by Mark Brannon, Ryan Purdy, Peter Scourtis, Anthony Kuhns, Allison Ott | June 1, 2022
After a fiery Special Session, Florida legislators passed Senate Bill (SB) 2D relating to property insurance and Senate Bill 4D relating to Building Safety, both by Senator Jim Boyd. Governor Ron DeSantis signed SB 2D and SB 4D into law on May 26, 2022.
SB 2D includes aid for insurers in the form of a Reinsurance to Assist Policyholders (RAP) Program. Other elements limit roof ineligibility but allow insurers to implement roof deductibles at 2% of coverage A or 50% of the cost to replace the roof. The bill includes Assignment of Benefit revisions, contractor solicitation requirements, slightly revised claim practices, and incorporates civil remedies to fight the out-of-control litigation in the Sunshine State. “All of us want a competitive and vibrant insurance market in our state. The reforms that passed in committee today help bring more stability to the market, more rate certainty to consumers, and address the underlying causes of the cost drivers in the market,” said Senator Jim Boyd (floir.com).
Those opposed loudly voiced their dissatisfaction regarding limited direct benefits to insureds. To this point, over 30 amendments were suggested but all failed. Ideas like rate freezes and rate caps were hot topics but the bill sponsors kept with the truth – a rate freeze or rate cap would lead to further inadequate rates that are not actuarially sound. Despite the bill passing, there is desire for further reform. “We’re not done,” said Rep. Matt Willhite, D-Wellington, suggesting that more legislation may be needed later this year or at the 2023 regular session of the Legislature (insurancejournal.com).
Despite the robust nature of the session, those well versed in the industry can agree that these bills are a key ingredient to sustaining the Florida property market. During the session, there appeared to be a lack of understanding that the market is indeed in crisis and surviving carriers are close to shutting off capacity to a significant part of the market which would have a devastating reach – possibly impacting Florida real estate if Florida’s Citizens Property Insurance Corporation is the only option for new business. These laws should help carriers create a viable path to keep and attract capital in the market and write policies with an expectation to be profitable.
Reinsurance to Assist Policyholders Program
Section 1 of SB 2D implements the Reinsurance to Assist Policyholders (RAP) Program. The RAP program authorizes a $2 billion reimbursement layer of reinsurance for hurricane losses directly below the mandatory layer of the FHCF and all eligible insurers must participate. An insurer’s limit is based on their pro-rata market share among all insurers that participate. Eligibility is determined by FHCF participation on 6/1/2022, with limited exceptions. (Greenberg Traurig, LLP)
An important stipulation is insurers must reduce their rates to reflect the savings evidenced by filings sent to the Florida Office of Insurance Regulation (FL OIR). Throughout the special session, legislators who generally opposed the bill lamented that insureds were unlikely to see premium reductions from other provisions for 12-18 months. An article published by the Insurance Journal states, “One actuary has calculated that the (RAP) plan could produce average premium reductions of as much as 4% for policyholders of participating insurers in the next several months.” (insurancejournal.com 2) Other experts in the field understand that, in isolation, rates may decrease because of the RAP program, but there should not be an expectation that rates will be 4% less due to other increasing pressure from topics like high reinsurance costs and increased loss levels.
Insurers must act swiftly to implement revisions due to roof requirements in SB 2D. SB 2D “Prohibits an insurer from refusing to issue or refusing to renew a homeowner’s insurance policy insuring a residential structure with a roof that is less than 15 years old solely because of the age of the roof…For a roof that is at least 15 years old, the insurer may not refuse to issue or renew a policy solely because of roof age if an inspection of the roof age indicates that the roof has 5 years or more of useful life remaining.”
