After a January special legislative session that substantially changed Florida’s approach to regulating property insurance, most Florida legislators returned to Tallahassee in March expecting that the property insurance front would be quiet for the legislature’s annual 60-day regular session, with one exception. Most expected that the legislature would address the scheduled October 1, 2007, sunset of Florida’s 35-year-old no-fault auto insurance law. In fact, however, by the time the session ended on May 4, the legislature had enacted further substantial changes to the property insurance system, while it did not address the scheduled repeal of the no-fault law.
Property Insurance: Making the Residual Market More Competitive While Imposing Additional Constraints on the Private Sector
The new property insurance act1 reinforces two of the policy decisions made earlier in the year:2 (1) the decision to restrict the operations of Florida-domiciled subsidiaries of multi-state insurers and (2) the decision to make the residual market, Citizens Property Insurance Corp. (Citizens), competitive with the admitted voluntary market.
In January, the enactment of restrictions on Florida subsidiaries of multi-state insurers, commonly referred to as “pup” companies, was a major goal of the newly-elected, populist governor and his legislative allies. The result of their efforts was a $50 million minimum surplus requirement for any new Florida-domiciled residential property insurance subsidiary of an insurer authorized to do business in any other state.
During the regular session, legislators considered several proposals that would have imposed further restrictions on subsidiaries, including a requirement that would have terminated the certificates of authority of existing subsidiaries. The final product was somewhat less draconian. Under the new act, formation of new Florida-domiciled residential property insurance subsidiaries will be prohibited as of December 31, 2008. In addition, the rate filing of any Florida-domiciled subsidiary must “include information relating to the profits of the parent company….” The rate filing requirement also takes effect December 31, 2008, and it is not limited to property insurance.
The legislature also revised the $50 million surplus requirement for Florida-domiciled residential property insurance subsidiaries. Under the new act, this requirement will not apply to a Florida-domiciled subsidiary of a Florida-domiciled parent.
January’s legislation substantially changed Florida’s residual market entity, Citizens Property Insurance Corp. Instead of being an insurer of last resort prohibited from competing with the private sector, Citizens received the mandate to lower its rates and compete with the private sector. The new act includes two provisions intended to make Citizens more competitive. Citizens’ rates had already been rolled back to pre-2007 levels and capped at that level for calendar year 2007. Now, Citizens may not increase its rates over the pre-2007 levels until January 1, 2009.
The act also makes Citizens more competitive by making more applicants eligible for Citizens coverage. Under the law enacted in January, an offer of coverage from the private sector would not disqualify an applicant for coverage from Citizens unless the private sector premium quote was more than 25 percent higher than the Citizens premium. Under the new act, the threshold is lowered to 15 percent.
The new act also addresses two claims-handling issues that created potential compliance problems for insurers. Under legislation enacted in 2006, Citizens was required to contract with insurers to provide adjusting services for windstorm claims on properties for which Citizens provided the windstorm coverage and the insurer covered other perils. This requirement was repealed.
The special session legislation created a claims-handling deadline that many insurers considered vague or unreasonably burdensome. Each property insurer was required to pay or deny a property insurance claim within 90 days after receiving notice of the claim. Insurers were unclear as to the meaning of the word “pay” in the context of this law, were concerned about their ability to meet the deadline with respect to complex commercial claims, and were concerned that the vagueness of the law could result in class-action litigation. The new version of the 90-day pay-or-deny law limits applicability to residential policies and to non-residential commercial policies covering structures no larger than 10,000 square feet, and it requires the insurer to pay or deny the claim or a portion of the claim within the 90-day period. Late payments will be subject to an interest penalty. To address concerns about civil actions, the new act provides that the failure to comply with the 90-day pay-or-deny deadline may not be the sole basis for a private cause of action.
Auto No-Fault: October 1, 2007 Repeal of No-Fault Law Allowed to Stand, for Now
Under a 2003 law,3 Florida’s auto no-fault system, including the mandatory first-party personal injury protection (PIP) coverage, is scheduled to be repealed effective October 1, 2007. The 2006 legislature passed an act that would have delayed the sunset date until January 1, 2009, but then-Governor Jeb Bush vetoed it. The 2007 legislature considered a variety of approaches.
Many legislators responded to the concerns of health care practitioners and the plaintiff’s bar, who have consistently supported retention of the current PIP law. Hospitals also have supported retention of the current law, but they have not opposed alternatives that would assure full payment for emergency care costs. Other legislators have responded to insurers, which have been split into three groups: supporters of major reform, including medical fee schedules, utilization controls, and restrictions on attorney fees; supporters of repeal; and a handful of companies that prefer retention of the current law.
The initial position of the Senate reflected the concerns of the pro-reform segment of the industry. A proposal to retain PIP and apply a medical fee schedule equal to 200 percent of Medicare won the support of the Banking & Insurance Committee, but it was subsequently amended to provide only for a five-year continuation of PIP, together with additional funding for insurance fraud investigators and prosecutors. The amended version of the bill passed the Senate on a unanimous vote but was not heard in the House.
In the House, the leadership supported several variations on a proposal that would have allowed the no-fault system to sunset and would have replaced PIP with mandatory first-party emergency care coverage. The last iteration of this proposal would have limited coverage to $10,000, with up to $3,000 available for non-emergency treatment. This proposal was controversial among House members and did not come up for a final vote.
Governor Charlie Crist was not publicly involved in the issue during the regular session, but he apparently supports including PIP in the agenda for a property tax reform special session scheduled for June. On May 6, 2007, he was quoted in one newspaper as saying, “I think having that kind of coverage is important. It doesn’t sunset until October, and obviously that gives us an opportunity to continue it.”4
The scheduled October 1, 2007 repeal date is creating uncertainties for insurers. If the no-fault system is allowed to die effective October 1, 2007 and insurers need to revise their rates or forms for other coverages, it is not clear that they will be able to have their new rates or forms in place in time for October 1, 2007 renewals and the associated notice deadlines. If PIP is replaced with another form of first-party coverage, insurers will need to create new forms and rate plans and obtain the necessary approvals in time for October 1, 2007 renewals, which would appear unlikely even under the most expedited review process.
Florida’s property insurers are looking forward to a summer that is both free of legislative activity and free of hurricane activity. Florida’s auto insurers, despite their varied positions on the no-fault issue, appear to be looking forward to a summer in which their uncertainties will be resolved.
1 CS/SB 2498, 3rd Engrossed, available online at http://www.flsenate.gov/data/session/2007/Senate/bills/billtext/pdf/s2498er.pdf.
2 See Ch. 2007-1, Laws of Florida (HB 1A), available online at http://election.dos.state.fl.us/laws/07laws/ch_2007-001.pdf.
3 Ch. 2003-411, Laws of Florida, available online at http://election.dos.state.fl.us/laws/03laws/ch_2003-411.pdf.
4 “No-fault might be revived,” St. Petersburg Times, May 6, 2007, available online at http://www.sptimes.com/2007/05/06/State/No_fault_might_be_rev.shtml.
This article is a part of the FOCUS on the Insurance Industry Summer 2007 Newsletter.