Florida’s intervention in property insurance has put the state government in the eye of a hurricane-battered market that is uninhabitable for some private insurers and unaffordable for many policyholders.

Even as the new hurricane season gets underway this month, the state is still recovering from Hurricane Ian, the Category 4 storm that crushed Southwest Florida last year. Ian has rocked, but not wrecked, the odd structure of Florida’s property insurance market — anchored by a state-run property insurer and a catastrophe fund that shields insurers from a portion of their hurricane claims.

The question is if the market is ready to weather the next one.

Property insurance premiums in Florida are already far above the national average and expected to soar higher. The average annual premium for a homeowner in Florida has risen to $4,200 — three times the national average — and it will increase by a projected 40 percent this year, according to a February report by the Insurance Information Institute, an industry trade group. Meanwhile, rapidly rising commercial policies are cutting into the bottom line for many asset holders.

The insurance industry blames not only natural disasters but also the high cost of litigation over claim disputes. Late last year, Gov. Ron DeSantis and the Republican-led Florida Legislature tried to stabilize premiums by enacting reforms to deter fraudulent claims and frivolous lawsuits against property insurance companies. But policyholders won’t get relief anytime soon.

“It will take years for the impacts of fraud and legal system abuse to be wrung out of the system, and for policyholders to experience premium benefits,” the Insurance Information Institute reported. “Job one is to stop the bleeding as insurers fail, leave the state, or stop writing critical personal lines.”

More bleeding is underway as the fallout from Hurricane Ian continues to add significantly to the cost of paying claims as well as fighting them. (All personal and commercial policies in force before Jan. 1, 2023, will fall under the old state regulations that insurers blamed for excessive litigation.) 

Ian is the third catastrophic hurricane to hit Florida in the last seven years, following an 11-year period from 2006 to 2016 that saw no serious hurricanes. The Florida Office of Insurance Regulation (FOIR) estimates that Hurricane Ian caused insured losses totaling $13.9 billion, compared to $1.45 billion for Hurricane Michael in 2018 and $7.8 billion for Hurricane Irma in 2017. 

The state-subsidized Florida Hurricane Catastrophe Fund (FHCF) expects to cover $10 billion of the insured losses from Hurricane Ian and may borrow money in the municipal bond market to increase its claims-paying capacity, according to the fund’s 2022 annual report on financing options. 

“The FHCF is in a weaker position to meet its statutory obligation for the 2023-2024 contract year [starting June 1] than in prior years, but it has the ability to access the markets,” according to the report. “Minimal storm activity from 2006 to 2016 resulted in the FHCF accumulating sufficient reserves to prepare for future storms. However, due to Hurricanes Irma, Michael and Ian, significant amounts of resources have been depleted.”

As of March 9, property insurers had processed and closed 77.5 percent of nearly 400,000 claims under homeowners’ policies due to Hurricane Ian and 41.7 percent of claims under commercial policies, according to the FOIR. 

One of the most impacted insurers is the state-run insurer Citizens Property Insurance, which is facing a new wave of litigation arising from Hurricane Ian. By far Florida’s largest insurer against wind damage, Citizens has a legal defense budget of about $100 million a year and is involved in more than 20,000 pending lawsuits, the Insurance Information Institute reported in February. (A spokesperson for the FOIR declined to confirm the report.)

The high cost of defending against lawsuits is one reason Citizens plans to impose a 14.2 percent increase in premiums for all personal lines of insurance, including property coverage for owners of houses and condos, the insurer said in a March 28 press release. The premium increase is pending approval by the state’s Office of Insurance Regulation. 

“Hurricane Ian did not even come close to putting Citizens in danger because they have very adequate reserves, for now at least, for this size of a storm,” said Oscar Seikaly, CEO and majority owner of NSI Insurance Group, a insurance agency based in Miami Lakes. 

But Ian may have endangered building codes that don’t match the state’s most stringent standard, like those in Miami-Dade County. The county’s high standards are a legal legacy of Hurricane Andrew, the Category 5 storm that flattened southern Miami-Dade in 1992. 

“The construction codes outside Miami-Dade County are terrible. And as a result, insurance companies are not going to insure any more homes in, say, the Naples area, unless the codes are upgraded,” Seikaly said. “They’re not going to insure anything that is not going to be up to snuff in terms of quality of construction and resilience.” And if they do, the premiums will reflect the higher risk.

Hurricane Ian taught a harsh lesson in resilience to Michael T. Traficante and his colleagues at a law office in Naples on Florida’s Gulf Coast. “A couple of our partners and support staff got flooded out and lost everything, so they’re in the process of rebuilding,” said Traficante, managing partner of the Naples office of law firm Gunster. “Knock on wood, my home was about a mile from where the storm surge stopped. I’ve been here my whole life, and I’ve never seen anything like it. Water does a lot more damage than wind.”

Yet some Florida homeowners are unaware that their property insurance doesn’t cover flood damage. Property insurance in the state typically covers windstorm risk, and flood insurance is sold as a separate policy — largely through a national flood insurance program managed by the Federal Emergency Management Agency (FEMA). 

“I don’t think enough people in Florida are educated about the fact that property insurance doesn’t cover flood insurance,” Traficante said. “I can’t tell you how many clients we had who were very educated clients, had done well in their lives, and they had property insurance. But they didn’t have flood insurance.” 

