MINUTES OF THE CLAIMS COMMITTEE MEETING Thursday, November 14, 2013

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1 CITIZENS PROPERTY INSURANCE CORPORATION MINUTES OF THE CLAIMS COMMITTEE MEETING Thursday, The Claims Committee of Citizens Property Insurance Corporation (Citizens) convened telephonically on Thursday, at 2:00 p.m. (EDT). The following members of the Claims Committee were present: Don Glisson (Chairman) Juan Cocuy (Board member) Jon Palmquist (Technical advisor) The following Citizens staff members were present telephonically: Yong Gilroy Barry Gilway Jay Adams Anne Olson Jeff Lambert Curt Overpeck Dan Sumner Jeff Handy Craig Sakraida Jimmy Johnson Anne Olson Jeremy Pope Stephanie Acuff Connie Bryan Call Meeting to Order Roll was called: Chairman Don Glisson, Juan Cocuy, and Jon Palmquist were present. 1. Approval of Prior Meeting s Minutes A motion was made and seconded to approve the August 29, 2013 minutes. All were in favor. Motion carried. 2. Key Performance Indicators (KPIs) Yong Gilroy stated, we have a KPI for the third quarter that will be provided by Jay Adams, our Vice President of Claims.

2 Jay Adams stated, please turn to tab two in your binder. New First Notice of Loss (FNL) volume continues to trend 34.6% lower than it did in the prior year. We continue to believe that the reduction is driven by a success in depopulation efforts, favorable weather during the 2013 hurricane season, and the continued reduction of sinkhole claims. The total pending inventory has trended down over the last quarter, which can be attributed to less FNLs and our non-cat closure ratio that remains above 103%. We also continue to have improvements in our sinkhole closure ratio; we re at 145% there. The sinkhole strategy that was put in place earlier in the year continues to improve the results. Jeff Lambert and Anne Olson will provide details in their presentations. Jay Adams continued, next I d like to discuss our budgeting process for Citizens had KPMG conduct an analysis of our organizational structure and our insourcing versus outsourcing resources. Traditionally, Citizens maintained a lower number of staff positions and relied heavily on contracted vendors. This model allows Citizens provides oversight on more complex claims and our vendor partners handle the less complex claims. The results of the KPMG study places focus on the cost of the model. It looks at how we spend on salary versus how we paid in loss adjustment expense (LAE) and our unallocated LAE. They were able to quantify that it is more beneficial and cost effective for us to convert additional positions into staff, which will reduce the overall LAE and unallocated LAE. As we complete the budget process, we re contemplating converting contracted vendor positions with additional staff position in the area of disputed claims, non-cat claims in our inside units, our recovery unit and our quality unit. Jay Adams continued, from a claims perspective, we expect this transition will take us three or four years to complete. I want to remind the committee why it s so important for us to continue to have strategic partnerships with our contracted vendors. We must always plan for an increased claim volume when a CAT arrives. We need to scale to meet those needs. Citizens CAT model relies heavily on our vendor partners to assist in the claims adjudication process and the need for us to scale quickly. In order to train our vendor partners properly, it s important to engage them in our non-cat claims workflows, which primarily focuses on less severity and noncomplex claims. We utilize these claims to evaluate and train independent adjuster (IA) firms to be prepared to scale their organization in order to meet our CAT needs. The main training grounds for these fall under our Managed Claims Model (MCM), which really stands for a full claims adjustment model for our non-cat claims. Citizens provides the oversight and direction for these teams as needed. Jay Adams continued, this model has been effective in absorbing all of our pocket storms, without needing to have a full CAT deployment over the past few years. Since this program has been implemented, we ve been able to handle upwards to a 10,000 claim event without the need for additional deployments. Due to this ongoing need to keep our vendors engaged and trained, we ll continue to utilize this model. In a few moments, I ll provide an update with respect to our IA solicitation. In the tab you ll find the IA request for proposal (RFP). I want to give you a brief update with where we are with that. Our current contract expires in May 2014, with one six-month renewal for that. Our goal is to release as solicitation for the IA program by the end of Citizens Property Insurance Corporation Claims Committee 2

