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Assistant Underwriter, U.S. Property Reinsurance Team, AXA XL

The active 2017 Atlantic Hurricane season has once again highlighted the problems that the United States is facing with Assignment of Benefits (“AOB”). AOB allows policyholders to assign their insurance benefits to a third-party vendor. Under this arrangement, a policyholder transfers insurance benefits to a water remediation company, repair company or contractor after a loss. This process allows the vendor to directly charge the insurance company for its work. This process is sound in principle with the goal of speeding up the home repair process, but has been found wanting in practice due to some contractors reportedly inflating repair claims in order to make a profit at the expense of insurance companies. Another issue that has increased AOB abuse is Florida’s “one-way attorney fee” law (Florida Statute 627.428), which mandates that insurance companies must cover the bill for attorney fees of the assignee vendor if it prevails in a lawsuit against the insurer. Thus, some law firms reportedly team up with assignee vendors to needlessly pursue claims against insurers to take advantage of this law.

A key piece of legislation in Florida aimed at addressing these issues has failed to materialize, and Jonathan Ball, Assistant Underwriter on XL Catlin’s US Property Reinsurance Team in Bermuda, explains the impact this will have on the industry.

The flood and wind damage caused by hurricanes that have made landfall in the US this year have damaged homes, caused loss of life, and shut down businesses. It is no wonder that everyone has been looking for the fastest way to get back to normal. In theory AOB should help affected individuals get repairs done quickly, but in practice AOBs can result in more long term financial harm to homeowners.

This is because some contractors and their lawyers have used AOBs to financially stress insurance companies with inflated claims and legal fees. Such costs in turn are eventually passed on to homeowners and businesses in the form of higher insurance premiums.

Major legislative reform aimed at curbing this type of alarming behavior has failed to materialize in 2017, and following the recent storms, the AOB issue continues to cause problems, particularly in Florida. To put the problem in perspective, from 2014 to 2016, the number of AOB lawsuits against Citizens Property Insurance Corporation, (aka Florida Citizens) Florida’s property insurer of last resort, has risen 200% to 3,574 from 1,193.¹ Another staggering statistic is that from 2014 - 2016, the frequency of water damage claims increased by 46% and the severity of water damage claims increased by 28%². The above statistics highlight the need for urgent legislative reform in the Florida insurance market.

Florida Senate Bill 1038 sponsored by Republican Sen. Dorothy Hukill attempted to address the AOB issue as it would have disallowed courts from awarding the one-way attorney fees in AOB lawsuits. It also attempted to allow homeowners to back out of AOB agreements without incurring a penalty. There was a large lobby against this bill by trial attorneys and some contractors who have been accused of inflating AOB claims by the insurance industry. Unfortunately, SB 1038 failed as the Florida Banking and Insurance Committee opted to pass on hearing the legislation in their committee meeting on April 3, 2017. It is clear that politics is inhibiting progress that would benefit consumers and the Florida insurance industry as a whole.

AOB is intended to add value in the form of speedy home repairs. Regrettably, it is creating a cost burden on consumers and the insurance industry alike. In March of 2017, the Florida Consumer Protection Coalition launched radio and television ads to educate the public on how AOB abuse could increase insurance premium rates. This Coalition is made up of the Florida Chamber of Commerce and Associated Builders and Contractors and insurance providers. Without considering the impact from the recent Atlantic hurricanes, the following statistics highlight the cost that the AOB issue is having on the industry:

  • 1.7 million Florida homeowners are expected to incur premium rate increases in 2017.¹
  • The increase in overall premium rates is in an environment of no major hurricanes since 2005 and historic low reinsurance rates.
  • Florida Citizens recently recommended an average 5.3% increase statewide for personal lines.³
  • Policyholders in three South Florida counties will see an average increase of 10% due to the prevalence of AOB abuse in these areas.³
    • Miami-Dade 10.5%, Broward 10.4%, and Palm Beach 9.3%
    • In South Florida, the average AOB claim costs more than $32,000, nearly triple the average of non-AOB claims.⁴
  • Trend of deteriorating combined ratios amongst Florida insurance companies.
    • Q2 2015 Combined ratio 99.75% vs Q2 2017 combined ratio of 110.56%⁵
  • The State Office of Insurance Regulation reported that in 2014, 63% of insurance companies filed and were approved for rate decreases. Two years later in 2016, 73% of insurers were approved for rate increases mostly due to AOB abuse.³

