Dog Days of Summer
We are in the middle of the dog days of summer! For those of you who live in milder climates, we thought we would share with you what that means. A fun factoid: The ancient Romans called the hottest, most humid days of summer “diēs caniculārēs” or “dog days.” The name came about because they associated the hottest days of summer with the star Sirius. Sirius was known as the “Dog Star” because it was the brightest star in the constellation named Canis Major meaning, Large Dog.
The sultry part of the summer, which is supposed to occur during the period that Sirius, the Dog Star, rises at the same time as the sun is now often thought to be from July 3 to August 11, a period marked by lethargy and inactivity. But not at LMA! We are busy preparing for the 2018 legislative session that will start in January with committee meetings commencing in September. We are not ready to forecast what will be on the docket but you will be the first to know.
And with that, keep reading for news you can use!
AOB: Finding Consensus Going Forward
Clarifying differences is helpful
With Legislative Committees starting their work in a little more than six weeks from now (the Florida Legislature’s regular session next year is early: January 9 through March 9, 2018) discussions among various parties continue in an effort to forge a workable consensus on how to fairly resolve problems within the state’s Assignment of Benefits (AOB) process for P&C claims. Will the fifth year of efforts be the charm for the legislature, which has failed to come to consensus?
From the insurance companies’ perspective, contractors (and the attorneys they hire) have exploited loopholes that are creating unnecessary litigation, which is driving up costs for all Florida homeowners. By any measure, it’s a problem: Frequency of Claims involving AOB (up 46% from 2010-2016), Severity of Claims involving AOB (up 28% from 2010-2016), and the granddaddy of all, Number of AOB lawsuits (from 405 lawsuits in 2006 to 28,200 in 2016) are all up. Increased costs equal increased rates by insurance companies, with OIR warning this spring that annual 10% rate increases on homeowners insurance policies in Florida could become the norm. OIR has produced this county-specific five-year projection of HO-3 rate increases in Florida without AOB reform. The projections do not include Citizens Property Insurance Corporation, the state’s insurer of last resort, which unfortunately, is in a class by itself when it comes to AOB abuse.
Citizens, which has a lot of its 450,000 policies in what I call Florida’s “AOB Abuse Alley” made up of the tri-counties of Palm Beach, Broward, and Miami-Dade, projects premium increases of 61% there over the next five years, absent reform, based on a modest home valued at $155,000. The number of Citizens’ claims going into litigation has grown from 12% in 2011 to 45% last year. –
Rather than sit around for another year awaiting legislative reform, Citizens President Barry Gilway and staff are taking action. This month, Citizens fully instituted its Managed Repair Program, which provides “a network of licensed, qualified, and credentialed contractors to perform permanent repairs based on nationally recognized estimates and quality standards that ensure the damage is repaired to pre-loss condition. The repairs are guaranteed for a minimum of three years,” according to Gilway. The program targets increasingly quirky “non-weather water losses” and is voluntary for its policyholders, but Citizens is awaiting OIR’s okay to institute a $10,000 cap on reimbursements for claims in which the policyholder goes outside the program to hire their own repair contractor.
Don Phillips, President of the Fla Association of Public Insurance Adjusters, has been critical of managed repair programs by insurers. He questions the quality of the programs and points to an inherent conflict of interest for any entity to act as both the adjuster and contractor on the same claim. He has also been critical of Citizen’s proposal to limit coverage on claims where repairs are performed by policyholder’s preferred contractor, calling the $10,000 “an artificially low cap… (where) policyholders would no longer have a say in what repairs are being made in their own homes nor in who is doing those repairs.” Citizens estimates that three out of four on-weather water claims will be covered adequately with this new program. Phillips says in essence, “what about the fourth one?”
Both Gilway and Phillips have been leaders in the effort to gain consensus among the many stakeholders involved, including wary lawmakers. Both have recently written thoughtful opinion pieces in the press about their respective concerns and you can read those pieces here from Mr. Phillips and Mr. Gilway.
There is consensus, even among contractors, that better regulation would help weed out the bad apples and make pursuing fraud cases easier. There’s also general agreement among key influencers that rules need to be tightened to require contractors provide written estimates prior to any AOB and give the policyholder a grace period to rescind the agreement; also, to limit or ban referral fees paid by contractors and limit the scope of AOB’s to work actually performed.
