By Butch Swank
Odds are good that if the rate for your homeowner’s insurance has not gone up yet that you are in for a shock when the renewal arrives in the mail. There are three primary reasons why this is happening, and I’ll go into greater detail later in this article. I will also explain what you can do to help yourself and what is being done legislatively to fix things. For a surface level explanation, the three reasons are legal fees, roof claims being paid for wear-and-tear or maintenance related issues, and reinsurance. Reinsurance is the insurance that insurance companies buy. Yes, even they need insurance.
Within the past five years, Florida law changed allowing attorneys to file lawsuits with what is known as a fee multiplier. This allows attorneys to charge 2-3 times their average hourly wage and was a tool put in place during the Civil Rights Era. If attorneys normally charged $500 per hour, they can now charge $1000 to $1500 per hour. The fee multiplier was created to help compensate an attorney willing to represent someone back when no other attorneys were willing. The thinking was to reward the attorney for purposely fighting an uphill battle on behalf of their client. This fee multiplier was not utilized for many years, but times have changed. Attorneys are now using it when representing a homeowner in a lawsuit. This allows them to earn six-figure fees on a $10,000 settlement and none of it is shared with the policyholder.
Because of the way things are now structured, attorneys are greatly motivated to use the system to file more and more lawsuits. They are bringing thousands of claims to court on roofs that appear to be old or neglected instead of damaged from a covered peril – like hurricane or hail. We can all agree that as homeowners, it is our responsibility to maintain and provide the upkeep of our houses. Not so here. In the current environment, a suit can be filed on an old roof and the insurance carrier is obligated to fight it in court or settle.
This leads to the third component causing rates to increase – reinsurance. Florida’s home insurance carriers use insurance to help them cover the cost of claims. For example, if a carrier insures $1 billion worth of homes but only has $200 million of reserves, they can use reinsurance to cover the needed $800 million. It is unlikely that every single home they insure would be destroyed, but reinsurance allows them to cover that unlikely event. The current problem comes from the cost of paying inflated damages from lawsuits for “damage” that was allegedly caused by a hurricane that landed three years ago. The Reinsurance Market has invested heavily in models that assess Florida’s hurricane, flood, and fire risk, but there is no effective model that can assess the added burden of legal loopholes and the explosion of attorney fee compensation. With all these claims being paid, the reinsurers have had to dramatically raise their rates. This means the insurance carriers are not only facing increased claims costs, but also the increased cost of reinsurance. I was told by one carrier that in the current situation, a home policy for $1000 would cost them over $1200. So, they are losing $200 from policies right out of the gate before any claims are filed. They literally cannot raise rates fast enough to compensate for these growing costs.
This is not sustainable for the carriers and all of us Floridians are being forced to pay for it. The Florida Legislature is already meeting in advance of their session this Spring. They are working to create legislation to end the fee multiplier. They are also working on giving homeowners a more affordable roof coverage option that would let them insure the roof for Actual Cash Value. Currently, most older roofs are covered at Replacement Value. These roofs are more costly to insure or may not be insurable at all. Allowing the use of Actual Cash Value means the insurance carrier can insure your 20-year-old roof for, say $6000, instead of the $20,000 a new roof would cost. That means your annual premium would go down. Once you replaced the older roof, you could change the coverage back to Replacement Cost. This is a win-win because new roofs are much more durable than old roofs, so it costs less to insure them.
I’m sure right about now you are thinking, “That’s great, but what can I do now to help my budget?” My first bit of advice would be to shop around. Many Florida carriers have dropped long time agencies and now greatly limit what agencies can write. Your current agent may not have as many options available as they did a few years ago. Our agency has over 30 home carriers. That allows our clients many options to shop and compare not just price but also coverage. Everyone is unique and we like to focus on your specific needs. Having as many options as we do allows us to be in a great place to help. My other bit of advice is age-old wisdom: contact your representatives in the Florida Legislature and let them know you want this man-made crisis fixed. The good news is that Senator Kathleen Passidomo and Senator Ray Rodrigues are already working on it, but I think you giving them a bit more encouragement is a great use of your time. I’m also willing to venture at your wallet would agree with me.