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The Insurance Insider

Florida AOB crisis flares as groups game system: study

Ted Bunker 09 March 2017

Florida's assignment of benefits (AOB) crisis can be partly blamed on a small number of lawyers and service providers who have helped fuel the explosive growth in lawsuits brought against insurers in recent years, a new study shows.

Eleven lawyers accounted for a quarter of all AOB cases brought to court from 2013 to 2106, while the Florida Justice Reform Institute study said one lawyer alone filed over 30,000 of the lawsuits against insurers from 2015 to last year. The data reflect all types of AOB cases, from personal injury to auto glass and property damage.

The report comes as many homeowners' carriers in the state continue to feel pressure on loss ratios from the deteriorating operating environment in the state, including from the impact of litigated water claims with AOBs attached.

The worsening conditions were cited by ratings agency Demotech last month as it pulled its guidance on the Florida homeowners' sector and warned that a number of carriers could face downgrades.

The study may fuel legislative efforts to reform rules that presently allow insureds or those to whom they have assigned benefits to sue carriers that have denied claims without concern that they may lose a costly legal battle. At least one bill to end the abuse has been filed in the state legislature.

Florida law says while insurers must cover successful litigants' legal costs, losers don't have to pay a carrier's court expenses. A bill supported by state Insurance Commissioner David Altmaier would prevent contractors with AOB agreements from receiving attorney fee awards.

The so-called one-way attorney fee law is often used by unscrupulous contractors and lawyers to extract payments from insurers, according to the Florida Property & Casualty Association.

In an example on its website, the industry group says the scheme typically works like this:

An insured who suffers a water leak calls a plumber, who in turn refers the home or business owner to an emergency services provider to siphon out water in a structure. That vendor then obtains an AOB agreement from the insured.

Armed with the AOB, the service provider cleans up the structure but then sends a "grossly inflated" bill to the insurer. When the carrier rejects the claim, the provider hires an AOB specialist to sue.

The insurer is then confronted with either paying the grossly inflated claim or entering what could be a protracted, expensive legal fight that, if lost, will result in a much higher payment.

Attorney fees on successful AOB claims average nearly three times the amount paid to the AOB recipient, the Justice Reform study said.

The AOB mechanism also can spawn multiple lawsuits from the same claim, the study showed, as insureds hire different vendors to address different effects of an event, such as a plumber and a mould remediation specialist, and they in turn hire their own lawyers to sue over rejected claims.

"This litigation-for-profit scheme permeates the property insurance, auto glass and PIP [personal injury protection] marketplaces," the study says.

The concentration of AOB actions among lawyers is mirrored among contractors, the study showed.

"A few vendors file hundreds, sometimes thousands, of AOB cases each year," it said.

Since 2010, the volume of property damage lawsuits has exploded, rising to almost 13,000 in 2016 from about 1,000 cases just six years earlier, the study shows. The percentage involving AOB, meanwhile, jumped to about a third from less than 5 percent.

The number of AOB cases brought in Florida climbed to about 28,000 last year from 405 in 2006, said state CFO Jeff Atwater, whose office oversees the state's insurance regulators, speaking last month.

And Barry Gilway, Citizens Property Insurance president, CEO and executive director, commented in December: "While less than 15 percent of water-related claims resulted in litigation in 2011, nearly 50 percent did so in 2016."

"The situation is really out of control."

The state-formed insurer of last resort reported that 8,097 new lawsuits were brought against it from January of last year through to November, a 30 percent increase from the same period in 2015. Its policyholder base fell by 26 percent during the same period.