It’s the statistical equivalent of an alligator in the drive-thru: Florida accounts for 9 percent of the nation’s homeowner’s insurance claims, but 79 percent of insurance lawsuits. That’s more than 100,000 lawsuits every year, compared to just a few thousand in more populous California. To hear the industry tell it, the state’s status as the insurance-lawsuit capital of America is due to an epidemic of roof-repair scams, in which fraudulent contractors have taken advantage of unwitting homeowners and plaintiff-friendly state statutes to drive the honorable insurance man clear across the state line.
Whether trial lawyers and unethical contractors are really responsible, one thing’s for sure: Florida’s property insurance market is deeply broken, and the timing couldn’t be worse. The average premium is three times the national average, and rates are rising by 30 to 50 percent a year. Allstate and State Farm have limited their exposure there, and smaller companies are foundering: Six insurers have already become insolvent this year, and another two dozen are at risk of a credit downgrade from the generally sympathetic rating agency Demotech. It has even become a political issue, with Democratic gubernatorial candidate Charlie Crist labeling incumbent Ron deSantis “the worst property insurance governor in Florida history. Period.”
“We’ve labeled it the most unstable home insurance market in the U.S., and this was without hurricanes,” said Mark Friedlander of the Insurance Information Institute, an industry-funded group. After all, the past three years have been nearly hurricane-free in the Sunshine State.
Then came Hurricane Ian, which demolished entire towns in Southwest Florida and drowned scores of residents, becoming the deadliest storm to strike Florida since 1935. Friedlander’s group estimates the damages will amount to $60 billion—which would make it the second-most costly natural disaster in recent history after Hurricane Katrina in 2005.
The most important question now for Floridians in the storm’s trail is whether their homes were damaged by wind or by water. Flood insurance is too risky for private insurers and must be underwritten by the National Flood Insurance Program, a federal money pit that has been criticized for subsidizing ill-advised development that floods over and over again. But because flood coverage is not part of the usual home-insurance package, many Floridians with water damage may find they are stuck with a big bill: Just 29 percent of residents in the nine-county disaster area have flood insurance, according to E&E News. Federal disaster aid could also help, though FEMA disbursals after the Kentucky floods this summer averaged under $10,000 per household.
Wind damage such as a blown-off roof or a tree through your wall, on the other hand, is covered by a typical insurer. The largest of them, Citizens Property Insurance Corps., estimates it will pay out between $2 and $4 billion, an amount covered by its $6.7 billion surplus.
If that is indeed the scale of the damage, it would be very good news indeed. As the name implies, Citizens is run by the state, and if Citizens runs out of money to pay out claims, it levies a so-called “Hurricane Tax” on almost every insurance policy in Florida.
How did a publicly managed company, established in 2002 as an “insurer of last resort,” come to back up more than a million Florida homeowners?
Just as there are no atheists in a foxhole, there are no libertarians when it comes to providing homeowners’ insurance in Florida. Once characterized as an “extraordinary step to protect consumers” by helping provide policies in parts of the state where no private company would go, Citizens has picked up the slack as national insurance companies retreat and smaller operators fold.
In 2018, Citizens had 400,000 policies; today it has more than a million; by 2023, the company projects it will hit 2 million. In the Miami area, public insurance now covers 40 percent of the market. A spokesperson told Bankrate that Citizens is, “the only game in town right now.” And it’s a good deal for policyholders: Unlike private insurers, Citizens’ rate increases are capped by state statute, insulating its customers from the choppy free market.
Whose fault is it that private insurance companies keep going under? The industry says it’s the fault of trial lawyers and roofing scams, though some observers say it’s a little simpler than that: Florida is a risky place to build and insure houses. “When was the last time you had a $30 billion to $40 billion loss in Illinois?” Matthew Carletti, an insurance analyst for JMP Securities, told CNN.
R.J. Lehmann, an insurance expert with International Center for Law & Economics who lives in St. Petersburg, told me Florida’s “perilous position” had its roots in the brutal period from 2004 to 2006 when a handful of huge storms caused widespread damage. “In most of the country, you do not find companies that only write homeowners’ insurance. It’s not a very profitable line,” he said. National insurers minimized their exposure, and smaller ones haven’t been able to take the heat.
Citizens seems likely to survive Hurricane Ian. But it is about to gain hundreds of thousands of new policyholders from companies that don’t, increasing its size and vulnerability to future storms.
Having one public company insure all of the state’s most vulnerable communities is not a good idea, experts agree. First, insurance works by spreading risk, and Citizens is doing something like the opposite. Second, a tough season for Citizens (and two other state-backed insurance providers) will get paid out by taxes on Floridians’ other insurance policies, which may not come as much of a relief to hard-hit homeowners.
Third is that Citizens is repeating, at a state level, the mistake that the National Flood Insurance Program is making nationally: It subsidizes people who build and buy in places that they probably shouldn’t. “The useful role of insurance is that prices convey information about risk. You shouldn’t build somewhere people can’t afford the insurance,” Lehman said. “Living on barrier islands is probably not a thing we can’t allow anymore. It’s difficult to move people. But at least stop future development.” High premiums send a message: This is not a safe place to live.
