Is Florida’s Property Insurance Mess Threatening Its Hot Real Estate Market?

Florida has always been a complex market for property insurance. That’s the case for residential homeowners and commercial landlords alike. It’s evident to anyone who takes even a passing glance at the news these days that the rising risk of hurricanes, fueled by climate change, threatens states like Florida. The fallout happening in the property insurance industry in the state is creating issues for real estate owners and developers.

Already, developers in Florida must purchase builder’s risk insurance that covers damage to a building while it’s under construction. Those premiums have increased by about 30 percent in the state in the past two years. Developers also need insurance that covers owners against third parties for the project’s life. For Florida condos, liability insurance rates have quadrupled in the past two years.

These surging insurance rates, combined with rising interest rates and inflation, have made it extremely challenging for some real estate developers to be profitable throughout much of Florida, especially in Miami-Dade, Broward, and Palm Beach Counties. Some high-rise multifamily projects in South Florida have seen insurance costs exceeding eight percent of a project’s total cost. About three years ago, insurance averaged only around two percent of project costs.

Picking up the pieces

Simply put, property insurance in Florida is a mess. Some say the property insurance market there is teetering on the edge of collapse, and fixing the problem could be make-or-break for one of the nation’s hottest real estate markets. Six property and casualty companies offering Florida homeowners insurance have liquidated since 2017. An additional five started the liquidation process in 2022, and other insurance firms are fleeing the state. More companies are either choosing not to renew home insurance policies, tightening eligibility requirements, or raising rates.

The frequency and severity of hurricanes have drastically increased the number of claims and, therefore, the cost of insurance. Property insurance rates in Florida were already three times higher than the national average, and they’re expected to rise another 20 to 30 percent in 2023. Hurricanes Matthew (2016), Irma (2017), and Michael (2018) were all destructive storms that led to a vast amount of claims. Climate-change-driven “rapid intensification” means that storms that might have once died out are increasingly becoming more powerful, which could have costly consequences for Florida property owners.

Legal risk

When examining Florida’s property insurance crisis, there’s such a dizzying array of factors that it’s hard to see how the situation could end well. And while the existential threat of hurricanes seems to loom the largest, some insurance experts say an overlooked factor is more directly man-made: frivolous litigation and fraud. 

One of these litigation problems is called “assignment of benefits” and involves contractors, usually roofers, after a storm. It typically works like this: contractors knock on doors and tell homeowners they can get insurance to cover a new roof. In most cases, there isn’t much damage but the roofer says they will do a replacement as long as the homeowners assign over their insurance benefit. Once that’s done, the contractors can then submit a claim for whatever amount they want to the insurer without the owner’s consent. If the insurance company denies the damage claim, the contractors often sue. This has left insurance companies stuck either settling or fighting a costly lawsuit.

These types of lawsuits are common because of the state’s “one-way attorney fees.” Historically, when a policyholder sues the insurance company, the insurer must pay all the attorney fees, no matter who wins the case. About nine percent of homeowner property claims nationwide are filed in Florida, but a staggering 79 percent of all property claim-related lawsuits in the U.S. are filed in the state. Legal expenses for insurance companies in Florida were more than $3 billion in 2019. Insurers had a more than $1 billion underwriting loss in 2020 and 2021, years in which there weren’t any major hurricanes.

Even as insurers raise premiums, insurance companies are losing money in Florida because of the litigation. That’s why so many insurers are leaving the state. “The property insurance mess in Florida is a man-made crisis and not necessarily just caused by hurricanes,” said Mark Friedlander, a spokesman at the Insurance Information Institute. “The insurance companies simply can’t afford all that frivolous litigation.”

Friedlander told me the commercial property insurance market is doing better than the homeowners’ market, but there are still spillover effects and lots of litigation on the commercial side. The Champlain Towers condo collapse in Surfside that killed 98 people in 2021 also triggered an unprecedented billion-dollar claim for the insurance industry, and there’s already been a ripple effect for insurance in the state. Obtaining insurance for condos is far more challenging now than for any type of real estate project in Florida.

Tax storm

Florida Governor Ron DeSantis recently convened the state’s legislature for a special session to stabilize the property insurance market. Lawmakers passed a package of bills, including some intended to reduce litigation and fraudulent claims that raise costs for insurers. The loophole for “one-way attorney fees” was ended, making Florida the 40^th state to do this. Policyholders still have the right to sue insurance companies, but the insurer won’t have to pay the fees if the policyholder loses the suit. Florida lawmakers also provided insurance companies with a $1 billion public subsidy to help them stay solvent next year. That’s in addition to another $2 billion subsidy the legislature passed earlier in 2022.

The reforms could work, but Florida is facing an uphill battle. The state government established a public insurance company called Citizens Property Insurance Corporation following Hurricane Andrew in 1992 that was supposed to serve as the provider of last resort for those who couldn’t acquire private coverage. But Citizens has doubled in size over the past four years as more private insurers go out of business or leave the state. In some parts of Florida, Citizens control more than half of the insurance market. “If Citizen’s were a private company, they’d be out of business,” said Friedlander. “What they’re doing is unrealistic.”

The situation could get even worse. Insurers that can’t raise more money through price hikes may continue to collapse or leave. That would force more people to join Citizens, making the state even more vulnerable to a massive hurricane like Ian. If another storm like that does hit, it would potentially put Florida’s government on the hook for billions of dollars they’d have to raise from a so-called “hurricane tax.” For a state that prides itself on low taxes and free market economics, that would possibly put a dent in the fast growth of its economy and real estate market.

Premiums for commercial real estate have spiked 20 to 25 percent in the last year and a half alone in Florida, according to Spencer Morris, the president of Allen Morris Co., a developer that owns offices, apartments, and hotels in the state. That single line item for insurance has increased faster than almost any other operating expense for Florida commercial buildings. Developers like Morris say they’ve shifted investments strategically away from South Florida to other markets less vulnerable to natural disasters. As population growth and development increase, the problem becomes a supply/demand issue. More insurance capital is needed, but fewer insurance firms want to underwrite policies, so prices keep increasing.

Florida’s real estate market has been hot for a while now, and, despite the risk of hurricanes, floods, and insurance issues, people continue to move there. Florida’s population has grown by nearly 3 million people since 2010. The Fort Myers area, which was decimated by Hurricane Ian, was recently named the sixth fastest-growing city in America by the U.S. Census Bureau. 

Hurricanes may not stop the population boom, but they will make it more expensive to live in Florida. The state’s property insurance crisis predates 2022’s Hurricane Ian, but that costly storm has pushed the market to the brink. Severe future storms will continue to threaten the industry if Florida’s government imposed reform measures aren’t successful. As insurance companies continue to raise rates, those costs may eventually start killing real estate deals. So while things still look bright for property owners in the sunshine state, storm clouds loom on the horizon.