Florida’s New Property Insurance Reform Tackles Fraud, But Only One Side

Earlier this year, I wrote about the ongoing saga that is the Florida property insurance legislative reform efforts in a blog post titled: Florida Insurers Continued Use of “Fraud” as a Red Herring in Their Legislative Agenda.

Throughout the article, I explained that the legislative reform efforts, which insurance companies and their lobbyists heralded, were driven behind the vehicle of the “F’ word: Fraud. Insurers and backers of the legislative reform argued that fraud perpetrated by shoddy contractors, roofers, policyholders, and their attorneys was one of the primary causes of increasing premiums for Florida homeowners. As support for their one-sided argument, these proponents cited the recent downfall of two insurance companies, Avatar Property and Casualty Insurance Company and St. John’s Insurance Company, as those affected by this alleged over-litigious conduct of policyholders and their attorneys.

When discussing “fraud” and why it would be smart to implement systems to thwart the conduct of bad actors in the property insurance industry, I explained:

The “F” word is not a one-way street, however. Contrary to popular belief, insurance companies continue to avoid their contractual and statutory obligations despite their incessant concerns about defending “rampant” lawsuits.

Actually addressing the truly frivolous litigation is step one in beginning to solve our property insurance market issue, but why stop there? If legislative efforts are going to be targeted towards holding the bad policyholder actors accountable for “fraud,” then the same efforts need to be targeted at combatting the unspoken immunity that is insurer fraud: The ongoing Managed Repair Program schemes under the guise of a “Right to Repair,”2 racketeering lawsuits against insurance companies who disclaim their liability to “independent” third-party adjusters who are anything but independent,3 and the utilization of adjusters who have criminal records – and I’m not talking DUIs, but rather adjusters who have criminal convictions for fraud and theft by deception – a shocking reoccurrence that I never once thought could continue to show up in bad faith actions.

Recently, on May 26, 2022, Governor Ron DeSantis signed Senate Bill 2B, which enacted many measures in an effort to alleviate rising insurance costs for homeowners. Amongst the various measures to be implemented in the property insurance industry, the recently signed bill included specific sections targeted at combatting “insurance fraud” – although, as expected, such measures seemed to be significantly one-sided, letting insurance companies continue to avoid culpability for similar conduct.

In conjunction with the new legislative reform for property insurance, Florida Chief Financial Officer (CFO) Jimmy Patronis held a press conference where he announced new “Anti-Fraud Initiatives,” stating:

“As area policyholders know, Florida’s insurance market is in trouble. We are seeing more private carriers exit the market, and we’re seeing Citizens Insurance policies grow. Governor DeSantis has rightly called a special session to reform insurance, and lawmakers will have an opportunity to curb frivolous litigation and fight fraud. Florida communities are under attack by fraudsters who are willing to try anything to game the system. They are stealing from us all! To win this war, we need the troops, the weapons, and a full commitment to the mission. So in this special session, I will put forward five initiatives aimed at cracking down on the kind of fraud that increases all of our rates.”1

Patronis identified five separate proposals as part of this initiative:

1) The first proposal for the upcoming session is to standup three Anti-Fraud Homeowner Squads. These three squads will be in addition to the two I-4 Corridor teams that were stood up last year. To standup the squads, the Department of Financial Services (DFS) will request 23 new positions, including: Fifteen detectives and three supervisors to work cases; Three attorneys, and one administrator, to prosecute cases; and One analyst to help expedite investigations.

2) The second initiative would create a $3 million anti-fraud and public education campaign. In many instances, policyholders do not understand that they are signing their rights away or that litigation will only slow down their claims and could result in liens on their property.

3) The CFO’s third initiative proposes to amend Florida’s False Claims Act to allow whistle blowers to recover damages in Qui-Tam cases. Qui-Tam cases are where the general public can file whistleblower complaints over fraud cases, without necessarily being the victim, or as part of the fraud taking place. This reporting mechanism will incentivize the public, financially, to come forward and report fraud.

4) The Qui-Tam proposal dovetails with the CFO’s fourth proposal to provide awards for calls to the “Florida Fraud Fighter Reward” tip line. Current law issues awards only when there is a conviction. The proposal lowers the standard, from conviction to arrest, for tipsters to qualify for the $25,000 anti-fraud program to get more participation.