Government’s Flood Insurance Program Debate Ebbs and Flows
Can Congress make the September 30 deadline?
When you look at the U.S. House and Senate calendar, there are blank spaces for the month of August meaning Congress is not planning to meet and they all want to “go fishin’” as we say in the South. So how will the break in the action affect the debate over flood insurance reauthorization, meaning can all the reauthorization details be worked out in time to “re-up” the National Flood Insurance Program’s (NFIP) authority to operate?
The jury is still out as to whether the September 30 deadline is met because we are all witnessing the fight over healthcare and the controversial Russian interference with our presidential election. And who is worried the most? You guessed it – those engaged in the real estate market. If the program lapses, realtors and real estate agents could not sell properties funded by federally backed mortgages that require appropriate NFIP policies.
Don’t get us wrong…there’s been some good work so far. The US Senate released its first draft last week of an NFIP reauthorization and reform bill. The Senate bill focuses on a narrow set of reform measures, including these key points:
- Reauthorizes the NFIP for six years
- Addresses repetitive loss properties with “appropriate sanctions”
- Increases ICC coverage from $30K to $60K with additional premium/fees
- Requires flood history to be disclosed for properties offered for sale or lease
- Calls for credits for multifamily structures that use alternative mitigation
- Continues funding the mapping program with added technology improvements required
- Incorporates replacement cost into the premium calculation
- Allows for risk transfer to the private market (reinsurance, bonds, etc.)
- Requires study on adding business interruption coverage
The House Financial Services Committee passed seven bills to reform and reauthorize the NFIP and have been working with industry stakeholders and consumer advocates to address their concerns. Key provisions include:
- A five-year program reauthorization
- Gradual decrease in WYO compensation to 27.9% of chargeable premium—down from 30.9%
- Administrative reforms to address issues from the aftermath of Super Storm Sandy
- Clarification that flood insurance policies written by private carriers satisfy the mandatory purchase requirement and allow continuous coverage rules to apply to private flood policies
- Repeal of the mandatory flood insurance coverage requirement for commercial and multifamily properties located in flood hazard areas
The Senate Banking Committee will debate its bill and then it will go the full Senate. The House is still mulling over its version of a bill and it MIGHT be heard this week or could be vetted by the entire House after their August recess. The House and Senate bills differ greatly so they will have to “conference” to reconcile those differences before sending the bill onto the President for signature.
“It is unsustainable,” said Rep. Jeb Hensarling, R-Texas, chairman of the Financial Services Committee. “We need to transition to sound actuarial rates. Otherwise, we are putting more people in harm’s way.” Hensarling is referring to the fact that low rates encourage homeowners to build in risky, high flood prone areas. Some federal legislators support eliminating the practice of the NFIP “grandfathering” premiums after 2021 and raising rates on grandfathered properties versus allowing homeowners to continue paying relatively low insurance rates even when FEMA changes its maps that determine who is in or out of a flood zone. Grandfathering is based on the concept that people with homes built to the required codes at the time of purchase shouldn’t be penalized when those codes change.
Maria S. Wells, president of the Florida Realtors trade group, which has 175,000 members statewide, led the negotiation last week with Congressional staffers to successfully retain the grandfathering provisions with the National Association of Realtors releasing this statement.
“People don’t realize they could be remapped into a much more high-risk zone,” said Wells, a real estate broker with offices in Florida and Pennsylvania. She said one frequent criticism of the program — that rich people benefit disproportionately — is a myth. Under the program, flood damage claims are capped at $250,000, much less than full replacement for a wealthy person’s home. “People talk about beach-side mansions, but I can tell you, they don’t use NFIP,” Wells said. “They use Lloyds of London.”
Reforming the NFIP and encouraging private insurance companies to enter the flood market is important and there is another exciting development that is allowing this to happen. New modeling techniques and new technology that make structures more resilient than ever to floodwaters, are allowing those private insurers to more accurately price risk and compete with the NFIP. Mike Graham of Smart Vent Products is our guest on the latest episode of The Florida Insurance Roundup podcast and shares how today’s flood mitigation techniques can lower private insurance rates, making flood coverage more affordable – and available – for everyone and helping grow Florida’s private market. You can listen to The Florida Insurance Roundup here.
How low will the crooks go in insurance fraud?
