Florida's growing familiarity with hurricanes over the last several years has taught consumers, agents, carriers, and regulators many hard lessons. From the consumers' perspective, however, perhaps no lesson has had more of a lasting impact than the realization they understood little about their insurance policies and what was and wasn't covered. For instance, many homeowners were shocked to learn that damage to screen enclosures and other outlying buildings was excluded under their policy. Other policyholders were greeted by the Byzantine world of sorting out claims for damage to their home that was caused by wind, which was covered under their private insurance policy, and claims for damage caused by flooding and storm surge, which was covered under the federal flood insurance program. That is, if the consumer had the foresight to purchase flood insurance. And that is not to mention the fact that many consumers learned that their coverage only kicked in after they paid a large hurricane deductible, which could range from between one and five percent of the value of their property.

Faced with thousands of consumer complaints being lodged with regulators and lawmakers, the legislature in the 2005 comprehensive homeowners' reform bill called for the chief financial officer to create a task force to study the possibility of developing an industry-wide standardized policy. The 10-member Standard Personal Lines Committee was charged with studying the feasibility of creating a standard policy and a checklist that would provide an easy explanation of the coverage provided under a policy. Further, the law stated that the policy and checklists must be written in plan English so they would be easily understood by policyholders. In addition to providing information on coverage, the policy and checklists must include any information on deductibles and/or policyholders' out-of-pocket expenses.

CFO Tom Gallagher applauded the legislature's move to create the committee, which, he said, was a positive step forward for consumer protection. Under the law, Gallagher was charged with naming the committee's members and monitoring its action. The committee was charged with drafting a report containing its findings and recommendations for presentation to the legislature as of January. “Time and time, in the hurricane recovery town hall meetings I held around the state and in calls to my office, Floridians said they were surprised at what their policies didn't cover of that their coverage was not enough to rebuild their homes,” he said. “The committee is tasked with developing a simple plain-language homeowners' insurance policy with the consumer in mind.”

Committee Passes on Standardized Policy

The committee's first major decision, and the one most monitored by carriers, was the feasibility of creating a standardized policy that could be used by all insurance companies. In theory, the use of the standardized policy would function to create a simpler policy, which would allow a consumer to easily compare one insurer's coverage versus another. Florida Insurance Consumer Advocate Steve Burgess, who served on the task force, supported the idea of creating a single master policy. “It would give everyone a common denominator to compare plans so you could make an apples-to-apples comparison,” he said.

From the industry's point of view, however, the creation of a master policy represented a potential administrative and legal nightmare. For example, it would require all insurers to redraft their current policies and institute the administrative systems required to service them. Agents and claim adjusters would have to be trained and regulators and insurers would have to develop some method to review and approve different policy changes and forms detailing specific coverage options, which might be necessary depending on an individual carrier's product.

State Farm Counsel Paula Fernandez told the committee that the above issues and their associated costs would make insurers think twice about doing business in Florida. “Rather than enticing insurers, these reasons actually provide a greater incentive for insurers to leave, limit activity in, or stay out of Florida altogether,” she stated. “The Department of Financial Services should be trying to entice companies to enter Florida in order to improve insurance availability. Allowing a competitive free market is one way to help solve the insurance crisis in our state.”

The other looming concern over the creation of a standardized policy is the potential legal costs associated with changing longstanding policy language. Florida Insurance Council President Guy Marvin, among others, pointed out that a policy is in point of fact, a legal contract between a homeowner and a company. As such, he said, the policy contains specific language and provisions that have been worked out as a matter of law. By interfering with that contract, he said, the committee risked creating widespread litigation, which could take years to resolve and have the effect of destabilizing the market.

“The new language of a standard policy would give those who make their living off of suing insurance companies a whole new role of the dice,” Marvin said. “The courts would have to interpret it all over again in order to bring some sort of predictability back to the product. Even if the industry won every suit, the cost would be enormous.”

Under the law, even if the committee recommended creating a standardized policy, it would not be implemented without the approval of the legislature. However, as a result of its deliberations, the committee agreed that it was ill suited to come out in favor of a standardized policy. As a result, the committee recommended that the legislature create a new task force that would have the actuarial and legal expertise to develop such a policy and formulate its impact on the market.

