Out With the Old, In With the New - Florida Property Insurance Litigation Reform

Florida’s property insurance market has long been a hotbed of litigation. According to the Florida Office of Insurance Regulation (FLOIR), in recent years, Florida has accounted for a disproportionately high percentage of the nation’s property insurance litigation. In 2016, only 7.75% of all homeowners’ insurance claims nationwide were filed in Florida, but Florida accounted for 64.43% of all homeowners’ insurance lawsuits nationwide. By 2021, the percentage of claims dropped to 6.9%, but the percentage of lawsuits increased to 76%. 

One-way attorneys’ fees

Until recently, Florida’s “one-way” attorney fee statute allowed insureds who prevail against their insurers to recover attorneys’ fees. Although the statute required the insured to obtain a “judgment” to recover fees, Florida case law created a “confession of judgment” standard, which gave an insured the right to recover fees even where an insurer had voluntarily issued payment before any judgment was rendered. Further, courts often applied “fee multipliers,” and awarded fees much greater than the “lodestar” fee (the reasonable hourly rate). These laws incentivised insureds to file suit even if a claim could be resolved out of court. In fact, rampant litigation has often been cited as a driver of drastically increasing insurance premiums in Florida.

Exacerbating the problem, third parties often took an assignment of benefits (AOB) for part of an insured’s claim in exchange for performing services. Water mitigation, mould remediation, and roofing contractors became regular litigants, claiming entitlement to attorneys’ fees which often exceeded the amount in dispute. A single claim could result in multiple lawsuits and multiple claims for attorneys’ fees.

Appraisal

Meanwhile, appraisal – an important tool for resolving claims – was misused to create additional litigation. Appraisal promoted the quick, efficient, and final resolution of claims. However, Florida case law recognised an appraisal award as a “favourable resolution” that could provide the springboard for a bad faith action. Even when an insurer agreed to participate in appraisal and paid the award, the insured could still sue for bad faith. This law had a chilling effect on insurers’ willingness to use appraisal, and many insurers even removed appraisal from their policies.

All the while, many policyholders and their advocates claimed rising insurance premiums were the result of insurers’ bad claims practices. They urged that abolishing the one-way fee statute and tightening the reins on litigation would allow insurers to continue to collect growing premiums while avoiding accountability for flawed coverage decisions and poor claims handling.

Senate Bill 2-A

As the situation reached crisis between 2019 and 2021, the Florida legislature passed several important insurance reforms, limiting the use of AOBs, creating a pre-suit notice and demand requirement, and limiting the availability of attorneys’ fees. In 2022, the legislature passed Senate Bill 2-A, which included the most substantial property insurance litigation reforms Florida has seen in decades.

Senate Bill 2-A enacted reforms aimed at curbing rampant litigation and stabilising the property insurance market, which included:

• repealing the one-way attorney fee statute (§ 627.428, Fla. Stat.);
• prohibiting AOBs on policies that incept after 1 January 2023;
• requiring a judgment for breach of contract (not an appraisal award) to sue for bad faith; and
• authorising insurers to issue policies requiring mandatory binding arbitration.

Senate Bill 7052

In 2023, the legislature also passed the Insurer Accountability Act, Senate Bill 7052, which provided heightened standards for the prompt investigation of claims and increased transparency, including:

• shortening the time frames for insurers to investigate and resolve claims;
• requiring insurers to provide their insureds with copies of any detailed written estimates prepared by their adjusters (and to track any revisions);
• requiring insurers to file quarterly reports with FLOIR regarding claims experience; and
• setting parameters for mandatory market conduct examinations by FLOIR.

The confluence of these new laws is expected to significantly impact property insurance litigation in Florida. In 2022, in response to the prior reforms enacted from 2019 to 2021, Florida’s percentage share of the nation’s homeowners’ insurance litigation fell from 76% to 70.83%, the lowest since 2017. As the most recent reforms take effect, insurers hope to see these numbers reduced further.

Carriers, however, should expect heightened scrutiny from FLOIR and the plaintiffs’ bar. Without a one-way fee statute for insureds, and with onerous new claims handling requirements for insurers, the focus of litigation may shift to issues regarding claims handling and bad faith. It has never been more important for Florida property insurers to develop and implement robust guidelines and standards to avoid the potential pitfalls that lie ahead.

Tit for Tat: Regulatory Accountability in the Wake of Sweeping Reform

As previously noted, Florida’s historic litigation and attorney fee reform comes with increased political pressure for heightened regulatory scrutiny of the insurance industry. Senate Bill 7052 (SB 7052) armed FLOIR, with effect from 1 July 2023, with additional regulatory surveillance and enforcement tools.