We routinely follow the topic of insurance fraud as our firm has been on the leading edge fighting it, standing alongside many Special Investigations Unit (SIU) soldiers and claims professionals who do all they can to stop it. For those of you who don’t subscribe to the US Department of Justice’s website, we recommend you do and we tracked a news release last year about a resident of Texas who was the hub of annuities fraud perpetrated on United Nations employees who were injured or killed in connection with their employment.
We read with disgust how Texas resident Wesley Michael Woodyard’s schemed to defraud Ace European Insurance Company (ACE) of more than $4.6 million from approximately 2002 through 2013. And when we say that his scheme defrauded Ace, what we are saying is that he fleeced innocent victims who thought they were receiving a structured settlement in connection with an annuity they purchased. Instead, Woodyard used the majority of ACE funds for his own personal financial benefit, including paying for personal living expenses, gambling habits, travel expenses, and the purchase of three Mercedes Benz and a Corvette. Woodyard was sentenced this month to 7 years in prison with 3 years of probation and restitution of the millions he stole from his victims.
In California recently, the Department of Insurance and U.S. Immigration and Customs Enforcement’s (ICE) Homeland Security Investigations (HSI) arrested two unlicensed individuals who allegedly submitted approximately 70 fraudulent life insurance policy applications to various life insurance carriers under another licensee’s agent appointments as a front, collecting over $81,000 in unearned commissions. Then the pair applied for and received their agent licenses and supposedly continued their scheme fleecing another $200,000 in unearned commissions.
To obtain personal information for the fraudulent applications, the crooks recruited applicants by paying them $50 to $200 and promising that they would receive free life insurance policies. Other applicants were victims of identity theft and unaware that life insurance policies had been issued in their names. Life insurance policy applications were also submitted with the two charged thieves posing as policyholders.
The applications submitted to the insurance carriers contained misrepresentations and fabricated information, including false occupations, income, net worth or beneficiary information. Some of the applications also contained forged signatures of the alleged applicants. The investigation also showed that premium payments were generally not paid by the applicants, but instead paid from accounts owned by these two, or from accounts opened by other individuals who assisted them in carrying out the advance commission scheme.
And don’t think this stuff only happens in the western US. In the Northeast recently, Attorney General Christopher S. Porrino and the Office of the Insurance Fraud Prosecutor (OIFP) announced that a New Jersey insurance agent and his parents were charged with conspiracy and money laundering in an alleged scheme that provided insurance applicants with free life insurance and caused various insurance companies to disburse more than $4 million in commissions.
A grand jury indictment said a son and his parents allegedly engaged in a scheme to provide free high-value, life insurance policies to applicants in order to obtain commissions from the insurance companies. Eighteen policies with face values totaling $61.5 million were caused to be issued by eight insurance companies in the scheme. This time, the trio used an insurance “rebating” system to induce applicants to buy the life insurance.
According to the indictment, Evan Pescatore and his father approached and recruited 13 applicants by offering them free insurance and the option to sell their policy in the future for profit. In fact, one of the crooks took out loans from a third-party lender to pay for the premiums on the policies, which ranged from $15,000 to $582,520, according to prosecutors. When the insurance companies disbursed agent commissions of more than $3 million in total, the trio transferred or assisted in transferring the commission funds to the lending sources in order to repay the loans for the insurance premiums, according to the indictment.
The lesson connecting all of these cases? We must remain ever-vigilant in countering increasingly sophisticated crooks, including a keeping a tight rein on our identification and other propriety data.
Throw Away the Curtains
Blockchain Can Make the Insurance Industry More Transparent
At LMA, we are doing all we can to follow “Insuretech” which is the evolution of new technologies transforming the insurance industry like “Fintech” that is doing the same for the banking and finance industry. Autonomous Vehicles (AV’s) are just around the corner and at some point drones will deliver your groceries. And blockchain platforms are truly going to force certain industries into a more transparent and efficient environment.
So to understand how these new technologies are going to work, it just makes sense to go backward a bit. Edward Lloyd is largely credited with commercializing the insurance industry, with the creation of his namesake firm, Lloyd’s, over 330 years ago. And “mutualizing” or “spreading risk” goes back hundreds of years further with the Chinese placing cargo equally among different transport vessels so that a catastrophic loss (weatherwise or human) wouldn’t be so catastrophic. Using multiple transport vessels meant all had skin in the game and business was about utmost good faith, as it remains today.
