The Regulatory Blind Spot: How Insurance Departments Fail to Detect Systemic Bad Faith Claims Practices

Recent investigative reporting by CBS’s 60 Minutes, noted in CBS 60 Minutes Exposes Alleged Insurance Company Fraud: Adjusters Reveal Altered Hurricane Damage Estimates by Claims Management, has exposed alleged widespread underpayments of claims and unethical claims practices in Florida’s property insurance industry. This exposé raises serious questions about the effectiveness of state insurance regulators, particularly the Florida Department of Financial Services (DFS) and Office of Insurance Regulation (OIR), in detecting and preventing systemic bad faith practices by insurers. As an attorney who has spent decades representing policyholders against insurance companies, I have long observed the limitations of regulatory oversight in this arena. The 60 Minutes report confirms what many of us in the field have suspected – that state insurance departments often lack the sophistication, resources, and perhaps even the will to uncover deeply entrenched patterns of wrongdoing by insurers.

The CBS 60 Minutes Bombshell

The 60 Minutes investigation featured whistleblowers alleging that several Florida insurance carriers, including Heritage Insurance, systematically altered damage reports to drastically reduce payouts to policyholders after Hurricane Ian. One insurance company adjuster claimed that 44 out of 46 of his Hurricane Ian reports for Heritage were adjusted to give policyholders less money, with one estimate slashed from $488,000 to just $13,051.

These allegations point to a potential pattern of deliberate underpayment of claims on a massive scale. If true, such practices would constitute egregious bad faith conduct by insurers. Yet despite the gravity of these claims, Florida’s insurance regulators appear to have been caught flat-footed, with no indication they were aware of or investigating such widespread malfeasance prior to the 60 Minutes report.

Regulatory Incompetence or Willful Blindness?

The failure of the Florida DFS and OIR to detect these alleged fraudulent practices raises troubling questions about the competence and effectiveness of insurance regulators. As I noted in a recent blog post, Florida’s Insurance Company Fraud Investigations: A Crisis of Public Trust (With a Side of Absurdity), there are serious concerns about the ability of these agencies to properly investigate wrongdoing.

In one almost comical example of regulatory ineptitude, I found myself having to provide DFS investigators with the cell phone numbers of whistleblowers they claimed they could not locate – despite these individuals having given sworn testimony to the Florida legislature. If state regulators and their investigators cannot even perform basic investigative tasks like locating key witnesses, how can we expect them to unravel complex insurance fraud schemes? Do they know what they are doing and how to generate evidence of wrongful claims processes? Do they even know what a wrongful claims process is because they have never been educated about this field?

This incompetence appears to extend beyond just investigative capabilities. In a bizarre incident, the Chief of the Bureau of Investigation for the DFS Division of Insurance Agent & Agency Services filed a bar complaint against me, alleging I did not have a Florida license to practice law. As someone who has been a member of the Florida Bar since 1983 and has practiced insurance law in the state for four decades, was appointed to the Citizens Insurance Company Review Task Force as a lawyer representing policyholders, testified in numerous Florida legislative hearings and publicly have been writing this blog for nearly 20 years, I found this accusation both baffling and deeply concerning. It speaks to a fundamental lack of basic fact-checking, due diligence and keeping up with the events and subtle issues within Florida’s insurance marketplace.

Are honest regulators passionate and educated enough to ferret out wrongful claims practices by insurance companies that have very sophisticated processes to cover up the sham of good faith claims conduct?

Lack of Sophistication in Uncovering Bad Faith Practices

The apparent inability of insurance regulators to detect the kind of systemic fraud alleged in the 60 Minutes report points to a broader lack of sophistication in how these agencies approach investigations. Our law firm regularly litigates bad faith cases against insurers across the country, and we are intimately familiar with the complex and often opaque ways in which insurance companies engage in unethical practices. So are the insurance defense attorneys who try to keep these practices as trade secrets.

Uncovering bad faith conduct typically requires a deep understanding of insurance company operations, claims handling procedures, and internal incentive structures. It demands rigorous analysis of claims data, thorough examination of internal documents and communications, and skilled interviewing of company personnel. Based on my experience, many state insurance departments simply lack the expertise and resources to conduct this level of in-depth investigation. Where do they go to learn how to do this? What is their motivation to do so?

This deficiency is evident in the types of discovery requests and investigative techniques employed by regulators. In our practice, we have developed extensive lists of document requests, interrogatories, and deposition questions specifically tailored to expose bad faith practices. These include demands for:

Complete claims files, including adjuster notes and communications
Claims handling manuals and training materials
Internal emails and other communications related to claims goals, directives, and culture
Information on claims reserves, how they are set and reasons for change, including internal discussion with offshore reinsurance claims executives about how to lower payments
Personnel files of claims handlers and their supervisors, which include claims department goals and the analysis of how departments and individuals are performing
Documents related to performance evaluations and compensation structures, especially for claims and company executives

State regulators, by contrast, often rely on much more limited and superficial information gathering. They may review a small sample of claims files or conduct cursory interviews with company representatives but rarely dig deep enough to uncover systemic issues or deliberate misconduct.

The Heritage CEO gave a laughable internal survey suggesting that they had uncovered everything and that the one-million-dollar fine was a penalty for what had happened in the past and had been corrected. If they want the truth, regulatory officials and the Heritage Board of Directors should audit this statement and the survey while allowing some third party like me to do a real survey of what is going on.

