A Closer Look at SB2044

The much-debated and massive SB 2044 has appropriately been called an “omnibus” bill. The legislation was sent to Gov. Charlie Crist on May 17, who has until June 1 to act on it. Here is a closer look at two of the significant sections in the legislation. SB 2044 and Mitigation Discounts In SB 2044, the Florida Legislature sought to address the required expansion of windstorm mitigation discounts without simultaneous rate increase offsets and a failed mitigation inspection program. Regarding mitigation inspections, the OIR and the insurance industry came to realize that a substantial percentage of the mitigation forms submitted on behalf of insureds were inaccurate at best, and fraudulent at worst. This has been exemplified by an ongoing pilot mitigation reinspection study undertaken by Citizens. As of April 30, 2010, inaccuracies have been found in almost 92 percent of the 566 properties surveyed. The mitigation discounts were too high for two-thirds of these properties. Even accounting for a smaller percentage of properties that should have received more mitigation discounts, and the costs of all reinspections, Citizens estimates it lost premium of $452,000 for the 566 properties averaging $800 per policy. SB 2044 provides for a reinspection program by insurers at their own expense, among other initiatives. The bill further attempts to address the increase in windstorm mitigation discounts that has resulted in a severe premium drain for Florida insurers. While the bill states an intent that insurers should not lose income from the application of mitigation discounts, it places the burden on the insurer to establish that the mitigation discounts will exceed the loss savings attributable to those discounts. Mark Brannon, a principal actuary for Merlinos & Associates, Inc. said, “SB 2044 provides some changes on how mitigation discounts can be applied, but I’m not sure many companies will be able to provide an adequate demonstration to support a rate offset at this time. For the most part, the premium reductions have worked their way into the companies’ historical underwriting experience, so the impact of the differences in the premium and loss cost affects should be addressed in experience based rate filings. Also, I would expect that the OIR will exercise their discretion on how to apply the bill language.” Even if a company can recoup lost revenue from inappropriate mitigation discounts, that recoupment will be on a lagging basis over an extended period of time, which may negatively affect the carrier’s near-term underwriting results, cash flow and surplus level. SB 2044 and Cost Drivers SB 2044 addresses the current requirement for the payment of claims based on full replacement costs, with no holdback for depreciation. Under SB 2044, claims payments for dwelling coverage would be based on the actual cash value of the property, which would include a holdback for depreciation, unless the property suffers a total loss. The insurer would be obligated to pay full replacement cost for the dwelling damage after the insured enters an agreement for repairs and as the repairs are undertaken. The bill also provides that initial claims, as well as supplemental and reopened claims, must be submitted to the insurer within three years after the windstorm damage occurred. The purpose of this provision is to address the significant number of post-Wilma claims filed years after the event by public adjusters. While the intent is good, it is debatable how effective this provision will be in impacting industry loss experience. Claimants will still have five years to file their lawsuits. More importantly, public adjusters will still have plenty of time to submit claims and will encourage policyholders to file placeholder claims within the new three-year timeframe. The legislation does not change the substance of any rights, but merely the target date for public adjusters to stake their claims. Another intended rate relief feature of SB 2044 is the expansion of the expedited filing process for the recoupment of pass-through costs for reinsurance, alternate reinsurance financing and a new OIR inflation trend factor. However, the rate increase with this filing, in combination with any other rate filings, may not exceed 10 percent per year. Fred E. Karlinsky is a shareholder in the law firm of Colodny, Fass, Talenfeld, Karlinsky, Abate. Richard J. Fidei is a partner in the firm. Karlinsky may be reached in the Ft. Lauderdale office at 954-332-1749 or by e-mail at [email protected]. Fidei may be reached in the Ft. Lauderdale office at 954-332-1758 or by e-mail at [email protected].