A state audit released in January could spark a fierce legislative battle this spring and raises additional concerns about the viability of both Citizens Property Insurance Corp. and the Florida Hurricane Catastrophe Fund (Cat Fund).

State auditors found that Citizens' policyholders who hire public adjusters wind up getting more money for their claims than those without public adjusters.

Auditors who work for the Florida Legislature spent months combing through claims data filed with Citizens, the state's largest property insurer with more than one million policyholders. The Office of Program Policy Analysis and Government Accountability sorted through more than 76,000 claims filed between March 2008 and June 2009.

Most of those claims were for non-catastrophic events, but nearly 15,000 of them were for claims related to the hurricanes that hit Florida in 2004 and 2005. Under Florida law, there is no limit for when a claim may be filed, although there is a five-year limit on filing a lawsuit about a claim.

State auditors concluded that policyholders who hire public adjusters wound up waiting longer to resolve their claims, with figures ranging from 132 to 296 days longer than claims without public adjuster representation. However, the data analyzed by auditors also showed that public adjusters eventually obtained larger settlements for Citizens' policyholders than those who did not use them.

Those who did not use a public adjuster typically received a settlement of $18,659 for 2004 hurricane-related claims versus $22,266 for those who did use one. The difference was even larger for 2005 hurricane claims. Those policyholders who used a public adjuster received a settlement typically worth $17,187 compared to $2,029 for those policyholders without a public adjuster. Over half of the hurricane-related claims examined by auditors were reopened claims.

For non-catastrophic claims, auditors concluded that policyholders who use public adjusters received a settlement typically worth $9,379 compared to $1,391 for those who did not use one. In all instances, the figures do not include the amount the policyholder would have to subtract to pay the public adjuster.

Citizens' officials do not dispute the findings of the audit, but warn that the audit was based on raw data that does not give a clear indication of exactly when the public adjuster was hired by the policyholder.

"We don't know what caused the payment to go up," said Christine Turner Ashburn, director of legislative and external affairs for Citizens.

Legislative Battle With Public Adjusters Likely

Still, the audit findings could provide ammunition for another legislative battle between public adjusters and the insurance industry. Some state officials say that legislators may need to consider whether there should be limits on how long policyholders can wait until they file their claims. There is talk of giving policyholders just three years to file.

"Five years is too long to allow people to file claims," said Chief Financial Officer Alex Sink, who is charge of licensing public adjusters. "You should either know there is a leak in your roof or there is not a leak in your roof."

The group that represents public adjusters, however, says the fact that they wind up getting more money for policyholders is proof that policyholders should use public adjusters instead of relying on adjusters hired by insurers. The number of public adjusters has substantially increased over the last six years.

What may get lost in the back and forth between the insurance industry and public adjusters is the ongoing impact that these claims may have on the shaky financial status of both Citizens and the Cat Fund. Both state-created entities have the power to assess most insurance policies in the event of large losses.

The Cat Fund — the state-created reinsurance fund — continues to deal with claims flowing in from the eight storms that hit Florida in 2004 and 2005. Members of the fund's advisory council are convinced that the problems stem from public adjusters convincing policyholders to submit questionable claims, especially claims related to Hurricane Wilma, which hit South Florida in 2005. The argument is that insurers have little incentive to investigate the claims because they have already reached the deductible limit needed to get Cat Fund reimbursements.

Cat Fund Executive Director Jack Nicholson, however, says there is no direct evidence to prove that the continued claims may be fraudulent, and he pointed out that he does not have the staff or time to delve deeply into the claims.

Here is what is clear: The Cat Fund will probably issue at least $400 million worth of bonds later this year to pay off outstanding claims associated with past storms. The bonds will then trigger an increased assessment on most insurance policies in the state, including auto insurance policies.

Nicholson said the extra charge, which likely would not show on insurance bills until 2011, could increase premiums by as much as $15 a year. The Cat Fund has already paid out $9.4 billion related to the 2004 and 2005 hurricanes, and there is an estimated $623 million in outstanding claims that still need to be paid. Since November 2008 the Cat Fund has been asked to pay 261 new claims associated with the two storm seasons.

Wind Mitigation Credits

Another ongoing probe may show problems with a different part of Citizens' operations — how the carrier has handed out wind mitigation credits to policyholders.

More than 450,000 Citizens policyholders receive credits on their policies for taking steps to protect their homes from hurricane wind damage. However, Citizens' officials say they have received information that shows there were errors on the forms used to document the policy discount.

Most of the information is coming from private carriers that have assumed policies previously held by Citizens. When these credits are removed by the private carrier, the policyholder is returning to Citizens and using the incorrect information on the mitigation form, which Citizens is required to accept.

Citizens recently hired a company to oversee a pilot program where it will inspect as many as 1,500 homes that have received mitigation credits. Citizens' officials will then evaluate whether more homes should be inspected or whether it should make changes to how it hands out credits in the future.

Ashburn noted that the impact of wind mitigation credits on Citizens' financial status is much larger than recently approved rate hikes. The new rate hikes that took effect in January are only expected to generate as much as $140 million, while Citizens is handing out policy discounts worth about $740 million.