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State's auditors savage Citizens

Florida's insurer of last resort is found to suffer from lax management and wide potential for exploitation.

By JONI JAMES
Published January 27, 2006


TALLAHASSEE - A state audit released Thursday blasted Citizens Property Insurance as being poorly managed and wholly unprepared to handle thousands of hurricane claims the past two years.

Citizens, the state-run insurer for those who cannot find property coverage on the open market, has been repeatedly derided for ethical and management shortfalls in recent months.

But the 47-page report by the Florida Legislature's auditor general marks the first official condemnation by a government agency of a lax operational system ripe for exploitation by insiders.

The audit repeated many previous criticisms, including calling inappropriate the hiring of a vendor to audit claims processed by a sister company.

It also painted the clearest picture yet of a systemic management problems at Citizens, including:

Citizens never formalized any contracts with 23 adjusting firms it hired in the wake of the 2004 hurricanes.

It never put in writing when or how it expected claims to be processed, how the adjusters' records would be maintained or whether the adjusters had to be licensed in Florida.

Contractors for other services, such as printing or legal work, were almost never sought through competitive bid, adding unknown costs to the operation.

There also was no evidence that company officials considered if the work might be done cheaper inside.

Citizens may have paid more on 2004 and 2005 hurricane damage claims than it needed to because it didn't penalize policyholders who carried less insurance than it cost to replace their home. A Times story last month disclosed the problem.

"I don't know what to say," Sen. Mike Fasano, R-New Port Richey. "I'm just totally disgusted. There's no question in my mind that people other than homeowners benefited from Citizens, individuals who were unethical or immoral benefited on the backs of insured homeowners."

Citizens' missteps have angered its policyholders for years.

Now, any Florida homeowner with insurance has an interest in the company's operation. Under state law, when Citizens runs a deficit, as it did for the 2004 and 2005 hurricane seasons, all property insurance policyholders are assessed to pay it. For the homeowner with a $1,500 annual premium, the estimated cost is about $270 between 2005 and 2006.

Citizens has made significant changes, and systemic problems are being addressed, the auditor noted, such as a tougher screening process for future employees.

A new contractor selection process is also in the works.

Citizens officials said they were confident their company was on the path to improvement.

"The results of this audit confirm that Citizens has taken and continues to take all the right steps to improve customer service," chairman Bruce Douglas said in a written statement.

Citizens already was under fire for its poor claims processing in the wake of Florida's unprecedented 2004 and 2005 seasons.

But the scrutiny ratcheted up in September after the Times reported Citizens' chief operating officer had quietly resigned after his bosses learned he had accepted a motorcycle from an adjuster he had hired.

The former employee, R. Paul Hulsebusch, remains under criminal investigation.

The Times later reported it wasn't Hulsebusch's first potential conflict of interest.

A month earlier he, two other Citizens officers and a then-Citizens board member, planned unsuccessfully to launch a private insurance firm that would assume some Citizens policies.

In a separate case, Citizens' longtime outside general counsel, Michael Colodny, resigned in October after the Times noted that other insurance companies represented by his firm routinely took policies out of Citizens' pool, a procedure that qualified them for a hefty payment from Citizens.

The contract for legal services had never been put out for bid.

Scott Rothenberg, a Texas lawyer representing a Texas adjuster suing Citizens for nonpayment of work from the 2004 hurricanes, said he's not surprised.

"The whole cornerstone of our case is that we would give them information (about individual claims) and the response we'd get back from them was like they never got it," Rothenberg said. "The bottom line is the adjustor is the fact-finding eyes of the insurance company, and if the insurance company puts on blinders and refuses to acknowledge what it's seen, the system falls apart."

The auditor general said a lack of verbal or written contracts with adjusters after the 2004 hurricanes meant the company had no agreement on how or when adjusters would file claims, how they would be compensated for reinspections, or how they would be penalized for poor work.

In a review of 17 other kinds of contracts, auditors found only one contained evidence that it had been competitively bid or included an explanation as to why an emergency or sole-source contract was needed.

And at least 10 of the contracts included no analysis of whether the work might have been done cheaper in house.

Joni James can be reached at 850 224-7263 or jjames@sptimes.com

[Last modified January 27, 2006, 01:30:05]


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