The enactment of Florida Statute 627.70152 has brought up many discussions regarding an Insurance Company’s good faith obligations to its Insureds. For more information on the enactment of Florida Statute 627.70152, read our previous blog post.
A respected colleague, Jonathan C. Brown recently wrote how carriers can use the new statutory framework to leverage settlements and avoid lawsuits. Mr. Brown is correct to a certain extent. If the spirit of the law is followed, then it can be used to avoid lengthy and unnecessary litigation by having a new set of eyes look at the pre-suit notice and determine if the prior claim decision was correct or not. However, insurance companies are not always going to follow the spirit of the law. Insurance companies are businesses and while they do have a good faith obligation to adjust losses, insurance companies also have shareholders that they must answer to.
Opportunities for Abuse
While SB 76 was being debated in Florida’s house and senate, the conversation largely circled around unscrupulous contractors that were “gaming” the system to get new roofs for insureds. However, a roof claim is not the most common claim that an insured will make in their lifetime.
An industry publication recently noted that the most common risk that an insured faces is a water claim. A more recent article cites to the Insurance Information Institute’s estimate that the average water claim costs around $10,900.00. This is where an insurance company can legally take advantage of an insured using the new statutory scheme.
Under the new statute, if the insurance company offers to settle the claim during the pre-suit process AND that offer is rejected, the disputed amount between the insurance company’s offer and the insured’s demand is used to calculate whether attorneys’ fees are owed.
Say Susy Insured has a water loss that is worth the average water loss amount of $10,900. Susy Insured presents her claim to her insurance company. The insurance company takes their sweet time to investigate the loss and on day 89, issues a payment $2,071.00, or 19% of the true amount of the claim. Susy Insured, disappointed in the result, hires an attorney to sue the insurance company. The attorney presents Susy Insured’s pre-suit demand for $8,829, the balance of the true cost of the water loss. After waiting 9 business days from receipt, the insurance company receives the pre-suit demand and offers to settle for an additional payment of $3,488, making the total payments made by the insurance company $5,559.00 (51% of the claim) on a $10,900.00 claim. Susy Insured has now been living in her damaged home for 100 days without the ability to make full repairs.
Susy Insured will have a decision to make: (a) accept the $3,488 and call it a day, even if the claim’s true value is not that amount or (b) decline the offer and sue the insurance company. The problem is, under the new statutory scheme, Susy Insured’s attorney does not have his fees paid for by the insurance company if Susy wins, as was done before the new legislative changes. Instead, the attorney only gets his/her full fees paid if he/she recovers more than 50% of the disputed amount, an additional $2,675.84 on top of the prior payments and offer. Anything under that amount results in the insured’s attorney recovering only a percentage of his fees relative to the recovery or no fees at all. And this is where insurance companies can legally take advantage of the new system. Insurance companies can routinely pay around 19% of the claim initially then offer to pay an amount that totals 51% of the total claim value. This scheme effectively creates a chilling effect on insureds access to courts to recover the true amounts owed on their claims, especially small claims where it would not make sense to pay an attorney’s hourly rate or where an attorney may not be willing to accept a contingency fee on an already small amount of recovery.
Conclusion
Florida’s insurance marketplace has faced some difficulties in the last four years. Insurance companies have repeatedly gone to the legislature to seek legislative changes that would put them on better financial footing. While no self-respecting first party attorney will deny that there are bad actors in the industry, the legislative “fix” that is SB 76 does nothing to prevent “fraud” or provide relief in terms of lowered premiums to the insureds. Instead, the new legislative fix creates a perverse incentive for insurance companies to routinely underpay smaller claims and effectively suffer no penalties for it. Only time will tell if the spirit of the law will be followed or if this will just provide another opportunity for insurance company gamesmanship.
Alvarez Law Group
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