How Surfside collapse could influence state-regulated insurance

The business of insurance relies upon predictive indicators of risk exposure. So how will a seemingly (and hopefully) rare event like the Surfside condo collapse impact the way that condominium association-owned buildings model? Does the fact that a board of laypeople is tasked with decisions affecting the structural integrity of condo buildings influence the insurability of those buildings? If so, Florida residents will likely see a continued decline in the availability of property insurance coverage from Florida licensed insurers.

Florida’s property and casualty insurance industry has been struggling to withstand a period of extreme turbulence during the past four years. Not only was the state hit with multiple major hurricanes from 2017-2019, but Florida’s legal landscape foreseeably contributed to the storms’ litigious aftermath. In fact, at least one study found that Florida insurers are paying out more in legal costs than actual indemnity payments owed to insureds. Although the legislature has taken some remedial action to retroactively address a few common causes, such as the 2019 AOB reforms and more recently with SB 76, Florida carriers were already issuing non-renewals in an effort to reel in their risk exposure. 

Not surprisingly, structures located in coastal regions already model as higher risk due to predictable factors such as exposure to saltwater-induced deterioration, as well as damage from windstorms and flooding. In fact, well before the devastating collapse of the Champlain Towers, it had become near impossible for oceanfront commercial properties and those located in coastal regions to obtain coverage from Florida licensed carriers. 

Yet insurers of condominium structures in Florida, whether state-licensed or not, could generally rely on the widely regarded strength and uniformity of the Florida building code to balance the risk equation. In fact, as of June 2021, Florida’s Building Code ranked highest out of the 18 states most vulnerable to catastrophic hurricanes along the Atlantic and Gulf Coasts, according to the Insurance Institute for Business & Home Safety (IIBHS). 

Property & casualty (P&C) insurers (and their reinsurers) had confidence that municipal enforcement of the sunshine state’s award-winning building code standards was instrumental to reducing potential financial costs associated with the statistical and environmental data on destructive windstorms.  For that very reason, many insurers of commercial condo buildings located in Broward and Miami-Dade counties would require the 40/50 year recertification approvals as a condition of coverage and/ or policy renewal.

However, as the investigation of the condo collapse unfolds, insurers and reinsurers are naturally beginning to question the enforcement standards of Florida’s building code, particularly for older buildings that were not subject to the code when originally constructed.

Less availability of property insurance coverage by Florida licensed companies will inevitably lead to the following: (1) an increased need for government-provided insurance (i.e., Citizens), and (2) an increased presence of excess and surplus lines insurance for Florida properties.

The problem with the first outcome, the growth of the “public option,” is that it is not a sustainable solution, and Florida residents will ultimately bear the brunt of the costs. The Florida Legislature created citizens Property Insurance to be the insurer of last resort for Florida homes and businesses. However, as Citizens President and CEO Barry Gilway recently stated, Citizens is increasingly becoming the insurer of first resort, as private insurers are pulling out of Florida’s volatile market. As Citizens’ policy count increases, so does the risk that a multi-billion dollar assessment will be required due to risk exposure that Citizens does not have the surplus to afford.

The second outcome, an influx of coverage from excess and surplus lines carriers, has already commenced. Excess and surplus lines carriers are insurance companies that are not licensed or “not admitted” by the state of Florida. Many of the Florida carriers who previously provided coverage in coastal regions and higher risk areas stopped writing the policies as they were unable to compete with the pricing terms offered by excess & surplus (E&S) insurers.

E&S insurers have greater flexibility to provide coverage for riskier and/ or less predictable policies. Because Florida does not license E&S carriers, they are not subject to state insurance agency regulation and/or oversight of the carriers’ rates, policy forms, and/ or financial health. Moreover, because E&S insurers are exempt from state regulation, they are not backed by the Florida Guaranty Association in the event the carrier becomes insolvent and is unable to pay its insureds’ claims. 

While that may sound alarming to property owners, E&S carriers can generally underwrite higher risk policies because they have larger pools of reinsurance, hence the term “excess” carrier. Additionally, because they do not require Florida government approval for their policy forms and/ or rates, E&S carriers can tailor policies and conditions of coverage more precisely based on the particular risk. So, for older oceanfront condo buildings like the Champlain Towers, for example, E&S carriers could potentially require that the Condo Association have stricter reporting requirements of damage to state regulators and/ or require that it obtain third-party inspections of the structural integrity.

On the other hand, Florida admitted carriers have less ability to make adjustments to policy language, coverage provisions, and/ or premium rates to reduce their exposure and therefore enable the carrier to provide coverage for greater risks. 

While the private insurance market in Florida has incurred multiple years of significant losses, it appears that state lawmakers are waking up to the potential long-term consequences. Legislators recognize that the remedial measures codified into law over the past two years are insufficient to improve the attractiveness of the Florida market and expand the availability of private insurance coverage in Florida. 

There is little doubt that Florida’s regulatory oversight of admitted insurers intends to protect policyholders from rogue rate increases and unfair policy provisions. However, the effect of strict regulations on private companies regarding the types of coverage it must provide and the amount it can increase premium rates — particularly as insurers are experiencing unprecedented losses — is unlikely to achieve that goal. On the contrary, as private insurers stop issuing policies for Florida properties, residents are seeking coverage through non-Florida-regulated options.

Tiffany Rothenberg is a partner at Kelley Kronenberg, focusing her practice on Commercial First Party Property Litigation.

The views are the author’s own.

Related:

• ‘This was preventable’: First lawsuit filed over Fla. condo tragedy
• Unraveling the mystery of the Miami building collapse
• Handling claims against architects & engineers