Disaster at Your Doorstep
Even a small claim can cost you big-time. protect yourself from home insurers running scared.
By Kristin W. Davis
Kimberly Lankford, Contributing Editor
Elizabeth Razzi
From Kiplinger's Personal Finance magazine, July 2003
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When Greg Stewart placed his luggage on the conveyor belt at Los Angeles International Airport, who could have guessed he would end up as yet another casualty in the insurance industry's war against its customers? Stewart, returning home to Yakima, Wash., from Australia, never saw the bag again. Alaska Airlines offered a flat $6 per pound for the lost luggage, and a helpful rep suggested his homeowners insurance might make up the shortfall.
It did. After Stewart paid the $1,000 deductible and the airline kicked in its share, Safeco sent a check for a few hundred dollars. Then the other shoe dropped.
Late last year, Safeco notified Stewart and his wife, Karen, it wouldn't renew their home insurance. Their transgression? They'd made three claims in the past four years.
This is but one of millions of instances of homeowners being punished by insurers who have suddenly and often arbitrarily raised rates, lowered coverage, denied claims and canceled policies. The insurers are losing money in this line of business, so you get the blunt end of their stick.
Are you defenseless? By no means. We'll explain 20 ways to protect yourself from this carnage and fight back if you do become the target of your insurer. You don't want to end up like the Stewarts. They finally found a policy with Foremost, an insurer that their agent, David Hargreaves, describes as a "carrier for distressed homeowners." At $1,600 a year, the premium is double the cost of the Safeco policy -- for much less coverage. Their deductible jumped from $1,000 to $5,000, and their liability coverage plunged. "Had we known this would happen, we wouldn't have submitted the claims we did," says Stewart. "But why buy insurance?"
The new rules
Why, indeed? As premiums soar and coverage gets skimpier, homeowners who make claims -- and those insurers suspect might make claims -- are shunned like lepers. What's going on?
Homeowners insurance has never been a big moneymaker for insurance companies. (It's always been a loss leader for more profitable insurance, such as auto coverage.) In the 1980s, it was typical for an insurer to pay out 95 cents in claims for every dollar collected in premiums. A string of catastrophes -- starting with hurricanes Hugo and Andrew, in 1989 and 1992, and the Northridge earthquake in 1994 -- has steadily increased the so-called loss ratio. This winter's snow and ice storms, and the hundreds of millions of dollars in losses caused by this spring's devastating tornadoes, have piled on. Insurers currently pay out about $1.18 in claims for every dollar they collect in premiums, according to the Insurance Information Institute, an industry-sponsored group.
But even so, through most of the '90s, insurers still earned enough money investing those premiums to come out okay. Industrywide, surpluses for property-and-casualty insurers peaked in 1999 at $336 billion. Since then, the cushion has dropped by $63 billion.
The industry's response? To hike premiums -- often by budget-busting amounts. More disturbing, insurers are now running scared from risk -- real and perceived. In some places, including parts of California, Florida, Louisiana and Texas, many firms have simply walked away from the homeowners market. In others, they try to cherry-pick the "safest" customers, shoving everyone else toward insurers of last resort. Making a mockery of the time-honored principle of risk sharing, "some companies are trying to privatize good risk and socialize bad risk," complains Missouri insurance commissioner Scott Lakin.
Insurers are even denying coverage on homes because a previous owner made claims, a new tack that can threaten real estate deals. At a congressional hearing this spring, Rep. William Lacy Clay (D.-Mo.) said that the situation had gotten so bad that it had become a "crisis of monumental and unprecedented proportions."
Even if you can get coverage, you may have to battle your insurer when you make a claim. Complaints about the way claims are being handled have risen dramatically at many state insurance departments. Public adjusters and lawyers who represent policyholders in bad-faith cases against insurers are busier than ever.
The Stewarts' predicament isn't unusual. In the past, a few minor claims didn't sound the death knell for a policy. But "now the reality with almost every insurer is you can't turn in every claim you have," explains Charlie Brown, an insurance agent in Kennett, Mo. "As a consumer, I don't like that very much," he says. "But it's just the reality."
Even insurance agent Hargreaves is on notice that he'll lose his policy if he makes another claim, because that would make three claims in three years. One of those cost only $90 more than his deductible, so he paid it himself. "It's still on my record," he says, "but the payout is zero."
