A group of Florida citizens filed a lawsuit on Jan. 9, 2001, against the Florida Windstorm Underwriting Association (FWUA) and Insurance Commissioner Tom Gallagher, alleging that the insurer's rate-setting process violates the state Constitution and asking the court to reverse massive wind insurance rate hikes.

FWUA is a group of insurers providing hurricane coverage to Florida homeowners who cannot get wind insurance in the regular market because of their hurricane exposure. Although regulated by the Florida Department of Insurance (DOI), FWUA is not a government entity.

In June 2000 FWUA enacted premium hikes of up to 380 percent and an average of 96 percent across the 430,000 Florida homes insured by FWUA. Those rates caused consumer discontent. Ex-Insurance Commissioner Bill Nelson intervened in the rate-setting process in February 2000, asking a court to declare FWUA's rates unreasonable, but the court ruled in FWUA's favor.

The Jan. 9 lawsuit, which seeks class action status, alleges FWUA's activities (which are mandated by two sections of the state's insurance code) violate Florida's constitution because FWUA rate increases are not approved by the DOI, but rather by an independent arbitration panel of three people. The panel consists of one arbitrator selected by the insurer, one by the DOI who may not be a DOI employee, and one selected by an independent arbitration organization. Florida's constitution prohibits the delegation of regulatory authority to private citizens, the lawsuit says, and thus the arbitration panel is unconstitutional.

Ron Natherson, public affairs manager for FWUA, believes that the rate hike that sparked the lawsuit is the only fair way to start on the path toward long-term financial stability. This move merely puts the windstorm insurance rates back near the top of the market as mandated by Florida law, says Natherson.

"When premiums fall short we have to assess everyone else in the state," says Natherson. "Less than 10 percent of homeowners insurance policyholders in Florida are causing the other 90 percent to pay about $236 million in assessments."

The average FWUA consumer already pays between $800 and $900 per year for $221,000 of windstorm insurance, says Natherson.

According to Leonard Elias, the consumer advocate for Miami-Dade County who seeks to throw the weight of the county behind the class action, the suit is more about the way the rates are handled than the specific increase.

"The rates the FWUA can charge should be determined by the insurance commissioner, not an arbitration panel," says Elias. "Currently the way in which the rates are determined lacks standards."

In a move unrelated to the lawsuit, two state legislators have proposed windstorm insurance legislation that would reform the FWUA's rate-setting process. If enacted, the legislation would mandate that insurers use a state-developed model for determining potential hurricane losses, rather than a proprietary model. It would also reorganize FWUA's board of directors, currently weighted in favor of the insurance industry, to include non-industry representatives, such as FWUA policyholders, experts in state building codes, and licensed property-casualty insurance agents.

"As important as property insurance is, we cannot sit by and watch an insurance cartel exercise unchecked power in setting rates," says Rep. Sally Heyman, a Democrat representing Miami Beach, who introduced the bill in the Florida House of Representatives. "We must have a panel that yields to the needs of consumers and the public when setting critical property insurance rates." The bill was introduced in the state Senate by Sen. Ron Silver, a Democrat representing Miami-Dade.

New Insurance Commissioner Tom Gallagher has no comment on the pending litigation. However, Gallagher supports revamping FWUA's operations, says spokesperson Karen Chandler. Among Gallagher's ideas for reform: A single policy for Florida homeowners who currently must purchase several different policies, including windstorm coverage from FWUA. Gallagher also supports the elimination of FWUA's arbitration panel and the reworking of its board of directors to include consumer and industry representatives.