The study sparks debate over the real impact of litigation, fraud on property insurance

An academic paper published in the Journal of Insurance Regulation appears to have reignited the debate over how much of an impact litigation and fraud have had on property insurance losses and premiums, particularly in Florida.

The paper, “The Case for Pausing Any Immediate Embrace of the Social Inflation Argument for Legal System Reforms,” ​​was written by Kenneth Klein, a professor at California Western School of Law who has spent much of his career as a lawyer in the field insurances. It was published a year ago, but was recently reposted by South Florida plaintiffs’ attorney Chip Merlin. Merlin argued that the study shows that claims of excessive litigation, fraud and welfare inflation have been blown out of proportion by the insurance industry.

Klein’s article exposed how the insurance industry numbers “are simply made up and completely unreliable,” Merlin wrote in an Aug. 15 blog post.

Industry advocates in Florida and beyond said the Klein document is light on the evidence and ignores the increasingly obvious effects Florida’s 2022 and 2023 litigation deterrence laws have had on the market state insurance company in difficulty. The Florida Office of Insurance Regulation, in an Aug. 9 bulletin, notes that two years after Florida saw 10 property insurer insolvencies, not to mention significant rate increases from most other insurers, the state now enjoys minor rate reductions from nine carriers. .

“Also, not only are rates stabilizing and falling for more carriers, but 15 new carriers have entered the market and there are reports of declining reinsurance prices,” said Scott Johnson, longtime insurance consultant, author and educator .

“Klein commits the rhetorical fallacy of arguing by assertion,” said Jerry Theodorou, policy director at the R Street Institute, a think tank that promotes free-market solutions. “No evidence at all. No proof. No support. No data. No facts.”

Here’s a look at some of the paper’s findings and counterpoints from insurance industry advocates:

Fraud numbers. Klein, who serves as a consumer representative for the National Association of Insurance Commissioners, finds fault with the statistics that have been cited by the American Homeowners Association and others. According to Klein, the APCIA in 2022 cited FBI intelligence from 2010 that showed home casualty insurance fraud totaled $40 billion a year nationwide, costing households up to $700 a year on average.

But Klein notes that the one-page FBI report appears to be mostly about fraud on the side of the insurance industryincluding embezzlement of premiums or embezzlement by insurance agents; changing fees in reinsurance contracts; theft of insurance company assets during mergers; and embezzlement of workers’ compensation premiums.

“In other words, the FBI does not quantify fraud against insurers; rather, the FBI quantifies fraud of insurers,” Merlin wrote on the blog. “Insurance companies argue that when claim numbers are simply made up, that act constitutes fraud. If so, then insurance company fraud statistics are a fraud.”

To be sure, the FBI report does not focus entirely on fraud by insurers or agents. It goes on to list examples of disaster insurance fraud, including false or exaggerated claims by policyholders; misclassifying flood damage as wind; and inflated repair costs by contractors. However, this section does not provide cost estimates.

APCIA did not dispute Klein’s reading of the flimsy FBI report. But Michael Richmond-Crum, the association’s director of personal lines, said in an email that another report, by the Coalition Against Insurance Fraud (CAIF), found the $40 billion figure the most credible. , because the FBI “is one of the premier law enforcement agencies in the world, and as a result, they maintain a robust investigative platform and have a vast network to collect credible and accurate data.”

Klein’s work also casts doubt on CAIF’s claims. The study noted that the coalition simply updated an often-cited 1995 estimate of the costs of fraud. But the group did not provide archival documents or information about how the figure was determined, and it appears to have come only from a press release, the law professor said.

Data on Litigation Costs and Tort Reform. Klein’s study notes that APCIA cited data from the Bureau of Labor Statistics, the Consumer Price Index and the Insurance Information Institute to show that from 2018 to 2020, personal injury verdicts increased by nearly 25 percent, far exceeding inflation.