Hurricane Irma will provide a unique understanding into the impact of AOB abuse in the Florida insurance market. Although AOB tends to be more of an attritional issue, its prevalence before and after a major hurricane will be insightful. AM Best recently signaled that AOB abuse will continue to be a burden on insurance companies and policyholders.⁶ In late September AM Best downgraded their outlook to negative on one of Florida’s largest residential property insurers. The rating agency stated: "The revised outlooks reflects multiple years of unfavorable underwriting performance as a result of weather-related losses, adverse development and the ongoing pressure stemming from the AOB issue in Florida." ⁷

With the issues that the abuse of AOB has caused, this problem has created an opportunity for good insurance companies to distinguish themselves from the pack.

The XL Catlin view

XL Catlin takes into account how much a primary insurance company spends on investigating and adjusting claims when underwriting risk. Specifically, XL Catlin will apply credits to companies that are acting responsibly and have the necessary infrastructure to avoid unwarranted AOB cost. In other words, XL Catlin has tailored its book around such clients who have made an effort to survive AOB and exorbitant costs associated with investigating claims.

XL Catlin has taken a deeper dive into various Florida insurers’ loss and adjustment expense ratios and the factors that are driving any recent increases. Hurricane Irma will provide another opportunity to analyze the financial performance of insurers and the effectiveness of claim management post event. Targeted strategies have separated the best insurers from the pack and turned the AOB problem into an opportunity. Here are some performance strategies worth considering by insurers:

  • Always perform due diligence and specifically ensure that rates are adequate when providing coverage, particularly in the Tri-county area.
  • Have efficient internal systems to participate in daily claims handling, with the view that the more involved in claims handling a company is, the more efficient it becomes.
  • Invest in water extraction and/or repair companies that focus on effectively handling claims and storm responses internally.
  • Have an adequate number of fully trained claims staff who respond promptly to claims.
  • Implement lower policy limits if a policyholder fails to utilize a recommended contractor or water remediation company.
  • Tighten overall policy language by instituting sub-limits on emergency repairs until the insurer is informed.

In addition to the above strategies, it is important to educate policyholders on the pitfalls of AOB. Domestic insurance companies should formulate detailed marketing plans which will dissuade policyholders from choosing the AOB option. The first step would involve identifying policyholders who may be more susceptible to AOB. Once identified, insurance companies should advise policyholders as follows:

  • Communicate all of the ways (phone apps, online, etc.) in which claims can be reported to the insurance company.
  • Emphasize the importance of the policyholder promptly contacting the insurance company after a loss, and preferably before a contractor is hired.
  • Stress that the policyholder should never sign a document with its contractor that is ambiguous. Call the insurance company if clarification is needed.
  • Highlight that AOB can ultimately lead to higher cost for policyholders in the future and that policyholders should discuss such an assignment form with the insurance company before signing it.

The above simple education strategies should be communicated in a clear and informative manner. If effectively relayed, these education strategies, in conjunction with the performance strategies above, will help insurance companies to perform better relative to their peers.

There is growing evidence that some Florida insurance companies are being proactive in combating AOB. With the insurance industry beginning to combat this issue, it is hoped that government can also play a role. The (re) insurance industry is hopeful that a change in legislation will occur in 2018 to combat AOB abuse. With state elections being held in Florida next year and the cost implications of Irma sure to be in the spotlight, XL Catlin is hopeful that the AOB issue will be addressed for the benefit of policyholders and the (re) insurance industry alike.

¹ Florida Chamber Insurance Summit, Bob Ritchie, February 2017² Florida Office of Insurance Regulation, Kevin McCarty, Review of the 2016 Assignments of Benefits Data Call, February 2016³ Insurance Insider Article “Citizens Approves Rate Hike”, June 2017⁴ Insurance Journal Article “Florida’s AOB Abuse by the Numbers”, February 2017⁵ Florida Domestic Property Insurers, Summary of 2nd Quarter Financial Results, Guy Carpenter, September 2017⁶ AM Best Special Report – Market Review May 22, 2017⁷ AM Best Press Release – September 29, 2017

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