The Problem of Regulatory Capture

Beyond mere incompetence or lack of resources, there are also legitimate concerns about whether insurance regulators have become too cozy with the industry they are meant to oversee. This phenomenon, known as “regulatory capture,” can result in government agencies and politicians prioritizing industry interests over consumer protection.

In Florida, there have been troubling indications of an overly close relationship between regulators and insurers. For instance, the state’s new Insurance Commissioner, Michael Yaworsky, must answer questions about his ties to the insurance industry and whether he will be an effective advocate for consumers because most Floridians now see his two bosses, Jimmy Patronis and Ron DeSantis, as in being in bed with the insurance industry. Even the number one Republican in the entire country, Donald Trump, has called out DeSantis and Florida’s political leadership for being in bed with insurance lobbyists.

As noted in Donald Trump and Chip Merlin Agree—Ron DeSantis and Florida Republican Leadership Have Sold Out to Insurance Company Lobbyists, this quote by Trump after the Florida legislature wrote laws to protect insurance companies, which DeSantis still tries to defend as being for policyholders, proves what many believe—that Florida politicians are in bed with insurance companies and their lobbyists to the detriment of the electorate:

(put the image from that post by Trump right here)

This Republican Leadership/Insurance Industry coziness may help explain why regulators seem reluctant to aggressively investigate allegations of wrongdoing or impose meaningful penalties when violations are found. It may also contribute to a culture of secrecy around bad faith practices, with regulators too often accepting insurers’ claims of trade secrets or confidentiality to shield potentially damaging information from public scrutiny.

The Importance of Effective and Different Market Conduct Exams

One key tool that insurance regulators have at their disposal but often underutilize is the market conduct examination. These exams allow regulators to conduct in-depth reviews of an insurer’s practices to ensure compliance with state laws and regulations. When properly executed, market conduct exams can be highly effective in uncovering systemic issues and bad faith practices.

However, as we noted in a blog post, The Case of the Missing Market Conduct Exams, many states have failed to consistently conduct and publish these crucial examinations. While some market conduct exams have been performed in Florida, they often seem to result in relatively minor fines or corrective action plans that do little to fundamentally change insurer behavior. If an insurer saves $100 million by underpaying claims and pays a $1 million fine, why not just “pay the ticket” rather than change the behavior?

The failure to regularly conduct rigorous market conduct exams represents a major missed opportunity for regulators to detect and address the kind of widespread fraud alleged in the 60 Minutes report. It also deprives the public and policyholders of valuable information about insurer conduct that could inform their decisions and help hold companies accountable. I tried to shed light on this in Understanding the Implications of the Heritage Market Conduct Study and $1 Million Consent Order Penalty.

The Need for Reform and Enhanced Regulatory Capabilities

The revelations from the 60 Minutes investigation, coupled with the apparent inability of Florida’s insurance regulators to detect these alleged wrongful claims practices resulting in systemic underpayment of claims, highlight the urgent need for reform and enhanced regulatory capabilities. Some key areas for improvement include:

Increased funding and staffing: State insurance departments need significantly more resources to attract and retain skilled investigators, data analysts, and industry experts capable of uncovering complex fraud schemes.
Enhanced training: Regulators should receive ongoing training on the latest industry practices, technology, and investigative techniques to keep pace with evolving bad faith tactics. How do you uncover claims practices when you do not understand the field or techniques of how insurance claims management accomplishes these?
Greater transparency: Market conduct exams, investigation results, and other regulatory actions should be made readily available to the public to increase accountability, and the manner of the reviews should be subject to criticism by policyholders and the public. People should understand that a major insurance consultant company made the current criteria to shield its insurer clients from critical review of insurance wrongful claims practices, as noted in “What is the History of Market Conduct Studies?”
Stronger whistleblower protections: Regulators should establish robust channels for industry insiders to report misconduct without fear of retaliation. It should be illegal for any insurance company or independent insurance company to penalize or keep secret any employee who believes a claims practice or act is unethical. Independent and company adjusters are often threatened with sanctions and penalties when they whistle blow or make transparent wrongful claims conduct. Any contract that suggests this should be illegal and criminal. The secrecy is what drives the wrongful claims conduct.
Tougher Unfair Claims Practice Laws and Penalties: The victims should be able to bring suit to stop the wrongful claims practice. Civil penalties, fines and other consequences for bad faith practices should be significantly increased to create a genuine deterrent effect. The victims, rather than the government, should be able to do this.

The Path Forward

The CBS 60 Minutes exposé has laid bare the glaring inadequacies of our current insurance regulatory system, particularly in Florida. State insurance departments, as currently constituted, lack the sophistication, resources, and perhaps even the motivation to effectively uncover and combat systemic bad faith practices by insurers.

The insurance industry plays a vital role in our economy and society, but it must be held to the highest standards of ethical conduct. When regulators fail to provide adequate oversight, it is ultimately consumers who suffer. We deserve better.

We must demand better from our insurance regulators. This means not only pushing for the reforms outlined above but also maintaining constant vigilance and pressure on both the industry and those tasked with overseeing it. Only through a concerted effort to enhance regulatory capabilities and increase transparency can we hope to create an insurance market that genuinely serves the interests of policyholders.

The 60 Minutes report should serve as a wake-up call – not just to regulators and policymakers but to all of us who believe in the importance of a fair and honest insurance system. The time for meaningful reform is now. The question is, will our regulators and elected officials heed the call, or will they continue to turn a blind eye to the systemic abuses occurring right under their noses?

Thought For The Day

One of the truest tests of integrity is its blunt refusal to be compromised.
—Chinua Achebe

An Old Song For A Day After All The Flooding From Helene