Hydrophobia alert
Every policyholder's situation is looked at on its individual merits -- the type of claim, how close together they are, could they have been avoided," says Phil Supple, a State Farm spokesperson. "Water claims are the ones that stand out among the rest." Nowadays, a single water-damage claim can be enough to get you dropped. "Water claims tend to have a tail to them," says Supple, "because of the potential for other damage, like rot and mold down the road."
Insurers are recoiling from mold -- because it costs a lot to clean up properly and because some companies have been hit with multimillion-dollar judgments for not paying up promptly on mold claims. "It used to be that a water-damage claim would be $3,000," says Bruce Baker, an independent agent in Coral Gables, Fla. "Now you get mold-mitigation people in there to make sure mold doesn't form, and it costs $15,000 to $20,000."
Or more. In April 2002, Kim Leslie returned from work to find two inches of water blanketing most of her Folsom, Cal., home. A pipe to the toilet had broken and water had been pouring out all day. Leslie's insurance company, Travelers, told her to call a water restoration company to fix the damage. Within hours, the firm had torn apart her home -- ripping out wet walls, pulling up carpet and sticking humidifiers and dryers in every room. The total bill: $58,000. Travelers paid without question.
But a lot of people aren't so lucky. Instead of eradicating mold, many companies are eradicating policyholders. That's what happened to MaryAnn and Derek Selva of Dickinson, Texas. The Selvas filed a $1,000 claim in 2000 for broken water pipes, then filed a $10,000 claim in 2001 when drainpipes broke and flooded the house. Farmers paid both times, but then canceled their policy.
Insurers share claims information through a database called CLUE (comprehensive loss underwriting exchange), so the Selvas' losses were no secret. The water-damage claims made the Selvas anathema to other insurers. "I couldn't find anybody," says MaryAnn. The couple spent three months without coverage, then found a high-risk insurer that charged $1,900 per year, an increase of nearly 300%. That company backed out after 30 days, leaving them with another insurer and extremely limited coverage. Then, in mid May, more bad news. Because the Selvas filed a hail-damage claim on a house they own in north Texas, the insurer wouldn't renew the policy on their Dickinson home.
Some people are so scared of getting blacklisted that they're afraid to submit water-damage claims. "I had a client with about $5,000 worth of water damage, and she considered eating the cost herself," says Hargreaves. "That's a good example of how frightening things have become."
Phantom claims
Unfortunately, not filing a claim isn't necessarily a solution either, as Kristen Angel discovered when she tried to insure a rental house in Chico, Cal., that she was buying as an investment. First she turned to State Farm, the company insuring her San Francisco residence. But State Farm was no longer writing new policies in the state. Nationwide said it would give her a policy on the rental house -- but only if it insured her primary residence as well. "They quoted a rate lower than I had," says Angel, "so I said, 'Great.' "
Not so fast. Nationwide reneged when it learned she had filed a claim in 2002 for water damage to her home. "I didn't know what they were talking about," says Angel. "I never filed a claim." What she had done was call her insurance company after a plumber suggested that sluggish drains might be caused by infiltrating tree roots. He suggested that she check to see if her homeowners policy would cover such damage. The insurance company recorded the call as an unpaid claim on her CLUE report. (A happy ending: Complaints to State Farm and the California Department of Insurance got the entry removed, and Nationwide wrote the policy.)
Although they can't do so in every state, insurers often count claims inquiries as full-fledged claims. Their rationale? "That loss may never turn into a claim, but nonetheless the loss occurred," says Joseph Annotti, vice-president of public affairs for the National Association of Independent Insurers. "That flags you as a potential risk."
Not only are insurers afraid that an old claim for a water leak can blossom into a future claim for mold, but they say homeowners with a claims history (or new owners of houses with a history of claims) are more likely than others to file claims in the future.
California's insurance commissioner John Garamendi, for one, rejects the idea: "That argument is mechanical and dumb because it doesn't assess the future as well as the past."
Huge premium hikes
Even if you're not dropped, you could end up with vastly higher premiums. Carol Smith paid $474 last year for insurance on her South Minneapolis home. This year she's paying $1,223. "It was shocking to me," she says. Smith has made only one claim in the past 15 years, for $3,000 in roof damage after a 1999 hailstorm. But a series of hailstorms and other costly disasters had broad repercussions for insurers, which had underpriced homeowners policies in the Midwest because they thought it was a safe place to expand their business. Now they are pushing up premiums in an attempt to catch up. Another culprit is the rise in the cost of construction. Part of Smith's rate hike is due to the fact that her insurer, USAA, set the replacement value of her home at $283,000, up from $160,000.
The top ten insurers raised rates by an average of 23% in Minnesota last year. In Ohio, "some companies are increasing rates by 50% to 100%," reports Tom Schneider, an agent in Gahanna, Ohio. "They came into the state, priced it way low and got their market share," he says, "and now they're losing a lot of money."
The rest of the country is struggling as well. A recent survey of 33 state insurance departments by the Consumer Federation of America (CFA) found rates increased an average of 13% in 2002, on top of a 7% price hike in 2001. Some states were much higher -- with average rates rising by 57% in Texas and 33% in Iowa. Companies explain that they're just trying to make up for some bad decisions in the past. "Homeowners has been underpriced for a very long period of time," says John Conners, executive vice-president of personal markets for Liberty Mutual. "We just didn't charge enough."
Expect rate hikes to continue. A study by reinsurer Aon Re (a firm that insurance companies pay to share risk with them) determined that rates still aren't high enough. "A further 25% increase would probably begin to give insurers the chance of staying in the business," says Bryon Ehrhart, president of Aon Re Services. One glimmer of hope: The CFA expects an average increase of just 5% this year. But few homeowners will jump for joy: That's still well above the rate of inflation and comes on top of the double-digit increases of past years.
Some unlucky souls get a double dose of rate increases, thanks to their credit records. Although rules vary by state, many insurers now crank credit scores into their pricing formula. People with low scores tend to file more claims, says the Insurance Information Institute. In fact, it says that two-thirds of policyholders pay less than they would otherwise, thanks to their good credit score.
This is a contentious issue nationwide. As part of a Homeowners' Bill of Rights unveiled earlier this year, for example, Garamendi prohibited the use of credit scores in insurance pricing in California, but the industry is contesting the decision.
More for less
If insurers are losing money in a state -- or don't get a rate increase they want -- they can simply pick up their marbles and go home: stop selling new policies, leave the state entirely or severely limit whom they'll deign to insure.
In the early 1990s, more than 50 companies sold homeowners insurance in Louisiana; now fewer than ten write coverage in most of the state. And the survivors reject a lot of people. "We're rapidly approaching crisis stage," says Robert Wooley, Louisiana's insurance commissioner. "Our high-risk pool is our fourth-largest insurer." That pool is the insurer of last resort, offering stripped-down coverage at high prices (see below, High cost for skimpy coverage). The same is happening in Florida, where several companies have pulled out of the state, stopped selling new policies and cracked down on whom they will accept and keep.
As premiums balloon, what policies actually cover is getting skimpier. First to go was guaranteed replacement-cost coverage, which most insurers eliminated within the past three years. With it, insurers pay the full cost to replace your home, no matter how much coverage you had. If you insured your home for $200,000 but it ended up costing $300,000 to rebuild it, the insurance company was on the hook for an extra $100,000. But now most insurers cap payouts at 120% to 125% of your coverage amount. So it's up to you to make sure the dollar amount set in your policy keeps up with construction costs. (A few companies continue to provide full-replacement coverage, as discussed below in Solid Protection -- for a price.)
Insurers are also stripping away other coverage. In states where they can, they may limit mold claims to $10,000 or make coverage for mold testing and mediation optional (and charge extra for those services).
Steve Barnes, president of Coldwell Banker United Realtors, in Austin, says premiums on his 2,700-square-foot home had always been in the $600 range. At renewal time in April, State Farm wanted $1,600. Even after dropping newly restricted mold coverage, Barnes is now paying $900.
Some insurers are eliminating sewage-backup coverage. Ohio agent Tom Schneider is now working with a woman who recently had a $28,000 claim, only to discover that State Farm dropped sewage-backup coverage from her policy last year. She dumped her old agent because he didn't warn her about the change and is now working with Schneider to find a new insurer.
Insurers are also raising deductibles for windstorm coverage in risky states. "I don't know of anybody who doesn't have a windstorm deductible of at least 1% or 2%, and some are 3% to 5%," says Bruce Baker. "In the last year, I saw some go from 5% to 10%." If you have a $500,000 home, a 5% deductible would mean you'd pay the first $25,000 out of your pocket to fix windstorm damages before the insurance kicked in. In the past, the deductible had been the same for all types of coverage -- typically $500 to $1,000.
Real estate deal killer
Difficulty nailing down an affordable policy is starting to disrupt real estate deals. Without insurance, you cannot get a mortgage. Without a mortgage, very few can buy a house. Trouble is, in many places it's easier to borrow a half-million dollars for 30 years than it is to find a $250,000 insurance policy for one year.
As first-time home buyers, Sam and Kelly Hamilton didn't have a claims history. Still, their real estate agent warned them not to dillydally about finding a policy in Texas, where the two largest insurers, State Farm and Farmers, hesitate to write new policies. They started looking as soon as they signed a contract on a house in Georgetown, just north of Austin, and had a policy from American Indemnity by the time they settled. Or so they thought.
"Three weeks after we moved in we got a notice that our insurance was being canceled because of a past claim," says Sam. "I didn't know they could do that." The claim was for roof shingles that had been damaged in a storm a year and a half before they bought the house -- a defect their home inspector assured them had been repaired. The new homeowners were rattled. "I was concerned, but my insurance agent just said, 'This happens in Texas,'" Sam recalls. In the scramble to find a replacement policy, the Hamiltons had to pay a 30% higher premium.
"If they don't want to cover us, fine," says Sam. "But they accepted us and they cashed the check, and then they turned us down."
Most states allow insurance companies to back out of a deal for any reason whatsoever (except illegal discrimination) during the first 60 days of a new policy. In Texas, where everything seems to be bigger than elsewhere, they can keep you in limbo for 90 days. In most cases homeowners are ultimately able to find an alternative insurer, but often at a higher price that can threaten to make the whole deal unaffordable, especially for a first-time buyer. An owner may also find that a history of claims -- or even inquiries on his or her CLUE report -- could affect selling a home. Barbara Davis, an independent insurance agent in Houston, says buyers sometimes ask for CLUE reports on houses they consider -- and choose the one that's easier to insure.
Tightening the screws
While rapidly rising premiums and hard-to-keep coverage are hot-button issues right now, consumer complaints to state regulators show that denied claims and delayed payments often generate the most mail.
In Missouri, for instance, complaints about claims handling tripled in 2001 (due in part to a major hailstorm) and accounted for 84% of all homeowners-insurance complaints. "After 2001, we expected the number of complaints would drop," says Missouri insurance commissioner Scott Lakin, "but 2002 was just as high."
Putting the thumbscrews to policyholders with claims is not a new tactic, but the squeeze is as tight as ever, say regulators, public adjusters and attorneys who represent policyholders. The trend is also evident on Web sites such as Screwedbyinsurance.com and Allstateinsurancesucks.com, where frustrated homeowners vent their anger about insurance company foot-dragging, low-balling and denied claims. (In one posting, for instance, a Texas homeowner says that her insurance company's adjuster not only denied a roof-damage claim without ever getting on the roof to inspect it but also told her she would have had a stronger case if she had saved some of the hail that caused the damage.)
"Whenever there are hard times, they tighten the purse strings," says Clinton Miller, author of How Insurance Companies Settle Cases. "You don't pay the claims in the gray zone. And even the ones that are black and white, you shave maybe 10%," he says.
"If a company tightens up 10% every step of the way in the claims process, you're going to see more complaints," says Randy McConnell, spokesperson for the Missouri department of insurance. "Word goes out to adjusters to tighten in terms of the way they value property and in terms of who can make the repairs."
Rita and Ronald Long of Faucett, Mo., felt the pinch when they filed a claim with State Farm after a windstorm blew off a portion of their roof in 1999. Two roofers said the roof had to be replaced because a patch wouldn't hold. But State Farm insisted on a patch, the Longs say, and chose a roofing company to do the repair for $400.