SB 7052 increased FLOIR’s authority to assess administrative fines against insurers for violations of the Florida Insurance Code by 250%. For example, the authority to assess fines for each non-wilful violation was increased from USD5,000 to USD12,500, and the aggregate cap for violations arising from the same action was increased from USD20,000 to USD50,000. The potential administrative fine for a wilful violation was increased from USD40,000 to USD100,000, and the aggregate cap for violations arising from the same action was increased from UDS200,000 to USD500,000. The penalty amounts increase even higher if the violation relates to a declared state of emergency, such as a hurricane-related claim.

SB 7052 required FLOIR to create a risk-based selection methodology for scheduling and conducting market conduct examinations of insurers and other regulated entities. Insurers that generate a disproportionate number of complaints, as compared to other insurers in Florida, are prioritised for market conduct examinations, particularly where the complaints arise from claims-related issues or unfair insurance trade practices. In addition, FLOIR is required by law to perform a market conduct examination of a residential property insurer within 18 months after the landfall of a hurricane resulting in an executive order or state of emergency issued by the Governor if, at any time more than 90 days after the end of such hurricane, the insurer:

• is among the top 20% of insurers based on a calculation of the ratio of hurricane claim-related consumer complaints filed with the Department of Financial Services (DFS) to the insurer’s total number of hurricane-related claims;
• is among the top 20% of insurers based on a calculation of the ratio of hurricane claims closed without payment to the insurer’s total number of hurricane claims;
• has made significant payments to its managing general agent since the hurricane; or
• is identified by the FLOIR as necessitating a market conduct exam for any other reason.

SB 7052 created a new law requiring every residential property insurer authorised to conduct business in Florida to create and use a claims-handling manual that provides guidelines and procedures that comply with the requirements of the Florida Insurance Code and, at a minimum, comports to usual and customary industry claims-handling practices. A residential property insurer is required to submit to FLOIR, within five business days of the request, a physical or electronic copy of its claims-handling manual in effect at the time requested by FLOIR. Authorised residential property insurers are further required to annually certify to FLOIR by 1 May of each calendar year that:

• each of the insurer’s current claims-handling manuals complies with the requirements of the Florida Insurance Code and comports to, at a minimum, usual and customary industry claims-handling practices; and
• the insurer maintains adequate resources available to implement the requirements of each of its claims-handling manuals at all times, including during natural disasters and catastrophic events.

The requirement for insurers to produce claims-handling manuals to FLOIR is likely to result in public records requests being submitted by plaintiff attorneys, public adjusters, and other parties interested in using such information to find a basis for asserting bad faith or other litigation, including class action litigation, against residential property insurers. The same is true with regard to information and files produced by insurers in connection with market conduct examinations. Consequently, insurers who produce their claims-handling manuals to FLOIR in response to the new law, as well as insurers who produce claims-related files to FLOIR in connection with market conduct examinations, should be careful to mark such manuals and materials “trade secret” in accordance with the procedures codified in Section 624.4213 of the Florida Statute.

SB 7052 further created a detailed framework for FLOIR to evaluate the claims-handling practices of liability insurers. If FLOIR concludes through a market conduct examination that an insurer providing liability coverage exhibits a pattern or practice of violations of the Florida Insurance Code, FLOIR is required to review the insurer’s claims-handling practices to determine whether the insurer should be subject to enhanced enforcement penalties, which include, but are not limited to, administrative fines that are subject to a 200% multiplier and fines that exceed the limits on fine amounts and aggregate fine amounts provided for under the Florida Insurance Code.

Considering the heightened surveillance and potential adverse regulatory impacts of “insurer accountability” measures adopted as part of SB 7052, insurers operating in Florida would be well advised to ensure that their claims-handling procedures are reviewed and documented on an ongoing basis for compliance with the Florida Insurance Code and industry best practices. Insurers should contemplate adopting or enhancing the use of technology solutions to minimise human errors, enhance the customer experience, and produce records and data that are readily auditable by FLOIR and its examiners.

Impact of Recent Florida Statutory Reforms on the Reinsurance Market

Over the past several years, property insurers doing business in Florida have incurred significant losses. Reports have estimated that Florida’s domestic property insurers had cumulative net underwriting losses exceeding USD3 billion from 2017–2021. 

Much of these losses arose from the heightened frequency of catastrophic weather events, including hurricanes and other severe wind and thunderstorms. Further, due to a legal environment that allowed an insured to recover attorney’s fees in the event the insured prevailed in litigation against their insurer, litigation exploded, with Florida experiencing a greatly disproportionate amount of claims litigation compared to the rest of the country.

The proliferation of insurance claim litigation significantly increased insurers’ loss expenses. These expenses are generally passed on to reinsurers, who in turn incurred significant losses in their portfolios. Reinsurers responded by raising rates and reducing capacity, placing a strain on the Florida marketplace. Insurance companies had difficulty finding affordable reinsurance, if they were able find reinsurance at all.