“But if you go back just a year, you’ll see that the average personal injury judgment was about the same as it was in 2020,” he said in an interview with Insurance Journal.

And the statistic most often cited by Florida insurers and regulators, one that appeared to play out in the 2022 legislative debate, is that Florida homeowners filed 7 percent of all claims filed nationwide in 2021 , but they opened 76% of all lawsuits. That number may also be suspect, Klein warned: The data came from insurance companies, provided to the NAIC, he said.

Klein’s study was published last year, before Florida’s sweeping reform legislation had time to make much of a difference. The paper argues that previous legislative changes, including Senate Bill 76 of 2021, which, among other changes, sought to limit attorneys’ fees for benefit award claims, had little effect, and AOB cases increased in the following months.

Klein said his main point is that good data supporting tort limits is hard to come by, and lawmakers and regulators should be wary of new rules that may affect the meritorious claims of honest policyholders.

“It may be that even in the best-case scenario for Florida—that reforms to Florida’s legal system eventually stabilize insurance markets (itself an open question)—the cost of stabilization will be outweighed by the cost of leaving Floridians hurt with a inadequate reward. “, he wrote.

Johnson and others in Florida said Florida was in a unique situation because of court rulings and laws enacted in the early 2000s that tilted the playing field toward opportunistic plaintiffs’ attorneys. Some of these attorneys and roofing companies have taken advantage of unilateral attorney fees and AOBs to create an unprecedented level of unnecessary litigation. It took sweeping measures, including the elimination of AOBs, flat fees and fee multipliers, along with a higher barrier to bad faith claims, plus tort reform laws, to finally stem the tide of lawsuits, the groups said by insurers.

Theodorou argues that Klein is wrong: good data on litigation and social inflation are, in fact, available. He points to a recent analysis by the Rand Corporation, which notes that court filings per capita increased by about 10 percent from 2012 to 2019.

The report also found that plaintiffs’ earnings rose from 2010 to 2019, and lawsuit awards, adjusted for inflation, rose 7.6 percent over that period, as did large awards of $5 million or more. a lot. The data came from tort records in 19 states, but not across the country.

The Rand authors also found that the frequency of insurance claims fell, “offsetting to some extent any impact of social inflation on loss rates.” (Social inflation has been variously defined, but usually refers to the trend toward higher insurance rates caused by higher claims and litigation awards, caused by third-party litigation funding, more aggressive advertising by plaintiffs’ attorneys, and the whims of gullible jurors influenced by social media.)

Klein pointed out that higher jury awards do not necessarily translate into higher insurance costs. Many states prohibit insurance policies from paying punitive damages. And a number of states, including Florida, place a strict cap on punitive damage amounts.

For Florida — ground zero for insurance litigation — data from regulators shows that insurance claims lawsuits have declined over the past year. Notices of intent to litigate, required by Florida law before lawsuits can be filed, have dropped significantly. From January 2023 to September 2023, approximately 61,790 NOIs were filed. For the same period this year, the number of notices was 40,388, according to the Florida Department of Financial Services’ NOI search site.

That 2023 period includes the wave of litigation initiated by policyholder attorneys even before Florida’s 2023 tort reform measures take effect. So for the later period, from 1 August to 10 September 2023, the figures show a further drop: around 9,083 notices were lodged during that period. For the same period this year, the number of NOIs reached just 5,711, the DFS website shows.

And Citizens Property Insurance Corp. of Florida, the state-run insurer that tracks a range of data, reported that litigation rates for Citizens non-catastrophic claims fell from a high of 14 percent in 2020 to 6 percent in 2023.

Klein, of course, could argue that those statistics only show that all lawsuits, not just frivolous or fraudulent ones, are in decline.

He used a sports analogy, comparing the home insurance industry to a football team that has suffered some losses. “But when the team loses, the answer is to play better – not try to fire the other team’s coach.”

TOPICS
Property Fraud Lawsuits