Senator Brandes attempted to amend the bill to require only state-backed Citizens Property Insurance Corporation to accept such roof risks but his amendment failed. He said, “No other state, not even California, has the 15-year requirement…you’re forcing insurers to write older roofs, and that’s really all they have to limit underwriting losses.” The National Association of Mutual Insurance Companies also said its members are concerned about the provisions in the bill “that restrict insurers’ ability to set appropriate rates that reflect risk, particularly in deciding which properties and roofs to insure.” (insurancejournal.com 2)
Along with Senate Bill 2D, legislators passed Senate Bill 4D regarding roof section replacement and provisions for condominiums and cooperative associations. Senate Bill 4D “requires the Florida Building Code to provide that when 25 percent or more of a roofing system is being repaired, replaced, or recovered, only the portion of the roofing system undergoing such work must be constructed in accordance with the current Florida Building Code in effect at that time.” While this is generally seen as a positive change, Senator Brandes raised a question about the interplay of the two bills, which no one could answer. “If more roofs are repaired instead of replaced in coming years, per the building-code legislation, and part of a home’s roof is repaired at year one, and another part at year five, how old is the roof?”, Brandes asked. “I think that is something we’ll probably need to clarify,” Boyd said. It may be relevant that lines 916 to 923 of SB 2D state, “…a roof’s age shall be calculated using… the initial date of a partial roof replacement when subsequent partial roof … replacements were completed that resulted in 100 percent of the roof’s surface area being … replaced.”
SB 2D further allows roof deductible options at 2% of the Coverage A limit or 50 percent of the cost to replace the roof. The new roof options are not required to be offered, but they will give consumers more options and allow insurers to write exposures they might otherwise pass up.
The Litigation Fight
The most popular statistic of the session is about the percentage of litigated claims in Florida. As explained by Mark Wilson, President & CEO, Florida Chamber of Commerce, “Litigation drives losses and losses drive rate increases. With Florida accounting for 79% of the nation’s homeowners’ insurance lawsuits over claims filed, while making up only 9% of the nation’s homeowners insurance claims, it is clear Florida has a litigation problem that is costing Florida ratepayers when they can least afford it. The necessary lawsuit abuse reforms outlined in SB 2D will help build the infrastructure for a more stable and more competitive Florida insurance market.” (floir.com)
SB 2D implements new hurdles and closes loopholes regarding litigation:
- Fee Multiplier – Creates a new standard that limits contingency fee multipliers to “rare and exceptional cases” and presumes the Lodestar method of attorney fee awards is sufficient.
- Civil Remedies – Breach of insurance contract must be proven before a claimant may bring forward a bad faith claim.
- Assignments of Benefits – Always a hot topic in Florida, SB 2D prohibits assignment of attorney fees in property suits to persons other than someone named in the policy and further clarifies requirements around notice of intent to initial litigation before filing suit.
- Contractor Solicitation of Roof Claims – Requires contractor solicitations to include language around insurance fraud and payment of deductible responsibilities.
Insurance companies must act now…
- Roof Eligibility Changes
Insurers must revise roof eligibility requirements by July 1, 2022. The simplest way to comply is to submit a rule only filing with revised underwriting guidelines. The revisions must reflect the insurer may not refuse to issue or renew a policy with a roof that is less than 15 years old solely due to the age of the roof. Further, for new and renewal business, insurers may not refuse a policy solely because the roof age, if an inspection of the roof performed by an authorized inspector deems the roof has 5 years or more of useful life remaining.
- RAP Program
All insurers who participate in the RAP program must send filings no later than June 30, 2022 if participating during the 2022-2023 calendar year, or May 1, 2023 for the 2023-2024 year to demonstrate the rate reduction realized by participating in the program. Insurers are not allowed to make any other changes to the rates within the filing.
- New Roof Deductible Options
Insurance companies who wish to implement the new roof options – 2% of coverage A or 50% of roof replacement – must send actuarially sound filings to the FL OIR. If an insurer issues a policy with a separate roof deductible, the actual dollar value of the roof deductible must be shown on the declarations page. Further, a new form, to be included directly after the declarations page, must contain promulgated language informing the insured of the separate deductible. Filings are required and SB 2D states the FL OIR will review the form filings within the 30-day review period; the 15-day extension does not apply.
Insurers may add a separate roof deductible to policies at renewal, but must provide a notice of change letter. The insurer must also offer the policyholder the ability to opt-out and reject the separate roof deductible. The same filing requirements apply.
Florida has taken a much-needed step in addressing its insurance crisis, just in time for hurricane season. Though every legislative effort contains elements of compromise, the overall outlook for these bills is positive for the Florida insurance market. What their actual impact will be, however, will bear out over the coming months.