Jonathan E. Kanov

The state of Florida is in the midst of a property insurance crisis, one of the worst in history. The market for property insurance is melting down in high-risk states, which also include Louisiana, Texas and California. Since 2020, private insurers operating in Florida have had a combined negative net income of over $1 billion each year. While the property insurance market is admittedly cyclical, there are other factors causing insurers to run for or be led to the exits in Florida. The Insurance In­formation Institute (Triple-I) issued a news release in August 2022, finding that the turmoil in Florida’s homeowners insurance market is being caused primarily by the state’s outsized number of law­suits and its commonplace fraud schemes. It is be­coming increasingly difficult for homeowners to find suitable property insurance, having to pay more money for less coverage. This cratering mar­ket could lead to additional potential exposure for insurance agents as they assist and advise their clients in navigating through this challenging land­scape. This report discusses the state of the prop­erty insurance market in Florida, the impact that the marketplace can have on insurance brokers and agents, and how insurance agents can best re­spond to reduce their risk exposure in procuring policies. It also discusses why in contrast real es­tate brokers and agents should not have the same concern of an uptick in E&O claims based on issues with their clients’ property insurance.

STATE OF THE PROPERTY INSURANCE MARKET IN FLORIDA

The best word to describe the property insurance market in Florida: precarious. Since the start of 2022, five insurers operating in Florida have been declared insolvent and have been placed into receivership for purposes of liquida­tion. The Florida Office of Insurance Regulation (OIR) obtained orders placing St. Johns, Avatar, Southern Fidelity and Weston Property Insurance into liquidation this year. Further, Lighthouse Property Insurance Corp, which had approximate­ly 13,000 policies in Florida, was ordered into liq­uidation by the state of Louisiana in April 2022. In addition to those insurers going out of business, there are even more companies pulling out or lim­iting their exposure to Florida. Federated National cancelled 56,500 policies in Florida as of June 29, 2022. It has not been liquidated by the OIR but ap­pears to be winding down or dramatically down­sizing its operations. Most recently, United Prop­erty and Casualty (UPC) announced on August 25, 2022, that it was withdrawing from Florida (in ad­dition to Texas, Louisiana and New York). UPC is one of the largest home insurers in Florida with over 185,000 policies as of March 31. The OIR now has to investigate if UPC is insolvent and needs to be liquidated immediately. Additional insurers eliminating or reducing their exposure to Florida include American Traditions, Universal, Progres­sive, Monarch, Heritage, Florida Farm Bureau, Centauri and Bankers. They are either leaving the state entirely, pausing new business in the state, phasing out older homes or limiting policies to new construction.

Four property insurers doing business in the state went insolvent in the previous four-year period (2018-2021), and there have already been five in-solvencies impacting Florida this year before any storm activity occurred. A comparison with what happened after Hurricane Andrew, the 1992 Cate­gory 5 storm that was the most destructive and costly (over $31 billion in inflation-adjusted in­sured losses) in state history, is very telling. There were seven insurers that fell in 1992-93, with ap­proximately 80,000 policies combined. The recent failures have included larger insurers, affecting over 500,000 policyholders (including FedNat but excluding UPC). These homeowners have to ob­tain new policies immediately in a shrinking and costlier market. For proper context, it should be noted that failures of property and casualty (P&C) insurance companies are rare events. Insurers typ­ically have fortress balance sheets, with assets several times their annual revenues to generate investment income, offsetting underwriting losses. In the entire P&C industry, with approxi­mately 2,900 U.S.-domiciled insurers, the number of annual impairments is typically in the low-me­dium single digits, or 0.2% of the total population. There were only five impairments of U.S. P&C in­surers in 2019 and four in 2018. The fact that there have been at least six Florida insurers failing this year, before the state was even impacted by the 2022 active hurricane season, should be a cause for alarm.

This article was largely researched and written be­fore Hurricane Ian, a large and destructive Cate­gory 4 storm which made landfall on September 28, 2022, in southwest Florida near Cape Coral and Fort Myers. It was the deadliest hurricane to strike Florida since the 1935 Labor Day hurricane. Pre­liminary estimates of damage are wide-ranging, with most in the range of $50–60 billion in insured losses in Florida alone. Triple-I estimates that litigation costs in Florida will be between $10–20 billion as a result of the storm. Because the insurance market was already unstable before Ian, this event will likely make things worse before they can get better. A large number of uninsured losses will end up in litiga­tion, and the split of losses between wind and storm surge should be contentious. Many home­owners didn’t carry flood insurance due to cost concerns while living in a floodplain.