Over the next two years, "the shingles blew off again and again," complains Rita Long. Because State Farm guaranteed the repair, she filed new claims each time the roof needed repatching. Finally in 2002, she filed a complaint with the Missouri department of insurance, which prompted State Farm to pay $1,561 to replace the entire front slope of the roof.
The Longs have since changed insurers. But because they have a history of roofing claims, they no longer qualify for preferred rates. Rita estimates that adds a $100 annual surcharge to their premium. (Several attempts to get State Farm's comments on the Longs' situation were unsuccessful.)
"Settling claims is as frustrating and as bad as I've ever seen it," says Wes Baldwin, who has been a public adjuster in Charlotte, N.C., since 1976 and is the incoming president of the National Association of Public Insurance Adjusters.
What other kinds of corner-cutting should policyholders be on the lookout for? After Missouri's 2001 hailstorm, some insurance companies were offering to replace only the siding on the side of the house that had hail damage, even if the new siding wasn't a good match. "We were having a lot of two-tone houses starting to pop up," says Lakin. "In addition to being unsightly, that lowers the property value of the house."
Solid protection -- for a price
Although most insurers have been cutting back on coverage, a few high-end companies, including Chubb, Fireman's Fund and AIG, do things differently. They still offer full-replacement-value coverage on your home. To do this, Chubb spends a lot of time calculating rebuilding costs. The company sends appraisers to assess the replacement value of each home and create a detailed report documenting its special features. The report helps Chubb make sure it's collecting enough money in premiums to pay for the full replacement value. The appraisers interview contractors every year to make sure the coverage amount and premiums keep up with local construction costs.
"We insure a lot of historic homes, and we typically find that the replacement cost far exceeds the market value," says Edward Fernandez, senior vice-president of the Chubb Group of Insurance Cos. This is the opposite of most basic homes, which lack unique architectural details and therefore the replacement cost is less than the market price because of the value of the land.
Chubb also tends to provide more coverage for possessions: $5,000 for jewelry, securities and furs, for example, $10,000 for silverware and about $5,000 for stamps and coins in their standard policy. Most other companies limit those coverages to $1,000 to $2,500 unless you buy extra insurance.
This extra coverage doesn't come cheap. A Chubb policy tends to cost about 20% to 40% higher than other companies' standard policies on a $600,000 home, and up to 10% to 25% higher on an $800,000 home, says Kevin Daly, an account executive with PLI Brokerage in Boston.
But you are getting a lot of insurance. "If you take a bare-bones policy from a standard company and add the bells and whistles, Chubb's pricing will be very competitive," says Mike Smerkanich, who heads the New York office of Marsh's Private Client Services, an insurance brokerage that generally works with Chubb, Fireman's Fund and AIG because of their extra features and good reputation for paying claims.
If you don't have a lot of valuable possessions, the Chubb policy may provide more insurance than you need -- and the company may not insure you anyway. In Massachusetts, the coverage is available only on homes with replacement values of $600,000 or more, says Daly.
High cost for skimpy coverage
Once you're deemed untouchable by the State Farms and Allstates of the world, you may be stuck getting coverage from your state's high-risk pool or a "surplus lines" insurance company, which means paying higher premiums or settling for skimpier coverage -- or probably both.
FAIR plans. In 32 states and the District of Columbia, homeowners who can't get coverage in the standard market can turn to their state's high-risk pool, often called a FAIR plan. (FAIR stands for Fair Access to Insurance Requirements.) Premiums are often reasonable; in California, for example, the average policy costs $350 a year. But the policies don't cover everything a standard homeowners policy does. California's covers fires and windstorms, but not crime or personal liability.
Some states offer full coverage, for much higher premiums. In Florida, an all-risk, replacement-cost policy on a $200,000 home costs about $1,700 a year with the Citizens Property Insurance Corp., the newly renamed high-risk pool. But that's better than insuring with a private high-risk carrier that might charge $2,600 for similar coverage, says Norman Sapp, an agent in St. Augustine. State risk pools may have other limitations. Missouri, for instance, caps coverage through its FAIR plan at just $100,000.
Surplus lines. If your state does not have a FAIR plan or if that coverage isn't suitable, you can generally get an all-risk policy through a nonstandard, or "surplus lines" carrier. However, deductibles may be high (in some cases as high as $5,000) and costs steep. In California, an all-risk policy with a surplus-lines carrier can cost two to three times as much as the same coverage from a regular insurer, says Jim Armitage, an agent in South Pasadena.
