Florida has a reputation as a difficult place for insurers to do business.
It doesn’t help that the state is routinely pummeled by hurricanes and tropical storms, or that insurers tend to rely more heavily on pricey reinsurance, leaving them prone to go out of business when Mother Nature, as she is wont to do, unleashes on the Sunshine State.
Another factor making business difficult, insurers say, is out-of-control litigation.
Florida lawmakers have aggressively tackled this issue in recent years. In December 2022, Gov. Ron DeSantis signed into law a bill that addressed prominent drivers of litigation costs.
Shortly thereafter, in March 2023, Gov. DeSantis signed more comprehensive legislation, with implications across all lines of Florida insurance. The bill broadly aimed to “decrease frivolous lawsuits and prevent predatory practices of trial attorneys who prey on hardworking Floridians,” according to a press release announcing the new law.
This article will examine how Florida’s recent tort reforms are playing out and how actuaries are unpacking their effects. It will also consider what other reforms may lie ahead in Florida.
December 2022 and March 2023 tort reforms
December 2022: Senate Bill 2-A becomes law
For Brian Donovan, FCAS, chief actuary for Citizens Property Insurance Corp., Florida’s state insurer of last resort, the most impactful tort reforms came in SB 2-A.
“That legislation directly addressed the root issues, and it did so by doing two things: one, eliminating the use of assignment of benefits and two, eliminating the one-way attorney fees” for property insurance, Donovan says.
Assignment of benefits
Previously, policyholders could assign the benefits to contractors who would offer to fix the problem and deal with insurance themselves.
“If you had a situation where you had water damage that was covered, quite often the insurance company’s first notice of loss would be an invoice for, you know, X fans to dry out the place and Y dollars of damage. And the insurance company had no say over whether there was a need for X fans or half of X fans,” says Joe Petrelli, ACAS, president and co-founder at Demotech, a financial analysis firm and ratings agency serving the insurance industry.
One-way attorneys’ fees
When a plaintiff wants more than what the insurance company is offering and heads to litigation, eventually that claim will be settled. Previously, Florida’s policy of one-way attorney fees said that if the claim was settled for even one cent more than the insurer’s initial offer, they were on the hook for all the plaintiff’s attorney fees.
This is obviously a substantial expense and, in many cases, could even exceed the indemnity payment. SB 2-A got rid of this practice in property insurance cases.
March 2023: HB 837 becomes law
This was followed up in late March 2023 with another new law decreasing insurers’ litigation liabilities and damages, as well as kneecapping the legal fee structure for plaintiffs’ attorneys and cutting the statute of limitations for negligence lawsuits in half, from four years to two years.
As the bill moved its way to the governor’s desk, it prompted a raft of lawsuits to be filed before becoming law. The month it was signed, civil filings surged 28% from the month before to 3.58 million — eclipsing the monthly record high, set in August 2022, by 10%.
So, were the reforms successful?
When Gov. DeSantis signed SB 2-A in December 2022, a press release announcing the signing touted it as “the most significant property insurance reform bill in recent history which helps to stabilize our property insurance market, increase competition and strengthen consumer protections.”
This language gets at the heart of the first end goal of the legislation, which was, broadly speaking, to make Florida’s property insurance market healthier.
The second end goal of that tort reform bill was essentially to help the consumer by striking at the ever-rising cost of insurance coverage.
“We are all feeling the effects of inflation and rising insurance premiums, so we took action to deliver consumer driven reforms that expedite the claims process and curb frivolous lawsuits that drive up costs,” said Florida House Speaker Paul Renner in the same press release.
Let’s evaluate whether those goals have been reached.
• Did the law make the insurance market healthier?
• Did insurance become more affordable?
“Everyone knows the reason everyone’s losing money is because of litigation. And if they believe the litigation issue has been resolved, then there’s an opportunity.” – Brian Donovan
Did tort reform make the insurance market healthier?
When I interviewed Petrelli in April, I asked him whether Florida insurance markets had become a better place to do business since the reforms went through. His response was unequivocal: “Yeah. [Florida Insurance] Commissioner Yaworsky just issued a press release earlier this year. I think there’s been eight companies that have entered the marketplace in 2024,” Petrelli said.
