When Insurance Is Too Good To Be True

With the 2013 hurricane season upon us I can’t help but think about how some insurers over the years of my career have touted themselves in ways contrary to the rest of the industry, perhaps suggesting that they could offer significantly lower prices or broader coverage or write coverage in places or ways their more established, experienced, competitors could not accomplish. What did (or does) these insurers know that the more established ones didn’t? As consumers we all want (and deserve) the best value for our dollar possible but when it comes to insurance, as much as anything I’ve seen in my life, when what an insurance company offers sounds too good to be true it usually, unfortunately, is just that.

The insurance graveyard is filled with insurers that offered seemingly wonderful costs, coverage or other benefits that their competitors could not, or would not, offer. Perhaps their rates were substantially lower. Perhaps they wrote coverage on or near the water at a time when the rest of the industry said would have said ‘no thanks’. A business called Poe Financial Group and their various insurers such as Atlantic Preferred, Florida Preferred and South Family Insurance Company) comes to mind. At the start of the last decade their sales people called on our office three times and in each case they touted much lower rates, being able to write coverage in ways and places others generally would not. Heck, they even offered to pay us more than what other insurers pay. They were a young, rapidly, growing business and in each of those visits, year after year, I thanked them for their interest in our agency and clients but suggested we would wait to allow them to gain more experience. They understood my answer the first time.

The second year they visited they were baffled over why we did not accept a contract with them. By year three they had begun aggressively writing condo and home associations in addition to homeowner’s and were doing so with rates well below the established experts in the industry. Now we are all for low rates but we are also more in favor of insurers that can pay their bills when our clients’ have claims.

The four central Florida hurricanes of 2004 nearly put Poe out of business, and the storms in 2005 did just that. Hundreds of thousands of Poe policies had no choice but to flee to Citizens, the state’s insurer of last resort. Also, many were left without coverage, due to the damage that they had suffered from that year’s hurricanes; damage that their ‘cut rate’ insurer would never pay due to its bankruptcy. Countless condo and home associations also suffered the same fate. Their Board, seduced by short term below market costs, and the promise of broad coverage, beyond what established insurers found prudent to offer, were left without insurance and in many cases with claims, but no insurer to pay them. It was a financial disaster for many consumers, on top of the impact of the natural disaster’s destruction.

Morris & Reynolds never did accept a contract with Poe Financial and for a year or two we even lost a few clients to Poe and the agents who touted their cut rate costs. Most of those client’s came back to us after their insurer failed, as did a number of new clients who wondered why their agent had so aggressively suggested such a new company, without sharing the reality of their possible risks with them in more detail.

Late last year we published a newsletter entitled When Insurance Is “Too Good To Be True” and in it outlined a few examples of insurers that for a short time did one thing while the rest of the industry did another only to fail financially when their policyholder’s most needed them. To learn a bit about what insurer’s do, some of their traits, that can lead to trouble in our experience it is a short overview you might find interesting. When you review your own insurance company some things to consider in our experience include the following;

1) Admitted Versus Excess & Surplus Lines

When possible, and admittedly it’s not always possible for some risks, using a ‘standard and Admitted’ insurer is nearly always best. Admitted insurers are subject to regulation oversight by the state on things such as rates and coverage. In the event of a dispute an Admitted insurer can be investigated by the state insurance department when a consumer files a complaint against them. And, in the event of insolvency, an Admitted insurer is typically protected by a state’s guarantee fund such as the Florida Insurance Guarantee Association (FIGA) here in Florida. FIGA backs failed Admitted insurers up to $ 500,000.00 for most policies which offers peace of mind when using an Admitted insurer, especially a younger one.

2) An Insurance Company’s Financial Rating

Insurers are rated by a number of independent businesses such as A.M. Best & Company (the oldest), Demotech, Moody’s, Standard & Poor’s and Weis. Reviewing an insurance company’s A.M. Best Rating and Outlook is always highly suggested.

3) Experience & Reinsurance Counts

Florida’s windstorm challenges ever since Hurricane Andrew visited in 1992 makes for a unique market for property insurance. Oddly, the largest home insurers in our state is the state itself via its insurer of last resort, Citizens Property Insurance Corporation. After Citizens many of the other writers of home, condo and renters policies (as well as certain commercial and also stand alone windstorm) are younger insurers that were formed to fill the gap that larger, well known, insurers created when they ceased writing, or dramatically reduced the amount of, coverage they would offer. As such, it’s wise to consider the experience of such insurers, review their financial statements to consider their assets and surplus, consider the experience of their executives and ask questions about the amount and quality of their reinsurance, the device that all insurers use to spread their risk of loss within a global marketplace of insurance for insurance companies.

Here’s to hoping that the 2013 storm season is uneventful for you. Should you have any questions about your insurance company, or coverage, or anything else we would be happy to help and invite you to call (305.238.1000), stop by or visit us at morrisandreynolds.com.

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14821 South Dixie Highway, Miami, Florida 33176
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