Abuse of Assignment of Benefits (AOB) in Florida has fuelled an insurance crisis that is acting as a “hidden tax” on consumers and helping to increase what are already some of the highest insurance premiums in the country, according to a report by the Insurance Information Institute.
According to the report there were roughly 1,300 AOB lawsuits statewide in 2000. There were more than 79,000 in 2013 and nearly 135,000 through November 9, 2018, a 70% increase in just five years.
As a result, Citizens Property Insurance Corporation, the state-run not-for-profit insurer, proposed recently an increase of its average premium rates by 8.2% in 2019.
Citizens explained that the primary driver of the rate increase is litigated water claims, 94% of which are coming from South-East Florida, despite the region only accounting for 57% of Citizens’ homeowners liability coverage.
The claims relate to water damage from issues such as burst pipes rather than storm-related damages, which Citizens has largely been able to offload to reinsurers.
Indeed, this ongoing exploitation of AOB will continue to inflate and extend the loss creep of Florida storms on reinsurers if left unabated.
There’s a concern that ongoing AOB issues in Florida will continue causing claims escalation, an issue that becomes more severe against the backdrop of hurricane Irma-level natural catastrophe.
This “mini-industry” results primarily from the abuse of two state-specific laws.
The first is the one-way attorney’s fee provision. Under state law, if “any named or omnibus insured or named beneficiary” under the insurance policy succeeds in a first-party suit against the insurer, the court will determine a “reasonable sum” that the insurer must pay to compensate the plaintiff’s attorneys.
But not vice versa, as if the insurer wins the plaintiff owes the insurer nothing. Furthermore, if a lawsuit is settled before judgement is rendered, attorneys can still collect from the insurer.
The law is meant to level the playing field between individual policyholders and economically powerful insurers. In practice it has encouraged attorneys to file thousands of AOB-related lawsuits because there is no limit to legal fees that can be collected.
Fees can dwarf the actual damages paid to the insured – sometimes tens of thousands of dollars for a single litigated, low damage claim. This kind of arrangement is unique to Florida.
A second issue is that no insurer consent is needed for an AOB. Florida insurance statutes permit an insured to assign the benefits to a third-party without insurer consent. This limits the insurance company’s ability to monitor a claim to make sure costs do not get inflated.