Hurricane Ian Shoreline Loss: Four Policies, Oh Joy!
October 19, 2023
This article originally appeared in Claims Management, a publication of the Claims & Litigation Management Alliance (CLM). Legal opinions may vary when based on subtle factual differences. All rights reserved.
Hurricane Matthew lashed Florida’s eastern coast in early October causing significant damage to both residential and commercial property. While Hurricane Matthew is gone, Florida insurers are now bracing for another type of storm, namely a flood of assigned insurance claims in the wake of Hurricane Matthew’s destruction. Over the past few years, assigned insurance claims – often referred to assignments of benefits or AOBs – have been particularly challenging for first-party property insurers in Florida. AOBs raise unique issues, including fraud concerns.
Let’s take a look at the history of AOBs, discuss how AOBs impact the resolution process including fraud concerns, and highlight some of the legal issues that are present with AOBs.
The typical AOB situation arises when an insured has a property loss. The loss is oftentimes a water loss due to a leaky roof, a broken pipe, or a plumbing malfunction. The insured hires a contractor to either prevent further damage or to make emergency repairs. The contractor requests the insured execute an AOB, which assigns the insured’s insurance rights to the contractor in return for the contractor’s services. Then, after providing the services, the contractor makes a claim directly to the insurer for payment using those assigned rights.
For nearly 100 years, Florida law has recognized that an insured may freely assign post-loss insurance benefits to another even without the insurer’s consent. The seminal case on the issue is W. Fla. Grocery Co. v. Teutonia Fire Ins. Co., 77 So. 209, 210-11 (Fla. 1917). Citing Sec. First Ins. Co. v. State, Office of Ins. Regulation, 177 So. 3d 627, 628 (Fla. 1st DCA 2015). Florida’s First District Court of Appeal (“1DCA”) recently cited Teutonia in an opinion regarding the free assignability of post-loss insurance claims. The 1DCA stated “[o]n this point, we find an unbroken string of Florida cases over the past century holding that policyholders have the right to assign such claims without insurer consent.”
However, with the increased use of AOBs in first-party property claims over the last few years, there have been concerns that some of these AOB claims are fraudulent. In fact, in the Security First case cited above, the 1DCA acknowledged in its opinion that “[the Court is] not unmindful of the concerns that Security First expressed in support of its policy change, providing evidence that inflated or fraudulent post-loss claims filed by remediation companies exceeded by thirty percent comparable services; that policyholders may sign away their rights without understanding the implications; and that a cottage industry of vendors, contractors, and attorneys exists that use the assignments of benefits and the threat of litigation to extract higher payments from insurers.”
Despite that observation, the 1DCA stated that those “policy arguments and evidentiary basis for them put forth by Security First are more properly addressed to the Legislature.” In fact, over the past few legislative sessions, Florida lawmakers have considered bills that would affect or limit the way AOBs are used in first-party property claims. However, to date, none of those bills have become law.
Citizens Property Insurance Corporation (Citizens) is the largest insurer in the State of Florida. In September of this year, Citizens’ Consumer Services Committee published a comprehensive report showing the impact of AOBs on claims and litigation. The data for the report came from claims closed between 2011 and 2016. In a nutshell, the report shows that assigned claims took significantly longer to settle than non-assigned claims. Moreover, the report shows that an assigned claim is more than four times more likely to end up going into litigation than a non-assigned claim.
In late October of this year, ABC Action News Tampa Bay published a report stating that a roofing contractor was arrested and accused of defrauding approximately 90 homeowners out of insurance proceeds. According to the report, the contractor went door-to-door in Florida’s Citrus County after a hail storm struck the area in 2014. In most instances, the contractor offered to replace the homeowner’s roof in exchange for the homeowner executing an AOB to the contractor. It is alleged that the contractor received over $950,000 of insurance proceeds, but never replaced the roofs.
One of the best ways for insurers to guard against suspected fraud is to gather as much information about the claim as possible. Most insurance policies contain post-loss conditions that obligate the insured to provide a sworn statement in proof of loss, or submit to an examination under oath, or provide documents to the insurer. These conditions provide the insurer with an opportunity to fully investigate the claim, which greatly reduces the chance of a fraudulent claim being paid.
In addition to those options, many insurers take recorded statements from their insureds following the first notice of the loss. A recorded statement is a convenient way for the insurer to confirm the facts of the loss and also determine if a contractor is involved. If a contractor is involved, the recorded statement allows the insurer to learn what work was actually performed and what equipment was used. Having that information early allows the insurer to be on guard for overbilling when the assignee contractor submits its claim. Having a cooperative insured assisting the insured is one of the best ways for the insurer to guard against potential fraud.
