The San Francisco Chronicle
Homeowners insurance in California is approaching a crisis level, according to the state Department of Insurance.
Increasingly, Californians who file homeowners claims are being hit with inflated rates or dumped by their insurer and blackballed. Premiums have risen more than 15 percent this year, and the state’s largest insurer, State Farm General Insurance Co., has stopped writing new homeowners policies here, constraining supply.
Applications to a last-ditch option, pricey, state-run insurance that covers only fire damage, are up by 50 percent.
“What’s the purpose of insurance?” if you can’t use it, said state Sen. Jackie Speier, D-Hillsborough. She chairs the Senate Committee on Insurance, but her position didn’t do her much good as a consumer.
After a burning log rolled out of her fireplace and singed the carpet at her home, causing about $2,000 worth of damage, she filed a homeowners claim — her only one in 10 years. Her insurance company turned around and almost doubled her premium.
An even more common fate for homeowners who file claims is to be summarily
nonrenewed when their policy lapses.
“The No. 1 complaint to our (consumer hot line) is nonrenewal,” said Nanci Kramer, a spokeswoman for the California Department of Insurance. “People are being nonrenewed because they had the audacity to use their insurance. We’re getting to crisis level.”
The insurance industry says the explanation for rising rates and nonrenewals can be summed up in a single word: mold.
“Water damage is a major cost driver of claims in California,” said Pete Moraga, a spokesman for the Insurance Information Network of California, an industry group. “Mold came out of nowhere.”
In California, water-related claims paid by homeowner insurers representing two-thirds of the market totaled $206 million in 1997. By last year, they had more than doubled to $430 million, according to the group’s research.
In Texas, a consumer won a $32 million settlement from her insurer over a mold claim. In California, Ed McMahon and Erin Brockovich have famously been embroiled in multimillion-dollar mold claims.
STOCK MARKET BLAMED
Some consumer advocates say mold is just a handy excuse. They say the real culprit is the stock market, where insurers, like everyone else, have seen their losses pile up.
“What really happened is that the insurance industry lost a lot of money by investing recklessly, and they want policyholders to fill the gap,” said Doug Heller, senior consumer advocate for the Foundation for Taxpayer and Consumer Rights in Santa Monica.
He said the state’s top 10 property and casualty insurance companies collectively lost a quarter of a billion dollars during the “corporate crime wave of 2001-2002” by investing in WorldCom, Enron, Adelphia, Global Crossing and Tyco. The insurance companies increased their investment in the corporate sector from about 48 percent stocks and bonds in 1998 to 57 percent in 2001.
“Rate increases should be heavily scrutinized to make sure we’re not just paying off a drunken splurge of the insurance industry,” Heller said.
Insurance industry representatives acknowledged they’ve had a tough time on Wall Street, but said that’s not the primary driver for the current situation.
“In times past when we had more investment income than we do now, we could rely on that income to help offset some of our losses,” said Bill Sirola, a spokesman for State Farm in Sacramento. “It’s not that the stock market has caused our losses, but it just has not made available the kind of investment income that we had before.”
He said spiraling claims costs drove State Farm to declare a moratorium on homeowners policies in California. “By the end of last year, we were paying out $1.22 in claims and expenses for every $1 that was coming in.”
State Farm needed to rein in costs to stay solvent for its existing customers, Sirola said. “The first obligation of an insurance company is to make sure it has the financial strength to pay the claims of its policyholders,” he said.
To raise rates, insurers have to apply to the state Insurance Department. This year, Allstate was granted an 18.5 percent increase. State Farm received two, for 6.9 percent and 6.7 percent (although it no longer writes new policies, its existing customers are still covered); and Farmers received two increases, for 14.5 percent and 6.9 percent.
These three companies have between 55 and 60 percent of the entire market.
The brutal homeowners insurance market can particularly wallop people who buy a house with a previous claim history.
PAST CLAIMS CLOUD PURCHASE
Steve and Vicki Guderian had an offer accepted on a three-bedroom house in Martinez this past summer. When they applied for homeowners insurance, they were met with slammed doors. It turned out the previous owner had filed two small claims: for a fence that was damaged by a broken tree limb and for a minor break-in, both three years ago.
“We were scared,” Steve Guderian said. “We had already sold our house in Southern California. The (Martinez) house was in escrow; there were other bids. If we couldn’t get insurance, we couldn’t get financed. We were worried about losing the house.”
