Frankly, Florida’s ailing property market is the result of many underlying causes. You’re familiar with the list and many of the solutions. Some items are subject to debate, particularly when it comes to priorities, but…conspicuous by its absence is hurricanes. Another season has ended bringing us to the five year mark without a wind event of any kind. Yet, loss frequency is up nearly 30%; severity is up 30%; the average loss per policy is up nearly 70%. The results are that we’ve had more rate increases and insolvencies after five years of no storms than we had after two years in which eight hurricanes ravaged our state.
What happened? Why have the losses for such traditionally profitable perils deteriorated so precipitously, and…only in Florida?
To find the answer we must go back to 2005.
A few realities came to light after the 2004 storms. It was, after all, the first season to truly test the catastrophe response apparatus of Florida’s new breed of domestic carrier. Citizens, you may recall, was so discombobulated that investigations were undertaken, government task forces were formed, employee’s were fired and indicted.
Some had concerns that private carriers might not be able to pay timely either; a few, depending on their policy spread, might not be able to pay at all. Eventually some residential contractors reacted by requiring full payment up front before agreeing to even begin work. Others in the building trades did likewise. Some carriers, particularly those with smaller reserves burned through their lines of credit and surplus in a matter of days and would, perhaps, look for ways to delay replacement cost payments in hopes that reimbursement from Florida’s Cat Fund or commercial reinsurers might help stave off what appeared inevitable.
Say what you will about underlying details; it was a perfect storm for legislative overreaction and Florida lawmakers would not disappoint. In 2005 they hastily enacted CS/SB-1486 which contained two very important provisions that would make Florida the world’s only venue to codify moral hazard. The bill added a section to Fs-627.7011, which stated:
In the event of a loss for which a dwelling or personal property is insured on the basis of replacement costs, the insurer shall pay the replacement cost without reservation or holdback of any depreciation in value, whether or not the insured replaces or repairs the dwelling or property.
Industry lobbyist were agile enough to cajole lawmakers into allowing an exception, for sinkholes, to the above language. An exception was logical; after all, hurricanes were the peril du jour in 2004 and 2005, not sinkholes. Besides, the moral hazard from sinkholes, created by paying the policy “face amount” for a fully habitable home was, and has proven to be, immense. So… reluctant lawmakers agreed to an exception to the prohibition against holding back with paragraphs (a) and (b) of Fs-627.707, as follows:
(5)(a) Subject to paragraph (b), if a sinkhole loss is verified, the insurer shall pay to stabilize the land and building and repair the foundation in accordance with the recommendations of the engineer as provided under s. 627.7073, and in consultation with the policyholder, subject to the coverage and terms of the policy. The insurer shall pay for other repairs to the structure and contents in accordance with the terms of the policy.
(b) The insurer may limit its payment to the actual cash value of the sinkhole loss, not including underpinning or grouting or any other repair technique performed below the existing foundation of the building, until the policyholder enters into a contract for the performance of building stabilization or foundation repairs. After the policyholder enters into the contract, the insurer shall pay the amounts necessary to begin and perform such repairs as the work is performed and the expenses are incurred. The insurer may not require the policyholder to advance payment for such repairs. If repair has begun and the engineer selected or approved by the insurer determines that the repair cannot be completed within the policy limits, the insurer must either complete the engineer’s recommended repair or tender the policy limits to the policyholder without a reduction for the repair expenses incurred.
While the exception to sinkholes was well intended (for that matter so, too, was the ill advised provision for other perils) it, nonetheless, had its own unique problems. The five year Statute of Limitations didn’t have a drop dead starting date like Hurricane Wilma provided for hurricane losses. Settlement cracks could be from an alleged sinkhole occurring at “any” time; even the crack itself could’ve gone undetected for a period of time. A five year window simply made it too easy to find a policy period during which sinkhole activity coverage could apply. Also, while carriers may have the right to withhold stabilization costs until contracts are signed, this doesn’t prevent pressure to pay out via the carrier having to pay attorney fees (usually 3 or 4 times what would go to a defense counsel) and the potential for a payout in excess of policy limits via a bad faith allegation.
Finally, having two separate statutes dealing with “holdback” created concerns they were in conflict; one prohibited holdback, the other allowing it. This conflict meant holding back replacement cost payment on sinkholes could lead to a court ordered settlement establishing new and damaging case law.
Logically, the fix to Florida’s problem must lie within the statute that gave rise to those problems in the first place. The industry needs to come together to convince lawmakers to remove the underlined language above, entirely. It’s about time Florida joined the rest of the world, again, by allowing policy language to apply for replacement cost payments, for all perils.
Now you know the rest of the story.