Rising Litigation Pushing Insurers to the Brink of Insolvency

Posted in Legal Alerts on May 4, 2022

While plaintiffs’ lawyers like to continuously point their fingers at insurance companies, the reality is that insurers must contend with a number of minefields and difficulties on all sides. When insurance companies deny claims, they are portrayed as heartless and penny-pinching; however, increases in fraud and litigation have made things precarious for Florida’s homeowners' insurance companies. Now, many of them are on the verge of bankruptcy and could go out of business without help from the Florida Legislature. 

Florida presents a difficult market to begin with for homeowners’ insurance companies. These companies write policies knowing full well they could be on the hook for catastrophic damages when storms hit the state. Market and weather conditions have forced many large insurers out of the state entirely. What is left are many small insurers that focus almost exclusively on homeowners’ insurance policies.

Litigation Drives Up the Cost of Doing Business

Litigation can be particularly precarious for these smaller insurers. Many are forced to devote a large share of their budgets to litigation expenses. These insurers spend as much time in court as they do trying to provide insurance to their customers. Small insurers are much more vulnerable to both litigation and severe storms that hit the state. In a sense, they are stuck between a proverbial rock and a hard place. They do not have the financial reserves to weather their own storm that comes from simply doing business in Florida. 

One problem is that homeowners end up receiving very little of the total amount paid in claims costs. One study from the Florida Association of Insurance Agents shows that attorneys receive nearly three out of every four dollars paid out in claims costs resulting from insurance litigation. The homeowners’ insurance litigation system benefits attorneys far more than it benefits homeowners, who end up with pennies on the dollar. 

Oftentimes, small insurers are placed in a difficult spot. If they deny homeowners’ claims, they will face lawsuits; however, these carriers are being sued over a growing number of fraudulent claims when they do not pay. Between scams on one side and punishing litigation on the other, many homeowners’ insurance companies are quickly running out of money. 

Homeowners’ Insurance Companies Are Disappearing from Florida 

Two local insurers have recently been declared insolvent by the State of Florida. There are several other insurers that missed the deadline to file a key financial report, which is often a sign of imminent insolvency. This is in addition to several insurers that have gone bankrupt in previous years. 

The scope of litigiousness in Florida is virtually incomprehensible. As a state, Florida accounts for roughly 6% of the country’s population. Yet, astonishingly, three out of every four lawsuits filed against homeowner’s insurance companies are filed in Florida.

The Florida Legislature Has Failed to Help Insurance Companies

One of the major areas where insurance companies are seeing a deluge of claims is in roofing. Some of these claims are fraudulent, as there are a number of potential scams in roofing claims. In response, the state’s insurance companies have sought special protection from the Florida Legislature.

However, Tallahassee has had other priorities, and the latest legislative session ended without any action being taken to help struggling insurers. One proposal would have allowed insurance companies to pay policyholders for the cash value of their roofs instead of for a full roof replacement. Other laws that have taken aim at the role contractors have played in raising insurance claim costs have yet to show results.

Homeowners End Up Paying the Price for Litigation 

In the meantime, every participant in Florida’s homeowners’ insurance market is facing challenges. Insurance companies have had no choice but to pass on the skyrocketing costs of doing business to their customers in the form of premium increases. This is the only way for them to have a chance of remaining in business. Florida homeowners pay over $600 more for homeowners’ insurance than residents of Georgia and Alabama – and the state’s storms are only part of the reason. 

The decreasing number of insurance companies, along with the latest insolvencies, have further weakened Florida’s private insurance market. Some financially strapped customers have had to take the risk of dropping their homeowners’ insurance altogether because they simply could not fit the cost into their budgets. These increasing costs, however, are not due to profiteering on the part of insurers. They’re about survival. The number of insurers going out of business shows there are few profits to be had. 

Faced with dwindling options, homeowners are being forced to pay for extremely expensive policies in the surplus market or to purchase insurance from the state-backed Citizens Insurance Co. Of serious concern is what will happen when the next major hurricane hits Florida, which is bound to occur at some point. With the homeowners’ insurance market near collapse, the state and federal government could end up having to foot a large bill. 

If there were ever a prime example of how out-of-control litigiousness can raise costs for homeowners and compromise their ability to obtain a critically needed service, this is it. The state that perhaps needs a robust homeowners’ insurance market the most is now threatened with the prospect of losing many of its insurance companies because they have been, and continue to be, besieged by lawsuits.