Homeowners discover they have much less insurance protection than they used to

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As the weather catastrophes keep coming, home insurance companies are trying to manage their risk by raising deductibles and capping the amount they pay if a home is damaged or destroyed by storms.

A recent study by the Consumer Federation of America found that insurance companies have for years been shifting the cost of weather catastrophes to policyholders -- and ultimately to taxpayers when homeowners without enough money to help themselves need more federal assistance.

"People with home insurance policies have much less protection than they used to, and many are surprised they don't get as much damage paid for as they expected," said Bob Hunter, director of insurance at the Consumer Federation in Washington, D.C.

Insurance companies began systematically raising rates on homeowners in the mid-1990s to recuperate the heavy losses from Hurricane Andrew in 1992. Another spike in home insurance rates occurred following Hurricane Katrina in 2005.

Even now, many home insurers fear they've underestimated the devastating effects of tornadoes following last year's unusually damaging wind storms that continued into 2012 with the recent Leap Day tornado outbreak.

The Insurance Information Institute in New York reports there were 1,725 tornadoes in 2011 -- the costliest type of natural disaster for that year based on insured losses. Already this year, multiple tornadoes that tore through the South and Midwest left at least 40 dead and leveled entire communities.

Because of how risk is built into insurance rates, concerns about one part of a state can affect rates in other zones. For example, while Philadelphia has a higher risk of hurricanes than Pittsburgh, by virtue of being located on the eastern seaboard, sweeping changes to insurance policies there affect Pittsburghers, too.

The Pennsylvania Insurance Department found that home insurance rates in the state have increased an average of 5.8 percent in the past year, said Randy Rohrbaugh, executive deputy commissioner.

He added that 190 companies actively sell homeowners insurance in this state and, if a company has raised its rates more than 5.8 percent, a consumer may want to shop around. The state Insurance Department lists the rate increases for all companies on its website at www.insurance.pa.gov.

"There are inflationary factors driving the increases such as higher labor and construction costs," Mr. Rohrbaugh said. "Rarely do these costs reverse and reduce. Normally they trend upward."

Still, he said, Pennsylvanians often benefit from the relatively stable weather in the Keystone State.

"We do not see dramatic fluctuations in homeowners rates driven by catastrophic events such as hurricanes, earthquakes, mudslides and wild fires that other states see."

Homeowners often don't realize the weak links in their insurance coverage until it's too late.

Guaranteed replacement insurance used to pay for rebuilding a whole house. For example, Mr. Hunter said if a house with a $100,000 policy were destroyed and the cost to rebuild it was $110,000, insurance companies used to pay the extra amount.

"Now they don't unless you buy additional coverage," Mr. Hunter said. "That's a big change."

Today, insurance companies will only pay up to the stated policy amount even if the actual cost is higher.

What's worse is if a house or commercial building is seriously damaged in a weather catastrophe, it may become classified as a "nonconforming use," which means it no longer complies with building codes in a municipality.

"The house may have an old electrical system, and when you reconstruct it you might be required to install a new electrical system to meet code," Mr. Hunter said. "Insurance doesn't cover that anymore, and it used to."

With so many flood zones in the Pittsburgh area, another instance of hollowed-out insurance coverage that could hurt homeowners in this region is if their home happens to sit in a flood plain.

People who live in flood plains and suffer any disaster that damages at least 50 percent of the property are required by federal law to elevate the house to the 100-year storm level on FEMA flood maps.

A 100-year storm is a worst case scenario for a big hurricane or earthquake. Insurance companies use 100-year storms to predict the cost of claims by looking at what has happened in the past and is likely to happen in the future. It allows them to have reserves to pay those claims.

Elevating a house is not inexpensive. "That could cost tens of thousands of dollars," Mr. Hunter said, adding once again that "insurance companies used to cover it, but they don't anymore.

"It could be a flood, a fire, a tornado or a gas explosion. Any damage [that affects] 50 percent or more of the property could cause the owner to have to elevate the property."

While rate increases and reduced coverage have forced policyholders to pay more, the industry practice apparently has helped stabilize insurance companies faced with rising claims for natural catastrophes.

U.S. property and casualty insurers cumulatively paid $408 billion in catastrophe-related claims to policyholders between 1990 and 2011, yet the overwhelming majority remain well capitalized in 2012, said Robert Hartwig, an economist and president of the Insurance Information Institute.

Mr. Hartwig strongly disagrees with the Consumer Federation's conclusion that insurance companies are overcapitalized and cannot justify the higher rates they are charging.

"We have seen the largest insured catastrophic losses in global and U.S. history," he said. "Whereas hundreds of banks have failed due to the financial crisis, not a single claim has gone unpaid as a result of the financial crisis.

"I can tell you the people of Joplin, Mo., or Tuscaloosa, Ala., or the hundreds of communities impacted in 2011 and now 2012 are very happy that insurers have adequate resources to pay the billions in claims arising from catastrophic losses in their communities."

Mr. Hartwig pointed out that insurers are required to have the money to pay claims in the bank before a catastrophe occurs.

"Consequently, they are very conservative in how they manage their operations and investments," Mr. Hartwig said. "Insurers work very hard to make certain the rates they charge are commensurate with the risk they assume."

There's no question the number and cost of natural catastrophes is on the rise. The Insurance Information Institute reports that insured catastrophe losses in the U.S. totaled $35.9 billion in 2011, well above the 2000 to 2010 average of $23.8 billion.

Insured losses from thunderstorms and tornadoes at over $25 billion were more than double the previous record. Last year saw the deadliest thunderstorm season in more than 75 years, with 552 direct fatalities.

To demonstrate how much more consumers are paying, the Consumer Federation study offered a hypothetical example of how much the owner of a home worth $100,000 with a typical policy would have paid for losses after Hurricane Katrina in 2005, compared with Hurricane Andrew in 1992.

Assuming the home had a $500 deductible under Hurricane Andrew and a 5 percent deductible during Hurricane Katrina, if $10,000 in damages occurred, the homeowner would have paid $500 to repair the damage after Andrew but $5,000 after Katrina, the study showed.

If the homeowner had to upgrade the home's electrical system to code, the insurance policy would have fully paid for those costs after Andrew but paid nothing after Katrina.

If water damage occurred at the same time, the policy would have fully covered the wind claim of $9,500 after Andrew but paid nothing after Katrina.

Damage caused by flood or surface water during a hurricane is not covered. If the primary damage is caused by wind and the secondary damage is caused by water, the claim is covered.

That means the insurance company will only pay if water damage occurred because of a window blowing out or a roof blowing off.

Tim Grant: tgrant@post-gazette.com or 412-263-1591. First Published March 11, 2012 5:00 AM


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