Insurers passed on their increased reinsurance costs to consumers in the form of increased rates, claiming that it was the only way to confront the underwriting losses being incurred. Between 2017 and 2022, 11 Florida-domiciled insurance companies became insolvent and went into receivership. With the market in crisis, the Florida legislature realised it had to act. Through a series of legislative sessions, the Florida legislature implemented two programmes to assist insurance companies in obtaining affordable reinsurance and enacted a series of reforms aimed at reducing cost drivers and stabilising the domestic property insurance industry.

The RAP programme

The first reinsurance programme the Florida legislature created was the Reinsurance to Assist Policyholders (RAP) programme. The RAP programme provided for a non-recurring total of USD2 billion in coverage for a portion of an insurer’s hurricane losses, with each insurer’s limit of the USD2 billion equal to their pro-rata market share among all insurers participating in the programme. Eligible insurers were required to participate in the RAP programme for one year. Insurers certified to be in an “unsound financial condition” by the Florida Insurance Commissioner were not eligible to participate in the programme. 

The RAP programme reimbursed insurers 90% of their covered losses from each covered event in excess of their RAP retention, plus a 10% loss adjustment expense allowance, not to exceed the RAP limit. Insurers did not pay premiums for RAP programme coverage but were required to reduce rates to reflect savings.

The FORA programme

The second reinsurance programme enacted by the Florida Legislature was the Florida Optional Reinsurance Assistance (FORA) programme, which was in effect for the 2023 hurricane season. FORA created an optional hurricane reinsurance programme from which insurers could obtain reinsurance at rates below those in the private reinsurance market. Rates differed by tier level purchased and ranged between 50 and 65% rate online. Tiers began at the Florida Hurricane Catastrophe Fund (FHCF) attachment point and cumulatively were limited to no more than USD5 billion below the FHCF attachment point. The Florida legislature funded the FORA programme with USD1 billion in general revenue funds and the premiums insurers paid for FORA coverage. FORA, however, was deemed to be too expensive and did not offer the level of coverage at the bottom of the reinsurance tower, where carriers needed the assistance most. As a result, only three insurers purchased FORA coverage in 2023.

Further reform

In addition to the 2022 reforms previously mentioned, the Florida legislature has reduced the deadline for policyholders to report a property insurance claim as follows: from two years to one year for a new or reopened claim, and from three years to eighteen months for a supplemental claim. Reductions in time to file a claim is a mechanism to eliminate fraudulent claims in that insurance companies report that many claims filed years after an event and closer to the filing deadline are usually fraudulent and/or orchestrated by a bad actor or interested third party.

Additional reforms enacted during the 2023 regular legislative session:

• repealed one-way attorneys’ fees in nearly all insurance policy matters (not just property insurance);
• created a rebuttable presumption that a lodestar fee is a sufficient and reasonable attorney fee in most civil actions;
• eliminated contingency fee multipliers in most instances; and
• enacted additional provisions intended to curtail bad faith litigation.

The intent of these reforms was to reduce the number of insurance claims filed, lower the frequency of insurance claim litigation and diminish uncertainty in how claims may develop. Reducing insurers’ loss and loss adjustment expenses would in turn reduce amounts payable by reinsurers, incentivising reinsurers to invest in the Florida market and increase capacity. While these reforms are still being rolled out, there are signs of optimism, resulting in some movement in the reinsurance market. Recent data shows that while the percentage of claims opened in Florida increased, possibly due to an influx of claims being filed in advance of the legislative reforms taking effect, the percentage of litigated claims dropped significantly. Whereas Florida had 79% of all litigated claims in 2020, the percentage was under 71% in 2022, the lowest level since 2017 (68%).

The fact that an increased number of claims resulted in a lower rate of claims being litigated is viewed positively for the Florida market, and the reinsurance industry is responding accordingly. A recent FLOIR reinsurance data call shows insurers purchased 11% more reinsurance in 2023 than 2022, evidencing increased capacity. The cost of that reinsurance, however, only increased by 27% from 2022 figures. This went against expectations that capacity would not be as robust and whatever capacity was available would be at higher cost.

Though reinsurers continue to wait to see the full impact of Florida’s recent legislative reforms, the early signs are encouraging. That said, reinsurers will continue to closely monitor the financial stability of ceding companies, especially considering the recent insolvencies as mentioned above, given that vulnerable insurers may have had to pay half or their entire premium upfront instead of in traditional quarterly instalments.

Use of Artificial Intelligence by Insurers in Florida’s New Regulatory and Legal Landscape

With the intensified examination of insurers in the Florida market by both regulators and litigants trying to assert bad faith, the possibility of unintentional discriminatory outcomes through the use of artificial intelligence (AI) cannot be ignored.

