Florida's new AOB insurance law is conjuring a storm

Every time Santa Rosa Beach restoration contractor Ken Larsen submits a request for payment, he braces himself. It’s always a fight, Larsen says, that rumbles for weeks, months, years, catapulting between 40% and 80% of his annual earnings into limbo.

And now, a new law passed in Florida on May 23 might make things even tougher for Larsen by threatening what legal power he had to demand payment.

On one hand, vendors like Larsen, and plaintiffs lawyers worry it will tip the scale against homeowners. But on the other are supporters who say the state was due for an overhaul, as ballooning litigation raised insurance rates. Among them: Tallahassee lawyer Michael Carlson, who says a group of unscrupulous contractors has abused the system by submitting inflated claims, then suing under a Florida law that guarantees them legal fees if they prevail.

The two opposing views reflect the combative and often vitriolic arena that pits contractors like Larsen against insurance company advocates like Carlson and makes Florida Ground Zero for fraud and litigation.

At the heart of the issue are assignment-of-benefit agreements, or AOBs, which allow homeowners to sign over their insurance policy rights to contractors. The measure was intended to speed up repairs, save consumers the hassle of chasing claims, and stymie denials of legitimate claims. But insurers allege some restoration contractors took advantage by exaggerating repair costs and profited from excessive lawsuits over minor claims.

Related: Insurance industry reacts to Florida Senate ‘AOB’ practice overhaul approval

‘Anxiety’ over payments

Carlson is president of the Personal Insurance Federation of Florida, whose members — including insurers State Farm, Allstate and Progressive — noticed a strange pattern emerging, starting around 2011 when a handful of plaintiffs’ attorneys appeared to be promoting AOBs among water restoration contractors.

At that time, they say, their flabbergasted Florida claims managers were faced with an avalanche of home water damage claims, complete with “very high” price tags and unjustified documentation. They’d adjust the claim, offering something lower, only to be served with a lawsuit. They suggest that period marked the beginning of a cottage industry that sprung from homeowners assigning their insurance benefits to contractors to cover the cost of repairs. Then the contractors would file suit under a Florida law that awarded them attorney fees if they succeeded in the litigation.

But contractors like Larsen paint a different picture, saying that getting about 30 cents for every dollar they billed for work on damaged houses was far from enough. They say it also didn’t help that insurers had taken to recruiting preferred vendors — companies that had signed on at cheaper rates in exchange for repeat business.

“Frequently, the stress of slow payments is so severe, claims representatives leverage the contractor’s anxiety into accepting a price reduction — just to get paid something,” Larsen said.

Related: Florida Supreme Court justices to take up ‘AOB’ insurance fight

‘Litigation for profit’

The result: AOB lawsuits are on the rise across the state.

In 2006, litigants filed 405 suits, according to the Florida Department of Financial Services, which reported that number had rocketed to 28,200 a decade later.

The courtroom flurry prompted insurers to turn to lawmakers for help.

“We realized that we were up against a really well-thought-out litigation-for-profit scheme,” Carlson said.

Their efforts succeed in May when Florida Gov. Ron DeSantis signed a law he said would protect consumers from “predatory insurance practices.”

When the law takes effect on July 1, insurance companies will be able to write more limited versions of AOB into their policies and offer cheaper premiums to customers who agree to never have contractors or third parties stand in their shoes.

Effective immediately, it also provides a new formula to decide who, if anyone, is entitled to attorney fees after a judgment. Before May 23, contractors could collect fees from insurers if they won in court, but insurers couldn’t do the same. While homeowners can still claim fees without risk, third parties will no longer inherit that right through AOB.

Related: State Farm Florida asks judge to shield assignment of benefits info

‘What a mess’

The legislation doesn’t get rid of AOB, but Tampa restoration contractor David Sweet argues it might as well, as it’s so restrictive that “nobody would want to use it.”

While in the homeowners’ shoes under AOB, Sweet explains his work to the insurer, detailing what he did, how he did it, and why it met industry standards. But that crucial conversation would go very differently, in Sweet’s view, if done by “the terrified, uninformed, worried, nervous insured who just wants it to go away.”

