HB 245 Passes: Legislation Aimed at Shrinking Citizens Heads to the Senate

Another high-profile insurance bill, HB 245, passed an important first test in the Florida House yesterday. The bill is aimed at reducing Citizens’ policy count by shifting policies to surplus lines carriers.  The Senate version is likely to face stiff opposition, although it seems to be on a trajectory to be one of the insurance industry’s legislative wins this session.  Governor Scott will almost certainly sign the bill if it passes the Senate.

Although passage of the legislation would be a victory for the insurance industry, Florida-based insurers would not benefit.  The surplus lines market is made up of non-admitted, foreign carriers that are subject to limited regulation in Florida.  Carriers such as Lloyd’s, Lexington, and Scottsdale are large players in the surplus lines market that charge above-average premiums for risks that the admitted market will not or cannot cover.  Surplus lines carriers provide a critical safety valve in insurance markets, in particular commercial insurance markets, where companies otherwise would be forced into self-insurance or captive arrangements.

The use of the surplus lines market to soak up homeowners’ policies from a bloated Citizens is a curious move.  Both Citizens and the surplus lines market are often referred to as the market of last resort for policyholders shunned by admitted carriers.  Apparently the House believes the surplus market should be the true last stop.

Potential upsides to policyholders of leaving Citizens for the surplus market include more professional underwriters and claims adjusters, the possibility of more flexibility in terms, and, possibly, a more financially secure insurance company.  Although Citizens is backed by the State of Florida, that backing has never faced a serious test.  The main downsides for policyholders entering the surplus market are that rates likely will rise due to the lack of rate regulation, policy forms need not be approved by the State and may contain narrower coverage, and surplus lines carriers are not backed by the Florida Insurance Guaranty Association in the event of insolvency.

Perhaps the greatest flaw in the legislation is logistical: policies can be taken out of Citizens by surplus insurers with a simple letter providing 30-days notice.  Policyholders do have the right to go back to Citizens if they choose, but they must affirmatively opt-out of the switch.  There will be a lot of confused homeowners if and when those letters go out.

It is a difficult dilemma for the State and its homeowners.  The State desperately wants to shrink Citizens but also wants to encourage the growth of the admitted market.  This legislation may help with the former but is contrary to the latter objective.  And for homeowners, the choice between insurance markets battling for the title of “last resort” is not exactly like choosing between The Breakers and the Ritz-Carlton.  It is a bit more like that hotel on the left coast, where you can check out anytime you like.