The storm in Florida's home insurance market is not weather-related. It's fraud and litigiousness
After years of shrinking, the state taxpayer-backed property insurance company Citizens has been growing as private insurers lose money in Florida.
To hear Barry Gilway tell it — the skyrocketing cost of home insurance in Florida is not because of Mother Nature. It’s more human nature.
"There are individuals who want their home fixed. And there are individuals who want to utilize their insurance policies like a maintenance agreement," he said.
Gilway blames Florida law for encouraging that by how it treats legal fees in insurance lawsuits.
Gilway is the CEO of Citizens Property Insurance — the largest property insurer in the state — and by far the dominant home insurer in South Florida. If you have property insurance in Palm Beach, Broward, Miami-Dade or Monroe counties, odds are your property is insured by Citizens. In South Florida, market share is 40%.
That means the insurance is ultimately insured by you since Citizens is the state-backed insurer of last resort. It does not have investors or shareholders on the hook if it has to pay out a monster loss like after a major hurricane. Instead, Florida residents ultimately would have to pick up the tab if the damages are big enough.
That “big enough to have to be bailed out by Floridians” number is $12.7 billion.
In South Florida, Citizens insures more than $100 billion dollars worth of homes and buildings.
That number has been growing fast as private insurance companies cancel policies, stop renewing them, or leave the market altogether, driven away by what Gilway said is not hurricane winds or storm surges, but what he describes as a "sea of red ink" among many private insurance companies covering homes in Florida. "They're all losing money and they're all scrambling to get rate increases as quickly as they possible can."
And Citizens is part of that push for higher priced property insurance premiums.
Gilway has been the boss at Citizens for almost a decade. He helped shrink the company from the biggest it had ever been to the smallest. And now it's growing again — and fast, fueled by what Gilway described as the social acceptance of filing small claims fueled by fraud and Florida’s law regarding legal fees.
Since the year before Hurricane Irma, the number of Citizens Property Insurance policies in Florida has grown by more than 300,000 — a 67% increase compared to 2016. Yes, there have been some expensive storms to hit Florida such as Irma in 2017 and Michael in 2018.
Before 2017, private insurers were profitable in Florida, earning more than $400 million a year.
"But what has happened since 2017 is these companies slowly but surely are losing money. I mean, not a little," said Gilway. He expects private insurers to report losing more than $1 billion last year in the state.
Gilway points to fraud and what he called "social inflation."
He defined social inflation "as the propensity for (property owners) to put in claims. So what you've got is you've got fraud, which makes it more and more and more acceptable to put in claims."
Data from the National Association of Insurance Commissioners found 8% of all home insurance property claims filed in 2019 were filed in Florida. However, 75% of home insurance claim lawsuits nationwide were filed in Florida.
"This is staggering. It's almost hard to believe," said Gilway. His diagnosis of why there is such a difference — "out-of-control litigation."
Specifically, Gilway cited the state's one-way attorneys fee law. In fact, he knew the statute by heart–"627.428."
When a homeowner makes an insurance claim requesting their insurance company pay for something — for example water damage, a roof, or fire damage — and that claim winds up in a lawsuit, the insurance company has to pay for all the legal fees in the case if it winds up paying more than the original claim. This has been the law in Florida for more than a century.
Supporters say it protects homeowners against paying for legal costs if they want to sue their insurance company for what they think is a low-ball settlement offer.
"Replacing a roof with two missing tiles doesn't comply with Florida statute," Gilway said, "so we're not paying that claim. What happens? They sue, and there's no reason why they wouldn't sue because (the homeowner's attorneys) going to get their plaintiff costs anyway."
Insurance companies and Gilway have tried unsuccessfully for years to modify or eliminate the one-way attorneys fees law. Some reforms have passed the Legislature and become law, but those changes have not stanched the lawsuits.
Citizens is facing 17,000 open civil claims lawsuits now and is the defendant in about 900 new ones each month. Last year, Citizens spent $80 million on its legal defense alone.
In mid-January, Southern Fidelity Insurance went before state regulators asking for permission to almost double its homeowners insurance rate. It would take its average insurance premium from below $2,500 a year up to almost $5,000 a year.
More than 16,000 properties in South Florida were protected by Southern Fidelity as of last September. Statewide, Southern Fidelity has about 99,000 property insurance policies in force.
During the rate hearing earlier in January, the state’s top property insurance regulator Susanne Murphy asked this question: "Is it accurate to say that without increases of the sort that you are seeking approval of today that Southern Fidelity Insurance Company would not continue to be a going concern?"
This is one of the worries of regulators — are insurance companies at risk of failing or leaving Florida without these big rate hikes?
Southern Fidelity Insurance co-CEO Bryon Wells responded: "This rate increase is vital to ensure the financial stability of this company moving forward. Without these increases, we would have to have significant contributions, substantial amounts of capital, which we feel is not sustainable (and) reasonable to expect."
By comparison to the rate hike Southern Fidelity is hoping for, the largest property insurance company’s rate hike seems modest (unless you are a Citizens policyholder facing the double-digit increase). Citizens is raising its average homeowners insurance premium 11% this year and another 12% next year. Those are the maximum increases allowed under state law.
And it still isn't enough to catch up with the private market, according to Gilway. "That puts us at least 25 to 30% below the market overall," he said. "Incredibly low. Way, way, way too low."
The spread is much less in South Florida though, where Citizens is concentrated. Gilway estimates its premiums in Miami-Dade County are underpriced by about 5%.
Yet he acknowledged Citizen's cheaper premiums discourages private companies from wanting to take on the risk of insuring more homes in Florida.
"We are, without any question whatsoever, with our current rate structure, the most affordable company in the marketplace, right? And that does not mean insurance in Florida is affordable," he said.