Persistence pays. If you shop hard, you may be able to stay out of the high-risk market. Ray and April Thornton of Tuscaloosa, Ala., were dropped by Allstate last year after filing three claims in three years (after a tornado, a windstorm and a hailstorm). Most agents quoted them annual premiums of about $2,400 for a fire policy on their $215,000 home. But, at last, Ray found an agent for Alfa Insurance, a regional carrier, willing to petition management for a better deal. Ultimately, the Thorntons got full coverage for about $550, albeit with a $2,000 deductible.
Tips | Protect yourself
When you're shopping for insurance
Increase your deductible. "We're raising a lot of deductibles to $1,000 or $2,500," says Washington agent David Hargreaves. "If you aren't going to turn in smaller claims, why don't you at least save the money in premiums?" Raising the deductible from $250 to $2,500 could cut your premium by up to 30%.
Drop add-on coverage that encourages you to make small claims, such as riders for jewelry worth $1,000 or less.
Overlap policies. If you're voluntarily switching insurers, don't let go of the old policy until the end of the 60- to 90-day period when the insurer can drop you.
Fight errors on your CLUE and credit reports that can push up premiums.
Try to reverse a decision to cancel your policy. Ask if there's anything you can do to keep coverage, such as raising your deductible or, after a water-damage claim, proving there's no mold.
Don't switch carriers just to save a few bucks. A claim within six months might lead your new insurer to drop you and you could wind up with a more expensive policy.
Once you have a policy
Don't submit claims for less than $1,000. And consider how much any claim could cost you in the long run. Even if you don't get dropped, you could lose a claims-free discount.
Stay off the record. Under current conditions, you run the risk of building a rap sheet just by wondering aloud whether something is covered. Stress to the agent that you're only making an inquiry. Later, buy your CLUE report for $12.95 from Choicetrust.com to see if your question has morphed into an unpaid claim.
Shop repair costs. If a repair will cost only a few hundred dollars more than your deductible, make the repair -- and don't get the insurance company involved.
Be your own advocate if you do file a claim: Take pictures, save receipts, document your contacts with your insurer and get your own estimates from contractors.
When you're buying a home
Ask about previous claims, damages and repairs. Ask to see any receipts for water-related damage.
Get a look at the CLUE report before you buy. Only owners -- and insurance agents -- can pull a report, so ask the seller or your agent.
Allow extra time. If you're in an especially tough market, such as California, Florida or Texas, you may need to get extra inspections -- for mold, perhaps -- or have to make repairs before you can get a policy.
When you're selling
Buy your own CLUE report. If innocent inquiries show up as claims, get the error fixed -- or buyers may pass by your "tainted" house. A CLUE report will cost you $12.95 at Choicetrust.com.
Make good repairs -- and keep receipts. Smart buyers and their home inspectors will be on the lookout for water problems.
Disclose problems. Many states require sellers to go through a long checklist of problems. Failing to disclose a water problem, for example, could land you a lawsuit from a disgruntled buyer who's forced to pay oversize insurance premiums.
When there's a dispute over a claim
Complain to your state regulator. Some states are more effective than others in resolving consumer complaints, but this is probably the best way to get an insurer's attention on a claim of less than $10,000 or so.
Hire an advocate. Hiring a public adjuster puts a pro on your side in interpreting the policy, estimating damages and negotiating a fair settlement. You'll probably pay 10% to 12% of the amount recovered. Make sure the adjuster is licensed with your state's insurance department. Referrals are available from the National Association of Public Insurance Adjusters.
Go to appraisal. Insurance policies usually include a clause that allows either you or the insurer to request "appraisal," which is an arbitration-like forum to resolve disputes over the amount of a loss. Each party chooses an appraiser, and the appraisers in turn agree on an umpire to hear the case and make a binding decision on the settlement.
Hire a lawyer. Egregious cases may warrant a lawsuit against the insurer. Lawyers usually take such cases on contingency and keep about one-third of any settlement. Be sure to seek out a trial lawyer who specializes in insurance cases.
--Reporter: Erin Burt