Surplus Lines. In Florida, as in other states, surplus lines insurance has historically been exempt from regulation as to rates or forms. The scope of the exemption was called into question in 2008, when the Florida Supreme Court reinterpreted key statutory language. A provision of Chapter 627, Florida Statutes, appeared to exempt surplus lines insurance from the entire chapter, which governs rates, forms, and claims. But in Essex Insurance Co. v. Zota, the Florida Supreme Court held that surplus lines insurance was exempt from Part I of Chapter 627, relating to rate regulation, and was not exempt from the other parts of that chapter.

Legislators needed to decide how to address the solvency of the Cat Fund and Citizens, whether and how to restore attorney fee caps for workers' compensation, and whether and how to restore the traditional functioning of the surplus lines market.

Property Insurance: Glide Path (CS/CS/CS/HB 1495)

The collapse of credit markets threatened the system of property insurance entities and regulation that Florida had created in the 16 years since Hurricane Andrew. Citizens is currently operating under the rates it had in place in 2005 and is subject to a statutory requirement to implement actuarially sound rates by the start of 2010; Citizens' actuaries estimate that meeting this requirement would have required a statewide average increase of 55 percent in its windstorm-only rates and 40 percent in its homeowners' rates. Legislation in both the House and the Senate started from the consensus understanding that the full Citizens' rate increase needed to be replaced with a multi-year "glide path" to actuarial soundness.

Legislators also recognized that no funding was available to support the $12 billion layer of reinsurance that had been added to the Cat Fund by 2007 legislation in an effort to force insurers to lower property insurance rates. The starting point for both chambers was another glide path — a gradual decrease in the size of the additional layer of Cat Fund coverage.

Legislative debate centered around the steepness of the glide path, the question of whether the freeze on Citizens' rate increases first imposed in 2007 should be maintained because of the recession, and other related issues, such as how insurers could recover the reinsurance or financing costs they incur as a result of the Cat Fund's reduced claims-paying capacity. The final product of the Legislature included provisions on these issues, as well as ratemaking, hurricane mitigation, public adjusters, and other matters.

The major provisions of the 2009 property insurance law include:

Citizens' Rates. Citizens may raise rates each year until the rates are actuarially sound, but no policyholder will be subject to a base rate increase of more than 10 percent. Rate increases can also reflect the "cash buildup factor" that is added to Cat Fund premiums paid by Citizens.

Cat Fund TICL Layer. The legislation phases out the $12 billion Temporary Increase in Coverage Limits (TICL) layer of Cat Fund coverage, which was added in 2007. The size of the layer is annually reduced by $2 billion until it reaches zero on Jan. 1, 2014. The law also annually raises the premium charged for TICL layer coverage, doubling the premium for the 2009 contract year and ultimately raising the premium by a factor of six in the 2013 contract year

Cat Fund Cash Buildup Factor. The legislation adds a "cash buildup factor" to the premiums charged for the basic layer of Cat Fund coverage. The increase is five percent for the 2009 contract year, 10 percent for 2010, 15 percent for 2011, 20 percent for 2012, and 25 percent for 2013 and later years.

Ratemaking. Insurers generally cannot use premium revenues to recover costs for reinsurance or other alternatives that "duplicate" Cat Fund coverage, even if the Cat Fund cannot pay claims in full. The act provides two exceptions that allow insurers' rates to reflect their additional reinsurance and financing costs, with caps to limit the rate impact on consumers.

Mitigation. The legislation changes the My Safe Florida Home Program into a program to certify inspectors, rather than to conduct inspections and provide loans. It also revises insurer verification of mitigation reports, provides criminal penalties for mitigation fraud, and requires the Florida Commission on Hurricane Loss Projection Methodology to analyze mitigation discounts.

Public Adjusters. The legislation prohibits public adjusters from paying referral fees, requires training and certification for public adjusters, and provides for a legislative study of public adjuster regulation, including a review of claims.

Property Insurance: Consumer Choice (CS/CS/HB 1171)

The 2009 Legislature also considered several alternative approaches to the residential property insurance market, driven in part by the financial problems of the Cat Fund and Citizens, and in part by the announced decision of State Farm Florida Insurance Co. to leave the property insurance market.

One alternative, which never received a committee vote, would have made the state the exclusive provider of hurricane-only coverage. Another alternative would have allowed consumers to elect a policy that was not subject to Citizens' assessments and was subject to rate regulation only as to the issue of rate adequacy.

As different versions of the consumer choice approach moved through the Legislature, the emphasis shifted to giving a consumer the ability to choose to be insured with a highly-solvent insurer after full disclosure about the partially deregulated nature of the policy. As enacted, the bill gives a consumer the right to choose a partially deregulated policy, which is still subject to Citizens' assessments, after receiving a statutorily specified notice and signing an acknowledgment.

The legislation includes solvency-related restrictions to limit the companies that can offer consumer choice policies. In order to participate, a company must have surplus of $500 million or more, or must have a combination of surplus of $200 million or more and a net premium-to-surplus ratio no higher than 2-to-1, or must have surplus of $150 million or more and provide insurance as a service or benefit to members of a nonprofit corporation.