In the immediate aftermath of the storm, the OIR issued an emergency order which temporarily sus­pends all planned policy cancellations and non-re­newals that had already been issued by carriers for two months. Also under the emergency order, in­surance companies cannot cancel policies for homeowners whose homes sustained damage for at least 90 days after their home has been repaired.

Despite the recent hurricane, this insurance crisis is man-made, not the result of a natural catastro­phe. It stems from an explosion in litigation ena­bled by a legal and legislative climate that has stoked loss frequency and severity to the breaking point. Florida accounts for 9% of the country’s property insurance claims, which results in 79% of the country’s lawsuits over homeowner claims, ac­cording to the National Association of Insurance Commissioners. That statistic is just staggering and illustrates the major problem causing the pri­vate market to shrink. Even before Hurricane Ian was formed, Floridians for Lawsuit Reform esti­mated 130,000 property claim lawsuits would be filed in 2022, largely due to Florida’s favorable liti­gation environment. This will increase significantly in 2023.

Triple-I re­leased an Issues Brief on August 9, 2022, delving into the causes of the turmoil in Florida’s home­owners insurance market. “Floridians are seeing homeowners’ insurance become costlier and scarcer because for years the state has been the home of too much litigation and too many fraudu­lent roof-replacement schemes,” said Sean Kevelighan, CEO, Triple-I. “These two factors contrib­uted enormously to the net underwriting losses Florida’s homeowners’ insurers cumulatively in­curred between 2017 and 2021.” Florida home­owners pay the highest average property insur­ance premium in the U.S. at $4,231, nearly three times the U.S. average of $1,544, according to Tri­ple-I’s analysis.

The net underwriting losses lead to rating down­grades, which often leads to insolvency. Even if an insurer can withstand these negative financial trends, it often reduces its exposure to the Florida market by issuing non-renewal notices to existing policyholders or restricting the writing of new business in the state, pursuant to the Triple-I re­port. In July 2022, about half (17) of the private homeowners insurance providers in Florida were notified of an impending downgrade in their finan­cial stability ratings by Demotech, the Florida rat­ing firm. Florida Insurance Commissioner, David Altmaier, challenged the methodology and find­ings, leading to Demotech pushing back deadlines and limiting its downgrades to one insurer (UPC), while withdrawing two others (Weston, FedNat). Demotech’s downgrades would move some insur­ance companies from an “A” rating to “S” (sub­stantial) or “M” (moderate).

“Florida has one of the most generous attorney-fee mechanisms in the country—sometimes re­sulting in insurer payment of plaintiff attorney fees far greater than the damage awards given to the policyholders who are the plaintiffs them­selves,” the Triple-I’s Issues Brief explained. “A 2017 state Supreme Court decision allows courts to award plaintiffs’ attorneys 2-2.5 times their hourly billing rate when courts rule in favor of pol­icyholders. These ‘contingency fee multipliers’ can result in attorneys receiving several hundred thou­sand dollars for a simple lawsuit.” The homeown­ers insurer pays the plaintiff’s attorney fees as well as damages to the plaintiff, the insurer’s policy­holder, in the event of a court ruling in favor of the policyholder. Triple-I’s Issues Brief also highlights the steps taken by unethical roofing contractors, who ask homeowners insurance policyholders to sign assignment of benefits (AOB) forms or direc­tion to pay agreements, giving the contractor the right to collect claim payments directly from the insurer and file a lawsuit without the knowledge or consent of the policyholder. These lawsuits re­quire insurers to allocate resources to defend themselves in court, with the policyholder often unaware the signed AOB form has set into motion potential litigation.