I asked Citizens’ Brian Donovan about early indications showing more private insurers entering the Florida market. Are the tort reforms related to that?
“I think it’s absolutely related to this legislation,” Donovan says. “Prior to these reforms, I don’t know if you looked at the financials for the industry … [these companies have] lost billions of dollars,” he says.
So why, Donovan asks, would insurers start flocking to a market where losing money is the status quo?
It’s because “everyone knows the reason everyone’s losing money is because of litigation. And if they believe the litigation issue has been resolved, then there’s an opportunity,” Donovan says.
For most property insurers, “opportunity” isn’t the first word that comes to mind when looking at the numbers in recent years.
“Industry results last year, while it was still the eighth consecutive year of an underwriting loss for the property-casualty industry in Florida, it was a much smaller loss than prior years,” says Mark Friedlander, director of corporate communications at the Insurance Information Institute.
Excluding the state-sponsored insurer, the Florida property-casualty industry posted $191 million in underwriting losses in 2023. That’s not a banner year for any industry, but it’s much easier to stomach than the $1.8 billion loss in 2022 or the $1.52 billion shortfall in 2021.
Plus, after factoring in more than $340 million in investment income, the industry ended up posting an operating profit of more than $147 million in 2023, according to an analysis by S&P Global Market Intelligence.
It was the industry’s first profitable year in the state since 2016.
Friedlander says that without the tort reforms, “Florida’s market would have continued to deteriorate and most likely we would have seen more insolvencies. There’s been no insolvencies now since February of last year.”
Another way to evaluate the health of Florida’s property insurance market is to look at how reliant Floridians are on Citizens, the government entity created in 2002 to offer property insurance to those who can’t find coverage in the private markets.
A healthy market would see a “depopulation” of Citizens — meaning fewer folks turning to the state’s insurer of last resort for coverage.
There’s been improvement on this front: As of May 24, there were 1.19 million Citizens policies in force, down from 1.30 million in May 2023 and below its peak of 1.41 million in September 2023.
Did insurance become more affordable?
Florida’s tort reforms have been successful in bringing down insurance-related legislation, attracting more insurers to the market and depopulating Citizens, but there’s an elephant lurking in the room when evaluating these new laws, and it’s time to address it.
Property and casualty insurance in Florida has only gotten more expensive since the passing of these laws.
“According to the Insurance Information Institute, homeowner’s insurance has increased 102% in the last three years in Florida and costs three times more than the national average,” with the average home insurance policy costing about $6,000, the highest of any state, according to a January report from a Tampa Bay FOX affiliate.
When reinsurers set high prices, the cost is ultimately passed on to policyholders by necessity, as insurers are forced to seek higher rates in rate filings to cover reinsurance costs.
“I don’t see rates ever coming down. . . I see increases moderating,” Petrelli says.
This is a point worth ruminating on. Limiting litigation has helped woo insurers back to the Florida market. But if smaller, more predictable litigation costs and more competition doesn’t ultimately serve the end goal of bringing down rates for policyholders, on what level are these reforms good for Florida policyholders and citizens?
While perhaps cold comfort to cash-strapped Floridians, it’s certainly true that consumers would prefer insurance premiums that rise less violently than they would have otherwise.
But given the language of that December 2022 press release citing “rising insurance premiums” and “frivolous lawsuits that drive up costs,” you’d be forgiven for expecting the legislation to actually reduce premiums.
That hasn’t happened. And opponents of the reforms argue that despite being sold in part as a way to protect consumers, tort reform has done the exact opposite to boot.
Critics of Florida’s tort reform: New laws benefit insurers at the public’s detriment
Another reasonable way to evaluate laws is to do so from the point of view of the stakeholders affected by them.
You might split the stakeholders here into two groups:
• Current and future writers of P&C insurance in Florida.
• The millions of P&C policyholders in Florida (there are more than 7.5 million property insurance policies in Florida).
Tort reform has been unambiguously good for the first set of stakeholders. But critics say it’s the second set of folks that’s been harmed.
“I’m not saying there’s not a lot of litigation in Florida, but the reality is that Florida insurers have a reputation for denying legitimate claims and forcing people to go to court against them,” says Joanne Doroshow, executive director of the Center for Justice & Democracy at New York Law School.
