Florida Report Finds Weaknesses in Citizens’ 2004 Hurricane Response

Friday, April 28th, 2006

TALLAHASSEE, Fla. November 08 (BestWire) – A report issued by the Florida Office of Insurance Regulation has identified several areas of weakness in the state-run homeowners insurer of last resort’s response to the 2004 hurricane season. The report also notes the corrective actions Citizens Property Insurance Corp. has since taken to address those problem areas.

The investigation was prompted by complaints made to the Division of
Consumer Services of the Department of Financial Services, according to a statement from the Insurance Office. By Dec. 31, 2004, 6,860 complaints about Citizens had been filed, about 6% of the total claims. A review was performed to verify the accuracy of Citizens’ filed hurricane reports with the office.

According to the report, Citizens handled a total of 116,122 claims stemming from hurricanes Charley, Frances, Ivan and Jeanne as of Jan. 25, 2005. Of these claims, 86% were closed, with $1.25 billion in losses paid. The report found a lack of dedicated resources to manage claims adjudication was “apparent” and that Citizens did not allow for proper monitoring of claims assigned to various adjusting firms, independent adjusters and Adjust-Your-Own firms. This lack of monitoring contributed to the “numerous” complaints received by the Department of Financial Services because the company could not provide the status of reported claims to policyholders.

In response, Citizens set up a Cat Center, which helped bring in 20
independent adjusting firms; implemented a new dispatch system to use adjusters more efficiently; re-evaluated its relationship with adjusters and took a more active management role in responding to policyholder questions, complaints, and managing claim closures; established a team of independent adjusters, supervised by team leaders, so more review of claims could be performed in-house; developed and implemented a new claims tracking system; and redesigned its adjuster fee payments and applied accounting principals
to reassess internal controls and processes.

In addition, the report found Citizens paid about $38 million for 2004
hurricane claims in the south Florida counties of Broward, Dade and Monroe, as of Jan. 25, 2005. A review of a sample of 30 of these hurricane claims was made to determine if these south Florida claims were justified. Emphasis for the sample collection was placed on hurricanes Ivan and Charley as both were less likely to have affected south Florida.

The report found seven of the 30 claims should have had additional review before Citizens paid the claim. Six claims received no additional review and one did receive additional review. The reasons the claims should have been reviewed were they were reported “substantially” later than the storm, the damage was possibly pre-existing, or no supporting documentation of the damage was made.

The report also found:

– Check stock at Citizens’ Cat Center was left on the printer when no checks were actively being printed;

– The company’s back-up data center is close enough to the main data center that a single storm could knock both out of commission; and

– The Tallahassee data center has no generator.

Citizens responded by tightening control over the check stock and in June 2005, hired a manager of disaster recovery and system security who is currently reviewing Citizens data centers and information technology disaster recovery plans.

Since the investigation, Citizens has changed its procedures for outsourcing claims to adjusting firms and improved the information available to its staff. The company has also upgraded its data collecting methods to ensure the data reported to regulators is correct and complete.

Attempts to contact Citizens for comment were not immediately successful.

An independent financial audit had found a $516 million deficit in Citizens’ high-risk account as a result of the four hurricanes that ravaged the Sunshine State in 2004 (BestWire, April 19, 2005). Citizens estimates its total losses from hurricanes Charley, Frances, Ivan and Jeanne at $2.2 billion, with $1.6 billion coming from the high-risk account. Earlier this year, Citizens approved a 6.8% assessment on all licensed property insurers in Florida to pay for the deficit (BestWire, Aug. 18, 2005). That cost will be passed on to all policyholders through higher rates. About 5.5 million policyholders in Florida would be affected by the surcharge (BestWire, April 19, 2005).

Citizens’ high-risk account writes wind-only coverage for homeowners living in Florida’s coastal areas, primarily in the southern counties of Dade, Broward and Palm Beach. The personal-lines account writes all perils, including hurricane coverage, for homeowners and condominium associations that can’t find coverage in the private market.

Citizens is also facing an investigation of allegations its former chief
operating officer took bribes and kickbacks (BestWire, Oct. 11, 2005). The allegations surfaced in an amended lawsuit Universal Risk Insurance Services Inc. filed in mid-September in Harris County, Texas District Court against Citizens; Paul Hulsebusch, Citizens’ chief operating officer; and Quantum Claim Service LLC. Universal Risk, which performed insurance adjusting services for Citizens after the 2004 hurricanes, alleges that Citizens’ owes it more than $1 million. But Universal Risk also alleges that Quantum and its owners, Rodney and Sonya Harrell, paid bribes and kickbacks to Hulsebusch. As of mid-September, “the bribes that have been discovered amount to literally thousands and thousands of dollars in goods and merchandise” purchased by the accused, Universal Risk’s suit contends.

About two days after Universal Risk provided evidence of the bribes and kickbacks to Citizens’ attorneys, Hulsebusch tendered his forced resignation to Citizens, according to the suit.

In 2004, the top five writers of homeowners multiperil in Florida were:
State Farm, with a 23.8% market share; Allstate, with 10.8%; Poe Insurance Group, with 6.5%; USAA, with 5.3%; and Nationwide Group, with 5.27%. (By Rick Cornejo, associate editor, BestWeek: rick.cornejo@ambest.com)
BN-NJ-11-08-2005 1127 ET #


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