Excess flood insurance may be advisable, because the FEMA-run flood insurance program limits payouts for property damage to $500,000, which is inadequate for larger homes. “When you have these higher-end homes that are 10,000 to 15,000 square feet, the $500,000 FEMA flood policy is not going to cover it,” Traficante said. “You usually got to buy excess flood [insurance], which comes at a significant cost.”

Still, fully insuring against damage is no guarantee of a quick fix after a bad storm. Arguments over property insurance claims often escalate to litigation in Florida. Homeowners in the state filed roughly 8 percent of such claims in the United States, but brought 76 percent of all lawsuits against insurers, according to a study of 2019 data from the National Association of Insurance Commissioners found. 

And policyholders who sue in Florida have lost some key advantages recently, as the state introduced reforms to reduce property insurance litigation. In 2021, the state government prohibited insurance companies from paying attorney fees if the plaintiff is an assignee of the policyholder, and not the policyholder themselves.

“They assign over the insurance benefits to a third party, like a contractor, that deals with the carrier directly,” said Marko Cerenko, an attorney who handles commercial and real estate litigation for Kluger Kaplan, a law firm with offices in Boca Raton and Miami. “If it’s a big policy, contractors often tend to overinflate what they did.” 

Unlike a typical individual policyholder, a construction contractor “may have the means of riding out the litigation for two or three years, which is added cost to the insurance company. Now they’re in court for two or three years fighting this, as opposed to simply trying to resolve it,” Cerekno said. “It’s one of the reasons they are continuing to increase premiums for homeowners insurance.” 

In 2022, state lawmakers went further and prohibited policyholders themselves, not just their assignees, from recovering attorney fees from insurers in property insurance litigation. The governor and the legislature also banned the assignment of benefits by property insurance policyholders to contractors and other third parties.

Removing the assignment of benefits as a factor in property insurance litigation is likely to reduce fraud, said Michael A. Cassel, managing partner of law firm Cassel & Cassel, based in Hollywood, Fla. “There were roofing contractors abusing the process,” he said. “Recently, a case came down where a roofing contractor was demanding $350,000 for a roof, knowing full well that he had already subcontracted that project for $99,000.”

But Cassel said state lawmakers went too far when they stripped policyholders of the right to recover attorney fees from insurance companies when suing them. “The problem is, many people don’t have the ability to hold insurance companies accountable in court, because they would have to pay out-of-pocket for attorney’s fees,” he said.

Despite the state’s effort to limit litigation over property insurance, some insurance companies have struggled to meet the demands of the Florida market. 

Last year, six privately owned property insurers with 307,000 Florida policyholders were liquidated after slipping into insolvency, according to the Florida Insurance Guaranty Fund (FIGA). The fund ensures that insurance contracts are honored even if the insurance company fails. FIGA disclosed in its 2022 annual report that these six insolvencies increased its liability by $606 million and led the fund to borrow $400 million last year. All six insolvencies were announced prior to Hurricane Ian’s landfall in Florida last year on Sept. 28.

Many of the policyholders of the six insolvent insurance companies ended up with coverage from Citizens Property Insurance. Created by the state in 2002, Citizens was supposed to be for homeowners who couldn’t find property coverage from a private insurance company. Citizens was supposed to be Florida’s “insurer of last resort,” but it has grown so much that it overshadows private insurance companies. Since Hurricane Irma in September 2017, the policy count at Citizens jumped from about 460,000 to 1.27 million at the end of April.

By tightening their underwriting standards, private property insurance companies in Florida are forcing some homeowners to buy coverage from Citizens. “A lot of times, it’s not that the premiums are cost prohibitive. It’s that these insurers just won’t write this policy, forcing them to Citizens,” Cassel said. The situation can be problematic for the affluent because some homeowners have properties that are too expensive for Citizens to insure. 

“There’s a cap on what they will insure,” he said. “But there are a lot of high-end homes in Florida, and a lot of their owners are unable to get insurance, because underwriting guidelines have been too restrictive at private companies, a lot of surplus line carriers aren’t writing anymore, and Citizens won’t insure them because, monetarily, they are too high a risk.”

This is true for many commercial and residential policyholders. While the insurance market hasn’t collapsed post-Ian, individual policyholders are bearing the weight of propping it up with double-digit premium increases that are eating away at their bottom line and cutting into the value of their properties. In a hearing this month, the Florida Office of Insurance Regulation recommended that Citizens increase rates by 12 percent for all primary residences. For second homes, rates are dramatically higher and are allowed to increase by 50 percent according to a new state law. 

And what will happen when the next major hurricane hits?

That will depend largely on the borrowing capacity of the Florida Hurricane Catastrophe Fund, the state’s backstop for property insurance claims. The catastrophe fund can raise billions of dollars annually after a major storm by assessing Florida property insurers, and it appears capable of leveraging its assessment power to borrow its way to a recovery from Hurricane Ian. 

“The FHCF has very strong debt repayment capabilities,” investment banking firm Raymond James said in an October 2022 analysis on the catastrophe fund, citing its AA credit ratings from three rating agencies, Moody’s, Standard & Poor’s, and Fitch. “To put that into perspective, less than 5 percent of U.S. corporations have ratings in the ‘AA’ category by all three rating agencies.”

Fitch Ratings was indeed confident about the repayment abilities of Citizens and the Catastrophe Fund after Ian, according to a report issued. But just a month later, when Hurricane Nicole unexpectedly made a late-season landfall in the Vero Beach area, the rating agency was suddenly less sanguine, writing that claims resulting from the storm could reduce liquidity at the two state institutions and potentially necessitate borrowing. 

Fitch was experiencing what Floridians are well aware of: That it only takes one.