When you buy a car for $20,000, you don’t expect a call from the dealer two months later saying hey, we just realized that’s actually a $30,000 car you bought. You owe us another $10,000.
But welcome to Florida’s property insurance market. Consumers say it’s not so funny when insurers seem to be able to reset whatever price they want months after a deal has been signed, backdated to the start of the policy, and come after them to collect the difference.
Homeowners like Leighton Williams call it “bait and switch” and an affront to the functioning of a healthy marketplace — to the extent one exists in South Florida.
Shopping around, he said he found a policy based on $353,000 coverage for a home in Palm Beach County. Three months later, he said, Florida Peninsula Insurance Co. raised dwelling coverage to $863,000, sending his annual premium shooting up more than $6,000.
Williams saw a “pointed example of an industry gone amok.”
Florida Peninsula officials declined to discuss individual policyholders, but said arriving at an appropriate cost to replace the home, if destroyed, is in everyone’s interest. Replacement values might need to rise to reflect home improvements, owners or agents might not have included all relevant information at first, and too little coverage can lead to disputes or lawsuits later, they said.
“Would it be reasonable for you to ask an insurer to cover the replacement of your Mercedes but only charge you for a Chevrolet?” said CEO Roger Desjadon in Boca Raton. “Would you call your health insurer and say you just want to buy coverage for infections but then expect them to cover a transplant?”
Insurers also say the cost to rebuild a home can be substantially higher than its market value — what the house might sell for now — or appraisals for tax purposes.
But here’s the rub: The system gives insurers a free hand to sign up customers at one price and reset the deal at another price, sometimes far higher. To the extent South Florida homeowners might have any choices at all, that can make a mockery of a consumer’s attempt to shop around and settle on the best policy for the best price.
An example from a different consumer and insurer in the county: Months after sign-up, the premium goes up to an amazingly exact round number. That gives the impression that the replacement value wasn’t reset by some scientific formula, but instead represented an arbitrary attempt to raise bills to some desired level.
It’s an issue to watch in an important moment for the South Florida insurance marketplace. Nearly 500,000 customers of state-run insurer Citizens are set to get offers to switch to private carriers by year’s end, potentially a record-setting exodus. In addition, at least two insurers (Security First, ASI Corp.) are actually decreasing rates because key costs such as reinsurance are coming down.
So the stage is set for a little more competition, based at least partly on price. That’s good. A key question, though, will be if consumers can trust the prices they are quoted if insurers feel free to reset them a couple of months into a policy.
Williams asked, “What is there to prevent insurance companies from changing the dwelling coverage after writing coverage?”
Not a whole lot, evidently. Florida regulators say there are rules that govern the setting of replacement costs for state-run insurer Citizens. But Office of Insurance Regulation spokeswoman Amy Bogner said, “We are not aware of any other statute that specifically addresses this issue.”
An insurer has 90 days to underwrite the risk, which would include determining the appropriate replacement cost, Bogner said. All insurers should offer some mechanism for the insured to contest the replacement cost amount, she said.
Consumers protested big premium increases after Citizens used software called 360Value to calculate replacement costs. Citzens eventually made clear it would accept certain other replacement valuations from licensed professionals.
So what can consumers do? First, don’t assume any proposed increase is set in stone and you have no choice. Pay attention to the policy notices or tell your agent to alert you immediately if replacement costs shoot up. Find out what alternative replacement values the insurer will accept. Find out how much of your paid premium you can get back if you have to shop around for a different carrier.
Replacement costs don’t come from the Oracle of Delphi or some single indisputable source. They’re based on different formulas and software programs whose results can vary. Homeowners may find it in their interest to get an independent idea of the cost to replace their home. If you’re happy with a higher replacement value, no problem. But with South Florida’s insurance prices, many homeowners see no point in paying for more coverage than they believe they reasonably need.
An insurer may find it worthwhile to use replacement-cost software that tends to raise premiums. Yes, a higher replacement cost could raise the potential payout if disaster strikes, and certainly a fire or a severe hurricane could level any given home. But most claims are for partial losses, not full replacement cost, even in big storms.
For his part, Florida Peninsula’s Desjadon doesn’t think the “bait and switch” characterization is fair. He’s all for improved communication: “The whole point is to have conversations with our agents and our consumers.”
Williams sees a systemic problem, though. As he views it, changing the price dramatically after sign-up works against a rational consumer’s attempts to make smart choices.
“There is no way the marketplace is able to determine a fair price when there is such manipulation,” he said.