AOB Reform Bill Catalyzes Eagerly Awaited Change

Insurance Law Alert

July 31, 2019

Nicole S. Houman

Nicole S. Houman

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After much ado, on April 24, 2019, the Florida Senate passed Senate Bill 122. The bill substitutes House Bill 7065, which passed weeks prior on April 11, 2019, and addresses the ongoing abuse of post loss assignment of benefit (AOB) agreements for residential and commercial property insurance claims. This much-desired reform is intended to diminish the frequency of lawsuits based on AOBs, which rose to nearly 135,000 through November 2018, up from 79,000 in 2013 and just 1,300 in 2000. In turn, the bill should lower legal fees for insurers and lead to pricing relief for consumers. According to the legislation, the bill will apply to all assignments executed after July 1, 2019 with the fee section becoming effective when it was signed into law on May 23, 2019 by Gov. Ron DeSantis.

The bill contains significant provisions, including a definition of “assignment agreement,” which establishes specific requirements for the execution, validity, and effect of an AOB agreement. It also places a continuing burden on contractors to legitimize their claims; the contractor is required to give the insurer almost two weeks’ notice, with a written notice of intent to initiate litigation as a condition precedent to filing suit. Moreover, in a claim arising under an AOB agreement, the contractor now has the initial burden to demonstrate that the insurer is not prejudiced by the AOB contractor’s failure to maintain records of all services provided under the assignment agreement and cooperate in claim investigation, among other compliance requirements.

The landscape of AOB litigation will also be fundamentally affected by the insurer’s newfound ability to make available a policy prohibiting assignment, in whole or in part, under certain conditions. Such restricted policies will necessarily have to comply with various conditions, including alternative policy availability, specific bold face notices, and include an insured’s express rejection of a fully assignable policy. This alone is anticipated to reduce the number of lawsuits.

However, the most significant change is the dramatic revision to Florida’s one-way attorney’s fee statute, which previously applied to all AOB litigation, and encouraged the exponential growth in the number of lawsuits. The bill incorporates an attorney’s fee structure that compares the amount obtained by the plaintiff to the amount in dispute, to assess whether an AOB plaintiff or insurer will be liable for attorney’s fees incurred in the litigation. This fee-shifting mechanism was specifically designed to discourage attorneys from needlessly pursuing litigation over typically small amounts simply to incur more fees.

Even where the AOB contractor may otherwise be entitled to an award of attorney’s fees, the bill imposes additional obligations upon the contractor to maintain eligibility for such an award. These additional duties include providing the insured and the insurer with accurate and up-to-date revised estimates of the scope of work to be performed, and performing that work in accordance with accepted industry standards. The latter obligation is a very important change, as a vast amount of AOB claims exhibit haphazard or lackadaisical services that do not comply with any formal water mitigation or roof tarping standards, to support overpriced invoices that were ultimately presented to insurers for payment to invite the need to institute a lawsuit.

The responsibilities of a contractor do not end there. To further dissuade non-meritorious AOB claims from litigation, the bill requires contractors to submit to examinations under oath and recorded statements conducted by the insurer as a condition precedent to filing suit. Notably, the scope of questioning presented to the contractor must be limited to matters related to the services provided, the cost of the services, and the assignment agreement. Generally, AOB contractors would claim that they had no such responsibility, regardless of the policy language, and this presents an avenue for resolution of these claims without lawsuit or fee entitlement. As another as a condition precedent to filing suit under the policy, if required by the insurer, the contractor must participate in appraisal or other alternative dispute resolution method. In short, these provisions force a contractor to have meaningful correspondence with the insurer before filing suit. These conversations can be material in resolving claims early, and save insurers from the mounting fees of protracted litigation, which can inevitably benefit the cost of policyholder premiums.

Despite all of these additional burdens now placed upon a contractor filing suit on an AOB, insurance carriers must also comply with certain obligations in order to avail themselves of the fee-shifting mechanism. Timeliness is critical, and an insurer must respond in writing within 10 business days after receiving the notice of an AOB claim, and must inspect the property or provide written or oral authorization for repairs within 7 calendar days after the first notice of loss. In addition, insurers must report specified data on claims paid in the prior year under assignment agreements by January 30, 2022, and each year thereafter. It is clear that the state’s Financial Services Commission intends to confirm that AOB reform will ultimately benefit consumers by ensuring that insurers’ offset litigation costs lead to less expensive premiums for insureds. The AOB reform took effect on July 1, 2019.

Also worth noting is House Bill 337, which recently took effect and may have major repercussions on AOB agreements. House Bill 337, Section (23), states that notwithstanding House Bill 7065, Section (10) of the statute is effective upon becoming the law – i.e. May 24, 2019. Although the language of these statutes do not match exactly, our interpretation of the legislative history indicates that the legislature intended for Section (10) to go into effect on May 24, 2019. The greatest challenge to this argument is that Section (10) determines attorney’s fees based on the calculations derived from the difference between the “offer” and the “demand,” which falls under Section (9) and those requirements do not go into effect until July 1, 2019. This hampers our ability to calculate the disparity between the insurer’s presuit offer and the contractor’s demand.

Nevertheless, the new statute clarifies that an AOB contractor is prohibited from collecting attorney fees via Florida Statute 627.428. This change is unambiguous under Section (10) of House Bill 337.