Homeowners Take Insurers to Court

The nation’s largest property insurers have been steadily shrinking their footprint in Florida, where increasingly frequent and powerful storms mean seasonal waves of claims. In 2022 alone, at least six smaller insurers have gone belly up, with the state-run “insurer of last resort” Citizens Property Insurance Corporation taking on their policies. The company now holds more than a million homeowner policies in the state.

In May, ahead of hurricane session, DeSantis convened a special legislative session dedicated to solutions for Florida’s property insurance market — including tort reform, a longtime GOP hobbyhorse, which DeSantis contended was needed to address “thousands of frivolous lawsuits.”

Such lawsuits undoubtedly exist; stories abound of unscrupulous contractors, in particular, taking advantage of hard-hit homeowners and billing their insurance companies for overpriced work. But consumer advocates and attorneys dispute the frequency of such lawsuits and their role in ever-increasing insurance costs.

“People aren’t lining up to get involved in years of litigation,” said Amy Boggs of the Florida Justice Association, a trade association for plaintiffs’ attorneys. “They’re suing the insurance industry because their claims aren’t being paid.”

Boggs takes particular issue with a statistic DeSantis routinely cites as evidence of a litigation crisis: that Florida accounts for 79 percent of the nation’s homeowners’ insurance lawsuits, but just 9 percent of the claims.

That number came from Florida Insurance Commissioner David Altmaier, a political appointee who relied on proprietary data from the National Association of Insurance Commissioners (NAIC), of which he is also president.

Altmaier circulated this figure last year as the legislature prepared to debate a separate property insurance bill aimed at curbing lawsuits, prompting alarm from consumer advocates.

In response, the advocacy group Florida Consumer Action Network submitted a report from Birny Birnbaum, a former Texas insurance regulator and director of the Center for Economic Justice, which called the insurance lawsuit figure “incomplete, without context, and misleading.”

Instead, after gaining access to the NAIC data, Birnbaum contended that it underscored that the bulk of litigation “can be tied to a small number of insurers and is not an industry-wide problem demanding wholesale changes to the civil justice system.”

According to Birnbaum, the same data also show that insurers in Florida take longer to close claims, and close more claims without ever paying, when compared to other states — suggesting a regulatory failure on Florida’s part. Insurers are also more likely to refuse to renew policies.

“While it is impossible to identify the cause of the poor consumer treatment by Florida insurers,” reads the report, “one possible explanation of higher amounts of litigation in Florida may be weak market conduct enforcement.”

A History of Bad Faith

In locales where increasingly frequent and destructive storms pose an existential threat to coastal communities, major property insurers have found creative ways to reduce their own losses from disasters. In 2006, the year after Hurricane Katrina and a slew of other devastating storms, insurers infamously reported a record $44.8 billion in profits.

That’s thanks, at least in part, to tactics developed beginning in the 1990s, when the insurance giant Allstate — and later State Farm and Farmers Group, Inc. — hired the consulting firm McKinsey & Co. to overhaul its claims processing procedure, which McKinsey referred to as a ​“zero-sum economic game.”

Throughout 1,300 pages of what became known as the “McKinsey documents,” obtained through litigation and detailed in a 2007 Bloomberg Markets Magazine cover story called “The Insurance Hoax,” the consulting firm outlined in shocking specificity the tactics insurance companies could use to avoid paying out claims.

Where insurance giant Allstate advertises to customers that they’re “in good hands,” for example, McKinsey consultants suggested a tweak in a slide called, “Good Hands or Boxing Gloves.” While customers who accepted an initial, low offer could be treated with good hands, the company should put on its boxing gloves if they protested or threatened legal action. Another slide showed an alligator with the heading “Sit and Wait” — a directive for how to wear down claimants in drawn-out proceedings.

The strategies appeared to work. State Farm doubled its profits between 1996 and 2006 while dropping its “payout per premium dollar” from 70.6 percent to 51.6 percent. That meant the company pocketed roughly half of what policyholders paid in premiums, even amidst a series of major hurricanes.

But the McKinsey-approved tactics also drew the attention of whistleblowers and regulators. Mississippi’s attorney general sued State Farm after two of its insurance adjusters came forward in the wake of Hurricane Katrina with allegations that the company was systematically destroying or falsifying damage reports in order to avoid paying out claims related to wind damage — instead maintaining that all the insured homes had been destroyed by flooding, which the company doesn’t cover. The lawsuit finally settled last year for $12 million, with the state now tasked with distributing the funds to homeowners whose claims State Farm denied more than fifteen years ago.