As previously discussed, Senate Bills 2-A and 7052 have heightened the scrutiny of insurance companies doing business in Florida, and bad faith litigation alleging unfair underwriting or claims handling under Section 624.155 of the Florida Statute is one of the few remaining avenues for successful litigants to be awarded attorney’s fees. Given this environment, avoiding unintended bias from AI-assisted underwriting and claims decisions is not just the right, but also the intelligent, thing to do.

But just what is unintentional bias? An example comes from Amazon, who developed and briefly used a recruiting tool to identify software engineers. The Amazon AI system “learned” by combing through ten years of resumes previously submitted to Amazon, which were predominantly male. As a result, the system favoured male candidates.

While only “intentional” discrimination is currently considered a violation of the Florida Unfair Insurance Trade Practices Act, see Section  626.9451 of the Florida Statute, the distinction between intentional and unintentional will likely become a contested issue of fact in regulatory or litigated matters.

The growing use of AI in insurance

The use of AI in the insurance industry is becoming ubiquitous. Yet AI systems, and how they actually make decisions, are a mystery to most people. Couple the mystery with an AI system’s unwitting reinforcement of bias gleaned from real world data, and you are assured unfortunate legal and regulatory outcomes.

Currently, AI assists insurers to quickly verify an applicant’s information and target advertising through publicly available data and social media. Online “chatbots” are used to facilitate the quoting process and generate leads for agents. Internet of things (IoT) sensors and “behavioural policy pricing” are becoming more common place. AI can accurately utilise satellite-based machine vision to assesses information about a roof, property, tree line, etc, without sending an inspector to the property. AI can also spot anomalies and unknown correlations impossible for the human eye to detect.

On an almost daily basis, traditional insurers are introducing AI software into their legacy claims process. New companies are entering the market with an AI/behavioural-first approach. Mobile apps allow claimants to assess damage in real-time using smartphones, and images processed by an AI model can create an estimate. Chatbots are designed to review claims, verify policy details, and undertake a fraud detection algorithm before sending wire instructions to pay for the claim settlement.

Data facilitated by AI is also expanding. The World Economic Forum estimates that there will be one trillion connected devices by 2025, exponentially multiplying the volume of information available to enhance machine learning.

The black box problem

AI systems are a “black box,” because only their creators truly understand how they work. If historical data used to train AI models contains biases, the system will perpetuate and amplify those biases. Biased algorithms giving certain data more weight or importance can also lead to disparities in underwriting or claims processing resulting in unfair outcomes for certain demographic groups and allegations of unfair insurance trade practices.

Regulatory scrutiny of AI is already a reality. The California Insurance Commissioner recently released Bulletin 2022-5 to address “Allegations of Racial Bias and Unfair Discrimination in Marketing, Rating, Underwriting and Claims Practices by the Insurance Industry” detailing investigations of allegations that insurers are:

• unfairly flagging claims from certain lower-income, residential Zip Codes and referring these claims to their special investigative units;

• using biometric data obtained through facial recognition technology to influence whether to pay or deny claims; and
• collecting biometric and other personal information unrelated to the risk in the marketing and underwriting of insurance policies.

The National Association of Insurance Commissioners, (NAIC) recently developed a Model Bulletin on the use of AI by insurers which, among other things, requires insurers to document data practices and perform bias analyses. Beyond the regulatory considerations, allegations regarding the misuse of AI will undoubtedly lead to increased class action and bad faith litigation.

Avoiding unintentional bias

The biggest hurdle faced in implementing adequate controls is the “black box” nature of most AI programs. Most end users are unaware of either the algorithms employed or the precise data being accessed by the AI system. Critically, then, whatever task AI is designed to do, an insurance AI system should have the following in place:

• transparent data sets;
• transparency as to who is in charge of compiling data;
• continuous monitoring and analysis of AI outcomes (sample decisions);
• internal audits and stress tests;
• training of insurance professionals working with AI;
• meaningful and substantive human involvement in the decision that is ultimately made;
• consumer consent to automated decisions which have no human involvement; and
• consumer rights to a human evaluation (appeal).

While no system will ever be immune to challenge, the use of these or similar safeguards are a necessity for consumer protection and trust and will protect companies from the likely onslaught of regulatory review and related litigation.

AI brings exciting and innovative possibilities. It can also lead to unimaginable pitfalls. As best said by Professor Stephen Hawking, “Unless we learn how to prepare for, and avoid, the potential risks, AI could be the worst event in the history of our civilisation.” In light of the keen regulatory and legal scrutiny of the Florida insurance market and the growing concern regarding the use of AI by regulators in other states, carriers must take care to use artificial intelligence intelligently.