A.M. Best Special Report–AOB Litigation Issue Presents Florida Market With a New Storm Front
May 23, 2017
Hurricane activity in Florida has been somewhat subdued over the past decade; however, the market has not been without its challenges, A.M. Best explained in a press release today, May 23, 2017. A number of threats have emerged, from the impact of sinkhole losses several years ago, to the recent sudden rise of the assignment of benefits (“AOB”) issue, according to a new special report the company published, also today.
The Best’s Special Report entitled “Florida Market Faces a New Kind Of Storm,” notes the substantial negative impact AOB issues have had on the Florida market, particularly regarding homeowner water claims. The AOB process allows an insured to assign payment of a claim to a third party. This allows for the third party–in Florida’s case, contractors–to be paid directly by the insurance company, rather than the insured paying and subsequently being reimbursed. Contractors are afforded the rights of the insured and essentially “stand in their shoes.” Consequently, contractors are protected by the same legislation meant to protect the insured–most importantly, the one-way attorneys’ fee rule, which dictates that, if an insured is able to prove that he/she is entitled to a larger indemnity payment of any amount, he/she is also entitled to the repayment of the associated attorneys’ fees incurred in the pursuit of restitution.
As a result of the AOB claims, insurers are sustaining unexpected and significant increases in indemnity payments and litigation fees. AOB issues not only are driving increases in both litigated and non-litigated claims, but they are also leading to proportionately larger increases on non-litigated claims even though dollar costs are higher for litigated claims. According to the Florida Office of Insurance Regulation (“OIR”), AOB lawsuits in Florida rose to 28,200 in 2016 from 405 in 2006. The number of water claims and the severity of such claims also are rising, causing deterioration in results, particularly in recent years. Per the OIR’s 2016 Data Call Study, since 2010 AOB claims have driven increases in water claims frequency by 46 percent and in severity by 28 percent, which, in combination, translates into a 14.2 percent increase in water claims losses per year.
Given the added cost associated with the AOB dynamic, the reality is insureds will bear some of the cost through higher rates. According to the OIR, 73 percent of rate filings in 2016 were for rate increases, and homeowners can expect to see 10 percent rate increases in the future. Pressures brought on by rising costs have led the insurance market to turn to the Florida Legislature for help. Unfortunately, calls for a bill that would curb AOB abuse have failed during the past five years. Without legislative relief in sight, insureds will likely face rate increases, A.M. Best said.
“We believe the rated entities in the Florida property market are adequately managing their ongoing exposure to these negative market trends, particularly as they relate to the companies’ current A.M. Best ratings. However, further escalation of losses resulting in deterioration in risk-adjusted capital could result in negative rating pressure,” A.M. Best concluded in its report.
A.M. Best said it continues to diligently monitor Florida’s property insurance market, placing careful consideration on several areas to determine appropriate Long-Term Issuer Credit Ratings for Florida-based companies, adding that “The AOB environment is a unique situation, and a solid enterprise risk management program that focuses not only on current risks but also on various emerging risks is essential.”
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