In the past decade, Florida’s property insurance market has limped from one crisis to another, driven by litigation surrounding sinkholes, mold, construction defects, water damage, assignment of benefits and unscrupulous roof contractors. Many of these claims are marred by fraud, with contractors falsely telling unsuspecting home­owners that they need a roof replacement, which the contractor will install in exchange for the right to collect from the homeowners’ insurer. The claim is then often inflated when presented to the carrier. One-way attorney’s fees statutes have been largely to blame, requiring insurers to pay the plaintiffs’ attorney’s fees if the insured or con­tractor prevails in court, even if the amount of damages awarded is $1 more than originally paid or offered by the insurer. Out of the $15 billion that property insurance companies paid in 2021 relating to claims, 71% went toward attorney’s fees, with only 8% to property owners. Insurers’ defense litigation costs reached $3 billion last year, double the amount spent five years ago.

After three years of legislative reform bills at­tempting to alter this landscape, meaningful mod­ifications were finally made to the Florida Statutes in July 2021. The most significant changes were the imposition of a pre-suit notice requirement and essentially shifting the burden to an insured to prove entitlement through the imposition of a judgment between 20%–50% higher than the pre-suit settlement offer in order to obtain fees. See Fla. Stat. 627.70152. Each party pays its own fees and costs if the difference between the amount obtained by the claimant and the pre-suit settle­ment offer is less than 20% of the disputed amount. If the difference between the amount ob­tained by the claimant and the pre-suit settlement offer Is greater than 20% but less than 50% of the disputed amount, the Insurer pays the claimant’s fees and cost equal to the percentage of the dis­puted amount obtained times the total attorney’s fees and costs. The insurer only pays the full amount of the claimant’s attorney’s fees and costs (without a lodestar) if the difference between the amount obtained by the claimant and the pre-suit settlement offer is greater than 5D96 of the dis­puted amount.

Then this past summer, in a special session, the Florida Legislature passed additional legislation, most significantly stripping contractors with AOB from being able to recover prevailing party attor­ney’s fees. Homeowners Can still recover prevail­ing party fees if they file lawsuits directly against insurers based on the framework previously noted, but the contractors cannot. On August 30, 2022, a Leon County judge dismissed a constitu­tional challenge to the new law on AOB, which ar­gued that this change violates equal-protection and due-process rights and denies contractors ac­cess to courts. “The inability to recover prevailing party attorneys’ fees will effectively shut the courthouse door to plaintiffs because it will be cost-prohibitive to pay an attorney for these types of small claims,” the complaint challenging the AOB law reads. Insurance experts state that it takes 24 months for such new laws to meaning­fully affect the market, so the hope is that positive changes will be seen by late 2023 or early 2024.

Most in the insurance industry do not believe that these new laws go far enough, but they are a good first step toward reducing litigation over property insurance claims in Florida. Litigation drives losses for insurers, and enough losses drive insurers to become insolvent or exit from the state. At the present, and for the foreseeable future, the crisis is getting worse, and the hope is that the old adage “it’s darkest before the dawn” holds true.

IMPACT OF THE PROPERTY INSURANCE MARKET ON INSURANCE AGENTS

Independent insurance brokers and agents can work with a wide range of carriers, but despite seemingly having such a multitude of options, they have reported the current market as a catastro­phe. Insurance brokers and agents who have weathered many ups and downs in the market have never experienced such troubles procuring suitable homeowners’ policies for their clients. Brightway Insurance, a brokerage in Jacksonville, indicated that they are getting hundreds of calls and emails about companies going out of busi­ness, cancellations, notices of non-renewal and rate increases. “It’s a scramble just to keep people covered,” stated Joe Carlucci, Brightway’s owner. Many insurance carriers are imposing strict guide­lines on new policies, such as requiring a roof to be no more than ten years old. It doesn’t make sense to a homeowner to replace a roof that has no problems and at least five to fifteen years of addi­tional life. Calucci added, “Whereas three years ago we were giving people like three or four op­tions. We’re like, ‘Hey, Company A is $1,000 bucks a year, company B is $1,500, but they are a little bit of a better company.’ You know, people want to see kind of what the options are. And right now there’s just like no options.” This means that an in­creasing number of Florida homeowners are hav­ing to turn to Citizens Property Insurance Corp. (Citizens), Florida’s state-run insurance company.

