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Florida's AOB disaster: a microcosm of social inflation

Never heard of "social inflation"? It is a fancy term to describe rising litigation costs and their impact on insurer claims payments, loss ratios and ultimately the amount of policyholders to cover.

The number of nationwide autobla AOB lawsuits was over 3,800 in 2013; by 2017 this number had grown to over 20,000.

While there is no generally agreed definition, frequently mentioned aspects of social inflation are growing awards from likeable juries and a trend called "litigation funding", in which investors pay plaintiffs to sue large companies – often insurers – for participating in the settlement .

Government initiatives that inadvertently lead to costly abuse are less discussed. The Florida crisis allocation is an excellent example.

Allocation of benefits (AOB) is a standard insurance practice and an efficient, customer-friendly method of claim settlement. For the sake of convenience, a policyholder has a third party – for example an auto glass repair company – bill the insurer directly.


However, legislative wrinkles have triggered a crisis in Florida.

The state law “David and Goliath” should improve the competitive conditions between policyholders and economically strong insurers. This allows plaintiffs' lawyers to charge the insurer if they win their case – but not the other way around. If the insurer wins, the plaintiff owes the insurer nothing. This creates an incentive for lawyers to file thousands of AOB-related lawsuits because the fees they can charge are unlimited and there is no risk. Legal costs can outshine the actual damage paid to the policyholder – sometimes tens of thousands of dollars for a single claim for compensation.

AOBs are an efficient and customer-friendly way of settling claims. However, legislative wrinkles have triggered a crisis in Florida.

This type of arrangement is unique in Florida. And despite efforts to contain it through reforms of the state's Personal Injury Protection Program (PIP), the abuse has expanded beyond its origins in the southern part of the state to areas other than personal auto and homeowners insurance. In 2018, more than 153,000 AOB lawsuits were filed in Florida – an increase of 94% compared to around 1,300 five years ago.

A contributor to the crisis is the ease with which unscrupulous contractors can find and make claims that are unrelated to an insured incident or overtime for work done. Florida law allows policyholders to transfer benefits to third parties without the insurer's consent. This limits the insurer's ability to monitor a claim to ensure that costs are not inflated.

A measure legally signed by Governor Ron DeSantis Earlier this year, it aimed to curb AOB legal disputes by placing new demands on contractors and offering insurers policies with limited or no AOB rights. Auto glass repairs are excluded. The number of nationwide autobla AOB lawsuits was over 3,800 in 2013; by 2017 this number had grown to over 20,000.

Florida's experience provides an ongoing study of how difficult it can be to put the spirit of social inflation back in the bottle.

For more details, see I.I.I.'s white paper, "Florida's allocation of benefit crises: outlier litigation spreads and consumers pay the price."

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