Checklists Finds Support

With the question of whether to work on developing a standardized policy behind it, the committee turned its attention to creating other tools to help policyholders better understand their coverage. To accomplish this goal, the committee took a two-prong approach with the aim of creating documents that would facilitate the flow of information to policyholders. The first approach calls for the creation of “Consumers' Quick Check Guides,” which consumers could use when shopping for a policy.

As part of its deliberations, the committee compiled a detailed comparison of coverage and forms used by the top five insurers providing insurance in the state. The insurers included Citizens Property Insurance Corporation, State Farm Florida Insurance Company, Allstate Floridian, Atlantic Preferred Insurance Company, and Nationwide Insurance Company of Florida. The five companies provide homeowners' insurance to 60 percent of the state's market. Looking at the results of the comparisons and other information, the committee determined that most insurers used ISO forms. Specifically, the ISO filed forms for 29 percent of its member companies, while other companies purchased ISO Florida-specific forms, covering an additional 46 percent of the market. The Florida Association of Insurance Agents also used ISO forms in training programs for new agents and continuing educational courses for licensed agents.

Based on that information, the committee approved four different quick check guides using the ISO forms as a model. The check guides cover homeowners, mobile homeowners, condominium, and dwelling policies. As stated in the committee's report, “The guidelines are not a mirror of the insurance policy, but instead, highlight certain limits and exclusions that have been the source of consumer concerns.” The quick check guides will be available on the Department of Financial Services web site and be published as pamphlets, which will be distributed to consumers during different outreach campaigns.

A more substantial recommendation by the committee follows the actions of the Office of Insurance Regulation, which is currently working on a controversial rule to develop a checklist of coverage. According to Chapter 627.4143, Florida Statutes, “A basic homeowner's, mobile homeowner's, dwelling, or condominium unit owner's policy may not be delivered or issued for delivery in this state unless a comprehensive checklist of coverage on a form adopted by the commission and an appropriate outline of coverage have been delivered prior to issuance of the policy or accompanies the policy when issued. The commission shall, by rule, adopt a form for the checklist for each type of policy to which this subsection applies.”

Under a proposed rule, OIR-B1-1670, all insurance agents would be required to provide the checklist to consumers at the point of sale. The checklist would include the coverage limits of the policy and whether losses would be calculated based on replacement costs or actual cash value. The checklist would also spell out the types of covered risks and any excluded coverage, such as losses due to flooding and storm surge. Additionally, the checklist would make clear the policyholder's financial responsibility for paying and deductibles as well as noting any policyholder discounts. Once the rule is finalized, it must be approved by the Financial Services Committee, which is composed of Gallagher, Governor Jeb Bush, and Attorney General Charlie Crist.

The mandatory checklist has support among regulators, but has more than its share of detractors. OIR spokesperson Bob Lotane said the goal of the agency is to have the checklist included on at the front of every policy so that it will resolve policyholders' questions up front, as compare to trying to answer them in the confusion that follows a hurricane. “Policies are very legally written and technical,” he said. “It will help for someone to have a clear checklist up front.”

The industry, however, has a dimmer view of the mandatory checklist. Several industry representatives noted that the checklist has a long way to go before being enacted. However, they point out that even without the document, changes by the legislature have already added at least a dozen more pages to existing policies. “The fear I have is that policies are already lengthy,” said Jeff Grady, president of FAIA.

Grady sees the mandatory checklist as a two-edge sword. On one hand, he is worried that carriers will react negatively to the fact that they must include the document, a requirement not faced in other states. On the other hand, Grady said the checklist could help agents if it helps reduce lawsuits against them from policyholders who accuse them of failing to accurately describing the policy they bought.

After listening to the industry and the agents, the committee came out against mandating that the checklist be provided at the point of sale. The rational for the decision is the belief that the checklist should not just be one more document, but rather a tool to encourage an exchange between agents and consumers over the terms of the policy. The committee did point out this would require a change in Chapter 627.4143, Florida Statutes. “The committee believes that this legislative change would provide consumers greater understanding of the coverage being offered, the policy's limitations and their option to purchase adequate coverage to protect their most valuable financial investment,” the committee stated in its report to the legislature.

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