In Florida, non-catastrophic damages such as water leakage during a rain storm can be insured. When a homeowner faces insured damages, he or she will call a contractor to mitigate further damage and repair the original damage. The homeowner is usually offered an assignment of benefits (AOB) form that appoints the contractor to fix the problem and receive the insurance payment due to the insured party for the claim. The contractor will bill the insurance company and if unsatisfied by the insurer’s proposed payout, the contractor will engage an attorney who will push the claim through negotiations and likely through a court case as needed.
Under the American Rule for litigation fees allocation, each party pays his own lawyer fees. This is the norm for the majority of civil litigation in the U.S. The American Rule aligns each party’s litigation costs with the degree of aggressiveness he chooses. A party who conducts an extensive search for evidence and expert testimony preparation does so knowing that he may need to pay for all that work if he does not prevail in court. The net effect of the American Rule is a more rational set of choices by the parties when incurring litigation costs.
Some exemptions to the American Rule have been chosen to accomplish public purposes. For example, a fee allocation rule that gives an advantage to plaintiffs would “induce private plaintiffs to enforce statutory objectives.” Such an advantage might also be given to plaintiffs with fewer resources than the defendants, thereby correcting the relative disadvantage of an impoverished litigant. There have been 2,000 statutory exemptions to the American Rule in the U.S.
Another fee allocation approach sometimes used in the U.S. is the English Rule where the “loser pays” litigation fees incurred by both parties. The prospect of paying for all litigation fees can be daunting when a party is outmatched in resources by his opponent. The English Rule tends to discourage frivolous cases, and those seeking resolution through a court case unless the party is very confident in his chances of winning. The English Rule will reduce court congestion.
A notorious approach to fee allocation is the Florida one-way attorney fee (Statute), which mandates that attorney fees be paid by the insurer if a claim is found to have been underpaid by any amount. This threat reduces the incentive to negotiate a settlement, however this Statute is designed to be policyholder protection because it gives policy holders an advantage against their casualty insurance companies.
The Statute encourages abuse by trial lawyers and vendors who obtain an AOB from a policyholder and then sue the insurer. Under the Statute there is no incentive for the water-damage remediation workers to constrain the hours of work they charge for and there is little incentive for constraining the billable hours that attorneys book against the case. Excessive charges are the norm in these one-way attorney fee cases. In effect, the Statute provides the plaintiffs’ attorney and water remediation contractors a license to pillage.
Another AOB Statute problem is that assignees have no responsibilities or duties under the policy, they are not required to communicate with the insurer to allow the insurer to understand the details of the AOB claim. Such details are necessary for insurers to adequately make a proposal for settlement.
Assignment of Benefits abuse in Florida has skyrocketed over the last several years, driving up litigation costs and property insurance rates across the state. In 2017, AOB litigation was 60% of all insurance litigation. The industry says the abuse is being led by attorneys working with unregulated water damage remediation firms.
The excessive fees charged to insurance companies are covered by consumers, of course. Some of the excessive fees become part of the price increases for subsequent year casualty insurance premiums. The shortfall will become part of the assessment that Citizens Property Insurance Corporation is permitted to levy against all Florida insurance policyholders (home, renters, auto, commercial, etc.). In other words, AOB one-way fees are privatized to benefit AOB lawyers, and the costs are socialized to burden all Florida insurance customers. This cannot be what the Florida Legislature intended, but this travesty is what has resulted from an AOB Statute run amok.