Both State Farm and Allstate have run afoul of regulators and elected officials in Florida, which has a fairly policyholder-friendly statute giving consumers the right to sue insurers for “not attempting in good faith to settle claims.” Such “bad faith” lawsuits are separate from the underlying insurance claims and can entitle consumers to additional damages — in some cases covering, for example, the expense of claimants’ temporary housing arrangements while they waited months or years for payment of their claims. Beyond compensating individual homeowners, plaintiffs’ attorneys say such bad faith provisions act as a critical deterrent against insurers following just the sort of “delay, deny, defend” tactics laid out in the McKinsey documents.

In 2008, Allstate found itself briefly suspended from selling new policies in Florida after refusing to respond to a subpoena to produce the McKinsey documents from the state insurance commissioner. Allstate eventually relented and posted all 1,300 pages on its website, and has since been subject to bad faith claims making use of the documents.

The following year, State Farm announced it would exit Florida after regulators refused to grant the company a 47 percent rate hike. Crist, then governor, had campaigned on reducing insurance costs and said he would gladly show State Farm the door — but the company quickly backed down after reaching a deal that allowed it to hike rates by 14.8 percent and discontinue coverage for 125,000 high-risk customers.

Even after dumping some of its riskiest policies and refusing to write new ones in certain parts of the state, State Farm maintains the third-largest market share in Florida. In the last decade, state courts have ruled against the company in a series of precedent-setting cases that shored up homeowners’ abilities to sue for bad faith. A case decided against State Farm in 2014, brought by Florida residents whose homes were damaged in 2005 by Hurricane Wilma, established that insurance policyholders do not have to show in court that insurers violated their policy before bringing such claims — a precedent that consumer advocates say helps combat stall tactics. Policyholders must still file a sixty-day notice of their intent to file a lawsuit and give insurers the opportunity to remedy alleged bad faith practices.

In May, the Florida legislature slipped a small change undercutting this precedent into a pair of bills passed during the special session called by DeSantis. The legislation amended Florida’s bad faith statute to require that policyholders prove a breach of contract before they can bring a bad faith claim — potentially removing a major disincentive to handle claims unfairly and providing another mechanism to delay.

According to plaintiff’s attorney Chip Merlin, this subtle change creates a loophole through which insurers can wait until they are informed that a homeowner intends to sue, then send the claim to a third-party process known as an appraisal that technically avoids breaching the contract. “The insurance companies want to be able to do all kinds of bad practices to an insured and then invoke appraisal and use the payment of appraisal as a ‘get out of jail free card,’” said Merlin.

Goldberg Segalla, a major law firm representing insurers and reinsurers, is likewise blunt about the impact: as a result of the Florida legislation, the company writes in a summary on its website, “bad faith claims should be fewer and harder to prove.”

A Cure Worse Than the Disease

Just before the May legislative session began, DeSantis’s campaign received a $225,000 influx of cash from the Florida Insurance Council, a political action committee backed by the state’s major insurers. The Associated Industries of Florida, which lobbies on behalf of insurers, also contributed $50,000 via its political action committee just four days before the legislative session began. DeSantis has received nearly $2 million in contributions from the insurance industry this campaign cycle, according to state records.

As debate over the bills proceeded in May, Democrats in the legislature introduced a number of amendments that would’ve passed on savings from the bill and taxes on premiums to consumers as rate relief, prohibited insurers from excluding high-risk areas from coverage, and required the state to collect data on how climate change was increasing natural disasters and driving up insurance costs — a step the US Treasury Department is now proposing. None of the amendments were included in the final bill.

Instead, the bill provided $2 billion in public financing that insurers can tap into to stem their losses from disasters — without any guarantee that they’ll pass on benefits to consumers. Many of the companies tapping into the fund have since applied to the state for rate increases, with some declining, on the grounds of trade secrets, to say how much of the savings from the publicly financed catastrophe fund they’ll return to consumers, according to the Orlando Sentinel.

“When you just put that much money down and say, ‘Here you go. Have a nice day,’ that’s what happens,” Bill Newton, deputy director for the Florida Consumer Action Network, told the newspaper.

The final version of the bill also limited homeowners’ ability to recoup attorneys’ fees in some situations.

DeSantis has not yet named any additional proposals he may ask the legislature to take up in the post-election special session to stabilize Florida’s property insurance market. But Jimmy Patronis, a DeSantis ally running for reelection as the state’s chief financial officer, has suggested appointing a special prosecutor to investigate property insurance fraud, which consumer advocates fear could portend an even more permissive environment for big insurers.

Meanwhile, Florida homeowners have already filed a record number of claims related to Hurricane Ian.

The hardest hit areas “are not going to be able to rebuild unless the insurance industry answers the call and pays their claims,” said the Florida Property Association’s Boggs. “And the longer they take to do that, the longer those communities suffer.”