FILE - Hurricane Michael Florida

Candace Phillips sifts through what was her third-floor bedroom while returning to her damaged home in Mexico Beach, Fla., Sunday, Oct. 14, 2018, in the aftermath of Hurricane Michael.

Last December, about 420,000 of 435,000 homeowners with property insurance provided by the state’s “insurer of last resort” – Citizens Property Insurance Corp. – were looking at an average 2019 increase in policy rates of about 8.2 percent.

Citizen’s commercial property owners were also expecting to see their policies increase on average by 9 percent in the coming year.

And yet Citizen’s policyholders were relatively lucky compared to those with property insurance provided by commercial carriers. Florida’s 6.2 million property insurance policyholders had seen rates increase by 36 percent over the last five years with more rate hikes proposed.

The culprit, according to state officials and insurers, was not hurricanes or flooding – factors, for sure – but a clause in state law that allows property insurance policy holders to sign away, or assign, benefits in insurance policies. The law allows policyholders to trade those benefits in exchange for “upfront work” in an emergency.

The controversial component of Florida’s Assignment of Benefits (AOB) statute was its “one-way” attorney fee provision, which required insurers to pay legal costs even when they win in court. Critics contended the one-way fee clause “incentivized” attorneys to file AOB lawsuits as a “can’t lose” business practice.

According to Florida’s Office of Insurance Regulation (OIR) and Citizens, in 2008, there were about 90 property insurance AOB lawsuits statewide but, by 2018, AOB lawsuits had increased by more than 19,000 percent.

“AOB abuse” was a “hidden tax” on consumers, a December 2018 report by the Insurance Information Institute explained with Citizens explicitly citing AOB litigation costs as the primary reason for rising rates.

According to that report, there were about 1,300 AOB lawsuits statewide in 2000, more than 79,000 in 2013 and nearly 135,000 by early November 2018, a 70-percent increase in just five years.

In December, Citizens’ board of governors approved a tentative 2019 rate package that included an 8.2 percent premium increase for about 97 percent of its residential policy holders – 420,000 of 435,000 homeowners – and an average 9 percent increase for commercial property owners.

But then something unexpected happened: The state Legislature, after seven years of fits and starts, adopted an AOB reform bill that, among other things, removes the “one-way” attorney fee provision.

For about 420,000 Citizens’ policyholders statewide, adoption of House Bill 7065 will pay immediate dividends. In fact, about 67,000 of those rate-payers will actually see rates go down this year because of the AOB reform bill.

In June, Citizens’ Board of Governors unanimously agreed to lower the proposed 8.2 percent and 9 percent 2019 increases to about 4.7 percent for its policyholders. Last week, the OIR formally approved the revised rate structure.

“We are pleased to see that AOB reforms passed by the Legislature are already having a positive effect on rates,” state Insurance Commissioner David Altmaier said last week in a statement. “We will be closely monitoring new rate filings to ensure that cost savings are passed along to Florida consumers.”

The new rates, which will vary for individual policyholders depending on what they coverage that have and where they live, will go into effect Dec. 1.

The new Citizens rates also reflect the OIR’s decision to freeze rates in Monroe County for many “wind and multi-peril’ residential policies.

How the commercial property insurers react to the AOB reform bill and Citizens rate adjustments is uncertain, although the general response is rates are likely to go down by reducing litigation costs but are adopting a wait-and-see posture, particularly in the wake of several successive active hurricane seasons.

As a result, reinsurance rates were up an average 10 to 20 percent in Florida this year, according to Keefe, Bruyette & Woods [KBW] insurance analysts.

The “wait-and-see” period could end in February 2020 when the OIR has issued a data call to insurers that will provide “an early look at the impact of the bill.”

“While we appreciate that nine months after the passage of the bill may not be sufficient time to recognize the full impact of the Act on rates and rate indications, collecting preliminary data to evaluate the potential impact of the Act is a valuable exercise,” the OIR said in a June memo to Insurance Journal.

Citizens said in a statement after HB 7065 was adopted that its actuaries estimated AOB reform would reduce the statewide average rate increase from 25.2 percent to 10.1 percent for all homeowner policyholders. In South Florida, the average hike would drop from 30.4 to 12.8 percent.