San Diego Union-Tribune
Rising homeowner insurance rates and the threat of policy nonrenewals have made many Californians wary of filing claims for anything short of catastrophic losses.
When storms topple fences and blow away shingles, homeowners increasingly are reaching into their own pockets to pay for damages, consumer advocates say.
People understand “that if they file a claim, they may lose their homeowner insurance or at least face a rate increase,” said Doug Heller of the Santa Monica-based Foundation for Taxpayer and Consumer Rights.
Because mortgage lenders require homeowner coverage, insurers are in the enviable position of offering a product that people are compelled to buy but afraid to use, Heller said.
“It doesn’t make sense that once you actually file a claim, once you use the product, you lose it,” he said. “There is a fundamental disconnect.”
While insurance companies insist that price increases are justified, state Insurance Commissioner John Garamendi says the public has been placed in a “use it and lose it” situation.
“I am a consumer, too,” Garamendi said. “I know they are going to jack up my rates if I file a claim.”
Garamendi holds that insurers are improperly raising rates to offset stock market losses. Until legislative and administrative reforms can be implemented, homeowners must make informed decisions to keep their rates down, he contends.
There is a growing public awareness that insurance rates can skyrocket once a claim is filed, said Brian Perkins, staff director of the state Senate Insurance Committee. “People tell me that when they have a loss, they are going to take care of it themselves.”
Bob Salazar, better known to his customers in Imperial Beach as Handyman Bob, says homeowners are better off calling a repairman like himself than their insurance agent.
“Man, once you start making claims, they are going to red-flag you,” he said. “It’s cheaper to use me.”
A perfect storm
The spike in insurance rates could damage the housing industry, which has been a bright spot in the national economic picture, according to Cathy Whatley, president of the National Association of Realtors. Cheryl Betyar, president of the San Diego Association of Realtors, recently got a firsthand view of the problem when her own homeowner insurance premiums doubled. Real estate agents are counseling home buyers to use their policies sparingly, she said.
Price increases are coming in response to “a perfect storm” of disasters that has sent insurance payouts soaring, said Peter Moraga of the Insurance Information Network of California. Earthquakes, the terrorist attacks of Sept. 11, and an explosion in mold- and water-related claims have cut deeply into company profits, Moraga said.
Justified or not, premium increases have had “a chilling effect on people filing claims,” said state Senate Insurance Committee Chairwoman Jackie Speier. “You have to ask yourself, ‘Why do I have homeowner insurance?’ ” the San Mateo Democrat said.
One thing that confuses consumers is the lack of a clear standard for increasing rates. The rules vary from company to company, said Moraga. “Some companies, because we are in a hardened market, may look at two claims in a period of three years as a red flag.”
The public’s dissatisfaction with rising rates is reflected by a growing number of complaints to the state Department of Insurance, said spokeswoman Nanci Kramer.
In all of 2001, 346 written complaints resulted in investigations of homeowner insurance issues by the department, she said. By comparison, there were 1,283 such complaints during the first 10 months of 2002.
Considering that there are hundreds of thousands of consumer calls to the department each year, that is not a bad record, Moraga said. “There are 8 million homeowner policies in California.”
Lowered expectations
Along with homeowner policy cancellations, “there is a significant increase in consumers complaining about double-and in some cases triple-digit increases,” Kramer said. Insurers say the hikes come in response to rising insurance payouts.
State Farm Insurance spokesman Bill Sirola said losses led his company to issue a moratorium on new homeowner policies in California about a year ago. The move signaled that all was not well in the industry.
“They insure one out of five homes in California,” Kramer said. “When your single-largest insurer stops writing policies, you do take notice.”
The solution is for homeowners to take more responsibility for routine home repairs while lowering their expectations for compensation, Sirola said.
“Insurance is really for those major, life-altering, catastrophic events,” he said. “The homeowner policy is probably one of the most inclusive policies there is, but it is not, nor will it ever be, a maintenance policy.”
If insurance companies want to cover only catastrophic losses, they should stop writing policies that are all-inclusive, said William J. Brown III, an Oceanside attorney who specializes in bad-faith insurance cases. “It’s sleight of hand.”
The root of the problem is on Wall Street, said Heller. “What has happened in the last couple of years is the investment income has fallen dramatically, just as everyone’s portfolio has fallen in this economy,” he said. “The difference is the insurance companies are trying to have policyholders make up the difference while the rest of us have to tighten our belts.”
Stock market losses are not a factor, insists Kevin Kelso, president of personal lines for Farmers Insurance in Los Angeles. Companies are heavily invested in bonds, “so the stock market is not driving our overall investment income.”
Concerns over rising homeowner rates soon will come before the state Legislature, said Garamendi. Consumer-oriented bills have been crafted with his support by Speier, Assemblyman Juan Vargas, D-San Diego, and Assemblyman Mark Wyland, R-Del Mar.
The insurance commissioner also has proposed a “Homeowner Bill of Rights.” Under the plan, insurers would be required to tell policyholders when they are using the Claims Loss Underwriting Exchange (CLUE), a national computer database used to calculate risk and set rates. Garamendi’s plan would ban the use of credit scores in underwriting.
Justifying increases
Legislation won’t change the fact that the homeowner market long has been a disaster for insurance providers nationwide, said Kelso. Recent rate hikes, while steep, are justified, he insists.
“Insurers as a group have not made money from underwriting homeowners insurance in any of the past 15 years,” Kelso said. “On average, insurers have spent $1.15 for every $1 collected in premiums. If we offered people the chance to invest in that business, I don’t think we’d get a lot of takers.”
National losses in the homeowner insurance line from 2000 through 2002 are estimated at $19 billion. Experts say consumers can expect premium increases to continue.
The rate hikes may not be popular, but they are based on sound numbers, said Brian P. Sullivan, publisher of the Property Insurance Report newsletter.
“Insurance companies don’t make this stuff up,” he said. “They are the greatest numbers nerds in history.”
Nationwide, the average cost of homeowners insurance rose by about 8 percent in 2002 and is expected to rise by 9 percent in 2003, according to the New York-based Insurance Information Institute.
Because 1999 was the last year that homeowner insurance rates were surveyed nationally, there is no way to compare costs in California to those of other states, officials said. In 1999 the institute ranked California ninth, with an average annual premium of $578. That ranking reflects the high cost of housing here, Sullivan said. The institute estimates that the current annual premium averages $603 nationally.
Even with recent increases, homeowner insurance rates represent a good deal for consumers, Moraga asserted. Critics fail to mention that insurers routinely assume hundreds of thousands of dollars in risk in exchange for premiums of several hundred dollars. As a backstop for catastrophic loss, Moraga said, homeowner insurance “is still the best bargain in town.”
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Contact Emmet Pierce: (619) 293-1372 or [email protected]
