AM Best has expressed concern about pricing adjustments insurers may look to make under regulatory pressure to pass on savings from the reform to customers
AM Best is “cautiously optimistic” about the long-term impact of the Florida assignment of benefits reform on insurance companies, according to a new report.
The global ratings agency’s latest report urged Florida’s property insurers not to overestimate the reduction in losses many expect will follow the change in law when they come to adjusting their prices, especially when regulators expect the savings to be passed on to policyholders through reduced premiums.
The reform bill makes an amendment to the assignment of benefits (AOB) rule, which until now has allowed contractors to agree a price for repairs with those who are insured directly, leaving them and the insurers that have to cover the costs open to exploitation through inflated prices.
The report said: “Although passage of the legislation is a step in the right direction, AM Best is cautiously optimistic about its impact on insurers over time, and whether there are any loopholes in the law that can be exploited remains to be seen.
“Also, given the market dynamic, insurers have come to expect approval of significant rate increases, but with the passage of these bills, such increases may no longer be as easily obtained, as regulators expect consumer relief.
“Just how much relief will be realised remains uncertain, and expectations of more moderate rate changes in the near term may be disproportionate.
“There is concern that, in the short term, insurers may over-estimate the benefit of the reform in their pricing.”
What is the Florida assignment of benefits reform bill?
The reform bill has changed this one-way attorney bill by necessitating that the awarding of legal fees is based on the nominal difference between the pre-suit settlement offer and judgement obtained.
In practice, this means if the difference is less than 25% of the pre-suit settlement, the insurer is awarded fees.
If it is 50% or more, the contractor is entitled to fees – in the case the difference is greater than 25% but less than 50%, no party is awarded fees.
Another area the bill addressed is the limited information insurers often have when work is completed before they can inspect the damage.
It remedies this by forcing contractors to issue a legal dispute that includes detail on the damages, a settlement demand, written invoice including labour and materials required, and proof that the work was performed in accordance with accepted industry standards.
Reform bill addresses ‘underhanded behaviour’
AM Best acknowledged the challenge rogue contractors have posed to Florida’s insurance market, noting that customers have been hurt by a reduction in the availability of insurance in the state, as well as rising costs.
The report said: “For several years, the Florida property insurance market has been plagued by underhanded behaviour that has led to elevated loss and litigation costs, higher insurance rates, and shifting coverage availability throughout the state.
“The impact for insureds has been the changing availability of insurance in certain sections of the state, as insurers rebalanced their geographic distribution based on declining appetites for areas more prone to the AOB issue.
“Some contractors have solicited the transfer of rights from insureds and subsequently inflated repair costs (primarily water-related), all the while using the legal system to their advantage.”
As part of the reform bill, insureds signing their rights to a claim payment to a third-party contractor can now rescind the assignment without penalty, and insurers also have the right to issue a policy restricting the use of AOBs entirely.
According to 2017 data from The Florida Office of Insurance Regulation, since 2015 the state has had an average 42.1% increase in water losses each year, with its south-east region the worst affected.
Furthermore, according to the Insurance Information Institute, the number of AOB lawsuits related to property insurance claims increased from 2,852 in 2013 to 19,253 in 2018.
AM Best welcomes reform to insurance company legal costs
For AM Best, one of the key benefits of the new AOB reform is that it prevents the exploitation of the one-way attorney fee rule, which until this legislation kicked in, forced insurers to cover the legal costs of both parties in a dispute in the event a ruling went against them.
According to AM Best’s report: “The practice led to insurers often contending with situations of insufficient information, as work was completed before an inspection was conducted, or with contractors calling for more repair than what insurers felt was necessary.
“The negative impact worsened steadily and attempts from legislators to pass meaningful regulation to mitigate the situation often stalled.”