Florida’s AOB Crisis: A Social-Inflation Microcosm

Never heard of “social inflation”? It’s a fancy term to describe rising litigation costs and their impact on insurers’ claim payouts, loss ratios, and, ultimately, how much policyholders pay for coverage.

The number of auto glass AOB lawsuits statewide in 2013 was over 3,800; by 2017, that number had grown to more than 20,000.

While there’s no universally agreed-upon definition, frequently mentioned aspects of social inflation are growing awards from sympathetic juries and a trend called “litigation funding”, in which investors pay plaintiffs to sue large companies – often insurers – in return for a share in the settlement.

Less discussed are state initiatives that inadvertently invite costly abuse. Florida’s assignment of benefits crisis is an excellent example.

Assignment of benefits (AOB) is a standard insurance practice and an efficient, customer-friendly way to settle claims. As a convenience, a policyholder lets a third party – say, an auto glass repair company – directly bill the insurer.

Easy.

In Florida, however, legislative wrinkles have spawned a crisis.

The state’s “David and Goliath” law was meant to level the playing field between policyholders and economically powerful insurers. It lets plaintiffs’ attorneys collect fees from the insurer if they win their case – but not vice versa. If the insurer wins, the plaintiff owes the insurer nothing.  This creates an incentive for attorneys to file thousands of AOB-related suits because there is no limit on the fees they can collect and no risk. Legal fees can dwarf actual damages paid to the policyholder – sometimes tens of thousands of dollars for a single low-damage claim.

AOBs are an efficient, customer-friendly way to settle claims…. In Florida, however, legislative wrinkles have spawned a crisis.

This type of arrangement is unique to Florida. And, despite efforts to contain it through reforms to the state’s personal injury protection (PIP) program, the abuse has spread beyond its origins in the southern part of the state and to other lines than personal auto and homeowner’s insurance. More than 153,000 AOB suits were filed in Florida in 2018 – a 94% increase from about 1,300 five years earlier.

Contributing to the crisis is the ease with which unscrupulous contractors can “find” damage unrelated to an insured incident or overbill for work done and file a claim. Florida statutes let policyholders assign benefits to a third party without insurer consent – which limits the insurer’s ability to monitor a claim to make sure costs aren’t inflated.

A measure signed into law by Gov. Ron DeSantis earlier this year aimed to curb AOB litigation by putting new requirements on contractors and letting insurers offer policies with limited AOB rights, or none at all.  However, it excludes auto glass repairs. The number of auto glass AOB lawsuits statewide in 2013 was over 3,800; by 2017, that number had grown to more than 20,000.

Florida’s experience provides an ongoing study into how hard it can be to stuff the social inflation genie back into its bottle.

For more details, see I.I.I.’s white paper, “Florida’s Assignment of Benefits Crisis: Runaway Litigation Is Spreading, and Consumers are Paying the Price”.