3 Jay Adams continued, the purpose of this solicitation is to partner with vendors that are able to provide independent adjuster services in order to service the policyholders and Citizens of the state of Florida. To properly balance our business needs this solicitation will combine multiple services and simplify the execution of workflows as outlined in the document. We hope to bring our results of the solicitation to our first meeting of We will request from this committee to take a recommendation to the Board to enter into contract for the new term. Jay Adams continued, the next item I d like to discuss is the Sinkhole Stabilization Managed Repair Program (SH MRP). This was released as an invitation to bid on October 27, The purpose of this solicitation is to implement a Sinkhole Managed Repair Program for stabilization services only. This solicitation will create a credentialed network of vendors that will be able to provide stabilization services for Citizens policyholders. Initially, the Program will be voluntary where the policyholder will be able to choose a vendor from the Program to provide stabilization services. Citizens goal is to seek legislative authority to develop, in conjunction with the Florida Legislature, a mandatory participation program. Jay Adams continued, the benefits of the Sinkhole Stabilization Managed Repair Program are to provide safety and security for our policyholders by stabilizing the home, to provide credentialed vendors who in turn provide 5 year warranties, to improve local real estate markets with documented home repairs, and to improve local tax basis by restoring homes to market value. Staff proposes that contracts (not to exceed $50 million) be entered into as a result of the ITB for Sinkhole MRP Vendors and implementation of the Sinkhole Stabilization Managed Repair Program. Citizens staff requests that the Claims Committee approve and recommend to the Board of Governors approval of the Sinkhole Stabilization Managed Repair Program, and allow Citizens to pursue contracts with vendors not to exceed $50 million for December 2013 BOG meeting. Not entered in contracts but trying to get program started by first of the year and propose ask for permission to move to board so that we do not have to wait for March BOG meeting. Yong Gilroy stated, one of the things I d like to do is ask if one of the committee members would like to participate as the Board oversight for this particular solicitation. Chairman Glisson asked, would the oversight appointee be made by this committee or by Chairman Gardner? He normally does those, I believe. Dan Sumner stated, under the new Purchasing Policy, the role of the Board observer... the chairman does invite Board observers to participate in a more observational role more so than in the previous role under the old policy. The real key here, though, is that the language is intended to be an assignment by the chairman of an observer. If there is a Board member who would like to watch the process and to orient themselves through the process, then that member has the opportunity. It is an observational role and for someone who wants to do rather than assigned to do it. Chairman Glisson stated, if anyone wants to do it, they can do so. It s strictly volunteer at this point. Citizens Property Insurance Corporation Claims Committee 3

4 Dan Sumner agreed, that s right. There does not need to be one, but if there is someone who would like to be one, then that person can make that known to the chairman. Jon Palmquist commented, the other members might not know about what the stabilization process is and what it means to the extent in which you evaluated its contingent exposure on a program like this under a couple scenarios. There can be a liability after a five year warranty is up and there is exposure to fires or a remediation company goes out of business and the homeowner is unhappy with the work has been done. Yong Gilroy responded, ultimately, we re trying to do what the law allows us to do, which is to be able to repair the property for multiple reasons. We want to remove the moral hazard. We want to stabilize the building for safety and security purposes. It will also help the real estate in that particular market. There are multiple reasons why we are doing it. The other aspect is that unusually when you stabilize or repair buildings, if there will be any issues with the repair, it will show up long before the five years warranty is up. That s been my experience. I think that is remote issue. When we run a program like this, there is a potential for a vendor to go out of business. If that is the case, then Citizens would be the responsible party because it is our program. We will address the issue. In all the years that I have been in business, I have not dealt with one claim with that scenario. If it does happen, we will take the responsibility to take care of the repair work. Jay Adams added, keep in mind that this is stabilization services only. There is an engineer on site validating that the work is done to his/her recommendation. When the stabilization is complete, they must sign off on their engineer report, indicating that the house is stable. If something were to change at a later date, we would have to reassess what created the change. Jon Palmquist commented, the concept is great. I want to make sure that everyone knows.... injecting grout into a potential hole and underpinning that house is not pure science. That stuff heaves and causes interior damage. Would the five-year warranty cover the interior damage if there is heave or other movement? Jay Adams responded, the sinkhole repair program is for stabilization of the ground services only. Anything above ground would be a normal claim process. We are not doing repairs physically to the house. Dan Sumner added, any damage caused by the stabilization would be covered under the warranty. Yong Gilroy added, if the damage is caused by our stabilization vendor, then it is part of the cost of doing business. We would take care of it. Juan Cocuy inquired, I want to understand the $50 million. Is this $50 million we would otherwise pay in claims? Or, is it new money to come up with another $50 million? Citizens Property Insurance Corporation Claims Committee 4

