State creates backstop to protect home insurance coverage

Florida homeowners won’t lose their insurance coverage or face force-placed policies if their insurers lose their financial stability ratings — at least through the hurricane season.

The Florida Office of Insurance Regulation today announced that the state, through the Florida Insurance Guaranty Association and state-run Citizens Property Insurance Corp., will offer 100% backstop coverage of any claim left unpaid by an insurer that goes bankrupt. The temporary program will be in effect through hurricane season, which ends on Nov. 30.

In a news release, the office said the pledge satisfies an exception to mortgage loan requirements by federally backed loan guarantors Fannie Mae and Freddie Mac that borrowers must maintain coverage with A-rated underwriters.

If insurers’ ratings slip below an A, Fannie Mae and Freddie Mac required mortgage lenders to force-place expensive coverage on properties if homeowners are not able to purchase A-rated replacement policies immediately. Fannie Mae and Freddie Mac back a majority of home loans in Florida and nationwide.

But Fannie Mae and Freddie Mac each offer an exception “for an insurer who assumes, by endorsement, 100 percent of the insurer’s liability for any covered loss payable, but unpaid by the insurer, by reason of insolvency,” according to the release.

“This innovative arrangement satisfies requirements set by the secondary mortgage market,” Florida Insurance Commissioner David Altmaier said in the release.

“In the event we need to implement this temporary solution, consumers will not need to seek coverage elsewhere, agents will not need to move policies, and lenders can have confidence that these insurers continue to meet the mortgage qualifications.”

The arrangement, which creates what’s known in the insurance industry as a “cut-through endorsement,” is an “elegant solution to a very disruptive problem that could potentially affect millions of policyholders,” said Paul Handerhan, resident of the Federal Association for Insurance Reform , the Fort Lauderdale-based consumer-focused watchdog group.

A “cut-through endorsement” is applied “when you have a company that’s a credit risk,” he said. “You can buy a policy that would guarantee meeting the obligations of that policy.”

In this case, several events would have to occur for the state to have to cover a total loss, Handerhan said.

First, the insurer’s financial stability rating would have to be downgraded. Second, the company would have to go insolvent. Third, the company would have to have open and existing claims.

Under existing protections, the Florida Insurance Guaranty Association is required to cover individual losses up to $500,000.

The extra level of protection would make Citizens liable for any amount of the loss exceeding $500,000.

Citizens, the state’s insurer of last resort, currently has $6.7 billion in reserves and with reinsurance, $11.3 billion in claims-paying ability, Citizens spokesman Michael Peltier said.

So while the likelihood that the state will have to pay the additional loss amount is small, the program guarantees to Fannie Mae and Freddie Mac that properties they back are 100% covered.

“It gives loan servicers the confidence that at the end of the day, they’ll be made whole,” Handerhan said. “There’s no reason for force-placed policies if the claims are guaranteed by the state.”

morning update


Start your day with the top stories in South Florida.

Altmaier’s office announced the program in the wake of a crisis triggered by ratings agency Demotech’s letters informing 27 Florida-based insurers that their A ratings, which stands for Exceptional or Unsurpassed, would be downgraded on July 26. The downgrade would place hundreds of thousands or perhaps millions of homeowners out of compliance with Fannie Mae and Freddie Mac’s loan terms.

Altmaier and Chief Financial Officer Jimmy Patronis publicly released letters on Thursday blasting Demotech and demanding to know whether the Ohio-based firm was basing its decision on assessments of the overall health of Florida’s insurance market rather than the quantitative methodology it has used in the past.

On Monday, Demotech CEO Joe Patronis announced it was delaying decisions to downgrade or affirms insurers’ ratings while it reviewed additional information provided by affected insurers.

Demotech also felt a lengthy response to the office outlining its methodology and contending that it has not departed from its historical method of analyzing firms’ financial stability.

Today’s release by the office acknowledges Demotech’s response but said it provided no timetable for its ratings decisions.

“The sudden loss of an acceptable Financial [Stability] Rating would have a significant and adverse impact on Florida’s insurance consumers, insurers, agents and property insurance market. OIR is remaining committed to protecting Floridians and the property insurance market under this plan,” the release said.

Ron Hurtibise covers business and consumer issues for the South Florida Sun Sentinel. He can be reached by phone at 954-356-4071, on Twitter @ronhurtibise or by email at

Leave a Reply

%d bloggers like this: