Addressing natural and man-made catastrophic risk affecting the Florida property insurance market

March 2023  |  SPECIAL REPORT: MANAGING RISK

Financier Worldwide Magazine

March 2023 Issue

The US property and casualty insurance industry has experienced challenges in recent years due, in large part, to increases in the frequency and severity of natural catastrophes, as well as a tightening reinsurance market. Additionally, Florida’s property insurance market has been negatively impacted by contractors who exploited the state’s former one-way attorney fee statute by artificially inflating the cost of insurance claims in collaboration with questionable billboard attorneys. These additional challenges have created unsustainable underwriting losses and have caused the reinsurance market to harden.

The combination of losses sustained because of both man-made and natural disasters and an ever-tightening reinsurance market have resulted in multiple high-profile insurer insolvencies and hundreds of thousands of Florida insurance policies being cancelled or nonrenewed. As private market capacity has declined, the number of Floridians being insured by Florida’s state-run insurer of last resort, Citizens Property Insurance Company, has nearly tripled in less than two years.

In this article, we explore the natural and man-made catastrophic risks inherent in Florida which have contributed to creating very challenging property insurance markets in the world. We also discuss measures that Florida’s leaders have undertaken to address these issues and help support the struggling market.

Man-made disasters

The Florida legislature has attempted, several times, to address Florida’s property insurance issues. In 2019, the legislature passed SB 7065 addressing abuses related to assignment of benefits under property insurance contracts. Later in 2021, the legislature passed SB 76, which implemented new notice requirements related to litigation, addressed attorney’s fees in a limited manner, and reduced claims filing deadlines. The measures were helpful but did not fully address the issues caused by fraud and abuse.

To address the growing problems affecting the Florida insurance marketplace, Ron DeSantis, governor of Florida, called a special session of the Florida legislature in May 2022, during which the legislature passed Senate Bill 2D, which included additional provisions aimed at litigation reform. Senate Bill 2D also aimed to provide relief to Florida insurers from the hardening reinsurance market by creating the Reinsurance to Assist Policyholders Program, which authorised a $2bn dollar reimbursement layer of reinsurance for hurricane losses directly below the mandatory layer of the Florida Hurricane Catastrophe Fund.

Subsequently, on 28 September 2022, Hurricane Ian made landfall on Florida’s Lee Island Coast. The storm produced winds of over 150 miles per hour and caused massive flooding across the state. It is estimated that Hurricane Ian inflicted over $50bn in damage on the state, striking yet another blow to the Florida property insurance market. Soon thereafter, the legislature met in December for its second special session of 2022 and passed Senate Bill 2A, which many industry experts regarded as the most significant property insurance reform bill in recent history. The bill strengthened Florida’s property insurance market by eliminating one-way attorney fees for property insurance claims, which was the driving force incentivising unscrupulous contractors and their attorneys to file frivolous lawsuits in defence of largely inflated or fraudulent property insurance claims.

Other key aspects of Senate Bill 2A included: (i) enhancing the authority of the Florida Office of Insurance Regulation to conduct market conduct examinations of property insurers following a hurricane to hold insurance companies accountable and prevent abuse of the property appraisal process; (ii) reducing timelines for insurers to process payments and get funds back into the hands of policyholders as they rebuild their lives; and (iii) building on reforms passed earlier in 2022 by committing additional funds to provide temporary reinsurance support and help stabilise the marketplace.

Additionally, the legislature passed Senate Bill 4A, which provided property tax relief for homes rendered uninhabitable due to recent storms. The bill provided $750m for the communities impacted by Hurricanes Ian and Nicole, including $350m to support the entire portion of local government match for Federal Emergency Management Agency (FEMA) Public Assistance, freeing up local funds to undertake additional hurricane recovery and mitigation projects and $150m to the Florida Department of Environmental Protection to support local beach renourishment projects and a new Hurricane Restoration Reimbursement Grant Program.

Natural catastrophe risk

Florida officials have also sought to better prepare the state to withstand the effects of increased natural disasters. In recent years, Florida lawmakers have implemented historic investments to ensure communities are prepared for rising sea levels and flooding.

For example, during the 2022 legislative session, lawmakers passed House Bill 7071, ‘Home Hardening and Other Tax Breaks for Floridians’. The law includes the ‘Home Hardening’ initiative, which provides sales tax relief to homeowners to harden their homes from storms. The bill also includes an abatement of all property taxes for owners of surfside condominiums, pro-rated refunds of property taxes on residential properties rendered uninhabitable by a catastrophic event for at least 30 days, a sales tax reduction on new mobile homes and several sales tax holidays.

In the same session, lawmakers passed House Bill 7053, ‘Coordination of Flooding and Sea-Level Rise Resilience Efforts’. The law establishes the Statewide Office of Resilience within the Governor’s Office, with a governor appointed chief resiliency officer. It also sets a minimum of $100m in funding to be identified annually in a comprehensive and ranked list of resilience projects.

Mindful of last summer’s tragic incident involving the collapse of the Champlain Towers, legislators passed Senate Bill 4D, ‘Building Safety’. Senate Bill 4D originally only made changes to the building code relating to roof replacement requirements. However, the scope was expanded to include policy changes related to condos and condo associations. The bill amends the Florida Building Code to provide that when 25 percent or more of a roofing system or roof section is being repaired, replaced or recovered, only the portion of the roofing system or roof section undergoing such work must be constructed in accordance with the current Florida Building Code in effect at that time. Senate Bill 4D, which addresses roof repairs as it relates to property insurance, was amended to include condo safety recommendations which largely mirror stronger structural and building safety measures outlined by the Surfside Working Group’s Florida Building Professionals Recommendations.

Looking to the future

Florida is regarded as one of the most difficult property insurance markets in the world, which is largely attributed to the prevalence of natural disasters such as catastrophic hurricanes and flooding. In fact, a main factor driving up property insurance and reinsurance rates in Florida is fraud. Most observers can agree the market is at a critical inflection point, and action must be taken to address these challenges.

Efforts by Mr DeSantis, the legislature, and the Florida Office of Insurance Regulation to address the fraud by eliminating one-way attorney fees and reforming the manner in which property insurance claims are adjudicated may help to address the problem and bring much-needed relief to Florida insurance consumers, but there will likely always be people looking to game the system.

The legislature is expected to focus on property insurance heavily in the 2023 regular legislative session. In that regard, Florida lawmakers have an opportunity to transform a struggling insurance marketplace which supports one of the most desirable and vibrant property markets in the world. Those of us who live and breathe in this market will be watching closely to see if the legislature will continue to build on the efforts taken in December 2022.

 

Fred E. Karlinsky and Timothy F. Stanfield are shareholders and Christian Brito is an associate at Greenberg Traurig, P.A. Mr Karlinsky can be contacted on +1 (954) 768 8278 or by email: karlinskyf@gtlaw.com. Mr Stanfield can be contacted on +1 (850) 222 6891 or by email: stanfieldt@gtlaw.com. Mr Brito can be contacted on +1 (954) 768 8279 or by email: christian.brito@gtlaw.com.

© Financier Worldwide

BY

Fred E. Karlinsky, Timothy F. Stanfield and Christian Brito

Greenberg Traurig, P.A.

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