5 Jay Adams responded, the $50 comes from indemnity dollars from the claim to do the stabilization repair. Yong Gilroy responded, we would pay these vendors directly on a managed repair program. Juan Cocuy added, instead of paying the policyholder, we re paying the vendor directly. Yong Gilroy added, correct. History shows that 25% of all payments made in sinkhole claims gets repaired. What we re trying to do is increase that percentage to 100% repairs. Juan Cocuy continued, so we re just changing the way we are doing it rather than... because this looks like we re going to spend $50 million. Yong Gilroy responded, no, sir. This is an indemnity dollar that we will pay because we are running the vendor program ourselves. Barry Gilway added, these are not additional dollars. We are paying for the claim as opposed to writing the check. Juan Cocuy recommended, somewhere in this action item summary, we need to be more specific to that point. An uneducated reader might ask, What is Citizens spending $50 million on now? It looks like we re entering into a new contract in addition to our budget. Jon Palmquist commented, I m a firm believer in a well-managed direct repair program. None of my comments are meant to be negative toward the program. I think it s a good program. I just want to point out to the other members that the $50 million may or may not be an accurate number because vendors can no longer be in business and the limits are no longer capped. Do you already have a process established for certifying the vendors who can do this? Jay Adams responded, the ITB that was released on October 27 th will take care of that on our behalf. Chairman Glisson asked, do you think that s a decent strategy, Jon? Jon Palmquist responded, I do. Anyone with a business license can submit a proposal. I want to make sure that the vendors are doing what they promised. Yong Gilroy stated, we will have a strong approval and credentialing process. Chairman Glisson asked, and we have enough resources to do that? Yong Gilroy responded, yes, sir. Jon Palmquist made the motion to approve staff s recommendation to enter a contract not to exceed $50 million as a result of the ITB for Sinkhole MRP Vendors Citizens Property Insurance Corporation Claims Committee 5

6 and implementation of the Sinkhole Stabilization Managed Repair Program and to recommend to the Board of Governors approval of the Sinkhole Stabilization Managed Repair Program and allow Citizens to pursue contracts with vendors not to exceed $50 million in indemnification. Juan Cocuy seconded the motion. All were in favor. Motion carried. Jay Adams stated, the last thing I d like to talk about is an update on the ClaimsCenter, which is our new claims management software. ClaimCenter was designed to enhance communications across business units, eliminate manual processes, improve reporting and automate workflows creating a full end to end claims management system from intake to final adjudication. Commercial ClaimCenter was released and has been in full production since May 4, Jeff Handy stated, I will provide a brief overview on the Commercial ClaimsCenter. It has met or exceeded every one of our expectations and then some. Citizens now has a state of the art claims system, the benefits of which we will realize in years to come. It went live on May 4 th. As of today, we ve proceed 532 new commercial reports directly through ClaimsCenter. Additionally, legacy claims that reopened were reopened in ClaimsCenter. Let me review with you some of the high level solutions and features it offers. It s a web-based application that is assessable anytime and anywhere on a number of hardware systems, including the smartphone. It eliminates our need for commercial adjusters. It eliminates the multiple systems platforms that we previously worked in. It brings it all under a single system platform. The notice of loss populates immediately into the ClaimsCenter. Before the customer leaves the call center, they know their claim number and the adjuster s name and contact information. Claims are autoassigned versus manually assigned through pre-determined routings. There are automated referrals into the Special Investigations Unit (SIU). It allows us to control better our indemnity and LAE financials. It allows for the handling of multiple building losses under a single claim. It allows the agents with loss history detail via . Jeff Handy continued, for the wind event, the system brings in a number of features to play. It converts characteristics from a loss and assigns a claim weight and severity. This allows us to identify claims with the greatest loss potential. In commercial, during a response, one of our challenges is to identify our greatest losses. Every claim has a claim weight now and every adjuster now has a claim capacity weight. We can automatically the flow of claim volume out for assignment. It also has a claims health metrics and it calculates and applies deductibles. It automatically identify previous payments made from a previous storm and do the mathematics to make sure we pay the proper payments. Jon Palmquist asked, is there a bridge to Xactimate in the system? Jeff Handy responded, yes. When you upload it, it automatically brings it through ClaimsCenter. Yong Gilroy added, the commercial policy system has gone live. We now have a policy and commercial claims system. Citizens Property Insurance Corporation Claims Committee 6

