Citizen Property Insurance is in a crisis. And it has nothing to do with the usual suspects troubling the state-run homeowners insurance company: sinkholes or hurricanes. You can't even blame Hurricane Matthew for this.
Instead, Citizens is being deluged by litigation — much of which it questions as fraudulent — over nonweather-related water damage caused by things like busted water pipes or leaky roofs. It has become so bad that more than $1,500 of the $2,412 annual premium collected for the most common type of Citizens policy goes toward paying water claims.
It's the reason why Insurance Commissioner David Altmaier last month approved a 6.4 percent average rate hike statewide for Citizens policies in 2017. If not for water claims, most Citizens' homeowners across the state would be paying less.
But here's the rub: New data show 95 percent of all such claims through this July came from just three South Florida counties: Miami-Dade, Broward and Palm Beach.
Yet, Citizens policyholders in Tampa Bay and across the state will have to help pay for it with higher rates. Even some customers outside South Florida who are still in line for a rate cut are getting less of a break because of water claims.
The Florida Office of Insurance Regulation maintained there was "no spreading of risk" for water claims in its approved rate hikes. The OIR says its actuaries based their recommendations on data from 2015 and earlier, not at the higher concentration of water claims in South Florida so far this year.
Citizens spokesman Michael Peltier acknowledges "there is some sharing of risk statewide" in the newly approved rates, even though the highest rate hikes will still be in South Florida.
Is that fair?
Florida Insurance Consumer Advocate Sha'Ron James, who represents consumers for Chief Financial Officer Jeff Atwater's office, said spreading the risk in raising premiums is a "pretty standard practice," though she understands the frustration.
"Looking at it from the policyholders' standpoint, I understand that it feels blatantly unfair that an individual policyholder in one area would have to bear the risk of activities that are taking place, particularly, in just two or three counties," she said. "The challenge is the way in which actuaries establish the risk."
J. Robert Hunter, director of insurance for the Consumer Federation of America and former Texas insurance commissioner, is among those questioning how Citizens' actuaries met that challenge.
He compared the situation to auto insurers that charge higher rates in areas that experience a greater number of auto thefts — while not making everyone statewide assume that risk. "There are precedents for keeping the (higher premiums) to where the cost is," Hunter said.
If there is strong evidence that water claims are becoming a problem in other areas of the state, those property owners should pay higher premiums, Hunter said. Until then, he added, the higher premiums "should stay in the counties where it is happening."
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During last month's board meetings, Citizens executives acknowledged that litigation primarily tied to water loss claims has had a widespread impact on rates extending outside of south Florida.
Were it not for water loss claims, more than two out of three Citizens' homeowners policyholders would have had lower rates in 2017. Instead, the vast majority face rate hikes.
"It's clear that the ability to settle claims quickly and satisfactorily leads to a major savings for Citizens and its policyholders," said Jay Adams, Citizens' chief of claims. "Whatever we can do to steer claims away from litigation will provide a direct benefit to our policyholders."
Chris Gardner, chairman of Citizens' board of governors, said the insurer is obliged to cover its losses without tapping into its hurricane claim surplus. That means litigation costs "must be passed on to our policyholders, who without significant reforms may be forced to pay higher rates for years to come," he said.
The villain that Citizens blames for its financial woes is a legal practice known as "assignment of benefits," or AOB in insurance lingo.
That means homeowners give a third party the right to represent their legal interests for things like fixing damage from busted water pipes or leaky roofs and windows.
Contractors and attorneys representing homeowners, however, have said that AOB lets them quickly make repairs to help homeowners without waiting for insurance company approval. But the insurance industry maintains the practice has been blatantly abused and often leads to contractors and their attorneys suing insurers without trying to work with them on repairs. Often, the damage has been repaired before insurance companies are contacted, making it hard to determine whether claims are valid.
Regardless of the merits, widespread use of AOB has undeniably triggered an explosion of water claims lawsuits from contractors demanding insurers pay them for home repairs they've made.
A year ago, Citizens was confident the problem would go away or at least level off. Instead, under new projections, it's going to get worse.
Water claims losses added a whopping $1,543 in annual costs to the average Citizens policy as of Sept. 30, far higher than the $861 cost per policy projected a year ago. By September 2017, that cost per policy is expected to top $2,000.
In other words, currently 60 cents out of every premium dollar that Citizens collects goes to pay water claims suits.
Adams, the chief of claims for Citizens, said that 88 percent of the water claims with an assignment of benefit wind up in litigation. That's often because contractors associated with the claims prefer to go to court rather than work with Citizens to cover repairs. "A lot of times, they don't even return our phone calls," Adams said.
To handle the water claims surge, Citizens is adding 30 independent adjusters and beefing up its litigation team.
A year ago, Citizens executives said, the spike in water-related claims was centered on South Florida, which is why rates rose sharply in that part of the state, but stayed flat or fell elsewhere.
In arguing for higher rates statewide this spring and summer, Citizens maintained the practice has spread to Tampa Bay and other parts of the state. Although there has been a smattering of claims in Hillsborough, which is a relatively small market for Citizens, that hasn't been true for most of Tampa Bay.
In the bay area, Citizens is most dominant in Pinellas County, where it accounts for 15 percent of all homeowners policies, and Hernando County, where it has a 20 percent market share. Yet those two counties combined had a negligible number of Citizens' water claims in the first seven months of the year compared to roughly 10,000 suits in Miami-Dade, Broward and Palm Beach counties in the same time.
Citizens, which accounts for 45 percent of water claims statewide, has made some internal policy changes to fight back.
Emulating other insurers, it has mandated policyholders with a water problem to take emergency measures to protect their property from further damage — spending up to $3,000, or 1 percent of the overall coverage — unless Citizens approves additional measures.
To give Citizens an opportunity to inspect the damage and confirm coverage, the revised policy rules restrict when permanent repairs can begin. The company can deny reimbursement for permanent repairs that begin before 72 hours after the loss is reported to Citizens, unless the loss is inspected by Citizens or Citizens gives approval.
But based on Citizens' latest projections, those policy changes won't be enough to stem the water claims tsunami.
Instead, the insurance industry is pushing hard for a legislative fix. Among the suggestions: regulating water remediation companies; limiting or banning referral fees for water claims cases; or finding other ways to hold third-party vendors more accountable.
Beyond hurting Citizens' bottom line, the growing threat of water claims jeopardizes the insurer's successful campaign to push more of its policies into the private marketplace.
Citizens president and CEO Barry Gilway said some private-market insurers in South Florida are already refusing to underwrite more homeowners policies for fear of water claims.
"New business has no place to go but us," Gilway said.
Without the state Legislature intervening, Gilway said, its hard to gauge how many South Florida policies could stream back into Citizens, which had whittled its policy count down from more than 1 million to under 500,000.
"We could be up to 617,000 policies or we could have continued depopulation," he told board members at last month's meeting.
Board vice chair Don Glisson urged the staff to spread the word to customers that the cost to litigate water claims is being passed on to them in higher rates.
"They have to understand they're paying for it," he said. "We're not paying for it; they are."
Contact Jeff Harrington at firstname.lastname@example.org. Follow @JeffMHarrington.