What Does Florida’s New Legislation on Homeowner’s Insurance Mean for Lenders, Investors, and Property Owners?

Posted on February 19, 2023, by Starlett Massey

Senate Bill 2-A

While Senate Bill 2-A (SB 2-A) has been touted as incentivizing insurers to insure Florida real estate by eliminating the risk of insolvency for insurers, this Bill provides a dramatic change in how claims are handled by insurers.  This change will arguably impact property owners and lenders when it comes to evaluating a property’s value as collateral for a loan.  While SB 2-A provides for many changes to the provisions in insurance policies and how claims are handled, there is a single issue that may dramatically change the landscape of real property values in Florida.  

Elimination of One-Way Attorney Fee Provision

Specifically, the repeal of the one-way attorney fee provision that previously applied to property insurance claims by a property owner against their insurance company will significantly impact the property owner’s ability to challenge an insurance company’s determination of coverage.  Previously, when a property owner filed a successful lawsuit against their insurance company, the insurance company would be required by statute to pay the property owner’s attorney’s fees and costs for bringing the suit.  

For example, if a property owner experienced a claim event and the policy required the insurance company to pay a claim for $100,000, but the insurance company refused to pay the full amount and instead offered to pay only $20,000, the property owner would typically engage an attorney to challenge the insurer’s decision.  That attorney was historically engaged on a contingency fee basis, meaning the attorney would only be paid if the lawsuit was successful.  After evaluating the claim, the attorney would then file a lawsuit to seek full payment for the claim under the policy limits.  The insurance company would pay the property owner’s attorney upon the successful resolution of the lawsuit in favor of the property owner.  

This one-way fee provision gave property owners access to counsel who could assert their rights without the property owner being forced to pay their attorneys’ fees throughout the litigation process.  Numerous law firms’ business models were based upon the income from fees paid under the one-way fee provision, and this resulted in the broad availability of lawyers to assist property owners who were not treated fairly by their insurance company.  

The New Landscape

Following the passage of SB 2-A, an insurance company should not expect to have its claim payment determination challenged except by a limited group of property owners who can afford legal representation to challenge that determination.  Based on that assumption, it is reasonable to anticipate that insurance companies will not be incentivized to pay claims at the full value provided under the policy when faced with a high volume of claims from an event such as a hurricane.  

Under the same logic, given the substantial reduction in potential clients, it is reasonable to assume that many law firms that modeled their practice on providing contingency fee representation to property owners will now redirect those resources to other practice areas.  More significantly, there will not be any contingency fee representation available for property owners.

If the legal terrain of obtaining representation to force a property owner’s insurance company to pay the value of a claim for damage has changed this drastically, then it follows that insurance companies’ decision-making when claims are submitted will similarly change.  

Impact on Lenders: How Much is the Collateral Really Worth?

Financial institutions and other investors who lend money secured by Florida real estate and know the implications of SB 2-A may reconsider how they “value” their collateral.  Suppose a parcel of real estate is at a greater risk of being damaged by a hurricane and receiving diminished insurance coverage benefits. In that case, a lender may be forced to de-value the collateral for purposes of extending funding.  

Lenders’ risk assessment may result in lenders lowering the loan-to-value (LTV) that they will lend on real estate in Florida.  They may even develop lending guidelines that propose lower LTVs on mortgage loans depending on the property’s proximity to the Florida coastline.  

Conclusion

Whether you are a property owner deciding whether or not to purchase homeowners insurance on a free-and-clear property, a property owner evaluating the necessary cash reserves required to protect your Florida property, or a lender making a determination as to how much to lend for the purchase of a beachfront property, SB 2-A raises significant issues regarding Florida homeowner’s insurance.