Why Is Home Insurance So Expensive in Florida?

It’s a common experience for homeowners in Florida to become shocked when they hear from their insurance company that their policy won’t be renewed, or that the renewal rate will be multiples of what they paid the prior year.

We’ll explain in this article why the Florida home owner insurance market is on the verge of collapse, and the reasons behind the many insurer bankruptcies, net losses and exits from the market.

Rampant insurance fraud

Insurers are exiting the Florida market, going bankrupt or surviving by drastically increasing renewal rates due to rampant insurance fraud in the state.

Unfortunately for unsuspecting home owners, the majority of this appears to be caused by unscrupulous roofers and contractors who canvass entire neighborhoods, often after storm damage, and approach home owners with the offer of a free roof replacement or other repair, paid for by the home owner’s insurance company.

While some repairs might be legitimately necessary, often times roofs or other structural elements with only minor damage might be completely replaced at the contractor’s behest.

As you can imagine, doing unnecessary major repairs and replacements are extremely costly, and increase the amount insurers have to pay out to unsustainable levels.

The Florida home insurance market is on the verge of collapse due to insurer bankruptcies and exits from the Florida market. Learn why.

What’s worse is that contractors will also convince home owners that they can even get their home insurance deductible, if any, waived.

They’ll pressure home owners to sign over their right to file an insurance claim to the contractor, and this “assignment of benefits” form is typically hidden at the end of many pages of terms and conditions.

It’s no wonder then that since 2017, six insurance companies that offer homeowner’s insurance in Florida have since collapsed, with at least four more in liquidation as of 2022.

In fact, insurance companies have faced two consecutive years of net underwriting losses over $1 billion due to the rampant insurance fraud in Florida.

The result? Insurance companies that are still solvent are either choosing to exit the state entirely, deciding to not renew vast swaths of policies, or offering renewal rates multiple times higher.

Lawsuits by contractors against insurers

Remember how home owners are pressured into assigning their right to file a claim to the contractor? While this may seem like a good move, to save the home owner time and hassle, what ends up actually happening brings minimal benefit to the individual home owner and disaster for the wider insurance market and all the innocent home owners who won’t get access to affordable home insurance.

Here’s what happens after a homeowner assigns their right to file a claim to a contractor:

1. The contractor files an inflated claim amount for replacing the entire roof or other structural element at or above its replacement cost.

2. The insurance company sends a claims adjuster to inspect the damage, and typically finds either minimal or no damage, and thus rejects the claim.

3. The contractor sues the insurance company for the full amount of their original quote. They don’t need permission from the homeowner to bring about legal action due to the assignment of rights. Furthermore, many lawyers offer their litigation services for free, only collecting a percentage of the payoff if they win.

4. The insurance company then either has to spend money to fight the litigation, with legal costs that easily might exceed the amount of the claim, or they can choose to settle out of court. Either way, the insurance company loses and has to spend money defending against a fraudulent claim. The contractor has only upside, because if they lose, they don’t have to pay legal fees anyway due to the incentive structure of many of these trial lawyers. If they win, even if they have to pay a percentage of the winnings to their lawyer, they still get a new job and often a check for much more than the actual cost of any repairs.

Fortunately, legislation has recently been passed which restricts the amount lawyers can charge for property insurance claims cases, which will hopefully discourage this behavior.

It may take years to determine whether the recently passed legislation will help alleviate the crisis. In the meantime, insurers are going bankrupt or fleeing the market en masse due to Florida accounting for 79% of all home insurance lawsuits in the country, despite only accounting for 9% of the country’s home insurance claims.

This is a disastrous statistic, as it means not only does Florida account for almost a tenth of all home insurance claims, but those claims result in an overwhelming majority of all ensuing claims litigation.

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High risk of natural disasters

It’s no surprise that home insurance is more expensive in Florida due to the risk of natural disasters like hurricanes, which can slam into Florida from both the east and the west. Even homes in the interior of Florida are at risk due to the thin shape of the peninsula.

And depending on your view of climate change and the associated risk of an increasing frequency in extreme weather events, i.e. hurricanes becoming more prevalent as water temperatures rise, the cost of home insurance may continue to rise in the future, and the market may even one day be completely uninsurable.

Florida has been hit by more hurricanes than any other state, which is why residents always keep an eye on the National Hurricane Center’s forecast during the storm season.

Lastly, it’s important to remember that the primary reason insurers are going bankrupt and fleeing Florida isn’t because of storm risk. After all, insurance companies aren’t fleeing Oklahoma due to the threat of tornado damage right?

It all comes down to rampant fraud and claims litigation in Florida, which becomes more ubiquitous any time there’s a storm or hurricane that causes widespread damage.

Pro Tip: Fortunately, it seems that Miami and southeastern Florida generally has seen fewer direct hits from hurricanes vs the Gulf Coast with its warmer waters more likely to attract a hurricane.

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Increasing replacement cost due to inflation

Lastly, it would be inappropriate not to mention the tremendous inflationary pressure we’re witnessing in the real estate construction industry, which means at the end of the day that replacement costs for everything from appliances to building materials have gone up.

With supply chains still disrupted, widespread labor shortages and a massive increase in the money supply, what would obviously happen has indeed happened. With less real world goods and services available, and a massive increase in the unit of account (i.e. money) in circulation, there are simply more dollars chasing fewer things.

Insurance companies are not dumb, and are fully aware that the replacement cost of the properties they’re insuring has gone up.

As a result, part of the reason that insurance premiums are so high is surely due to the massive inflation we’re seeing across the economy.

In order to remain viable and hopefully make a profit, insurance companies obviously must increase premiums to cover the rising cost of claims that they must pay out when damages do occur.

Disclosure: Hauseit® and its affiliates do not provide tax, legal, financial or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, financial or accounting advice. No representation, guarantee or warranty of any kind is made regarding the completeness or accuracy of information provided.

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