Citizens was designed to be an insurer of last re­sort for Floridians who couldn’t obtain private in­surance. Citizens continues to add policyholders at an alarming rate, recently surpassing one million policies for the first time since 2013. Two years ago, Citizens had less than half the amount of pol­icies as part of a dedicated plan to shed risk. “When the market is healthy, Citizens gets smaller as private companies take advantage of good mar­ket conditions,” said Citizens spokesperson Mi­chael Peltier. “When the market is in challenging times, we grow.” Insurance regulators approved across-the-board rate hikes for Citizens' policies before Hurricane Ian, which go into effect later this year.

For mortgagors, obtaining property insurance is not only prudent but mandatory. Thus, agents must notify their clients of impending cancella­tions or non-renewals and efficiently work to find new policy options. Further, a home insurance company needs an “A” rating to be compliant with federal mortgage loans backed by Fannie Mae and Freddie Mac. For insurers downgraded below an “A” rating, even if they continue to write new pol­icies, the homeowner could be in violation of his mortgage if he doesn’t move his policy to a higher rated company. Anyone who has a policy with any of the 17 companies that could be losing their “A” rating may be forced to find a new policy—poten­tially one that could cost more and provide less coverage.

Florida CFO Jimmy Patronis urged the Federal Housing Finance Agency to reconsider relying on Demotech as the primary rating agency for the state’s insurance market. He noted that if Fannie Mae/Freddie Mac were to de-authorize a “sizable percentage” of Florida’s insurers based on Demotech’s ratings, it would bring financial chaos to the lives of millions living in the state. “Not only could Florida families end up being required to ac­cept expensive and inadequate forced-placed cov­erage from their lender, but a ‘rug-pull’ of this magnitude would expose over 115,000 Florida in­surance agents to litigation risks,” Patronis wrote. “Such extreme outcomes are not necessary given the fact that all Florida insurance companies being downgraded were able to obtain reinsurance and are not presently ‘impaired’ or ‘insolvent’ as those terms are defined in the Florida Insurance Code.” The Florida Association of Insurance Agents (FAIA) reported that if the downgraded ratings go through, many agents in the state will question if they have adequate coverage under their E&O po­lices, which can include insolvency exclusion pro­visions.

Altmaier believes that Demotech’s rating method­ology doesn’t adequately consider the recent leg­islative reforms when rating carriers. In a July 21, 2022, letter to Demotech’s president, Altmaier asked: “Did Demotech expect the positive benefits from recent Florida legislation to happen over­night? If not, does Demotech believe that seven weeks after passage of this legislation is a reason­able timeframe for years of litigation to cease? If not, what other factors did Demotech consider when making the assertion that the claims envi­ronment will continue to be unfavorable, given the positive progress the Florida legislature has made? Did Demotech expect carriers to immedi­ately reflect underwriting results as of first quar­ter, despite the fact that first quarter results oc­curred before the effective date of SB 2D [new law]?”

In this market, insurance agents often do not have the luxury of just recommending a renewal of the prior policy. Agents will really earn their commis­sions by having to do significantly more work to find suitable alternatives. When they find the best (or only) choices for a customer, the agent must be sure to timely provide such information and fully explain the coverages and pricing, especially as to how they differ from the prior policy on an existing home.

A homeowner could find himself without ade­quate compensation if his insurer fails and is una­ble to pay a covered claim. The Florida Insurance Guaranty Association (FIGA) is designed to offer protections for policyholders insured by an insol­vent insurer who was authorized and admitted by the Florida Department of Financial Services prior to insolvency. The maximum amount FIGA will cover is $300,000, with special limits applying to (1) damages to structure and contents on home­owners’ claims and (2) condominium and home­owners’ association claims. For damages to struc­ture and contents on homeowners’ claims, the FIGA cap is an additional $200,000. For condomin­ium and homeowners’ association claims, the cap will be $100,000 times the number of units in the association. If a recovery from FIGA does not make the insured whole, the insured may place respon­sibility on the broker or agent for not selecting or recommending a more financially secure insurer. 

