On Blaming Bank Auditors for Losses from a Robbery or How One Courageous Insurance Rating Agency Has Been Unjustly Scapegoated for Litigation Machine Insolvencies

Steve Acunto Foreword

One thing Demotech does not have is a PR agency nor, given its size, nor does it have the ability to teach writers about its proven, time tested traditional processes and numerous wins for insurers….. and for distressed area homeowners in the most troubled of US markets.

So when rather clumsily written articles appear – and they do – typically questioning the judgment of Demotech in its rating, say, of a smaller insurer, it appears to many that the inspiration for such a questioning could well come from competitors, from a disgruntled third party, or just be the work of a pseudo-muckraker in search of a culprit for an insurers failure. The reportage is usually lopsided and naïve.

Without the patina of righteousness that characterizes rating services and pundits, Demotech, its founder, Joe Petrelli,, his wife and business partner, Sharon Romano Petrelli, and their staff of 20 professionals, provide 450 predominantly regional and some national insurers with an assessment of financial stability, focused upon its Claims Paying Ability. No rating is guaranteed. No pay for play. No grading curves. Ratings are clear well based opinions, no more nor less, always straightforward, never hyperbolic nor misleading. Since 1989, Demotech ratings have assisted consumers and carriers by providing an alternative to the larger rating services, and, in doing so, providing resources to individuals living in areas of concern, and carriers dependent on reinsurance to get the job done.

Demotech has rated favorably some companies that have gone belly up. Demotech rating standards, algorithms, and common sense, saved large portions of the market in Florida and elsewhere from disastrous unavailability of coverage. Demotech has been unafraid to work in Florida and Louisiana, particularly, where others have feared to tread.

With the same zest that some critics emphasize that Demotech’s operation is modest – who would expect a Midwest firm to have the thick carpets and physical amenities of a Park Avenue enterprise? – they fail to emphasize how Demotech, over its nearly forty years, has rated carriers that have paid tens of billions of dollars of claims and loss adjustment expense that sustained entire markets.

Problem is that regardless of any rating, carriers often find themselves imperiled suddenly after a disastrous course of events that affect their clients, such as a hurricane or a large flash flood loss or worse. The company may be able to pay out claims reasonably, until a new element enters the fray: greedy, tech driven litigation machinery. Whether in Louisiana where Commissioner James Donelon issued a cease and desist to McClenney Mosely Associates due to their efforts to secure litigated claims to support the tens of millions of dollars of litigation funding that they borrowed or Florida, where Petrelli initiated a research project in an effort to understand how carriers that had secured unqualified audits and favorable opinions on loss reserves by satisfactorily addressing assignments of benefit, one-way attorney fees and disproportionate litigation levels, the legislatures and regulators have not protected the carriers and by extension, the consumers. After validating Demotech’s review process, Petrelli discovered that each of the failed carriers, including ones rated by A. M. Best and others, had seen extraordinary growth in new litigation, year over year, prior to failure- a factor that is an actuarial wild card, not able to be predicted from financial analysis.

Petrelli knew something new was underlying this growth, something years of reviews by actuaries and accountants had overlooked. In 2022, Petrelli turned to Todd Kozikowski, much like the character Erin Brockovich did in the movie by that name when she turned to Masry. In fulfilling that research project, Kozikowski found the cause of “social inflation” and “nuclear verdicts” to be closely linked to “tech-enabled claim instigation”. i.e. the targeting of insurers using internet tactics such as pay-per-click, SEO, and other techniques to leverage litigation platforms and, as McClenny Mosely Associates did in Louisiana before Commissioner James Donelon stepped in, Kozikowski identified further the practice of borrowing third party litigation funds in an effort to bury targeted carriers with litigated claims, excessive costs and a defense of late and partial notices.. Litigators targeting carriers with millions of dollars of online marketing and ads in catastrophe prone states hit the jackpot when disasters occur. Online targeting, an avalanche of claims from a catastrophe, and the ensuing chaos is a litigators’ trifecta.

Lopsided attacks on Demotech, a high integrity, hard-working and most useful and reliable enterprise, one that presents an alternative to larger institutional rating services, and somehow “saw” what others missed, do a serious disservice to the insurance business, the carriers, and, worse, to the insuring public and, yes, to common sense itself. Attacks on Demotech have hindered the industry’s recognition and absorption of what has been discovered, uncovered and then rarely covered in the media: the root cause of insolvencies and financial stresses i is a trial bar gone rogue and newly in love with internet marketing.

Attacking Demotech ratings or claiming that their ratings are to blame for insurer failures to pay claims following catastrophes is like indicting a bank’s auditor for the unforeseen losses caused by a robbery.

Someone needs to get that point across to state lawmakers, regulators, insurer organizations, the media and the insurance consumer…and voter.