Florida's Antitrust Act Is Consistent With Federal Antitrust Laws

Three years have passed since the 2004 and 2005 hurricane seasons punished Florida with eight powerful hurricanes that caused in excess of $30 billion in damages, most of that covered by private insurance companies operating in the Sunshine State at the time.

Fallout from those two horrific seasons continues to pollute public policy decisions governing insurance companies, although the origins of many of the decisions regarding the way the State of Florida copes with hurricanes can be traced back to Hurricane Andrew in 1992.

In the wake of Andrew, companies found it increasingly difficult to gain approval of rate increases that actuaries insisted were necessary to continue to take on the risk in Florida, especially in light of the fact that property values soared in the 1990s combined with new development that continued to add to the overall risk insurers were expected to absorb. The day of reckoning was put off again and again as relatively few hurricanes blew ashore in the twelve years since Andrew.

But the day of reckoning was coming. That day was August 13, 2004, when the first of four storms would strike Florida in a single season. Before the industry could recover from that disastrous year, the totally unexpected happened. Florida was hit a second straight year, again with four back-to-back hurricanes.

The massive damages continued to mount, and it became abundantly clear that insurers were not getting adequate premium for the nearly $2 trillion in exposure that had developed in Florida. Making the case even stronger was that fact that a handful of companies had gone bankrupt, and the government-run Citizens Property Insurance Corporation required cash infusions of taxpayer dollars to stay afloat.

Insurers, including Citizens, moved to raise rates. If these companies were going to be able to continue to take on the risk and pay for future losses — that experts say could pale in comparison to losses realized over the 2004 to 2005 hurricane seasons — the rate adequacy issue would have to be addressed now.

The Political Fallout Begins

In the spring of 2006, the Florida Legislature reformed the rate structure of Citizens, setting into motion a plan that experts said would have provided the government insurer with actuarially sound rates for the first time in its brief history. Private companies, acting as any financially responsible company should, filed for rate adjustments as well.

No sooner had the ink dried on the legislation, that reality set in. “Actuarially sound rates” would mean hefty rate increases for some policyholders, particularly those whose homes were on or near the vulnerable coastlines.

In hindsight, those costs could have been more easily absorbed gradually had rates not been held artificially low for so many years. Instead, the increases coming all at once was sticker shock for many homeowners and unfortunately created a backlash smack in the midst of the vicious 2006 election cycle. Candidates to replace Governor Jeb Bush and candidates for House and Senate seats quickly boarded the populist bandwagon in denouncing the need for rate adequacy and in so doing, they demonized the insurance industry.

As soon as Governor Charlie Crist took office in January 2007, he assembled a special legislative session to undo what lawmakers had done some eight months earlier. This created political capital for some policymakers to continue the negative rhetoric, eventually evolving into the introduction of punitive legislative measures toward the industry.

Applying the Antitrust Act to The “Business of Insurance”

One of the most onerous pieces of legislation was a provision tucked away in a lengthy insurance bill during the 2008 Legislative Session that would have broadened the Florida Antitrust Act.

Originally passed in 1980, the Florida Antitrust Act essentially codified the provisions of the federal

Sherman Antitrust Act by providing restraints of trade or commerce.

As originally conceived, the language in the bill before lawmakers this past spring would have allowed anyone to file suit against an insurer alleging antitrust violations. The floodgates would have opened and lawsuits against the industry would have poured in challenging conduct that is traditionally exempt under the Act, but carefully regulated by the Office of Insurance Regulation (OIR).

The OIR clearly has substantial power to investigate insurance companies and furthermore already has broad authority to sanction insurers for violations of the Insurance Code. Those powers include the ability of the OIR to halt companies from selling new policies and to heavily fine companies for any violations.

Thanks to effective lobbying efforts by the Florida Insurance Council and the entire insurance community, that provision was removed from the bill before final passage. However, the issue was not laid to rest.

The Senate ordered an interim study by staff of the Senate Banking and Insurance Committee to evaluate the effects of applying the Florida Antitrust Act to the business of insurance.

The study was to be complete by September 15, but that deadline was extended to October 1. The findings of the study should be released sometime shortly after that date.

The Florida Insurance Council recommended Senate staff consider testimony from Jerome W. Hoffman, who appeared before the Senate Banking and Insurance Committee as the bill was making its way through the Senate earlier this year.

Hoffman, of the Holland and Knight law firm office in Tallahassee, is an expert on the Florida Antitrust Act. He was on staff with the Florida Attorney General's Office when the Act was drafted and passed in 1980. He testified that the intent of Florida's Antitrust Act was to complement federal antitrust laws and that it was not intended to be applied to what is termed “the business of insurance.”

He said the original purpose of the exemption was “to preserve state regulation of insurance which had been undermined by the Supreme Court ruling in the Southeast Underwriters case in 1945 in which the Court, for the first time, ruled that the business of insurance was subject to federal regulation as interstate commerce.”

Hoffman has since summarized his testimony before the Senate Committee in an August 25 letter to Senate staff. He wrote that the 1945 court decision prompted insurance commissioners from every state in the nation to lobby Congress to pass the McCarran-Ferguson Act to help preserve the viability of state insurance regulation.

Hoffman noted that, “the Act does not exempt the 'business of insurance companies,' but rather only the 'business of insurance' and then only to the extent that such business is regulated by state law.” In order to fall within the definition of “business of insurance” the activities must involve the spreading of risk, the relationship or contract between the insured and the insurer, and they must not involve persons outside the insurance industry.

For example, it allows insurers to share related information that lowers costs of doing business such as the pooling of historic loss information so that they are better able to project future losses and charge an actuarially based price for their products. It also allows for joint development of policy forms.

The benefit to consumers is that it helps increase competition by giving small insurers who otherwise would have too little data to develop actuarially credible rates, the tools to compete with larger insurers who have much more data on which to base rates.

Repealing the Exemption

It is unclear what the final Senate staff interim report will look like when it is submitted on or about October 1. What is known is that the stated objective of the interim report is to “evaluate the effects of applying the Florida Antitrust Act to the business of insurance and provide options for applying the Act to the business of insurance.”

Hoffman has clearly stated in his written comments on the issue that “repeal of the antitrust exemption for the business of insurance under Florida law does little to help protect consumers beyond the current regulatory system and current antitrust law.”

Instead, he maintained that repeal of the exemption would create even more uncertainty and confusion. “Insurers would not know whether conduct approved and or directed by the OIR would be exempt from challenge under the Florida antitrust laws,” he wrote, adding, insurers would be “reluctant to invest resources into writing insurance policies in Florida in an uncertain legal environment that may or may not subject them to antitrust liability for conduct that is specifically regulated and approved by the OIR.

It must also be noted that an early version of the bill that included the antitrust provision was amended to provide that only the Attorney General or a State Attorney could bring a suit against an insurer alleging violations of antitrust laws, but that concession failed to cure the fact that insurers would still be subject to two different enforcement standards–one state and one federal–and susceptible to expensive investigations and possible litigation over their rate making activities–activities that Hoffman noted are already subject to review, investigation and approval by the OIR.

Finally, the Florida Insurance Council finds that a repeal of the exemptions would not likely drive down insurance premiums for consumers. In fact, it would lead to fewer choices for consumers, less access to coverage, and higher prices for what coverage is available. We urge the Legislature to not tamper with the law.