Louisiana Blueprint: How to repair Florida's home insurance market

Florida’s home insurance market has been in crisis for years, and recent tort reform aims to reduce claims costs by putting an end to frivolous lawsuits, a welcome development in a state where insurers have spent $51 billion over 10 years against a torrent of litigation.

To put it another way, 79 percent of all home insurance litigation in the U.S. stems from Florida despite the state only accounting for 9 percent of all home insurance claims, according to a Triple I analysis of Florida Office of Insurance Regulation and National Association of Insurance Commissioners data.

Tort reform alone won’t rehabilitate Florida’s home insurance market because litigation isn’t the only cause of its inhospitable landscape. Florida must still contend with unaddressed issues with its residual market and its legal and regulatory environment, which continue to undermine competition.

As a blueprint for a path forward, Florida might look to Louisiana, a Gulf state with significant catastrophe exposure that has made notable strides in creating the following conditions.

Ensure the Residual Market Cannot Compete with Private Markets

By law in Louisiana, its state-run insurer of last resort Citizens must rate each policy at least 10 percent more than the highest market rate in each parish or 10 percent more than the actuarial rate—whichever is higher. By providing clear rating guidance, regulators have ensured the residual market in Louisiana doesn’t compete with the private market. In fact, recently Louisiana Citizens implemented a 63 percent rate increase effective on January 1, 2023.

By contrast, Florida’s residual market openly competes with private insurers—in some areas of the state, Florida Citizens’ rates are 50 percent lower than the private market.

After tripling its policy count in the last two years, Florida Citizens is the largest home insurer in the state and is projected to have 1.7 million inforce policies by the end of 2023. Put another way, Citizens is the largest player in the Florida property insurance market—its market share is more than 50 percent higher than any private carrier in the state.

While Citizens has filed for a 14.2 percent rate increase across all personal lines policies, it has yet to receive approval from the Office of Insurance Regulation. Moreover, the proposed increase does not keep pace with the statewide average rate increases of 40 percent or more projected by Triple-I for 2023.

Though the recent reforms require Florida Citizens’ rates to be higher than the private market, it laid out no clear path to achieve such a standard. Current statutory caps on its rating plans even hinder it: Citizens’ rate increases are capped at 12 percent this year.

Prohibit Adjuster Contingency Fees that Incentivize Loss Inflation

To date, Louisiana is the only state that prohibits public adjusters from charging contingency fees. Instead, adjusters are required to charge a defined fee, which deters opportunists from artificially inflating losses to serve their own interests. It also protects policyholders, ensuring high adjuster fees don’t carve into their claims payment and result in out-of-pocket costs to rebuild. The Louisiana legislature even doubled down on its stance last year and blocked a bill that would have allowed public adjusters to charge contingency fees.

In Florida, public adjuster contingency fees have the highest cap in the U.S. at 20 percent for non-catastrophe claims. These fees incentivize loss inflation and reduce the total claims payment to policyholders. Prohibiting contingency fees outright would reduce the incentives to pursue extracontractual losses.

Regulate Attorney Marketing Practices

Florida’s tort reform removes one-way attorney fees, but it does little to reinforce the intent of “bad faith” reforms. While the law does heighten the insured’s burden for recovery of extracontractual damages, it doesn’t address the cycle caused by this type of litigation. Because it costs less to settle extracontractual cases than to defend them in Florida, attorneys will continue encouraging these cases—with little oversight or regulation in how they market to insureds—and insurance companies will be forced to keep settling them.

Louisiana offers robust guidelines to curtail attorney marketing practices that encourage litigation abuse. The Louisiana State Bar maintains a 30-page handbook that provides clear guidance on how attorneys are allowed to market their services. Moreover, Louisiana reinforces accountability for attorneys through both the courts and the DOI—most recently by suspending law licenses and issuing large fines for a fraud scheme that affected more than 850 consumers. A similar case in Florida only led to the disbarment of a single attorney.

Meet the Needs of Insurers While Protecting Consumers

Louisiana strikes a balance between what insurers need to operate effectively in the market and what consumers need to protect them. Perhaps this is most clearly demonstrated in the Louisiana Department of Insurance’s timeliness in approving rates insurers need to stay healthy and solvent long-term while actively advocating to bring more competition to the market to bring down premiums for consumers.

Florida has yet to find this balance, often letting actuarially supported rate increases languish for quarters—or years—which impedes carriers from implementing the appropriate rates to account for rising costs. It’s a move that has resulted in a number of insolvencies in the recent past, leaving homeowners without reliable coverage options.

To give credit where credit is due, Florida’s regulation has shined in one particular area: Florida’s wind building codes are the most stringent in the U.S. FEMA rates each state based on the hazard-resistance of their building codes on a scale of 0 to 100 (the highest possible score). Florida’s score is 99, indicating its standards better equip homes and commercial structures to withstand extreme conditions. The Florida Building Code (FBC) requires stronger standards in areas exposed to high wind speeds, so homes built in these areas are more likely to be wind resistant (e.g., via installed hurricane shutters), to meet even higher design pressure standards, and to have stronger anchoring methods.

Robust building standards coupled with effective strategies to ensure compliance (e.g., permitting requirements for roof replacements) give insurers confidence in the resilience of Florida homes and can be an enticing reason to do business in Florida. If Florida can build on these strengths, prove its commitment to curbing insurance litigation, and take a few lessons from its coastal neighbor, we may see a bright future for the Sunshine state’s insurance market yet.

Reprinted with permission from the May 29, 2023 edition of Carrier Management.