ATLANTA -- The Florida Legislature last week set up a state fund that can be used to back bonds sold to bail out insurers deluged by hurricane claims.
According to the Florida Hurricane Catastrophe Fund Act, money for the fund will come from each premium payment that property and casualty insurers collect in Florida.
Florida officials expect to take in about $500 million a year that way, although the state has not yet decided what slice the fund will take out of a given insurance payment. The state's Board of Administration, which will manage the fund, plans to select a consultant who will determine that.
The act allows the fund to pay debt service for revenue bonds if borrowing is needed to cover hurricane claims presented to insurers. The bonds would be sold by local governments in Florida whose citizens have been victimized by storm damage.
The bill was passed last Tuesday during a seven-day special legislative session that focused on insurance and workers' compensation. It was signed into law by Gov. Lawton Chiles on Wednesday.
The public was outraged when insurers could not cover the $16.5 billion of claims prompted by Hurricane Andrew, which struck south Florida in August 1992. At least nine Florida-based insurers went bankrupt because of the storm.
Second Safety Net
The fund adds a safety net to the one provided by the Florida Insurance Guaranty Association, a nonprofit corporation that backstops insurers in the event of catastrophes. In February, the guarantee association backed a $470 million issue of special insurance revenue bonds sold by the City of Homestead to pay off unpaid claims.
"The state's new hurricane catastrophe fund can be used to bond money so that if there is another storm, the immediate costs of a storm can be covered," said Jill Chamberlin, spokeswoman to Florida's treasurer and insurance commissioner, Tom Gallagher.
Gallagher originally proposed the concept of an insurance catastrophe fund this spring, but legislative sources said lawmakers did not prove receptive until they were able to catch their breath after dealing with a heavy load of issues at the start of the year.
Chamberlain stressed that the new law contains safeguards to prevent the state or local governments in Florida from being on the hook for bonds sold on behalf of the fund.
Neither state nor local funds in Florida can be used to secure the catastrophe fund bonds, according to the act.
However, the measure does give the fund broad discretion to arrange for debt issuance.
"Upon the occurrence of a hurricane, and a determination that the moneys in the fund are or will be insufficient to pay reimbursement at the levels promised in the reimbursement contracts, the board shall enter into agreements with local governments for the issuance of revenue bonds," the law says. "The board may also enter into such agreements in the absence of a hurricane upon a determination that such action would maximize the ability of the fund to meet future obligations."
Legislative sources said Friday that lawmakers rejected a provision whereby the fund would be financed by an outright surcharge on premiums.
However, if money on hand is not sufficient to cover debt service on bonds sold, the fund will be able to levy from property-casualty insurers an emergency assessment of 2% of gross written premiums.
Such annual assessments would continue until bonds are retired.
The fund will reimburse insurers for 75% of hurricane losses when they exceed twice the insurers' total premiums from policies written the earlier year.
Under the bill, guidelines for contracts with insurance companies will be set Feb. 1, with an initial premium formula actually set by March 1. The contracts themselves will take effect on June 1.
Limit on Cancellations
Florida lawmakers also passed legislation last week to limit insurers' cancellation of policies following natural disasters.
Under the legislation, an insurer could cancel up to 10% of its policies in a given county, but only 5% of its policies statewide. In addition, insurers must give 90 days' notice before canceling policy. Previous law had set the notice period at 45 days.
The measure was prompted by public anger after insurance companies announced plans to reduce their exposure by canceling 844,000 policies following Hurricane Andrew. Without the legislation, a six-month moratorium on cancellations would have expired Nov. 15.
The insurance bills "included some important steps to make certain that insurance companies that operate in the state are solvent, healthy, and stable," according to a statement released by the governor's office.
Lawmakers also passed, during the special session, legislation that reforms the workers' compensation system to save businesses in the state about 25% on the cost of this coverage.