REDUCING RISK EXPOSURE TO INSURANCE AGENTS IN PROCURING HOMEOWNERS’ POLICIES

The most common cause of action brought by a customer against an insurance broker or agent is for negligent procurement of insurance. An in­sured often relies on a broker or agent to recom­mend and procure specific insurance to meet his needs, and the broker and agent must meet the appropriate standard of care while providing their services. It is well settled that where an insurance agent or broker undertakes to obtain insurance coverage for another person and fails to do so, he may be held liable for resulting damages for negli­gence. More specifically, “[a]n agent is required to use reasonable skill and diligence, and liability may result from a negligent failure to obtain coverage which is specifically requested or clearly war­ranted by the insured’s expressed needs. This gen­eral duty requires the agent to exercise due care in correctly advising the insured of the existence and availability of particular insurance, including the availability and desirability of obtaining higher limits, depending on the scope of the agents un­dertaking.” Kendall South Medical Ctr. v. Consoli­dated Ins. Nation, 219 So.3d 185, 188 (Fla. 3d DCA 2017).

Liability does not only apply when an insured makes a specific request or specifically communi­cates his needs. While an agent does not have to be omniscient, he is tasked with asking the right questions and reviewing and understanding his customer’s needs. An insured states a cause of ac­tion for negligent procurement in Florida where he alleges that, without providing an explanation that different coverage was required, the agent pro­cured a policy not meeting his customer’s needs. An agent has a general duty to explain particular policy clauses to the insured before issuing a policy. The failure to maintain appropriate coverage and the failure to properly explain coverage are the two biggest areas of errors and omissions claims against insurance agents.

The measure of damages in a negligent procurement of insurance case is what would have been covered had the insurance policy been properly obtained. Gelsomino v. ACE Am. Ins. Co., 207 So. 3d 288, 292 (Fla. 4th DCA 2016). That means if a coverage is excluded, the broker and agent could be responsible for the entirety of the loss, and if a policy has inadequate limits, the agent could be liable for the difference between the plaintiff’s losses and the policy limits. 

One of the challenges in a dramatically rising rate environment is that consumers want to keep premiums as low as possible but still need to have minimum levels of insurance. Oftentimes, the insured will buy a policy which eliminates or reduces certain mandatory or recommended coverages, such as for water loss or windstorm damage. If such a loss is later incurred, and coverage is non-existent or insufficient, the insured may look to blame his broker and/or agent and assert a claim for negligent procurement of insurance. The insured may represent that he specifically requested the coverage or spelled out his needs, or that the agent should have properly advised him that such coverage was required or advisable. The best way for an agent to guard against being brought into a lawsuit, or to defend himself in litigation, is to effectively communicate with his client and to document that communication.

Best practices would find the agent preparing a written acknowledgement that certain coverages have been offered and rejected by the policyholder, or that a particular coverage is not avail-able. The acknowledgement should also state that the coverages at issue were fully explained to the insured. The insured would sign the acknowledgement, providing clear evidence that the insured chose to save money in premiums and specifically elected to go without certain coverage, despite the agent’s advice to the contrary. If an acknowledgement is not obtained, the agent should take fastidious notes of his conversations with the insured, and even better, send a confirming email of any key oral conversations regarding coverage. Agents can also record all calls for future reference, with appropriate notice to the insured.

The same logic applies to defend against future claims that an agent steered a customer toward a financially unstable insurer, should the carrier later fail and leave the insured with losses that cannot be recovered. A plaintiff could allege that the agent failed to advise him of the insurer’s risk of insolvency. Whether there was a lack of options because of the dearth of private insurers that would accept a particular risk, or the insured chose to go with a lower-rated carrier because the premiums were also lower, a written and signed acknowledgement by the insured goes a long way toward eliminating any future ambiguity that an insured may attempt to create.

Independent insurance agents are not typically the best record-keepers, and the more harried their schedule, the less likely they are to document their conversations with an insured. In the absence of any written evidence, a negligent procurement of insurance suit will largely hinge on the credibility of the competing testimony of the agent and the insured. This makes it very difficult to have a case dismissed or to prevail on a summary judgment, as is available when there is sufficient and unrefuted documentation. In what is likely to be an increasingly litigious environment for brokers and agents, they would be well advised to spend the time now to document their dealings so they don’t have to explain themselves later in a lawsuit challenging their actions.