In the previous article we discussed the concept of trust among business associates. Blockchain technology has as its core, trust and an efficiency engine to drive radical change (read: transparency and improved outcomes) in the insurance industry. It will be painful for established, legacy companies to grapple with price corrections and the fact that consumers will decide the price but there are ways organizations can innovate and survive. Blockchain, which is a form of mutualized record-keeping in a near irrevocable time-stamped ledger, has some truly profound implications for the world much like the Internet in the 90’s. Industry leaders such as the Global Blockchain Business Council see this tool not as a threat but as a source of competitive advantage, efficiency, and security.
When a property or commercial insurance policy is sold, the document that seals the deal is the insurance policy which is a lot like a lottery ticket. Both have the same payoff potential, with the one claimed on bad news or undesirable events and the other claimed by very happy lottery ticket buyers. They both rely on odds — and accrue massive amounts of hopes, aspirations, risks, and, naturally, money. If a lottery is not honored, the claimant has recourse. By contrast, if a life insurance claim is denied, the policyholder is long gone, leaving their next of kin, beneficiaries, and estate to connect the dots at a time when cash is immediately required. We basically “trust” that the insurance company will keep their promise.
So when we look at the brass tacks of the process in which insurance flows through origination, quoting, binding, policy issuance all the way through to claims and renewals, there is often a trust deficit and that is where blockchain can step in.
According to a recent Harvard Business Review (HBR) article, by leveraging blockchain, the insurance industry has a unique opportunity to revisit its entire value chain, which has always hinged on utmost good faith and trust. For example, blockchain can power the insurance industry, when there is a lack of on-the-ground loss adjusters, by creating a validation engine. Part of the reason insurers are wary of insuring tangible assets in developing markets is the fear of fraud and losses that cannot be validated. In these cases, the insurers’ right to subrogate, or go after the assets of others to recoup their losses, is largely unenforceable. A blockchain-based claims validation network can serve as a utility benefiting the entire industry by recording in a semipublic blockchain ledger the physical status of an insured asset, which in turn could help improve insurance penetration and adoption rates in emerging and developing markets.
Blockchain is here. It’s time to pull back the curtains and let it take a bow!
What’s in a Handshake?
Florida Power & Light Co. was ordered by a Palm Beach circuit court to pay a real estate agent a $1.5 million commission because of a handshake at a Florida State University tailgate party, even though there were no bystanders to vouch for the conversation between an FPL representative and the real estate agent. Florida law says an oral agreement is a binding contract. This is a classic case of “he said/she said” or in this case, “he said/he said”! The jury had to make a decision with two sides telling a completely different story.
The real estate agent testified he approached the FPL representative about the tract of land at a 2008 Parents’ Weekend tailgate party and they spoke for half an hour about FPL’s need for a combined natural gas and solar farm site. After the conversation, the real estate agent asked if FPL would pay a commission should the sale come to fruition and according to the realtor, the FPL contact said yes. FPL contended they learned of the land sale from another source. The jury didn’t agree and after trial and expert testimony on what a reasonable commission should be, the $1.5 million commission was awarded.
This case begs the question of the age old saying, “Let’s shake on it and get to work.” Research shows that older jurors, those over 30 and particularly those over 40, are not shocked that a multi-million dollar business deal can be reached with a handshake. In fact many times older jurors have gone into business with others on similar terms and LMA feels certain that many of our readers have entered into an agreement without a single document reflecting the terms of the deal or delineating the deliverables.
This writer doesn’t trust the bank or a cell phone company as far as they can be thrown, and as such, it’s not uncommon to demand everything in writing. But when it comes to building a business, there’s a trust among the parties – would you go into business with someone you didn’t trust? – and so there’s the tendency to put aside formalities like a written contract. There’s three questions we can live by when contemplating entering into business with others – Do we know the person? Do we like the person? And finally, do we trust the person? If the answer to all three is yes, then you know the rest of the story!
What Do Restaurants and Pot Shops Have in Common?
Debate whether crime goes up or down when retail stores close
When Los Angeles closed hundreds of medical marijuana retail storefronts, crime increased about 60% within three blocks of a closed dispensary compared to the same parameters for those that remained open. Almost 10 years later, two researchers tackled the issue of crime as it relates to pot dispensaries (MMDs) in the July issue of the Journal of Urban Economics.