7 Jay Adams added, I m also excited to announce that our personal lines is about to come online on February 3, At this release, our claims organization will be utilizing ClaimsCenter. Leading up to this February 3 rd release, I d like to recognize Jimmy Johnson who is leading the training efforts that all of our staff and vendor teams are ready to work in the new system. I want to close with that some of the focus points for 2014 will be our CAT preparations and testing, implementation of a fraud analytics tool, work on water and fire loss mitigation program, and the development on an assignment task module for vendors. 3. Claims and CAT Update Jimmy Johnson stated, I ve asked our Assistant Director of CAT Operations, Craig Sakraida to join us to provide us with an update. Craig Sakraida stated, we had only one storm in the beginning of June Tropical Storm (TS) Andrea. We had 627 claims reported 593 personal lines and 34 commercial lines. 97% of them are closed. The total indemnity is almost $1.6 million. Closed without payment is at 53% and the average claim payment is $5,597. The only other storm did not produce any claim volume. I think we are safe for the rest of the season. Every year we prepare for a CAT. We took note of what happened in the Philippines. That storm went from a tropical storm to a CAT 5 in less than three days. That is why we prepare year round. Craig Sakraida stated0, we did want to mention the printer capacity strategy. We had a solution implemented in August and tested to validate the ability to print 4,000 packages per day. That testing has been completed. Everything is working. The other update is on the generators. Both generators, Cummins 800 KW, have been delivered; one is being stored in Jacksonville, the other in Orlando. Jimmy Johnson stated, for the satellite update, the Board approved extending our current year contract through the end of this year, allowing staff to explore options. We are currently in the negotiation phase. Our goal was to explore as many options as possible, including the feasibility of purchasing satellites as well as on-demand leasing. We only received two submissions and both were for on-demand leasing. The benefit of the on-demand leasing keeps up-to-date technology and provides the service and technology. It eliminates the need for expertise. We are exploring longer term agreements. It makes it more economically advantageous. While I can t go into specifics on the dollars spent, I want to make sure that you understand that the estimated cost includes activation costs. In the event that we had to deploy the satellites, then the cost would be incurred. Yong Gilroy added, one of the questions raised in the past is what would be more advantageous for us. Would it be to purchase a satellite like we did with the generators versus leasing? I think that is what Jimmy is trying to convey to you. Our communication back to this committee is that the leasing option is more advantageous us. Jon Palmquist inquired, the last time we looked at this, I remember Mr. Lacasa stating that he would rather purchase the equipment. He did ask for providing an evaluation of Citizens Property Insurance Corporation Claims Committee 7

