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Insurance Solutions

Formerly Moody’s RMS

For Texas, it all began with Hurricane Ike in 2008. In the run-up and during the global financial crisis, between September 2006 and the last quarter of 2008, 780,000 jobs disappeared in the U.S. construction sector. Following Ike, with its generally modest levels of damage across a wide area, “two men in a pickup” teams turned up to get homeowners to sign “Assignment of Benefits” (AOB) forms. A signed AOB form gave repairers responsibility for dealing with the insurer over the claim, and the right to pass the case onto a lawyer assembling a class action lawsuit.

The original idea of contractors sourcing AOBs may have emerged after the 2004-2005 hurricanes in Florida, when lawyer Harvey V Cohen of Cohen Grossman met with restoration contractors to encourage them to employ “Assignment of Benefits” forms so they would deal directly with the insurance company for their payments.

I visited the Bolivar Peninsula, east along the coast from Galveston, Texas, a few months after Ike’s storm surge had obliterated the elevated beach front houses. Reconstruction seemed to be limited to the erection of some huge billboards giving the names and phone numbers of lawyers. There were similar billboards looming over Gulfport, Mississippi after all the near shore properties had been swept away by the storm surge from Hurricane Katrina in 2005.

Gilchrist Texas
Gilchrist, TX, September 22, 2008 – A view from the deck of a house on 922 Church Street that survived the destruction of Hurricane Ike. Source: Jocelyn Augusitno/FEMA

One class action lawsuit after Ike focused on establishing the proportion of the obliterated beach front properties in Bolivar County that could be attributed to the covered wind policy rather than to the storm surge and battering waves. Objectively, the actual percentage of Category 2 wind damage was tiny, while the lawyers got it assessed as 28 percent. But that was just one of the class action lawsuits underway after the hurricane.

“Hundreds of Millions in Fees”

Stephen Badger, a commercial insurance attorney in Dallas, has written about what was happening. First, the insureds signed the “Assignment of Benefits” forms, transferring their benefits to the unscrupulous repairers, and then these contractors passed the claims onto lawyers arranging mass torts, often without telling the insureds. Lawyers conjured up additional sources of loss and sent the bill to the insurers. Badger has written that Steve Mostyn, a renowned Houston insurance litigator “reaped hundreds of millions in fees” in advancing insurance recoveries through mass tort litigation after Hurricane Ike. In response to the class action lawsuit on behalf of the owners of the slab claims, the  Texas Windstorm Insurance Association (TWIA)  (the state’s windpool and insurer of last resort) paid out $37 million in defense costs before acceding to disputed claims of $189 million along with $87 million of attorney’s reward fees. With total Ike costs exceeding $2 billion, the TWIA’s funds were exhausted. The TWIA was later sued for passing on some of these costs to its customers in raised premiums over the following years.

After Ike, the action moved to south Texas and Hidalgo County on the Mexican border, where in spring 2010 there were 30,000 claims following an intense hailstorm. Of those, up to 40 percent were turned into lawsuits. The storm was said to have caused $250 million of damage, while insurers ultimately paid out $600 million in response to the lawsuits that imagined multiple additional sources of damage on the properties, such as demanding all the brick work should be replaced. The insurers also had to pay all the legal fees.

Southern Florida provides another hotspot of property claims lawsuits. In the absence of any recent hurricane or hail damage, the litigation has focused around the assignment of benefits for “non- weather-related” water damages. For the publicly owned insurer Citizens, the percentage of such water claims that went to litigation increased from 15 percent in 2011 to 46 percent (or 28,000 claims) in 2016, with nine out of ten cases coming from three counties: Broward, Miami Dade, and Palm Beach. The cost of water claims has increased at an annual rate of 17 percent, as paid out losses can be three times higher when they pass to litigation.

Lawyers Capitalize on Catastrophe

Based on what has been happening in south Florida and Texas, after the next big U.S. hurricane or earthquake wherever it occurs, we can expect widespread litigation.  Following 2012 Superstorm Sandy, Gulf lawyers from Florida and Louisiana came carpetbagging, lauding their victories from Katrina and Ike, and signed up more than a thousand Long Island and New Jersey homeowners. Litigation focused on three key topics; that the insurers had altered engineering reports to reduce the costs of claims, misclassifying non-covered basements, and failing to include sales tax in compensation payments. However most of this litigation concerned National Flood Insurance Program (NFIP) flood coverages.

As insurers argue for raised insurance rates to cover these additional costs, we have seen the beginnings of a fight back. In Texas, the insurance industry backed House Bill #1774 was formulated to reduce the costs of the trial lawyers not only for hail claims, but a wide range of other natural perils including hurricane. Since 2011, the state had seen a fourteen-fold increase in the number of insurance claims passing to litigation.

The existing Texas state law requires the plaintiff’s attorney to file a notice with an insurance company sixty days before filing a lawsuit, but this notice could be filed even when an insurance claim has not been made, or when the amount sought was multiples higher than the eventual recovery. HB1774 would require this notice to include the “acts or omissions” that were the basis for a claim, the amount owed, and the attorney’s “reasonable fees.” It would also limit the legal fees that could be charged where the court’s final assessment of the insurer’s liabilities was significantly lower than the original claim. The bill, while backed by the House’s Republican majority, was strongly resisted by representatives of the plaintiff’s bar. However, on May 5, 2017, the Texas House of Representatives approved the bill and sent it to the state’s Senate, which was expected to back the measure.

At the same time, it seemed a comparable ”Prohibited Property Insurance Practices Bill” would also get through the Florida legislature. House Bill #1412 would prevent an unaccredited contractor to whom benefits have been assigned by the insured, then passing on the case to a lawyer. There would also be significant restrictions on the fees that lawyers could charge according to their success in challenging the insurer’s assessment of the claim. The bill was passed by the Florida House on April 27. However, resistance from the plaintiffs’ lawyers was successful at frustrating a parallel bill being considered by the Florida Senate before the end of the legislative session on May 5, and “the bill is now dead.”

Litigation for property insurance claims is likely to be one of the biggest factors in driving up U.S. catastrophe loss costs. Some of the largest increases will be in Loss Adjustment Expenses. The legislative initiative in Texas should help reduce this claims inflation, but the failure to pass corrective legislation in Florida means claims litigation could be rampant after the next major hurricane strike. Also, as one state clamps down on the practice it will move to other jurisdictions. Trial lawyers have discovered the lucrative opportunities in litigating property insurance claims, and are not going to give up this burgeoning new source of revenues.

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Robert Muir-Wood
Robert Muir-Wood
Chief Research Officer, Moody's RMS

Robert Muir-Wood works to enhance approaches to natural catastrophe modeling, identify models for new areas of risk, and explore expanded applications for catastrophe modeling. Robert has more than 25 years of experience developing probabilistic catastrophe models. He was lead author for the 2007 IPCC Fourth Assessment Report and 2011 IPCC Special Report on Extremes, and is Chair of the OECD panel on the Financial Consequences of Large Scale Catastrophes.

He is the author of seven books, most recently: ‘The Cure for Catastrophe: How we can Stop Manufacturing Natural Disasters’. He has also written numerous research papers and articles in scientific and industry publications as well as frequent blogs. He holds a degree in natural sciences and a PhD both from Cambridge University and is a Visiting Professor at the Institute for Risk and Disaster Reduction at University College London.

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