Having a cooperative insured, especially in the AOB context, is helpful because an insurer usually does not have the ability to require an assignee contractor to comply with the post-loss conditions with which the insured has to comply with the post-loss conditions with which the insured has to comply. That is because, when an insured assigns insurance rights to a contractor, the contractor does not assume the duties and obligations of the insurance policy. Shaw v. State Farm Fire & Cas. Co., 37 So. 3d 329, 333 (Fla. 5th DCA 2010) disapproved of on other grounds by Nunez v. Geico Gen. Ins. Co., 117 So. 3d 388 (Fla. 2013).
That said, an insurer can still request that its insured fulfill those post-loss obligations even if the insured has assigned her claim to a contractor. If the insured fails or refuses to fulfill those post-loss obligations, that failure on the part of the insured may bar the assignee contractor’s claim, as further noted in Shaw: “If the assignor is entitled to be paid, the assignee is entitled to be paid, but if the assignor is not entitled to be paid because of some failure of performance on the part of the assignor, then the assignee is not entitled to be paid either.”
Another way insurers can guard against fraud and the inflated value of claims is by using the insurance policy’s appraisal provision. Most insurance policy appraisal provisions state that, if the parties disagree on the amount of money owed under the insurance policy, either party can request appraisal. Once appraisal is requested, each party names an appraiser, and each appraiser then estimates the value of the claim. If the appraisers agree, that sets the amount of money owed. If the appraisers disagree, then the appraisers select an umpire, and the agreement of any two of those people sets the amount of money owed.
However, some assignee contractors have tried to resist participating in the appraisal process. Some contractors argue that they only provide an emergency service (rather than actual repair to the damaged property), and the costs of such services are not subject to the insurance policy’s appraisal provision. Other contractors argue that the appraisal process is a duty or obligation of the insurance policy and, along the same lines as the Shaw case discussed above, the assignee contractor cannot be compelled to perform such duties and obligations.
That issue was addressed in the recent case of Certified Priority Restoration v. State Farm Fla. Ins. Co., 191 So. 3d 961, 962 (Fla. 4th DCA 2016). In that case, Florida’s Fourth District Court of Appeal (“4DCA”) affirmed the trial court’s ruling that compelled an appraisal that was requested by the insurer despite the fact the insured assigned her claim to a contractor. The 4DCA cited to the Shaw case discussed above and held that participation the insurance policy’s appraisal process is not one of the non-delegable duties that must be performed solely by the insured. Thus, the 4DCA held that the trial court did not err in compelling the appraisal.
Some contractors try to avoid appraisal because they would rather litigate the dispute. Part of the reason some contractors prefer litigation over appraisal is because the contractor has a close relationship with an attorney, and because Florida has an attorney fee shifting statute that applies to first-party insurance disputes. In a nutshell, Florida Statute § 627.428 provides that, if an insured is required to resort to litigation and is successful against her insurer, the insured will be entitled to recover her attorney fees from her insurer. In the case of Continental Cas. Co. v. Ryan Inc. E., 974 So. 2d 368, 377 (Fla. 2008), the Florida Supreme Court held that the statute also applies to assignees of insurance benefits. That means, if an assignee contractor is required to resort to litigation against an insurer and is successful, the assignee contractor will be entitled to recover its attorney fees from the insurer as well.
Because of Florida’s attorney fee shifting statute, many lawyers are eager to represent assignee contractors in litigation, especially when the loss is covered and the only dispute is over the amount of money owed. In fact, AOB work has become so coveted by lawyers in Florida that one law firm in Orlando periodically hosts what it calls an “insider secrets workshop” for contractors. The workshop promises to show contractors “the insider secrets the insurance companies don’t want [them] to know.” The workshop teaches contractors how to use AOBs, work authorizations, and demand letters in order to collect money from insurance companies. Contractors who attend the workshop are given a flashdrive with documents as well as a PowerPoint presentation that explains the AOB process from the perspective of the contractor and the law firm.
There is no doubt Florida insurers will be dealing with insurance claims spawned by the destruction left in the wake of Hurricane Matthew and other storms for many months, if not years, to come. It is equally certain that some, if not many, of those claims will come in the form of AOB claims. By using some of the approaches discussed above, insurers can guard against fraud concerns while, at the same time, fulfilling their obligations under the insurance policy.