8 purchasing versus lease. At the time, we were talking about the risk of obsolescence as much as five years into the future. Have you done an analysis? Jimmy Johnson responded, we updated the ITN looking at three options purchasing one, broad-banding to share with others, and leasing. We included that in the ITN and was published for the market to respond. The market did not have an appetite to sell that equipment. We have informal numbers of the purchase of that equipment. Satellites are a specialty issue. We feel that the on-demand leasing provide most bang for the money. Once we purchase the bandwidth for this system, we can slice and dice it any way we chose it. Once we leas it, it is ours. We ll have to look into internal security to ensure privacy for our customers. Jon Palmquist continued, did you say that there will not be deployment costs when a storm arises? Jimmy Johnson responded, that s if we buy. Right now we are looking at on-demand leasing. Anytime we buy a bandwidth, we will be billed for usage. It will be for usage costs. It will not exceed $3 million. Jon Palmquist asked, does that include the deployment costs? Jimmy Johnson responded, it does. We forecasted some. If the committee approves it and we bring it before the Board, we ll have more detailed numbers. Jon Palmquist continued, I m assuming that this is for the hurricane villages. Jimmy Johnson responded, this will be for anywhere in Florida when we have a need. Jon Palmquist continued, let s go back to 2004 when telecommunications went down. That was almost 10 years ago. Last year we had Hurricane Sandy up north. The telecommunications were up within days, making communications available. Have we discussed this issue of the availability with the telecommunications industry to see what plans they have in the event of a storm? Jimmy Johnson responded, we reviewed that issue. Hurricane Sandy certainly was a good eye-opener for us. 25% of the cell towers were damaged in Sandy. There were multiple telecommunication issues. It took about 15 to 16 days for 95% of the power to return. If you recall, 65% of our volume is reported. When we look at our last eight storms, 65% of those storms are reported within the first 14 days. These are internal calls. We need to have resources nearby the scene to receive that communication. Jon Palmquist continued, in terms of the workflow, the call comes into the Jacksonville office. The Jacksonville office makes the assignments to the field IAs. Do you envision the field IAs at the remote villages receiving assignments if cell phones are not working? Jimmy Johnson responded, cell phones and connectivity. Keep in mind that we are completely web-based. We need connectivity to the internet. We set up a central location and Citizens Property Insurance Corporation Claims Committee 8

9 bring in 1,000 adjusters, for example. They can get within the close proximity of the storm site and upload case assignments. Yong Gilroy added, it gives us flexibility to run a CAT operation. What happens if our Jacksonville operation got hit? I think in this instance we are bringing in a solution that will help us respond like no other. Jon Palmquist asked, so are you saying the satellite services will be used as backup for Jacksonville if it was taken out? Jimmy Johnson responded, it will be used for anywhere its needed in Florida. Yong Gilroy added, it s not just a CAT tool. It could be a disaster recovery tool. Jon Palmquist stated, I apologize for using so much air time, but I was trying to catch you up to speed on this conversation we had earlier in the year. It was a pretty healthy conversation. There were a couple members who felt that they weren t convinced that this is not a luxury that we did or did not need. I m trying to flesh that out to see where we stand today relative to the last analysis. In terms of due diligence, have we shown that it is imperative? It shows that it is backup for Jacksonville. I m not sure from my experience to have a satellite. Jimmy Johnson continued, we deployed a satellite location to Jacksonville and we invited our reinsurers to come in to observer this. We took them through the whole process of being connected. What I stress is that everything now is web-based. People demand instant connectivity. They have more on-demand needs versus what we did in 2004 and If we had a CAT 3, we d get 250,000 claims. It s imperative that we have the full array of tools and equipment at our disposal to serve our policyholders. Jon Palmquist continued, if a storm hits in south Florida, are you going to staff desk adjusters in south Florida to work in a trailer? Who will use your bandwidth in Florida? Most claims go into Jacksonville and then go to the IA firms that have their own capacities and technology. The adjusters write the estimates and give it back to Citizens. That is the normal model. What I m having trouble is who in south Florida using the bandwidth? Jimmy Johnson continued, we ll take everyone through a full deployment process. We do not anticipate running or manning a response from Jacksonville to manage a direct hit in south Florida. We desire to set up a facility there at the storm center. We have to make sure the vendors get the connectivity with our policyholders. Yong Gilroy added, having reviewed the 2004/2005 files, I don t think we will ever have anyone question us how quickly we handle our claims versus if we do not address claims. We will hear more now than we will in 2004/2005 because we have time to prepare. We re trying to accomplish being prepared. Yes, we are prepared as corporately with facilities assistance, with HR assistance, claims assistance, etc. We re absolutely preparing for the worst case scenario. We re asking for your support in preparing for the worst. Citizens Property Insurance Corporation Claims Committee 9

