The powerful hurricanes that struck the nation’s Gulf Coast and Southeastern states in recent years remain an undying memory for those who survived the fierce gales.
In Florida, recovering from the financial blows wreaked by the disasters has been equally tough. Scores of commercial interests are bereft that many insurance companies will no longer pledge support to salve the financial wounds that will rise from a natural disaster, leaving building owners and their tenants frantically searching for carriers willing to take on risk in a state constantly ravaged by fierce storms. According to C. Graham Carothers, Jr., a partner in the Real Estate and Institutional Lending Practice Group at Shumaker, Loop & Kendrick LLP, insurance issues are headed to court.
Smart Business spoke with Carothers about the challenges faced by Florida’s legal community due to the recent rash of weather-related damage.
How have insurance and real estate disputes impacted your firm and the legal community at large?
In our state, a commercial building owner typically passes through the cost of property taxes and insurance to tenants on a pro rata basis. We have seen cases where tenants are called in default under their leases because they have been unable to pay the increased insurance costs. Commercial lenders are not always willing to negotiate with their borrowers when it comes to the coverage levels required under existing mortgages, and many require ‘full replacement value’ coverage, which under the new underwriting models require much higher coverage levels than have been required in the past. Many in the commercial sector have resorted to self-insuring when allowed by their lenders, or to seeking coverage from international underwriters due to the crisis faced by domestic insurers.
We have seen some cases in which tenants, property owners and borrowers are in situations where enforcing existing obligations would be commercially unreasonable and/or impossible to perform.
These disputes are of a different type than what we’ve historically faced. We certainly do everything possible to avoid litigation, but these issues have started to spark litigation in many circumstances. In instances where tenants or potential buyers try to negotiate, landlords and lenders are not always willing to.
Under these difficult conditions, how must the businessperson plan his efforts to do business in Florida?
Several months ago, our state government created a special committee of businesspeople, insurance industry representatives and government officials to study the situation and issue a comprehensive set of findings and recommendations to the governor. The committee’s report may recommend a special legislative session specifically devoted to addressing the current crisis.
Until then, property owners, investors and commercial tenants all need to focus on the cost of insurance in budgeting for the coming years. The biggest challenge in selling, leasing and financing property in Florida today is obtaining adequate insurance coverage at prices that make sense.
How then do businesses manage to operate in a state that is routinely touted as one of the nation’s fastest-growing?
It is becoming increasingly difficult for many property owners. The state-run and state-subsidized program, Citizen’s Insurance Co., was designed to be an ‘insurer of last resort,’ but is now viewed as one of the very few available options for many people. The huge payouts following the hurricanes of the last two years, which amounted to billions of dollars, revealed that many properties were underinsured and thus resulted in the modifications to underwriting risk models used by insurers. At the same time, premiums for windstorm coverage have climbed by 200 percent or more in the last year.
In my own practice, we have seen a number of commercial transactions fall through in the last few months because either the buyer is unable to secure property insurance or the costs of obtaining such insurance is prohibitively expensive. It often takes weeks to obtain binders for property coverage whereas in previous years insurance could have been bound within a few days.
What recommendations are you making?
We’ve been making recommendations that buyers allow enough time in their due diligence period to shop around for insurance, because it’s taking more time than it has in the past. We also recommend that they try to get quotes for property insurance before they spend large sums of money on other due diligence issues.
The experts are saying that there are no easy solutions for the insurance crisis; we'll have to fix this over the course of a few years.
C. GRAHAM CAROTHERS, JR., is a partner at the Tampa offices of Shumaker, Loop & Kendrick LLP. Reach him at (813) 227-2349 or at email@example.com.