While the people of Joplin, Mo., as well as Tuscaloosa, Ala., and Birmingham, Ala., don't have to be reminded, this year marks the fifth anniversary since these and several other cities were devastated by massive tornadoes.
The insurance industry responded very effectively to these events and played a significant role in the rebuilding.
As the 2016 tornado season nears, it's difficult to predict what's in store, but we do know that severe weather accounts for the majority of insured losses in the United States. The trends for catastrophes continue to point to more frequent and costly events. We're reminded that these events can happen virtually anywhere. We also recognize the importance of insurers' responding immediately to clients and taking steps to improve disaster readiness and mitigation.
However, in addition to the potential for devastating losses that drive up costs, insurers in some states must increasingly contend with fraudulent activity that unnecessarily adds to losses. In Texas and Florida, states with extensive exposure to catastrophic weather events, steps continue to be taken to mitigate losses. Nevertheless, some contractors, public adjusters and lawyers are abusing the legal system and driving up not only the rate of disputed claims and court action, but also costs.
Hijacked process
Now in Texas when the severe storms and extensive damage come, so do the contractors, public adjusters and lawyers who use questionable solicitation and business tactics to insert themselves into the insurance claims settlement process. They hijack the process by seeking claims that are beyond the actual losses and taking legal actions that delay settlements and generate large legal fees. In many cases, the homeowner has already settled a claim with the insurance company with no issue. The lawsuit only comes after a third-party insurance adjuster or contractor shows up at the door and suggests the homeowner was underpaid and encourages legal action.
While contractor fraud and lawsuit abuse is a problem across the country, it is particularly significant in several Texas counties. In some areas of Texas 10% to 30% of claims following hailstorms end up with lawsuits. Because of the frequency of hailstorms and other severe weather these activities have become quite lucrative.
Last year, when the Texas Legislature was in session, the insurance industry supported legislation (S.B. 1628) that would have put in place first-party property claims reforms. Although the bill did not pass, the industry is using this year to continue educating lawmakers about the problem and how it hurts consumers by increasing claims costs, raising insurance rates and clogging court dockets.
In Florida, an influx of assignment of benefits (AOB) lawsuits is putting pressure on the state's insurance system. In recent years, trial lawyers and vendors have used AOB to inflate claims and file costly lawsuits against insurance companies, driving up the cost of insurance for homeowners. A Florida Office of Insurance Regulation report recently documented that water claims involving AOB are, on average, 50% more costly than claims without an AOB, and that the total number of water claims using AOB had risen from 6% in 2010 to 16% in 2016. Southeast Florida has witnessed the largest increase in AOB claims, however Central and Southwest Florida are also seeing rapid increases in water claims using AOB. The OIR report also warns that if current water claims and AOB trends persist, consumers may face rate increases of 10% or more annually as private insurers grapple with rising losses associated with the surge in such claims in many parts of Florida.
The biggest factor driving the explosion of AOB-related lawsuits in Florida is the trial bar's misappropriation of the "one-way attorney fees" statute, which allows attorneys suing insurers to collect legal fees if the plaintiffs win but doesn't allow insurers to collect fees if they prevail.
Legislative response
The Florida Legislature is currently considering H.B. 1097 and S.B. 596, which provide requirements under a property insurance policy for post-loss assignment of claims benefits. The industry is seeking to correct vulnerabilities within the assignment of benefits process to reduce fraud and costs for consumers. A priority is to address one-way attorney fees, prohibit referral fees to and from licensed contractors and provide parameters for voiding an AOB.
Nebraska is another state that had experienced issues with contractor fraud. The industry was seeking to expand existing roofing-contractor fraud statutes to address a loophole and apply that statute to residential contractors. The bill advancing through the legislature last year was L.B. 223. However, since the last session, new business entities have emerged and are using assignments of benefits to exploit loopholes in the existing statute and the pending legislation. The bill is being amended with language on AOB that is similar to that being pursued in Florida.
Over the past few years, 27 states across the country have passed strong consumer protections to prevent contractor fraud and abuse, and discussions continue in several states about adopting similar measures. Legislation in North Carolina (H.B. 643) passed the House last session with industry support, and insurers are urging Ohio, which is surrounded by states with "storm chaser" contractor fraud laws, to take action. The industry will continue working with lawmakers in these and other states to address these critical issues and ensure consumers are protected.
Jeffrey Brewer is the vice president of public affairs at the Chicago-based Property Casualty Insurers Association of America.
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