Texas Home Insurance Crisis Roils Residents and Top Race

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Texas Home Insurance Crisis Roils Residents and Top Race

By JIM YARDLEY

HOUSTON, Oct. 3 - Hundreds of thousands of homeowners in Texas are expected

to lose their insurance coverage in the next year while others are seeing

huge increases in premiums in a crisis that could harm the state's economy.

It has already become a central issue in the governors' race.

Experts say the situation in Texas is the most extreme in the nation, at a

time when homeowners' insurance has become harder to attain and more costly

in every state, with insurers saying it is a marginally profitable part of

the business at best. As a whole, the insurance industry is in a difficult

period, as companies have suffered huge losses from the stock market

collapse and from the aftermath of the Sept. 11 attacks.

The problems in Texas with homeowners' insurance, though, derive mostly from

unique circumstances that have left policyholders paying the highest

premiums in the nation even as insurers complain that they have lost

billions of dollars on homeowner policies in the state. Not only is Texas a

magnet for bad weather, like Tropical Storm last year, but analysts

say its regulatory structure has managed to hurt both insurers and

consumers.

" The Texas homeowners insurance market is the most dysfunctional in the

United States today, " said Hartwig, chief economist for the Insurance

Information Institute, an industry-financed research organization. " A

confluence of a lot of events has brought the market to the brink of

collapse. "

The event that has caused the most public anxiety occurred on Sept. 24 when

Farmers Insurance announced plans to end its coverage for its 700,000

homeowner customers in Texas, beginning in November. The company is the

second biggest insurer in Texas and will cancel about 58,000 policies each

month as they come due over the coming year.

The decision also comes after the state's leading insurer, State Farm, had

stopped selling new homeowner policies in Texas and several other states

because of losses. The two companies accounted for more than 50 percent of

the Texas homeowner insurance market, and many policyholders fear they will

not be able to find coverage.

Crane, 42, who lives with her husband, a disabled veteran, in a

Houston suburb, said they are considering selling their home, partly because

of the pullout by Farmers. Mrs. Crane has been fighting with the company

over a claim for water damage and had already seen her yearly premium jump

to $1,900 from $1,300.

Then, on Saturday, she received notice that as part of the pullout, her

policy would not be renewed when it ends next year.

Even before the notice, Mrs. Crane said she tried to buy insurance from

another company, but it did not return her calls. She says she believes she

is being blackballed because of her outstanding claim.

" It's been a total nightmare, a total horror story, " Mrs. Crane said.

It is still too early to assess the impact of the situation, but signs of

disruption have already appeared in the real estate market, one of a

dwindling number of economic bright spots in Texas. A recent survey of more

than 2,300 real estate agents in Texas found that 51 percent of them

reported having at least one client who had been unable to secure coverage,

while 70 percent had had a house sale delayed by insurance problems.

" It has definitely had an impact on the residential home market, " said

Gormley, communications director for the Texas Association of Realtors,

which conducted the poll.

The average cost of home insurance in Texas was $861 in 1999, the last year

available, according to the Insurance Information Institute. By comparison,

it was $533 in New York the same year.

Industry analysts say the crux of the problem in Texas is the state's flawed

regulatory structure, which, for very different reasons, displeases both

insurers and consumer advocates. Insurers note that the other 49 states use

national standards in setting homeowner policies. But Texas, by contrast,

has state-written standards. Insurers complain that these standards require

them to provide broader coverage that enables policyholders to file claims

for water damage that would not be covered in other states.

As a result, tens of thousands of claims for mold damage have been filed

over the last two years in Texas. Mr. Hartwig, the economist, said these

claims are crushing the industry. He said a typical homeowner claim costs

$2,800, while a typical mold claim that often requires extensive cleaning

and rebuilding costs $35,000. Insurers also say losses have been aggravated

by a spate of mold-related lawsuits.

But advocacy groups like Consumer's Union and Texas Watch, while agreeing

that insurers have lost money on mold claims, also say the companies have

exploited a loophole. For more than a decade, insurers in Texas have been

allowed to form unregulated subsidiaries, initially intended as a way of

providing homeowner coverage to riskier policyholders. This allowed

companies to charge higher premiums to compensate for their additional risk.

Gradually, though, insurers have shifted regular homeowner policies to these

subsidiaries. Now, 95 percent of homeowners have their policies in this

unregulated market. Consumer advocates say this has allowed insurers to

raise premiums without government oversight and has left homeowners with

little control over the costs of their policies.

" The bottom line is it's an essential product, and you've got to have it, "

said Rob Schneider, a senior attorney with Consumer's Union in Austin. " If

rates double overnight, too bad - you've got to pay it. "

Public frustration and anger is palpable, and insurance has become a

radioactive political issue that recently has dominated the governor's race.

The Democratic challenger, Tony , has pounded Gov. Rick for

accepting more than $1 million in campaign contributions from insurance

companies (including health care coverage) and blamed the

administration for allowing premiums to rise. A heavily aired

television commercial labels the higher insurance costs as " the

premium. "

Mr. , the former lieutenant governor who inherited the top job when

W. Bush became president, has attacked Mr. as part of the

problem. Mr. has run campaign commercials reminding voters that an

insurance company owned by a bank controlled by Mr. sells

unregulated policies.

But today, The Dallas Morning News reported that Mr. was once an

advisory director of an insurance company that was sued over unregulated

policies. Mr. 's campaign said he served without pay and resigned after

a year.

Each candidate has called for changes in insurance laws. The issue is

expected to dominate the legislative session that opens in January.

Mr. also puts the blame for the Farmers' pullout on Mr. .

Earlier this year, Mr. 's administration ordered an investigation into

Farmers. As a result, the Texas Department of Insurance accused the company

of price gouging and ordered it to change its practices and pay a fine that

could have exceeded $1 billion.

Officials with Farmers accuse Mr. of playing election year politics by

unfairly attacking the company as a way of appealing to voters on the

insurance issue.

Bill , an Austin lobbyist representing the company, said Farmers had

not broken any laws. Mr. said the company had lost money in Texas in

8 of the past 10 years and had seen the number of mold claims rise to 12,000

in the first six months of this year from 12 in 1999. " We've considered this

whole matter from the very start to be politically driven, " Mr. said.

State officials, though, believe Farmers announced its pullout as a

negotiating tactic. " They are trying to cause an artificial crisis, " said

Black, a spokesman for the Department of Insurance. " They are trying

to use their market share and their agents to put pressure on us to turn a

blind eye to what they are doing. "

For policyholders with Farmers, the options are not hopeful. They can try to

get coverage elsewhere, but few companies are writing policies in Texas,

particularly in coastal cities like Houston, which was saturated with

flooding by last year. If a person cannot secure coverage, by law

his mortgage company is required to do so. But often this means that the

premium is far higher and can imperil a person's ability to meet the monthly

note.