10 Jon Palmquist responded, I couldn t agree more. What I m missing is this after a storm, Department of Financial Services (DFS) sets up the hurricane village. We take the losses and claims. That doesn t last for months. It takes a couple weeks and everyone goes back home. I m not sure if you need the bandwidth for tent city or if you re going to set up an operation that will operate for six months in Ft. Lauderdale to manage the claims. After a couple weeks, you ll have the bandwidth anyway. Yong Gilroy responded, one of the things that we re going to do, Jon, is have a 250 seat operation out there very quickly if it is a large event. We want to provide a facility, provide the generator, and provide the connectivity so that we can have people housed in that operation from the beginning until when that power and connectivity comes online. It s a gap solution. If you think about it, if the Office of Insurance Regulation (OIR) gives us a mandate to handle these within 90 days, every day will count to us. Jay Adams added, a lot of the things that we ve scoped out do not have the infrastructure to stand all this up. The satellite connectivity allows us to fill the gap so that those services can be stood up. If we went to the shell building without the connectivity, we are dead in the water for 35 to 40 days until phone line and other stuff can be brought in. Barry Gilway added, I support this wholeheartedly. I have great respect for the claims management team. They ve been looking at this issue for over a year. They ve looked at this in every possible conceivable way. We need to be in a position to respond and not be subject to the criticism that we were subjected to in 2004/2005. I believe this is a key component. Juan Cocuy observed, in the case of a hurricane, how much criticism would we get if we did not do this if we are not up to speed with state-of-the-art technology? Jon Palmquist responded, that s what I m trying to get at. If, indeed, they will establish an office in south Florida to staff, then it s needed. If you re saying that you need these satellites for a tent city operation, then I don t think the argument is compelling. Jay Adams responded, we are relying heavily on web-based applications. There is no working a claim without the web connection. We need that web technology through the satellite piece so we can bridge that gap. Chairman Glisson stated, I know that Mr. Lacasa was pretty adamant about us having to look at the purchase options for the generators. I m not sure if there was a viable option to purchase the satellite equipment. This has been discussed a lot; it is not an easy issue. Juan Cocuy made the motion to approve and recommend to the Board of Governors approval of the contract (not to exceed $3,000,000) for Satellite Services. Jon Palmquist seconded the motion. All were in favor. Motion carried. Jimmy Johnson continued, I want to give you a brief update on our water loss initiative that we started in the second quarter. We started an inside water migration team dedicated to Citizens Property Insurance Corporation Claims Committee 10

11 review water mitigation invoices. We reviewed about 105 files that had an impact savings of about $1,600 a file. Today through October 31 st, we reviewed over 1,200 files and we are start targeting impact dollars of about $1,500 per file ($1.6 million overall). We think that this team is doing a good job having a direct impact on the way we handle claims. We are exploring options to standup a water mitigation vendor program as a pilot. Jon Palmquist asked, all the members of the team are certified, right? Jimmy Johnson responded, yes. Jon Palmquist continued, congratulations. That s great news. We are not seeing any lawsuits as a result of this, correct? Jimmy Johnson responded, no. 4. Sinkhole Claims Update Jeff Lambert stated, the information provided follows the trend we ve seen in prior updates to this committee. The chart shows the incoming sinkhole volume, and it shows a decrease in 2012 and aligns with the volumes from 2008 and New claim volume is down 61% compared to Under financial results, you ll see that the indemnity is slightly below the prior year. Even though we ve seen a significant decrease in a new claim volume, the indemnity numbers are driven by claims received in prior years due to cycle times. It will take some time to see significant changes in those results. This is reflective of the Adjusted Loss Expense (ALE) reserves. If you look at indemnity reserves and ALE paid, you ll see that trend reduction that we ve seen over the last several months. Reduction of 29.1 in reserves and 14.8% in LAE pays. In the area of non-litigated pending, we ve had a pending total of 4,163 claims in the beginning. That number has reduced significantly to 1,907 claims. Those numbers are distributed among the staff that we have. We ve been able to reduce our outsourced staffing needs. We ve had some activity on the managed repair program. We re also working on an engineer targeted audit. 5. Litigation Management Anne Olson stated, turn to tab five in your binders. You ll see on the graph on page one that we've experienced growth in new assignments. We ve averaged 729 new lawsuits per month, which is a 13% increase over the 2012 numbers of 641. For water loses, while we continue to work diligently in our efforts to reduce losses, the 13% is due to water losses. Citizens completed recently a comprehensive litigation review. That review contains some analysis that was specific to the water losses. As a follow up to the water losses, we ll complete a case specific file to review closely at the trends. While water losses did increase, the sinkhole lawsuits remain down. Anne Olson continued, turning to page two, the chart reflects the resolved cases pending with the ligation closing team which is now at 24% compared to 15% at the beginning of the year. We ve seen marked improvement in the closing ratio at 76%. This does not account for the Citizens Property Insurance Corporation Claims Committee 11