5) The fifth proposal would make changes to Assignment of Benefits (AOBs) law, including banning the bundling of AOBs.2

While those are all great initiatives and proposals that are surely welcome in our industry, throughout all five of these proposals, not once are insurers or insurance company fraud mentioned. Not only were property insurers not included in any of this legislative reform effort to curb bad actors, but the new legislation implemented new law making it even more difficult to sue insurers for unfair claims handling. The following was included within Senate Bill 2B, which was recently signed into law:

Bad Faith – Establishes that a policyholder may not prevail in a property insurance bad faith suit unless he or she establishes that the property insurer breached the insurance contract.

By the way, remember how the legislative reform efforts used Avatar and St. John’s downfall as a reason why such legislative reform was necessary? When the credibility and data for the position were inquired into during the special session, proponents of the theory could not point to where or what data showed that Avatar and St. John’s met their demise because of frivolous litigation conduct and policyholder fraud.

What is interesting, however, is that Florida, through the Department of Financial Services, is supposed to review, analyze, and maintain “financial autopsies” on insurance companies that fail. Unfortunately, in recent years, these reports are finished and effectively “shoved in a drawer” as the Miami Herald states.3

Since 2018, there were a total of 7 different property insurers who went insolvent; and four of them went insolvent in just the last 13 months. The Miami Herald/Times dove deeper into the data and requested the insolvency reports of five of the seven property insurance companies that went insolvent recently. They were provided with only one insolvency report, and the data revealed that it was the insurer’s own conduct that caused its failure:

The Herald/Times requested insolvency reports from the Department of Financial Services on five property insurers that have gone under since 2014. The department has finished only one report, on the 2014 failure of Jacksonville-based Sunshine State Insurance Company, according to Galetta. That 73-page report found the company’s demise was, in part, because it was sending millions of dollars in fees to its affiliated companies, which were not approved by the Office of Insurance Regulation.

Sunshine State Insurance had about 37,000 policies when it was found insolvent by the Office of Insurance Regulation in 2014. Earlier that year, it told regulators that it had discovered an accounting error that cost the company the ability to meet Florida’s surplus requirements, according to a report at the time by Insurance Journal. Consultants hired by the state delved into the company’s officers, finances, emails and board minutes — and allegations against the company brought by a whistle-blower.

They found Sunshine State Insurance’s parent and sister companies were taking millions of dollars out of the company through written and “verbal” agreements. In the 10 months before the company was liquidated, Sunshine State Insurance paid its parent company $708,830 in two separate “corporate recharges” that were based on oral, not written, agreements.

Under Florida law, such payments were required to be written and pre-approved by the Office of Insurance Regulation, but the company’s executives never sought such approval, the report notes. Sunshine State had another agreement, also not approved by the Office of Insurance Regulation, with a sister company to pay “markup fees” of more than $1.5 million between 2009 and 2014, the report states.

And in 2013, the year before the company was liquidated, Sunshine State paid another sister company $13 million for fees, payroll and expense reimbursements. Sunshine State’s CEO and president received bonuses based on how much the insurer paid its sister company, which the report states “may be an inherent conflict of interest in his fiduciary duties.”

Nine months before the company was liquidated, Sunshine State’s CEO was telling the sister company’s board that he felt he deserved a $600,000 bonus for the amount of money the insurer paid. He received a $200,000 bonus that year.

The report’s authors concluded that accounting errors and millions of dollars in unauthorized fees sunk the company, and it was insolvent as early as 2005. None of the sister companies mentioned in the report are operating in Florida. Last year, lawmakers at the request of the Office of Insurance Regulation passed a law that allowed the office to seek more information about insurers’ relationships with affiliated companies.4

Thus, of the seven insurers to go insolvent since 2018, we have only one furnished insolvency report to go off of, and the data revealed that it was the insurance company itself that caused its demise, rather than “frivolous litigation” or conduct as of policyholders and their advocates. Yet, when the time comes around in the Spring when lawmakers are set to address current laws, the finger is always pointed at policyholder advocates as the reason behind why such area requires reform.

As I said in my last blog on this issue: The “F” word is not a one-way street: we will soon see if the legislative reform efforts to the property insurance laws of Florida create meaningful change despite the fact that it was inherently one-sided nature and only addressed bad actors on one-side of the field.
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1 https://www.myfloridacfo.com/sitePages/newsroom/pressRelease.aspx?ID=6172
2 Id.
3 https://www.miamiherald.com/news/politics-government/state-politics/article261495072.html
4 Id.