Florida's homeowners' insurance crisis, part 5: Reader questions on roof deductibles and $2 billion reinsurance slush fund
July 8, 2022
Please share Letters from a Floridian with a friend! I have 57 subscribers receiving email so far, and more readers who view from Facebook and Twitter. Currently, I am writing intermittently due to our son Jonah's health issues and the impending birth of our second son within the next couple weeks, but I aim for each letter I write to be accurate and informative.
Today, I want to come back around to the homeowners' insurance crisis that I last wrote about on June 6, 2022. In this 5th part of my mini-series, I will answer 2 questions I received from a reader named Steve, who wrote:
Thank you for your series.
I do not understand the new limits on roofs. The newspaper said 2% of the value of your home and 50% of the value of the roof. Using numbers what does that mean?
For a $300,000 house with a $60,000 tile roof, is that insured for $6,000 or $30,000?
Second question: Where does the $2 billion in state reinsurance come from? State taxpayers? State bonds? Covid money from the Feds?
Thanx,
Steve
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For the first question, which will be the bulk of today's letter:
I had to look into this, not being an expert on homeowners' insurance. The new Florida law takes effect for policies issued or renewed after July 1, 2022. The Florida legislature created a new option to have a separate deductible for roof damage requiring the whole roof to be replaced. This deductible cannot exceed the lesser of 2% of dwelling coverage or 50% of the cost to replace the roof.
I am using an article published on May 31, 2022 by an attorney named William Collum, a partner at Butler Weihmuller Katz Craig LLP in Tampa. I have included the article as the first hyperlink in today's Notes. Collum explains that the separate roof deductible requires the insurance company to offer a premium credit or discount. It supersedes other deductibles in cases where the whole roof needs to be replaced. But, if the damage is due to a hurricane, a "tree fall or other hazard that damages the roof and punctures the roof deck," or repairing less than 50% of the roof, then the roof deductible would not come into play.
Thus, to answer Steve's question, if your home has $300,000 of dwelling coverage under a policy with a roof deductible, and the replacement cost of the tile roof is $60,000, that would mean that the maximum roof deductible would be the lesser of 2% of dwelling coverage ($6,000, in this case) or 50% of the roof's replacement cost ($30,000, in this case). The lesser of $6,000 and $30,000 is $6,000, so $6,000 would be the maximum allowable roof deductible. This would mean that you would be on the hook for the first $6,000 of cost to replace the roof.
Collum goes on to write that "if a separate roof deductible applies, the insurer may limit the claim payment to Actual Cash Value of the roof until the carrier receives reasonable proof of payment of the deductible." This allows the insurance company to demand a copy of a canceled check, credit card statement, or other financing arrangement to show that you paid the deductible ($6,000 in our hypothetical scenario) before the will pay for the full cost of the new roof. The "actual cash value" of an existing roof would be much less than the cost of a new roof.
An aside on "actual cash value": Think about how with collision and comprehensive auto insurance, they will only pay up to the value of the car, which may be quite a bit less than how much you paid for the car / financed due to depreciation (in normal times—the past couple years have been unusual with used cars going up in value). Some people purchase "gap insurance" so that if their car is totaled, they can pay off the loan fully with the insurance settlement. This may be required by your lender if you did not make a large down payment on the car, similar to how private mortgage insurance (PMI) is required by most lenders until you pay off 20% of the purchase price of the home.
Overall, the separate roof deductible is just an option, and insurance companies could decide to not offer the option at all and stick with the standard deductibles for hurricanes and "all other covered perils," without adding this 3rd deductible. Or, they can choose to offer both types of policies. The law provides that you can sign a form to opt out of a separate roof deductible. Of course, it could be expensive to do so (higher premium).
There are other interesting provisions in the law that prohibit insurance companies from refusing to issue a policy due to (a) the roof being too old if the roof is less than 15 years old, or (b) if older than 15 years, the homeowner can pay for a roof inspection and if the inspector says the roof has 5 or more years of useful life remaining, the insurance company cannot refuse to issue the policy for the reason of the roof being too old. To me, this almost sounds like the Affordable Care Act ("Obamacare") for the pre-existing condition of having an older roof, which has been a frequent rationale for insurance companies to refuse a customer. But, it doesn't seem like the legislature fully pondered the potential negative consequences to homeowners and it is debatable whether these new provisions will lower premium costs.
Regarding the second question, on source of funds for the state's new $2 billion reinsurance fund:
Laura Cassels writes in the Florida Pheonix: "The source of the $2 billion fund, titled, 'Reinsurance to Assist Policyholders,' is general revenue, meaning taxpayer dollars may be used to pay claims in the event of a catastrophe such as a major hurricane."
Chris Gray of Roofing Contractor writes: "The $2 billion in reinsurance funding the law provides helps insurance companies share risks, which decreases the risk that a company becomes insolvent after being hit with massive amounts of storm damage claims."
So, this is actually one of the taxpayer-funded wealth redistribution schemes that so-called "small government" Republicans typically criticize, yet here they have implemented one. The risks are getting bigger, but the developers want to continue making their money while offloading the risk onto the public purse. Typically, these risks are offloaded onto the homeowner, but to sell the home, the developers need the homeowner to be able to get a mortgage and insurance on it. Building homes that cannot be financed is not a winning strategy. Creating a $2 billion taxpayer slush fund is a huge bailout to the developers, who are already doing quite well. I am seeing online that Google's favorite definition of "slush fund" is "a reserve of money used for illicit purposes, especially political bribery." The developers fund Governor DeSantis and the Republican majorities in the Florida House and Senate, which is basically legal bribery.
We get bailouts already, but they are usually from the federal government which can do deficit spending, unlike the State of Florida. The creation of the new $2 billion slush fund is aided by federal COVID money which covered billions of dollars in state expenses. So, the general revenue fund had more money in it this year than it would have without the infusion of federal funds. But, this $2 billion could have been spent on something else, like homelessness and affordable housing, teachers, environmental conservation, et cetera. But, those groups aren't contributing tens of millions of dollars to the campaigns of our elected officials, so they don't get the gravy train.
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Notes:
https://www.jdsupra.com/legalnews/what-you-need-to-know-about-recent-3133890/
Prior letters in this mini-series:
June 6, 2022: Florida's homeowners' insurance crisis, part 4: The climate crisis and predatory over-development
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June 3, 2022: Florida's homeowners' insurance crisis, part 3: Litigation reform
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June 1, 2022: Florida's homeowners' insurance crisis, part 2: Moral hazard
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May 31, 2022: Florida's homeowners' insurance crisis, part 1: Background
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Letters from a Floridian is a new newsletter by Dr. Richard Thripp of Volusia County, Florida, modeled after Professor Heather Cox Richardson's Letters from an American, with a focus on the corruption and authoritarian ambitions of Republicans in Florida—most notably Governor Ron DeSantis. Dr. Thripp was born and raised in the Daytona Beach area and is an accomplished educator, former Republican, husband and father, former congressional candidate, and former Chair of the Volusia County Democratic Party.