You can’t just look at raw figures showing a high amount of litigation against Florida insurers and conclude that the legal system is being abused, Doroshow says.
“The first thing I would want to know is: Why do people feel like they need to sue their insurance company? And I would say 95% of the time it’s because the insurer has denied a legitimate claim or has lowballed the claim in some way,” she says.
A March 2023 investigative report by The Washington Post found emails detailing “how independent adjusting firms followed orders from carriers to write claims in specific ways that significantly reduced payouts” to policyholders in the wake of Hurricane Ian in 2022.
Florida has overhauled tort law for the insurance industry in the last few years, but it might not be done just yet.
“I think you need to balance trying to prevent abuse of the legal system with consumers’ access to some mechanism to get a fair claim settlement or get fair treatment,” says Birny Birnbaum, director of the Center for Economic Justice, a consumer advocacy organization.
“If you have a situation in which a number of companies were systematically lowballing claims settlements, as evidenced by The Washington Post investigation, then limiting consumers’ access to the courts. . . isn’t going to improve the claim settlement process — it’s going to put even less pressure on those companies that don’t want to treat consumers fairly,” Birnbaum says.
For Birnbaum, not only did Florida tort reforms unfairly punish millions of Florida consumers, but they did so while ignoring the real culprit sending rates into the stratosphere: reinsurance prices.
“After the major carriers left the Florida market after Hurricane Andrew, the state decided on a strategy of allowing thinly capitalized insurers who write only in Florida, or Florida and Louisiana, to come into the state. Those companies rely highly on reinsurance,” Birnbaum says.
“The companies that were failing were giving away 75% of their premium to reinsurers … if you’re dependent to such a huge extent on reinsurance, and you have an unregulated reinsurance market that can double its prices overnight, then you’re going to have huge increases in homeowners’ insurance rates,” Birnbaum says, adding that it’s a recipe for insolvencies as well.
”The cost of reinsurance has to cover what the reinsurers believe they’re going to pay out in claims. So, it’s going to be their average expected claim costs, in any particular year, plus their administrative costs, plus the profit they want to make. Well, in an unregulated market, they can set the profit anywhere they want,” Birnbaum says.
It should be noted that Florida reinsurers aren’t literally unregulated — they’re required to get an actuary to sign off on the adequacy of loss reserves held by intermediary brokers or managers, for example — but unlike insurers, they aren’t legally required to submit rate filings for approval with state regulators. This allows reinsurers the sort of broad discretion in setting prices that insurers themselves do not enjoy.
When reinsurers set high prices, the cost is ultimately passed on to policyholders by necessity, as insurers are forced to seek higher rates in rate filings to cover reinsurance costs.
How actuaries are unpacking the laws
While different stakeholders debate the impact of the laws, actuaries themselves have already incorporated them into their work.
Citizens’ Donovan shared a little about how the reforms affected rate indications at Florida’s insurer of last resort.
“For Senate Bill 2-A, we made very specific adjustments in projecting what our ultimate costs would be based on this,” Donovan says, explaining that the effects started to be incorporated into policies effective June 1, 2023. As of June 2024, all policies are governed by the law.
Donovan talks about how Citizens factored in the new policy language as it updated 2024 rates in late 2023.
“What we did is we went and looked at the prior expenses and prior patterns and broke that into litigated and non-litigated. We, in projecting forward, gave more weight and consideration to the non-litigated costs, to the non-litigated loss development patterns and to the non-litigated loss trend selections,” Donovan says.
Citizens, by design, charges actuarially unsound rates — but it still needs to calculate what actuarially sound rates would be, if it could charge them.
Without taking the reform into account, the uncapped indicated rate increase would’ve been 89% for 2024 policies, Donovan says.
“But then we went in and said, ‘Well, let’s go look at the litigation costs. That’s driving the cost. Let’s temper them to reflect what we think is going to happen with this new bill.’ And that drops that overall indication to 55%,” Donovan says.
While Citizens policyholders haven’t seen or felt the impact of tort reform on their rates — rate increases are capped at 13% per year for primary residences — the reforms do help Citizens in the long-run as it engages in a glide path towards charging actuarially sound rates.
Third-Party litigation funding: The next tort to sort?
