Is There an AOB Crisis or Not? What Big Insurance Says May Surprise You

The English classic rock band Supertramp had an album called, “Crisis? What Crisis?” After learning what insurance executives say about the assignment of benefits (AOB) issue, it’s understandable if that’s the conclusion you make.

The big insurance message machine has been working overtime to scare homeowners about potential rate increases and crushed dreams due to an increase in assignment of benefits litigation. These cases are the result of insurance companies denying payment to mainly small businesses that serve property owners when their home is hit by a disaster, such as when a broken pipe causes a flood in the home.

In response to consumers and their chosen contractors holding the big insurance companies accountable, the insurance lobby has pushed a complicated bill through the House (CS/HB 1421) that empowers the insurance companies at the expense of homeowners who need immediate attention when facing flooding and the small businesses that serve them. Under the bill, a small business would have to abide by more than a dozen new government mandates in order to serve homeowners in need.

While Tallahassee is responding to the crisis, the leaders of the insurance companies send a different message to their shareholders.

They paint a picture of a situation with an elevated but stable number of lawsuits and say the AOB issue is being handled appropriately through good old-fashioned customer service.

Here’s what big insurance says

For example, consider Exhibit A from Citizens Property Insurance Corporation.

“Citizens is involved in certain litigation and disputes incidental to its operations. In the opinion of management, after consultation with legal counsel, there are substantial defenses to such litigation and disputes and any ultimate liability, in excess of reserves resulting there from, will not have a material adverse effect on the financial condition or results of operations of Citizens.”

Source: 2016 Annual Statement of the Citizens Property Insurance Corporation

Note what’s missing in the statement referenced above. There is no mention of assignment of benefits or AOBs . There’s only a reference to “certain litigation and disputes” that will not impact Citizens financial condition. This is the same company that in March announced it would post a $27.1 million net loss for 2016 – even though the company had  $7.4 billion in policyholder surplus.

This is the very the same company that says litigation caused primarily by tri-county homeowners challenging denied claims continues to “sap the ability of Citizens Property Insurance Corporation to control costs, which are being passed on to policyholders forced to pay higher rates.”

This makes people wonder, which is it? The AOB litigation and disputes have “no adverse effect” on the financial condition of the company or it’s forcing them to charge policyholders “higher rates?”

It’s interesting to see what people and companies say when their word is legally binding.

Exhibit B, please read the following statements from insurance company CEOs made during earnings calls where they speak about the impact of the AOB issue on their corporations:

“We saw a little bit uptick in frequency, nothing major. . . But the severity is down. . .  From a severity perspective, I believe that it’s relatively flat. . . I think our ability to get out of these claims quicker with a fast-track team in the day of the claim and the next day is mitigating the potential for plaintiffs’ law firms, public adjusters, contractors et cetera to intervene to create a separation from us to our insured.”

Sean Downes, CEO, Universal Property & Casualty Insurance Company
Q4 2016 Earnings Call
Feb. 22, 2017
Source: http://protectingyourpocket.blog.palmbeachpost.com/2017/02/22/crisis-maybe-but-top-fl-insurer-says-severity-of-aob-claims-falling/

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“Importantly, the percentage of AOB claims at Heritage has remained essentially flat over the past four years. We believe that unique trend is tied directly to the way that we handle claims, through our quick response and vertically integrated claims model.”

Bruce Lucas, CEO, Heritage Insurance Holdings
Q4 2016 Earnings Call
Source: https://seekingalpha.com/article/4055883-heritage-insurance-holdings-hrtg-ceo-bruce-lucas-q4-2016-results-earnings-call-transcript?page=2

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“It’s a small group that is abusing the process, and when we come across fraud, we do share it with the state. But in many cases what a lot of people call AOB fraud, it’s not AOB fraud. It’s not fraud. It’s just people getting on claims enough unnecessarily, in my opinion, raising the cost associated with that.”

Michael Braun, CEO, Federated National Holdings
Q4 2016 Earnings Call
March 5, 2017
Source: https://seekingalpha.com/article/4054233-federated-national-holdings-fnhc-michael-braun-q4-2016-results-earnings-call-transcript?page=5

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“[W]hat we seemed to see is a stabilization in terms of the amount of AOB that’s going on. It is at extremely elevated levels, but it is stable. What we are saying is for every 100 claims we are getting in HO3 in Dade and Broward, we are seeing ultimately about 35 lawsuits. And these are all measurable trends and we can see that they have steadied out. . . . It’s too early to tell yet, but the action, we have taken make us very optimistic that at a minimum, the AOB problem for us has stabilized and at a maximum, it may actually go into decline because of some of the underwriting actions that we have taken. Longwinded answer, but hopefully, that gives you some clarity.”

Paresh Patel, Chairman and Chief Executive Officer, HCI
Q4 2016 Earnings Call
Feb. 21, 2017
Source: https://seekingalpha.com/article/4048096-hcis-hci-ceo-paresh-patel-q4-2016-results-earnings-call-transcript?part=single

So, is there a crisis or is everything just fine? There’s no doubt it was the right move for leaders in the Florida Senate to advance reasonable legislation like Sen. Gary Farmer’s proposal, SB 1218.

Senator Farmer’s proposal says valid AOBs must include the following elements:

• Must be in writing between the policyholder and assignee and is delivered to the insurer under specified time requirements;
• Is limited to claims for work performed by the assignee for damages claimed to be covered;
• Allows the policyholder to unilaterally rescind the assignment of post-loss benefits to a vendor within 5 days of execution of the agreement; and
• Contains an accurate and up-to-date statement of the scope of work to be performed.

The bill provides that an assignee working on behalf of the policyholder:

• Must provide the policyholder with accurate and up-to date revised statements of the scope of work to be performed as supplemental or additional repairs are required;
• Must guarantee to the policyholder that the work performed conforms to current and accepted industry standards;

• May not charge the policyholder more than the applicable deductible contained in the policy unless the policyholder opts for additional work at the policyholder’s own expense;
• May not charge the policyholder directly, except for additional work not covered under the policy; and
• May not pay referral fees totaling more than $750 in connection with the assignment.

In light of the evidence above, there’s no clear and convincing need to justify taking away rights enjoyed by Florida’s homeowners for a century. This point is especially clear when Sen. Farmer’s responsible proposal is available for consideration and passage.