With AOB, Sweet’s water damage company NextGen Restoration Inc. can chase the money it’s owed, but if consumers opt out, Sweet said he’d have to start putting liens on houses. Homeowners could get “the monumentally short end of the stick,” the way he sees it, as contractors might start choosing commercial work over home repairs.

“What a mess,” Sweet said. “For the citizens of Florida, just wait until the first hurricane rolls through and no one shows up to help them.”

The National Oceanic and Atmospheric Administration has predicted Florida will see about 15 named storms in 2019. It estimates four to eight hurricanes, between two and four of which could be major.

Related: ‘Loss creep’ from major recent hurricanes threatens premium hike in Florida

New type of lawsuits?

Several pro-insurance organizations helped push the legislation, including the Florida Property & Casualty Association. Its executive director William Stander said it became important to address what some saw as an AOB cottage industry riddled with consumer horror stories.

“The homeowner is basically cut out of the process and they don’t know what’s going on. The roof is not being repaired, and now there are lawsuits in their name,” Stander said.

Larsen believes the legislation could start a new strain of lawsuits by homeowners against preferred vendors, who he claims have done substandard work when insurance carriers limit the time and scope of repairs.

Some insurers mandate, for example, that any drying that will take more than four days has to be approved by an adjuster.

“Materials do not dry according to the desires of a claims representative,” Larsen said.

There are bad actors in Florida’s water restoration field, Larsen conceded, but the new overhaul is not the answer. The solution, as he sees it is to expose the fraud and incompetent craftsmanship.

“You don’t get rid of bad restoration contractors by eliminating a collections mechanism,” he said.

Lawyers ‘will probably go away’

Tampa lawyer William F. “Chip” Merlin Jr. of the Merlin Law Group suggests there’s good and bad news. The good: The law “clobbered” vendors and lawyers filing frivolous lawsuits. The bad: It’ll hurt honest contractors as insurance companies discourage AOB agreements.

“I feel for them because we need quality construction and contractors not looking to game the system, but to demand that construction work be done properly and to the specifications required by law,” Merlin said.

Merlin represents policyholders and knew Florida’s AOB abuse had to be addressed, but wonders whether this law was the right one.

“I understand that the insurance companies were feeling that they were being gamed by some AOB lawyers that would file thousands of lawsuits just to get their attorneys fees,” he said. “Those same lawyers were not around 10 years ago, and they will probably go away. But at what cost, and what will happen to their customers who will get lowballed, and quality contractors that cannot do the work because the insurer is paying too little?”

Tallahassee attorney Anna Cam Fentriss represents licensed contractors’ associations, including the Florida Roofing and Sheet Metal Contractors Association and Florida’s Association of Roofing Professionals — many of whom she said have never heard of AOBs. They have the same qualms about preferred vendor requirements, but Fentriss says that’s for another bill.

“We absolutely share their concerns about the lowballing and that sort of thing, but there’s such an enormous amount of abuse out there in the other direction,” Fentriss said. “Opening the floodgates to AOB is not a solution to that problem.”

While AOB “means an automatic straight shot to the insurance company’s bank account,” Fentriss stressed that another protection for third parties can still be written into contracts. “Direction of pay” ensures the insurance company writes checks to both the homeowner and contractor.

“Contractors have a lot of tools out there,” Fentriss said.

Related: Florida state-backed Citizens Property pitches insurance rate hikes

Whatever happens next, contractor Larsen said he’s tired of what he considers an unnecessarily adversarial field — when compared to the rest of the U.S. and the world.

“It is astounding to most other contractors in our industry in Australia, Europe and elsewhere,” Larsen said. “Why on Earth do we do battle like this on every insurance claim, to the point where it’s hard feelings and companies going broke?”

It will likely take about a year for the effects to bleed into insurance rates, and “the proof is in the pudding,” according to FPCA director Stander.

Stander hopes the legislation solves problems but says it could become another hurdle that attorneys will work around. But withholding judgment for now, he is confident Florida will muddle through.

“Insurance companies have existed in the United States of America since Benjamin Franklin founded the first one. And we’ve had many, many hurricanes since then and people got paid,” Stander said. “Claims got paid before assignment of benefits, and they will continue to be paid.”