While Gov. Charlie Crist has indicated that he is likely to sign the glide path bill, a veto of the consumer choice bill is a clear possibility. Insurance Commissioner Kevin McCarty, who opposed the consumer choice bill, has warned that it would lead to increased rates and would give larger, older insurers a competitive advantage over smaller, newer companies.

Workers' Compensation: Fee Caps (CS/HB 903)

The 2003 workers' compensation reform law substantially eliminated a judge's discretion with regard to an award of attorney fees to a prevailing claimant, replacing subjective criteria with a fee schedule based on the amount recovered by the claimant. The Florida Supreme Court found in the Murray case that, because the 2003 law retained a reference to "reasonable" attorney fees, the Legislature had not intended to remove the judge's discretion. This interpretation of the 2003 reforms came as a surprise to employers, carriers, regulators, and most legislators who had been involved in the issue. The Florida Supreme Court did not address issues related to the constitutionality of the workers' compensation fee schedule.

The two chambers of the Legislature took markedly different approaches to the issue. The House passed legislation to resolve the ambiguity identified by the Supreme Court (by removing the reference to "reasonable" attorney fees) and to restore the fee schedule.

As the Senate version of the bill went through the committee process, it was amended to add provisions requested by labor, claimants' lawyers, and first responders. The version that passed the Senate provided a generous fee schedule for cases in which a claimant prevails before a judge of compensation claims, together with a series of broad exceptions in which subjective criteria, and not the fee schedule, would determine the amount of the award. The Senate version also provided that the claimant's attorney could be awarded as much as the fee that the carrier paid its attorney.

In the closing days of the regular legislative session, the House refused to agree to the Senate proposal. The matter came back before the Senate as one of the last items considered before the session was extended by a week to deal only with budget and revenue issues. After heated debate, the Senate voted to accept the House version on a largely party line 22-16 vote.

Surplus Lines: Restoration (CS/HB 853)

Traditionally, states exempt surplus lines insurers from regulation of rates and forms. In Florida, the exemption states that "this chapter" (referring to Chapter 627 of the Florida Statutes) does not apply to surplus lines insurance. This provision is part of a section headed "scope of this part." In the Essex case, the Florida Supreme Court found the exemption to be ambiguous and held that surplus lines insurance was exempt only from Part I of the chapter, which addresses rate regulation, and not from the entire chapter. The other parts of the chapter address such issues as form regulation, mandatory coverages, cancellation and nonrenewal, and deductibles.

As with the workers' compensation decision, the decision in Essex came as a surprise to carriers, regulators, and legislators. Both chambers worked to restore the traditional role of the surplus lines market, but issues arose with respect to retroactivity and consumer protections. The House wanted the legislation to operate retroactively to Oct. 1, 1988, the date on which the statutory exemption for surplus lines originally took effect. For the Senate, consumer protection for purchasers of surplus lines coverage was a key issue. The two chambers were able to agree on compromise legislation, which:

Exempts surplus lines insurance from all provisions of Chapter 627, except for provisions that are specifically stated to apply to surplus lines.

Requires consumer disclosures regarding regulation of rates and forms and hurricane deductibles.

Requires that claims be paid in cash or cash equivalents.

Requires surplus lines liability insurers to disclose coverage information to claimants.

Provides for award of attorney fees in cases where the insured or beneficiary prevails against a surplus lines insurer.

Provides that for regulatory purposes, the act is retroactive to Oct. 1, 1988, but that for litigation purposes, the act does not apply to lawsuits filed on or before May 15, 2009.

Health Insurance: Direct Pay (CS/SB 1122)

The 2009 session was not without its impacts on auto insurers or health insurers. The biggest health insurance controversy of the 2009 session involved a proposal to expand direct payment to health-care providers. Florida law allows a consumer to request direct payment to a provider of emergency care, but not other medical care. Payment to the provider may not exceed the amount that the insurer would otherwise have paid.

CS/SB 1122 expands this provision for direct payment by allowing direct payment for any health-care providers. Health-care providers supported the bill. Health insurers were opposed, arguing that the bill would adversely affect their ability to form preferred provider networks.

To address concerns that allowing direct pay could remove incentives for physicians to participate in preferred provider networks, the act requires an Office of Program Policy Analysis and Government Accountability (OPPAGA) study, and provides for repeal on July 1, 2012, if OPPAGA finds that the act has increased the cost of the state employee health insurance program or adversely affected the program's preferred provider network.

Auto Insurance: Fee Increases (CS/CS/SB 1778)

The dominant issue of the 2009 session was the effort to address state budget shortfalls. The search for new state revenues led the Legislature to enact approximately $800 million a year in fee increases, primarily increases on fees relating to motor vehicles and drivers (CS/CS/SB 1778). Some fee increases will affect costs for auto insurers. The fee for obtaining a three-year driver history or record search is increased to $8 from the current $2.10, and the fee for obtaining an individual's seven-year driver history or record search, or for a certified copy of a driver history transcript, is increased to $10 from the current $3.10.

Thomas J. Maida is the managing partner of the Tallahassee office of Foley & Lardner LLP. Leonard Schulte is public affairs director at Foley & Lardner LLP. Both are members of the firm's insurance industry team and public affairs practice. They may be reached at [email protected] or [email protected].