065, by the Florida Legislature. The proposals would restore the original intent of the one-way attorney’s fee statute by making it apply only to named policyholders and beneficiaries -- not corporate third-parties. Every insurance consumer in Florida should demand that these reforms be enacted to curb the legalized fraud that has already done so much harm.
Steve Pociask is president of the American Consumer Institute, a nonprofit educational and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org.