And interestingly, the correlation between crime and shuttered restaurants was the same as shut down MMDs. “The connection between restaurants and MMDs is that they both contribute to the ‘walkability score’ of a given area. Areas with higher scores have more ‘eyes upon the street’ a factor that is proven to deter some types of crime,” according to the research paper.
So why would crime increase when restaurants and MMDs close? The simplest answer is that the foot traffic isn’t around to deter criminals from entering these establishments. Some of the research contends that security cameras aren’t operational when these businesses close – another deterrent to bad behavior. And when a restaurant reopened, crime immediately disappeared. The research was conclusive that retail businesses are effective in lowering crime, even when the retail business is a medical marijuana dispensary.
Other research in the Journal of Primary Prevention points to crime in the surrounding area where MMDs are located increases. To read more about this perspective, see this Insurance Journal story.
Made in the U.S.A.
California law says no
Governor Rick Scott, following his theme of “Jobs, jobs, jobs” since he entered office in 2008, has reached out to California businessman and Maglite founder and President Anthony Maglica to move Maglite’s headquarters to Florida after Mr. Maglica wrote a letter to the Wall Street Journal editor complaining about California’s ancient laws dealing with the Made in USA label.
Mr. Maglica is not allowed to put a “Made in USA” label on his American designed, engineered and manufactured flashlights because the California laws have not kept up with the times as he explains in his letter. As some would say, “vintage” Governor Scott wrote Mr. Maglica, saying in part, “I look forward to meeting you and bringing your all-American operation to Florida… to escape California’s burdensome and unnecessary regulations that make it harder for businesses to succeed.” Here’s the complete Governor’s letter here. We will see if Mr. Maglica responds!
Over a Barrel
Et tu boubon?
Mint Juleps are an old Southern tradition, especially during the oh-so-hot and humid days of a Florida summer. As we enjoy the cool breeze from the fan on the front porch, we are especially mindful of stories that might impact our gentle readers and their traditional summertime cocktail hours. So we bring news here that good ol’ Kentucky Bourbon could become a casualty in a potential future U.S. trade war with the European Union.
In a scene reminiscent of the War of Northern Aggression (or as one of our grandmothers still refers to it – “that unpleasantness”) E.U. President Jean-Claude Juncker is warning that should the Trump Administration carry through on a threat to add tariffs to German and Chinese steel imports to the U.S., that the E.U. would “react with counter-measures” within a matter of days and one of their key targets is reported to be bourbon whiskey.
Nearly 60% of our bourbon exports go to EU countries and carry a value of $131 million. You get less of what you tax, so an EU tariff would be expected to have a significant impact on the Kentucky bourbon industry, the only producers of official legitimate bourbon in the world. For our friends in Kentucky, it employs 17,500 people and brings $166 million in tax revenue annually.
Juncker – akin to Ulysses S. Grant – declared the E.U to be “in an elevated battle mood.” The Kentucky and U.S. Distillers’ Association are raising their own battle flags, warning that a trade war would hurt consumers around the world and not only Southerners toiling in Kentucky’s distilleries, but also the corn farmers and the truckers who transport the liquid gold. Other, as yet undisclosed U.S. agricultural products are also in the crosshairs of the E.U. on its potential retaliatory list. LMA will be watching this like a duck on a Junebug!
It’s definitely the summer and I hear from many of you about your travels. That got the idea factory moving and it gave me pause and a thought: send LMA a photo and scene about what you love about where you live. Is it a mountain range? Is it a sunset and palm trees? Or your favorite fishing hole?
Many of you have heard me speak at various events and I often open my presentations with the fact that I grew up in Plant City, Florida, the world’s winter strawberry capital. I spent my formative years in public schools, worked odd jobs like many of you in my teens (the local restaurant, baby sitting and the occasional yard mowing) and I am grateful for the time I spent in that lovely town. During my youth (some would call it “my first youth”), Plant City’s population hovered around 15,000 and now it is booming at 37,000 residents. I still go “home” as often as I can and enjoy what I love about Plant City and where I lived. And here’s my picture as to why!
Yummy strawberry shortcake at Plant City’s Winter Strawberry Festival