The Guderians persevered and eventually found insurance, but the experience left an unpleasant aftertaste.
“Acquiring homeowners insurance has never been an issue in the 30 years I’ve done business,” said Verne Hansen, director of risk management for Pacific Union Real Estate Group in San Francisco. “Now it’s become an issue.”
The California Association of Realtors last month amended its statewide purchase agreement, advising buyers to investigate the insurability of any property and making obtaining homeowners insurance a condition of the sale.
“We feel this is a large enough issue” that the new language was necessary, said Robert Bailey, president of the group.
California homeowners who can’t get insurance in the open market can turn to a state-run, industry-financed program called Fair Access to Insurance Requirements, or FAIR, which was created by the Legislature after the 1994 Northridge earthquake.
It’s more expensive than regular insurance, and it covers only basic fire damage with no provision for liability or water damage, but it meets the minimum requirements of mortgage lenders.
In one clear sign of the tightening market, applications to FAIR have jumped 50 percent this year.
“Business is up. We’re getting 300 new applications a day,” said Mike Harris, FAIR spokesman. “That’s up from under 200 a year ago. Our renewal/retention rate historically has been 75 percent, meaning 25 percent would leave every year. Since early this year, it’s been at an all-time high of 86 percent.”
DON’T FILE SMALL CLAIMS
Harris and others said one way consumers can avoid being nonrenewed is to limit their use of insurance to major damage, not picayune problems.
People should “avoid filing of very small claims just over the deductible because that implies that you’re using insurance as a maintenance contract,” he said.
Moraga from the insurance trade group agreed.
“Oftentimes people will think, ‘Since I’ve paid so much into my insurance. I should get a new roof out of it,’ ” he said.
“It’s important for consumers to understand (that) homeowners insurance is a backstop for catastrophic loss. The way you file claims and how many claims does affect your insurance.”
One claim every 10 years is the average in the industry. Filing claims more often raises red flags for insurers, especially in the new, tighter market, he said.
“Most companies will look at the figures if it’s two claims in three years, especially if there’s a water claim.”
But Kramer from the state insurance office said that practice is unfair to consumers. “People are so shocked. They had no idea that just using their insurance could (hurt) them.”
When someone files a claim, he’s entered into a national database called Claims Loss Underwriting Exchange, or CLUE, to which all insurers have access.
“It’s like the scarlet letter of insurance,” Kramer said. “It permanently marks you and your property as having filed a claim.”
Both Kramer and Speier said they know of consumers who had been blackballed simply for calling to inquire about a claim, even without actually filing one. Both said they think that practice is probably illegal.
SENATOR TO CONDUCT HEARINGS
Speier plans to hold hearings on the industry next month. “There are some practices by insurers that are either illegal or unethical,” she said. “They’re using the guise of mold as a reason to increase premiums in California. It doesn’t all add up.”
However, homeowners who are nonrenewed or slapped with premium increases for filing claims probably don’t have legal protection.
Under current California law, insurance companies can raise rates or nonrenew clients who represent an increased hazard to them, Kramer said. The law doesn’t define “increased hazard,” so insurers can interpret it as broadly or narrowly as they like.
Some cases are particularly galling.
Ronald Hess bought a house in Windsor next to a golf course. His insurance agent urged him to spent an extra $35 a year for a policy that covers glass breakage.
Sure enough, he had two windows shattered by errant golf balls and filed two claims totaling about $330. They were his only claims during 15 years as a customer with the insurer. When his policy came up for renewal, the firm said it was dropping him because of his claims.
“I’ve paid (the company) thousands of dollars over a long period of business,” Hess said. “I get two small glass claims, and they drop me without hesitation.
“Why do (they) offer this coverage if they expect none of the policyholders to have a claim or two?”
CHART: California homeowners claims
Insurers have seen payments for water damage claims in California more than double in five years, while other types of homeowner claims have risen more modestly. Insurers say this is why rates are going up and insurance is harder to get.
Water claims paid — All Other Homeowner Claims
1997 — $206 ————- $805
1998 — $277 ————- $835
1999 — $287 ————- $911
2000 — $384 ————- $784
2001 — $431 ————- $975
Chart reflects data for insurers representing 63% of California homeowner’s insurance market
Source: Insurance Information Network of California
E-mail Carolyn Said at [email protected]