Peak Storm Season

Have legislative and regulatory reforms prepared us for a better future?

September 07, 2022 Photo

The deafening sound of howling winds; cars flipped, thrown, or swept away in flood waters; facades ripped off buildings; neighborhoods flattened; entire communities devastated; hundreds of thousands of people and businesses looking to their insurers to help them rebuild or, in some cases, simply survive.

That was the scene almost exactly 30 years ago, on Aug. 24, 1992, when Hurricane Andrew, a monster Category 5 storm, roared through the Southeast. With sustained winds reported at 185 mph, it was one of the strongest and most destructive natural catastrophes the U.S. has ever suffered. The storm caused damage to the Bahamas and southern Louisiana, but the brunt of its impact was felt in South Florida. More than 250,000 people were left homeless in Miami-Dade County alone.

All told, Hurricane Andrew caused $25 billion in damages. Of that total, $16 billion was in insured losses, which amounts to a whopping $31 billion adjusted to 2021 dollars. These staggering losses caused seven insurance companies to fail. Many more considered exiting the state.

In the aftermath, insurance contracts were overhauled in Florida, effectively imposing higher retentions on policyholders. Rates increased dramatically. Dollar deductibles were replaced with percentage deductibles, particularly when it came to covering windstorm damages.

Unfortunately, in recent years, these “monster storms” have become all too familiar, and increasingly expensive. A string of storms—starting with Hurricane Ike in 2008 and continuing with Hurricanes Harvey, Irma, and Marie in 2017 and Hurricane Ida in 2021—have collectively caused more than $160 billion of insured losses in today’s dollars.

Last year’s Hurricane Ida had much of the same effect on the Louisiana insurance market as Hurricane Andrew did in Florida. Spanning nine states and causing widespread damage—in some cases far from the coastline—Hurricane Ida’s impact had a ripple effect felt around the world. Damages have totaled more than $75 billion so far, with that number likely to increase, making it the costliest natural disaster of 2021.

In November 2021, FedNat Holding Company, the seventh-largest property insurer in Louisiana in 2020, announced plans to withdraw entirely from the state and several other states that were hit hard by Hurricane Ida. Other insurers have followed suit, with nearly a dozen filing withdrawal notices with the Louisiana Department of Insurance (LDOI) since April, affecting coverage for more than 100,000 customers.

In early December 2021, Access Home Insurance Company and State National Fire Insurance Company, which collectively insured around 28,000 customers, announced that they could not pay out all of their Hurricane Ida claims, with a third company, Americas Insurance Company, declaring insolvency shortly thereafter. The companies were placed into receivership with the state, and initially several insurers expressed interest in taking on the abandoned policies. The commissioner was able to quickly locate an insurer, Safepoint Insurance of Florida, to take over the policies of the first three failed carriers.

This past spring, a fourth insurer became insolvent. The LDOI took over Lighthouse Property Insurance Corporation in a court-ordered receivership in April 2022. To date, other insurers have agreed to take on about 22,000 of Lighthouse’s nearly 30,000 policies, but as more companies continue to file for insolvency, insurers are becoming increasingly reluctant to take over the abandoned policies. Instead, they are fleeing the state.

So far, at least seven insurers have become insolvent from Hurricane Ida, a reality that threatens to leave tens of thousands of property owners uninsured during the 2022 hurricane season.

Response in Florida

Shortly after Hurricane Andrew, Florida stepped in with legislative and regulatory changes in response to some of the insurance woes facing policyholders in damage-prone areas. The legislature established a state-run insurance carrier that could cover risky customers who might otherwise find difficulties obtaining coverage in the commercial insurance market. The state also increased the amount of cash reserves it required insurers to keep available to pay claims.

The Florida courts and legislature also enacted a number of changes that lowered barriers to filing suits and increased the recoveries available to policyholders. Although Florida has 9% of property insurance claims in the U.S., it generates 79% of the nation’s homeowners’ insurance lawsuits, according to industry statistics. As a result, the rising cost of doing business in the state led to the dual problems of rising insurance premiums and the insolvency of several insurance carriers.

Florida lawmakers recognized the state’s insurance market was only getting worse, and something more needed to be done. In May 2022, legislators passed a property insurance reform package with an immediate goal of stabilizing the market to keep insurers from failing or fleeing by reducing the number of frivolous lawsuits and outsized recoveries. The reforms were enacted with a long-term goal of reducing insureds’ premiums, even though many insureds would not see a reduction for 18 months. The Florida legislature also homed in on roofs in its reforms, some favorable to insurers and some favorable to insureds.

Among the reforms is the creation of the Reinsurance to Assist Policyholders program. Under this program, Florida insurance carriers can tap into a $2 billion pool for their two greatest loss events in a year. The program could cover up to 90% of the losses above a retention. Also included are widespread litigation reforms, including restriction of the use of attorney fee multipliers in an award to “rare and exceptional circumstances.”

In addition, courts are not permitted to award attorneys’ fees in cases where residential or commercial policyholders assign their benefits to a contractor, and defendants could be awarded attorney’s fees if a plaintiff fails to provide pre-suit notice. Finally, in order to prevail in a bad faith suit, plaintiffs would be required to prove the insurer breached the contract.

Response in Louisiana

Louisiana’s legislative response in the wake of severe storms has been strikingly similar to Florida’s early efforts after Hurricane Andrew. A state-run insurer of last resort program was formed after Hurricane Katrina, and it is currently stepping in to take over some abandoned policies after Hurricane Ida.

However, it is widely recognized that state-run insurance coverage has certain drawbacks. The coverage is expensive—many times, double the cost of private plans—and imposes a hard cap on claims payouts. Perhaps the biggest challenge is that it attracts the riskiest customers, which in turn creates the greatest risk of failure.

In addition to providing state-run coverage, Louisiana has passed legislation that imposes minimum capital and surplus requirements for certain domestic insurers. These state-mandated minimum capital requirements force more carriers to purchase larger amounts of reinsurance protection, and it also increases the amount of cash insurers must have available from $3 million to $5 million by 2026 (up to $10 million by 2031). Such solutions help customers find coverage and should help to prevent carriers from becoming insolvent, but there is no indication that they will reduce prices or stop carriers from fleeing the state. Indeed, similar responses did not stop price increases or prevent insurers from failing, or fleeing the market, in Florida.

Louisiana has also followed Florida’s lead by passing more legislation in 2022 relating to property insurance claims. As was the case in Florida, Louisiana passed legislation that allows homeowners to apply for grants to retrofit roofing to higher standards.

Another recent piece of legislation changes how insurance companies cover additional living expenses due to an evacuation. It replaces the requirement for an emergency declaration with consideration of the totality of circumstances, with the aim of allowing for coverage in unique circumstances.

Louisiana legislators have also imposed significant changes to the claims process on insurers, focusing mostly on communicating better with their insureds. Many of these are pro-policyholder.

Experts have been predicting that the 2022 Atlantic hurricane season will be well above-average, with up to 20 named storms and five major hurricanes. This would make it the seventh consecutive above-average hurricane season. Louisiana officials fear another large hurricane could implode the state’s insurance market, which is already stretched thin. It will be interesting to see over the next couple of years how the different tactics by Louisiana and Florida lawmakers affect their respective markets. 

About The Authors
Multiple Contributors
Taylor L. Davis

Taylor L. Davis is partner at Clyde & Co US

Jocelyn Cubbon DeMars

Jocelyn Cubbon DeMars is senior counsel with Clyde & Co US LLP.

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CLM’s Property Committee provides education relevant topics, practical skills, and innovative strategies for handling property claims and litigation related to coverage and insurance claims for CLM’s members and fellows.

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