Florida has overhauled tort law for the insurance industry in the last few years, but it might not be done just yet.
Third-party litigation funding (TPLF) is the practice of a third party financing a plaintiff’s lawsuit in exchange for a chunk of the eventual judgment or settlement. Many in the insurance industry would like more transparency around the practice.
“We are a strong supporter of transparency in third-party litigation funding,” says the Insurance Information Institute’s Friedlander.
These third parties include hedge funds and other financial firms seeking above-average returns by investing in all sorts of lawsuits, from personal injury cases and class actions to contract breaches and arbitration, Friedlander says.
The Florida legislature was moving forward on a bill in early 2024 to address TPLF transparency, but it was blocked by the Florida House, and for a simple reason, Friedlander says: “Many members of the Florida House are members of the trial bar.”
Still, Friedlander doesn’t think it’s over. “We expect the legislation to be reintroduced next year,” he says.
Of course, consumer advocates have a different take on TPLF transparency — and why the insurance industry is pushing for it.
Doroshow says that issues like this tend to rise to the attention of legislators during “hard markets” — when the country experiences insurance crises and rates shoot up for a number of years before stabilizing. We’re in such a market right now, Doroshow says.
“Whenever these hard markets hit … the insurance industry will decide on a set of legal restrictions on people’s rights that they want to try to lobby for,” Doroshow says.
This time the insurance lobby has chosen transparency in TPLF, an issue she says is actually about insurers gaining a litigation advantage in big cases; they hate the fact that there can be independent funding for such causes.
As for the argument that TPLF results in legal system abuse, Doroshow rejects it outright.
“What they don’t say is litigation finance firms only get involved in a case after they’ve invested money in a very extensive risk assessment of the case. They only get paid if the case is successful. . . so we’re talking about a case, if it gets this kind of funding, it’s a legitimate case,” Doroshow says.
“There’s no increased cost to the system because these are legitimate cases that should be brought and won,” Doroshow says.
Deliberations
At the end of the day, were Florida’s tort reforms successful or not? The answer to that question depends on who’s asking it.
The tort reforms have been objectively good for insurers, who enjoy far more legal protections than before. The health of the Florida property insurance market, as measured by new entrants, the depopulation of Citizens, and even the P&L of the industry as a whole, is on the up-and-up.
For your average Florida policyholder, it’s frankly harder to point to big wins from the reforms. Depopulating Citizens would be an objective win for all Florida policyholders, as the healthier the insurer of last resort is, the less likely it is to need to levy assessments on them to pay out its claims.
But while fewer folks are relying on Citizens today than a year ago, those numbers have been ticking in the wrong direction in recent months. It’s just a little too early to declare victory.
Also, property insurance remains unaffordable for many in Florida. And in the view of consumer advocates, reforms have missed the mark. Insurance is a business that is made to pay out on legitimate claims, and Florida’s tort reforms make consumers less able to collect on the claims that are legitimately owed.
And while the insurance industry wants to continue on the tort reform path, potentially looking to TPLF reform next, Birnbaum says the industry is simply focusing on the wrong thing.
“If litigation was the problem, why wouldn’t the so-called tort reform that was passed immediately lead to lower insurance premiums? It hasn’t. What that tells me is that it’s the ongoing high cost of reinsurance” that’s the real driver of ever-higher, less affordable rates, Birnbaum says.
For Birnbaum, the path to making property insurance more affordable and accessible in a state like Florida instead requires a renewed focus on factors like loss mitigation and the reinsurance market.
He also wonders how robust Florida’s new-and-improved insurance market really is.
“There’s certainly more companies now in the market … but there haven’t been any events,” he says. The 2023 U.S. hurricane season was the tamest in almost a decade.
“What will happen if we get two major hurricanes in a season? Will those companies continue to be around? History tells us no,” Birnbaum says.
Time will tell. But one thing’s for sure: If Florida property insurers do suffer a rough patch in the coming years and start going insolvent, billboard lawyers will be less likely to be to blamed.
John Divine is a financial writer and editor with bylines for The Motley Fool, Yahoo! Finance, U.S. News & World Report, and InvestorPlace.com, among other outlets. He has also written on actuarial issues for Contingencies, a publication from the American Academy of Actuaries.
