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The Impact of Climate Change on Florida's Insurers

In late September last year, Hurricane Ian made landfall on the West Coast of Florida as a Category 4 hurricane on the Saffir-Simpson scale, with sustained wind speeds of 150 mph. It passed across the state before travelling up the Atlantic coast. The strongest storm to hit Florida since 1994, the event brought catastrophic wind damage to affected areas, together with sea storm surge, and flooding from rainfall. As of 1 November, 131 direct deaths in Florida were attributed to the storm. The full cost of property damage is yet to be assessed, with preliminary estimates for property insurance industry losses ranging from $40-60 billion, which would make it the largest single aggregate insurance loss so far in 2022. The wider economic costs of the uninsured losses cannot yet be calculated. However, in events of this type, these often exceed insured losses.


The event brings into sharp focus the challenges faced by property insurers, policyholders, and state legislators in Florida. These challenges are partly created both by geography and demographics. Florida is a southern state heavily exposed to seasonal North Atlantic tropical storms. It has strong economic and population growth, with population centres and assets such as buildings and infrastructure clustered on its coasts and very low-lying land. The state therefore presents high risk features to insurers; this perception of risk is increasing. Insurers commonly believe that climate change is increasing the severity and frequency of certain weather-related natural catastrophes. This is particularly the case for tropical storms, as the mechanisms of increased sea surface temperatures drive storm formation, severity and longevity, and rising sea levels. Data published in 2021 by the National Oceanic and Administration, an agency of the U.S. Federal Government, shows that of the ten most damaging hurricanes in U.S. history, five occurred in the last ten years. Hurricane Ian is likely to take a place in that top ten. In the face of this escalation in risk many insurers and, critically, reinsurers – usually large international diversified companies which provide insurers with a measure of financial protection against volatile large losses including natural catastrophes – are seeking to reduce their financial exposures to such events. They can do this in several ways, the principal approaches being to either underwrite fewer storm-exposed risks or indeed withdraw from those markets, or to increase the premiums they charge to customers. In that context the ability of businesses and consumers to source suitable and affordable insurance coverage in Florida has inevitably come under pressure.


However, the challenges in Florida are exacerbated by the state’s civil legal system as it relates to insurance. Floridian insurance law includes several features that drive up the cost of insurance claims. Firstly, the Assignment of Benefits rule, through which a homeowner could proceed with repairs to a property and allow the building contractor to pursue the claim directly against that homeowner’s insurer up to and including litigation. This feature has enabled sometimes unscrupulous contractors to inflate claims which, since the property had already been repaired, were challenging for insurers to refute. Secondly, the decision in the 2016 case of Sebo vs American Home Assurance led to the replacement of the traditional “proximate cause” approach with the “concurrent causation doctrine”. This means that, for example, a small area of storm damage to a wall that was already in poor condition could result in a successful claim for a whole new wall. Thirdly, Florida Statute 627.428 provides for a regime of “one-way” attorney fees. This means that if, for example, a homeowner successfully sued their insurer, gaining a court award even slightly above that insurer’s original settlement offer, all their legal fees must be paid by the insurer. Those legal fees may outweigh the value of the claim itself, so insurers have been forced to increase settlement offers above objectively reasonable levels in order to avoid the risk of punitive legal costs. In the reverse situation, where the homeowner gained a court award below the insurer’s offer, the insurer would be unable to recover their own legal costs from the homeowner, hence the “one-way” moniker.


The cumulative effect of these provisions has resulted in a proliferation of claims and litigation in Florida, with the state accounting for 79 per cent of U.S. property insurance litigation with almost 100,000 new lawsuits in 2021


Given the combination of increased risk due to climate change and a difficult legal environment many national and multinational insurers have all but withdrawn from Florida. Citizens Insurance, a not-for-profit business, was created by the state to boost supply to those unable to source insurance cover, and there has been an increased reliance on smaller state-only insurers. Those insurers lacked the scale and capital of larger insurers, and six Florida property insurers had been declared insolvent by September 2022 in that year alone (that was before the financial impacts of Hurricane Ian). Citizens Insurance, restricted by law in its ability to raise premiums in line with the rest of the insurance market, has come under pressure with the number of policies more than doubling between 2019 and 2022.


By 2019 the issue of scarcity of insurance availability and rocketing premiums unsurprisingly became a political issue. Florida Gov. Ron DeSantis described assignment of benefits as having “really degenerated into a racket” and the process of identifying legislative changes to make the insurance market in Florida viable started, balanced with the need to protect consumers.


The state has made several attempts to curtail the issues within Floridian issuance law, with successive legislation in 2019, 2021, and 2022 (the Florida Property Insurance Reform Bill, passed in a special legislative session) to address issues including assignment of benefits, permitted legal costs and building codes. Incentives such as State grants were enacted to encourage homeowners of older homes to alter their homes to “harden” them against storm damage. However, the legislation also imposed new duties on insurers to ensure consumer protection. Following Hurricane Ian, further potential measures, including changes to Florida Statute 627.428 may potentially be in development, although they will be subject to political debate. In aggregate the state hopes that vexatious litigation can be reduced and the insurance market stabilised.


It remains to be seen whether these legislative steps, and adapted insurance law, will be successful in achieving their objectives. The ongoing impacts of climate change combined with Florida’s inherent geographical and demographic characteristics present risks that insurers – and their essential reinsurers – may find unattractive. Insurers may also want to wait to see how the legal reforms work in practice before deploying their scarce capital to the state.


The risks presented to insurers and reinsurers by climate change are not unique to Florida or even other tropical storm-exposed areas around the world. Increased prevalence of wildfires in the Western U.S. and Southern Europe, atypical winter storms in the U.S., and flooding in Northern Europe, Asia and Australia is being attributed to climate change. Legislators around the world may soon be grappling with scarcity of insurance supply and identifying measures to alleviate the impact of the issue on their citizens.


Image via Flickr.


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