Citizens approves policy changes to stem water damage claim costs

Article Courtesy of The Orlando Sentinel

By Ron Hurtibise   

Published December 17, 2015


Citizens Property Insurance Corp. officials celebrated something they considered good news Wednesday at the beginning of the company's Board of Governors meeting:

Results of the company's mandate to get smaller have been better than expected, with total number of policies expected to fall below 400,000 in 2017 down from a peak of 1.5 million in 2012. The low price of reinsurance combined with an absence of any direct hurricane strike over the past decade have enabled private insurers to offer policies at competitive rates, including to riskier coastal homeowners.

The celebration was short-lived, however, as the downside of the policy reductions quickly dominated the meeting: Fewer customers means less revenue, and revenue is falling for the state-run "insurer of last resort" while lawsuits over non-weather-related water damage claims continue to gush out of South Florida.

Revenue from insurance premiums is expected to decline from $2.5 billion in 2012 to $838 million in 2017. And the declines are coming as the number of claims-related lawsuits grew from 6,303 in 2013 to 8,214 in 2015.

About 800 new cases are being filed each month, officials said.

"Miami-Dade County is out of control. It's really out of control," Citizens President and CEO Barry Gilway said early in the meeting.

To stem the tide, the board unanimously approved new policy exclusions on water damage claims that would take effect in mid-2016 if approved by the Office of Insurance Regulation. The changes are intended to eliminate policy language that attorneys have relied upon to settle their clients' claims.

Payouts for claims fought in court averaged $27,631 compared with $9,028 for non-litigated claims, Citizens budget officials said.

Policyholders in Miami-Dade County, where most of the lawsuits originate, pay an average of $2,800 a year in premiums. That's 20 percent more than they should be paying, Gilway said. If water damage claims are allowed to keep increasing, premiums on Miami-Dade homes might have to be hiked by 10 percent a year, the maximum allowable annual increase, and end up at $4,099 in four years.

Gilway also said falling revenues and rising claims costs might force Citizens to ask the legislature to allow it to increase annual premium hikes by more than 10 percent.

The policy changes include:

Limiting coverage for emergency services and temporary repairs to between $2,500 and $5,000 unless authorized by Citizens. Repairs after hurricanes would not be subject to the limit.

Requiring reports of losses to Citizens within 72 hours of "when the insured knew or should have known that the loss occurred." Currently, Citizens is often notified of losses when attorneys file suits weeks afterward, and often after repair companies have completed thousands of dollars in work, Citizens officials have said.

Limiting replacement coverage to parts of the house, such as tile, carpet, doorways or walls, directly damaged by water. Citizens says policyholders are too often fighting for replacement of the entire houseful of carpet or tile, for example, to ensure the appearance is uniform throughout. Coverage "to restore reasonable uniformity of appearance" would be available for additional cost.

Clarifying that Citizens' policies do not cover age-related deterioration of plumbing systems, and specifying that replacement of a collapsed plumbing system is limited to just the collapsed portion and not the entire system.

Specifying that in the case of blocked water pipes, a policy will pay only for the cost of accessing and repairing the specific portion that is blocked and not for tearing out and replacing the entire plumbing system.

In addition, a promotional campaign will kick off in early 2016 urging policyholders with claims to "Call Citizens First," while a related campaign will urge Citizens customers to report fraudulent activity.

Spokesmen for the Florida Chamber of Commerce and the Personal Insurance Federation of Florida issued a joint news release lauding the changes.

"Stopping fraud and abuse in the claims process is essential to ensuring that property insurance coverage is affordable and available to Florida's working families, and to maintaining our state's momentum in attracting new businesses and new jobs," said David Hart, executive vice president of governmental affairs and political operations for the Florida Chamber of Commerce.

But Ely Levy, an Orlando-based attorney who has represented plaintiffs in more than 800 lawsuits against the 25 largest property insurance companies in the state since 2010, said several of the policy revisions amount to Citizens' reducing the value of coverage for its policyholders.

That's particularly true of the limitations for the cost of tear-out and replacement of plumbing systems, Levy said in an email. "What is common to all these recommendations is an attempt by Citizens to reduce the coverage their policyholders depend on without regard for the practical needs of the policyholders in the event of a loss," he said. "Why are policyholders spending more for insurance and getting less?"

Miami-based attorney Joe Ligman, who has represented clients in more than 1,200 suits against property and casualty insurers since 2010, said Citizens could save money by properly paying claims rather than paying attorneys to fight policyholders. "Homeowners are entitled to the benefits that they paid for," Ligman said in an email.

The Citizens board approved spending $65 million to pay a long list of law firms to defend the company against policyholder lawsuits, prompting board member Don Giisson to note that the services cost $145 to each policyholder. "The vast majority of policyholders who don't litigate are paying for the ones who do," he said.

Steve Geller, lobbyist for the Florida Association of Public Insurance Adjusters, said the 72-hour notification requirement is unnecessary because "current case law says if you fail to make timely notification to your insurance company, then you have the burden of proving your delay did not prejudice your insurance company, meaning make it more difficult for them."

Citizens also is creating a managed repair program that would restrict policyholders to use of pre-approved repair companies. The program would be voluntary in 2016 and give participating policyholders a premium discount.

Jay Adams, Citizens chief claims officer, said he expects "third parties" to encourage policyholders not to participate. "So we recommend making the program mandatory in 2017," Adams said.

Attorney Levy predicted the managed repair program would create more, not less, litigation for Citizens.

Citizens has complained about increasing litigated water damage claims for several years, blaming increases on fraud by a group of attorneys, damage repair companies and public adjusters. Attorneys who frequently fight Citizens in court, in response, say the company is too often slow to respond to claims and frequently fails to pay the full cost of repairing damages.

Citizens and other insurers have unsuccessfully lobbied the state legislature for three years to sharply restrict use of assignment of benefits a contract clause many repair companies require policyholders to sign before commencing repair work. By signing the clause, policyholders give repair companies the right to sue insurance companies on their behalf. Insurers say the assignments leads to overbilling and fraud.

John Rollins, chief claims officer, said assignments of benefits are increasingly driving claims statewide. Citizens examined a sample of 1,400 recent claims and found that 36 percent of claims outside the tri-county area included assignment of benefits clause.

"What the AOB does is serve as a potential pipeline, or time bomb maybe, if you want to look at it that way, which could go off in the form of a tsunami of future litigation if it's not addressed."