12 nearly 3,000 cases pending. Residential non-cat water losses remain the volume driver of the pending. Our strategic approach to sinkhole litigation is resulting to longer cycle times and increased sinkhole litigation pending. Dan Sumner stated, back in the spring of 2012, I came before this committee to request that we embark on the process of utilizing a coordinating counsel for sinkhole claims. I m here to report to you today with an action item to proceed with the next critical stage of utilizing Coordinating Counsel. We d like to use the counsel for all claims. In the years time since the March 2013 Board meeting, we ve learned several things about this process. The Coordinating Counsel has shown us being an effective claims litigation process, especially complex cases. It establishes a process that if the cases can be settled, then they are settled. Coordinating Counsel is not about putting more cases in litigation. It s about litigation smarter and more efficiently. Dan Sumner continued, one of the principle concepts in the sinkhole litigation process is that is that when we confirm a sinkhole, we want to repair the property. We do not want to pay a check and we believe it is our right that there is a contract repair for us to proceed. Senate Bill (SB) 408 has been very effective in reducing sinkhole claims. Some component of are reduced litigation is that the message has gotten through that if a policyholder has a sinkhole claim and enter into a contract to stabilize the property, then we are ready to go. We do not want to take the policyholder s time or waste resources if they just repair the home. Coordination is about making sure that we are optimizing our legal theories. There was a landmark case that went through the sinkhole Coordinating Counsel process called Hunter vs. Citizens. Judge Arnold was the circuit judge who heard a great many sinkhole cases. He issued an order where he adopted our theory of the case, which had wide-range precedence. The burden of proof lies with the policyholder to prove that there is a sinkhole loss during the policy period. That rule changes entirely the earlier process where we were obligated with the burden of proof to prove a negative. Dan Sumner continued, water losses are driving our claims and litigation. It is an area that cries out for coordination where we can coordinate cases through a triage cases. We want to move cases that are not good candidates for litigation. We can close them. A point of contention will always be whether it s damage to seepage or damage due to a sudden accidental discharge. Almost always a seeping pipe becomes a discharge. Coordinating Counsel allows us to be on the same pages. It will make sure that we are handling this smartly for our policyholders and ourselves. This is amount smart laywering of these cases. We are going back to the Board meeting in March We apprised the Board that our strategy will be to runoff the sinkhole claim coordination process and solicit a Coordinating Counsel for all claims. We went through that solicitation process and we evaluated the candidates. Dan Sumner continued, our sinkhole Coordinating Counsel Ackerman would be the best choice to transition into all claims. The estimated cost for that for a three year period plus a one year renewal option is $6.5 million. That is a lot of money, but when you look at the ability to alter the landscape in terms of how we strategically and effectively deal with our litigation, then this is a good way to ensure that we have governance and strategic oversight over our litigation and defense counsel activity. Back at the March 2013 at a Board meeting, we did a cost benefit Citizens Property Insurance Corporation Claims Committee 12