The specific facts and circumstances will vary and need to be modified, but a sample acknowledgement form for brokers and agents to provide to their clients reads as follows:

(Put in Named Insured or Authorized Person on behalf of Named Insured) acknowledges and agrees that (put in name of Brokerage and Broker) has fully explained the coverages provided in the subject policy being purchased and answered any questions or concerns that (put in Named Insured or Authorized Person on behalf of Named Insured) may have. (Put in Named Insured or Authorized Person on behalf of Named Insured) acknowledges that the subject policy excludes and/or limits coverage for (schedule exclusions under the policy or any other limitations to which the policyholder should be aware), and (put in Named Insured or Authorized Person on behalf of Named Insured) acknowledges that alternate insurance policies (put in “were” or “were not”) available and offered by (put in name of Brokerage and Broker).

(Put in Named Insured or Authorized Person on behalf of Named Insured) understands that (put in name of Brokerage and Broker) recommended a policy with more extensive coverage, but (put in named Insured or Authorized Person on behalf of Named Insured) chose to purchase the subject policy with lower premiums. Furthermore, (put in name of Brokerage and Broker) cannot attest to the financial viability of any property insurer, and (put in Named Insured or Authorized Person on behalf of Named Insured) accepts that (put in name of Brokerage and Broker) has no responsibility to (put in Named Insured or Authorized Person on behalf of Named Insured) for the failure or insolvency of the insurer, which issued its policy to (put in name of policyholders).

REAL ESTATE AGENTS ARE NOT SIMILARLY AT RISK

Real estate brokers and agents should have much less exposure for E&O claims relating to the pre-carious property insurance market. A homeowner suffering a loss and having insufficient or non-existent insurance coverage is unlikely to blame his real estate agent.

There are a number of reasons why real estate brokers and agents are shielded from these types of claims. First, Florida law presumes that all licensees will operate as a transaction broker unless a single or no agency is established in writing. It is estimated that over 85% of all residential transactions in the state involve a transaction broker/agent. As a transaction broker or agent, a limited form of representation to either or both parties to a real estate transaction is provided. There are no fiduciary duties owed by a transaction broker or agent. See Fla. Stat. 475.278(2); Burchfield v. Realty Executives, 971 So.2d 138, 139 (Fla. 5^th DCA 2007).

The duties of a real estate licensee in this limited form of representation include: (a) dealing honesty and fairly; (b) accounting for all funds; (c) using skill, care and diligence in the transaction; (d) disclosing all known facts that materially affect the value of residential real property and are not readily observable to the buyer; (e) presenting all offers and counteroffers in a timely matter; and (f) limited confidentiality. Section 475.278(2). The only sub-section that would arguably apply would be (c). However, real estate agents generally do not procure or select insurance coverage for the buyer.

Even if the real estate broker or agent makes recommendations or referrals to the buyer for insurance agencies or provides advice as to what types and amounts of coverages are recommended, the standard FAR/BAR (approved by Florida Realtors and Florida Bar) As-Is Residential Contract for Sale and Purchase (Contract) has additional protections for the broker and agent based on professional advice. The Contract contains language requiring the buyer and seller to consult appropriate professionals for all specialized advice concerning matters affecting the property and the transaction contemplated in the Contract. The buyer agrees to indemnify the broker for “Broker’s performance, at Indemnifying Party’s request, of any task beyond the scope of services regulated by Chapter 475, F.S., as amended, including Broker’s referral, recommendation or retention of any vendor for, or on behalf of, Indemnifying Party; and products or services provided by any such vendor for, or on behalf of, Indemnifying Party.” The Contract also states that “Buyer and Seller each assumes full responsibility for selecting and compensating their respective vendors…”

Thus, unlike insurance brokers and agents, real estate brokers and agents already have significant legal protection due to the limited scope of their representation and the exculpatory language in their standard residential contractual documents.

*Jonathon is a shareholder in Marshall Dennehey’s Fort Lauderdale, Florida, office. He can be reached at 954.847.4943 or jekanov@mdwcg.com.

 

_{Legal Update for Insurance Agents & Brokers – November 2022, has been prepared for our readers by Marshall Dennehey. It is solely intended to provide information on recent legal developments, and is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. We welcome the opportunity to provide such legal assistance as you require on this and other subjects. If you receive the alerts in error, please send a note tgventura@mdwcg.com. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2022 Marshall Dennehey. All Rights Reserved.}