TALLAHASSEE — Citizens Property Insurance Corp. will be raising its rates for the third time next year and the proceeds will cover more than claims.

They'll also pay attorneys' fees — now averaging an estimated $2 million each month — as policyholders battle over getting their claims paid.

Between January 2011 and June 2013, Citizens spent more than $16 million on lawyers from 177 different law firms who have successfully challenged the state's largest insurance company on behalf of policyholders. Citizens collects $2.2 billion in annual premiums and has a 2013 administrative operating budget of $205 million.

The data was compiled by the state-run insurer at the request of Rep. Frank Artiles, R-Miami, a licensed general contractor and appraiser who has been one of the Legislature's most vocal critics of Citizens. He and several plaintiffs' lawyers estimate that Citizens has spent a comparable amount on defense attorneys, with total litigation costs exceeding $30 million a year, but the company does not have total data available.

"How can you ask me to increase my premiums when you are wasting away my premiums in litigation?" asked Artiles, who wants the Legislature to force Citizens' board of directors to keep the company's legal costs in check. "How can you function as a board when you cannot control your costs?"

The issue presents another prickly management question for the state-run insurer of last resort: Should the company continue its aggressive policy of rejecting claims and battling disputes in court, or should it cut its losses early and pay more claims to avoid the costly legal fees.

Citizens president and chief executive officer Barry Gilway told the company's board of directors at its meeting on Friday that the company is undergoing an internal study to get a handle on its litigation costs.

He said that 87 percent of all new litigation since January has come from Miami-Dade, Broward and Palm Beach counties and that 56 percent of those claims allege water losses. Many water losses are denied, he said, because Citizens only covers sudden and accidental water damage, not long-term leakage.

"The comprehensive review that we are doing is how do we get our arms around the significant increase in water damage losses," he said.

Citizens spokesman Michael Peltier said part of the surge in lawsuits since 2010 results from disputes over sinkhole claims.

"We have found that the environment has changed,'' he said, noting that in many cases mortgage companies are refusing to turn over money paid on a claim to all the parties entitled to it and so Citizens gets sued.

"We are taking the time to go through and systematically determine what our litigation costs are and how it compares with what it was in the past,'' he said. "We're responding to a situation in the market and we're trying to figure out if we're responding to it in a cost-effective manner for our policyholders or not."

Artiles believes the increase in water damage claims is the result of cast iron pipes failing in many older South Florida homes — losses he thinks Citizens should cover.

But attorneys who make their living battling Citizens attribute the rise in litigation to a 2010 change in the Citizens policies. The board that year removed a clause that required homeowners to hire a third-party appraiser when there is a dispute over the claim. Citizens replaced it with a provision that allows Citizens to decide what should be appraised, not the policyholder.

Ken Schurr, a Miami lawyer who also spends much of his practice representing Citizens customers, said his clients frequently resort to lawsuits because the company will only pay for part of the damage.

"They say: 'We think only the kitchen was damaged so we're willing to go to appraisal for the kitchen' but they don't want to talk about the living room, the roof or the bathroom," he said. "If I can't agree to appraise the entire loss, we don't go through the appraisal. We go through litigation."

The result, several lawyers told the Times/Herald, is an explosion in litigation and an increase in the number of homeowners who are forced to swallow their losses.

Sean Shaw, who served as the state's consumer advocate for insurance issues under former state Chief Financial Officer Alex Sink, now works for the Merlin Law Group in Tampa, one of the companies that has collected some of the highest amounts in attorneys' fees from Citizens in the past three years.

Since 2011, Citizens has paid his firm $502,539 in attorney fees for representing policyholders. But, he said, "even we would rather have appraisal."

"It's more efficient and better for consumers,'' he said. "There are tons of cases that we and other firms can't take because the amount at issue is too low. Without appraisal, those cases don't get brought, despite the fact that they should."

In 2009, Citizens argued that it needed to shift away from appraisals because the system was flawed, devoid of standards, and could be abused by third-party stakeholders.

But several lawyers told the Times/Herald they believe the existing system is abused by law firms and other vendors working for Citizens.

"Many law firms are consistently giving Citizens poor legal advice,'' said Rep. Carlos Trujillo, a Miami Republican whose firm specializes in insurance law.

For example, he is representing a client whose property was extensively damaged when a burglar broke into the apartment while she was in the hospital. The floor of the home was flooded when the burglar tried to rip out the refrigerator. Citizens' adjusters refused to pay the $5,000 claim, accusing the policyholder of neglecting the property. The case has gone before a hearing officer, is now in mediation and is scheduled for trial next week.

Trujillo said he has racked up $20,000 in attorneys' fees so far and believes that Citizens has been billed at least $35,000 from their attorneys. If Citizens loses, it will have to pay fees by Trujillo and defense lawyers.

"They are pennywise and dollar foolish,'' Trujillo said.

Schurr, a Miami attorney, said that because Citizens controls nearly one-fourth of the property insurance market in the state, a cottage industry of closely knit companies of appraisers and adjusters has emerged to handle the work as contractors.

"They all know each other and they horse trade all their cases, and, if you are the homeowner that doesn't know anybody, you get screwed,'' he said.

To avoid that, he advises clients to get the case before a judge who can protect the property owners' interests, Schurr said. "Litigation is a more expensive way to resolve the case, but it's fairer."

Several lawyers told the Times/Herald that they believe that Citizens uniformly attempts to low-ball claims because, as a quasi-public corporation, it is not subject to so-called "bad faith" laws that apply to private insurance companies.

Under that law, if a policyholder can prove that an insurance company intentionally refused to negotiate the claim fairly, he can recover damages.

Without that law, "it gives Citizens a green light to be irresponsible,'' Trujillo said. "They delay, deny and defend because, at the end of the day, you can only collect what they want to pay."

Mary Ellen Klas can be reached at meklas@MiamiHerald.com.