13 analysis, which illustrated what the potential cost savings and benefits were with expanding the Coordinating Counsel. I apologize that an updated version is not ready for this meeting, but an updated analysis will be ready prior to the December Board meeting. Jon Palmquist stated, at the last meeting, there was a healthy debate and a spirited debate at the time. I think the concern was that the sinkhole Coordinating Counsel was a good concept but the authorized expenditures were consumed well before the timeframe they were expected to. My first question is what comfort you have that $6.5 million is going to last for the three years. Dan Sumner responded, when we embarked in the spring of 2012, the perception was that they would be the football coach in the press box. Essential, the Coordinating Counsel watches from that vantage point to help everyone on the field. It really did not turn out that way. The Coordinating Counsel is more hand on with mock trials, mock oral statements, etc. The reason why we ve exhausted the funds so much quicker than anticipated, we did not expect that much hands on work. During a three-year period starting with the 2014 budget, one of the things we ll be doing is dramatically increasing our skilled in-house defense. One of the things that is a specific component of the Coordinating Counsel over the next three years is to help stand up this unit and to have these people groomed and prepared to take more of a coordinating role in-house. Now that we understand what the real role of the Coordinating Counsel is, we are much more able to estimate what the true costs are. Yong Gilroy stated, there has been no doubt a profound difference in our litigation management approach, strategically and tactically. We think having Coordinating counsel in non-sinkhole ligations will have a profound impact. Jon Palmquist stated, I go back to the meeting we had last time. For a targeted issue like sinkholes, this almost sounds like a job description for one of my attorneys at USAA or Nationwide. They never had Coordinating Counsel. For $6.5 million, you can hire a few inside attorneys with an investment of training. Dan Sumner responded, we are going to do that. What the Coordinating Counsel process has shown us is that at least while you are building up your group, having someone like Ackerman, Link, and Sartory as an upper tier law firm has been an irreplaceable component of us understanding what it means to be successful and efficient in handling our cases. Hiring good defense lawyers is different from hiring someone who can teach people how to coordinate. Barry Gilway added, it would be almost impossible to describe the impact Scott Link and his firm has had on the capabilities in litigation management over the last six months. His direct and financial impact on specific cases has been indispensable. If you spent time on that litigation report, you ll understand the magnitude of the issue in the water mitigation area. The thought of bringing him on for water litigation in an out-of-control environment will be indispensable. Over time, we need to develop far greater capabilities in water litigation. We need the training, education, and talent. Juan Cocuy inquired, would this be put out to proposal for a bid? Citizens Property Insurance Corporation Claims Committee 13

14 Dan Sumner responded, yes, it was. Barry Gilway added, it has been already and what you have in front of you is the result of the proposal and the final recommendation after the interviews and evaluation. Juan Cocuy asked, was there a Board observer? Barry Gilway responded, Mr. Wortman was the Board observer. Juan Cocuy continued, I see that the recommendation is for the Board to approve this contract. I ve heard that there is a cost study that will be ready soon. Can we defer to the Board to talk about this when we have the hard numbers? Barry Gilway responded, yes. Today the recommendation is to move this forward for the Board s approval. Jon Palmquist stated, I would share Mr. Cocuy s points. Dan Sumner stated, the request is that the committee simply moves it forward for Board consideration. Chairman Glisson stated, my concern is if the Board will have enough time to seriously vet this out at the meeting. Dan Sumner responded, we are taking the cost benefit analysis that was done for the March meeting and we are updating it. A great deal of the information is going to be the same but we are updating the numbers. We can get the prior cost benefit analysis to you and to the Board members with the understanding that the numbers will change. The direction will not change. Jon Palmquist suggested, have those numbers readably and easily presentable. The optics involved in an awarding a $6.5 million contract to the same law firm that went through eh first award rather quickly is a little disconcerting. I would be prepared to address that. I would be prepared to talk about why it s better to do it this way or in conjunction in-house, which did not jump out at us when I first read it. Juan Cocuy added, there should be a plan and a procedure going forward to measure the outcomes to prove out that cost analysis. I think the Board would be very interested in seeing how we will measure those results on a timely basis. Dan Sumner responded, absolutely. The request is that the Claims Committee move this action item to the Board for final Board consideration. I don t think you need to endorse or ratify it. Citizens Property Insurance Corporation Claims Committee 14

15 Juan Cocuy made the motion to bring before the Board to consider the Coordinating Counsel proposal. Jon Palmquist seconded the motion with the caveat that the committee has not endorsed it but willing to move it forward. All were in favor. Motion carried. 6. Special Investigations Unit (SIU) Update Yong Gilroy stated, in 2013, we ve had 13 holders arrested as well as public adjusters. We had one public adjuster to serve one year in state prison with 10 years probation. We ve made many arrests on the policyholder side. We ve had one public adjuster and one policyholder that fled the country to avoid prosecution. Although you ve seen 27 different referrals, there are results produced by the fraud division that s had tremendous impact to oversee the fraud activity in the marketplace. New Business [meeting adjourned] Citizens Property Insurance Corporation Claims Committee 15