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TAMPA, FL, March 23, 2011 — With property insurance, things are done differently in Florida—and one of those differences is being highlighted by the current legislative debate over how insurers are directed to pay claims to policyholders who purchase replacement cost coverage.

Florida appears to be the only state that requires insurers to pay upfront for replacement cost coverage, while other states allow insurers to hold back a portion of the claim until property actually is repaired or replaced. This difference is causing the average loss per policy to rise and is a contributing factor to rising property insurance costs, according to the Insurance Information Institute.

Replacement cost coverage has historically been priced to match payouts to receipts. This is a basic insurance principle of indemnity, which is defined as financial compensation sufficient to put a policyholder back in the same financial position as before the loss. Ignoring that principle is costing all Floridians more money for property insurance because it is driving up the average cost of a claim. For example, with sinkhole claims, insurers are paying the full limits of the policy, rather than only for necessary repairs, which is causing total claims payouts for sinkholes to exceed the premiums being collected for the coverage.

“Insurers establish their premiums by reviewing their loss history, and when the average cost of claims keeps rising, then rates have to rise to make sure enough money is on hand to follow that trend,” said Lynne McChristian, Florida representative for the I.I.I.

Ignoring the principle of indemnity means that people are being compensated for an amount exceeding their economic loss. This is further compounded in Florida because current law does not require policyholders to use their claims check for its intended purpose. The result is many damaged homes are not being repaired, according to property appraisers in “sinkhole alley” counties.

Outside of Florida, insurers pay actual cash value on a claim, which takes depreciation into account, and then pay the full amount when repairs or rebuilding occur or when a policyholder turns in receipts for replacing possessions that were damaged, destroyed or stolen. That is the way it worked in Florida until four hurricanes hit in 2005. That year, the Florida Legislature responded to public concerns over claim payment delays by passing a law to have insurers pay full replacement cost benefits upfront to policyholders who purchased such coverage. But because the law did not require people to repair their property, some did not.

“Redefining how replacement cost coverage is paid may have sounded like a good idea, but it has the unintended consequence of driving up the cost of insurance,” said McChristian.

In every other state, except Florida, people have two options when it comes to insuring their property and possessions. They can purchase coverage for:
  • Actual cash value which pays to replace a home or possessions, minus a deduction for depreciation, or
  • Replacement cost coverage which pays the cost of rebuilding or repairing a home or replacing possessions without a deduction for depreciation.