Thousands of Florida mortgages could be at risk because of insurance abuse

Sen. Jeff Brandes, R-St. Petersburg, is fighting to reform “assignment of benefits.”
Sen. Jeff Brandes, R-St. Petersburg, is fighting to reform “assignment of benefits.”
Published Feb. 15, 2017

TALLAHASSEE — An Ohio insurance-rating company has warned that recent court rulings and skyrocketing losses from water-damage claims have created an "uncertain operating environment" for Florida's property insurers and that it will downgrade the financial stability of 10 to 15 Florida-based companies, potentially threatening the solvency of thousands of homeowners policies.

Demotech Inc., which rates the financial strength of 400 companies nationwide, including 57 in Florida, said Tuesday that it will likely reduce the financial stability rating of the Florida-based companies from A to B, below the level needed for federally backed mortgages.

The decision, which takes effect in March, could put mortgages of thousands of homeowners in jeopardy because those backed by Fannie Mae and Freddie Mac require property insurance to be A-rated. Anything less and they default.

"My concern is these companies will not be able to write insurance on federally backed mortgages — which is the vast majority of property bought and sold in Florida," said Sen. Jeff Brandes, R-St. Petersburg, chairman of the Appropriations Subcommittee on Transportation, Tourism, and Economic Development.

The driving factor behind changing market conditions, Demotech said, is widespread abuse of "assignment of benefits," the practice in which policyholders who need repairs to their homes may assign their rights to seek reimbursement from the insurance companies to third-party contractors.

Under the practice that began in South Florida and is now used widely in the Orlando and Tampa markets, contractors persuade homeowners whose pipes or appliances have ruptured to assign over the benefits (AOB) and, working with attorneys, file lawsuits against the insurer if the claims are denied or payments are reduced.

Attorneys reap fees from the claims and contractors must get reimbursed by the insurer, sometimes without the insurer even knowing about the claim until the work is done.

Brandes said 20 to 30 percent of Florida's market could be affected by the ratings downgrade, forcing some ZIP codes to scare away insurers and forcing homeowners into Citizens Property Insurance Corp., the state-run insurer of last resort.

"This slaps the Legislature across the face and wakes us up to the problem of assignment of benefits — which is bleeding money out of these companies,'' Brandes said.

The number of AOB lawsuits in Florida exploded from 405 in 2006 to 28,000 in 2016, according to Chief Financial Officer Jeff Atwater.

Citizens, Florida's largest insurer, predicts the cost of assignment of benefits has soared from $367 per Citizens multiperil homeowners policy in 2011 to a projected $2,083 in 2017.

Demotech said no companies are in danger of failing, but it is advising companies to make sure they are adequately capitalized to handle the uncertain operating environment.

"Insurance companies are doing all they can to ensure their financial stability, but as we have discussed in our publications and public statements, it is challenging to do so given the changes in Florida's operating environment," Demotech president Joseph Petrelli said Tuesday.

Petrelli said that companies with less than $25 million in surplus capital are especially vulnerable because some of them "will not have the leeway to navigate their business models," he told the Times/Herald.

Despite calls for reform, Florida lawmakers have refused to change the law.

"We need a full-court press against assignment of benefits," Brandes said Tuesday. "It has metastasized and is starting to spread across the state like a pandemic."

(EDITOR'S NOTE: This story has been updated to say that the number of AOB lawsuits, not claims, has risen dramatically and that the source of that information is Florida CFO Jeff Atwater, not the Office of Insurance Regulation.)

Contact Mary Ellen Klas at Follow @MaryEllenKlas