Angry Homeowners Demand Governor Candidates Regulate Insurance Costs

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Saturday, February 16, 2002

Insurers' rates test governor hopefuls

Two candidates propose regulation for soaring homeowners prices

By TERRENCE STUTZ / The Dallas Morning News

AUSTIN - Insurance rates are going up - way up - and the political landscape

of Texas is being shaken by angry homeowners wanting an explanation.

Gov. Rick has called for an investigation of possible price gouging by

the state's three largest insurers, and Democratic rival Tony has

proposed a regulatory crackdown on insurance companies.

RATE INCREASES

A look at the average increase this year in homeowners insurance policies

sold by the largest companies:

State Farm, 34.5 percent

Farmers, 46.5 percent

Allstate, 53.5 percent

Why is homeowners insurance rising so dramatically?

Because recent losses - especially from water-related claims - have been

much larger than anticipated, and consumer groups say state regulators have

been unable to limit policy increases.

Aside from price increases, how have insurance companies responded?

By restricting new business. Policies now being sold across Texas do not

have the same level of protection as policies in force a year ago. Namely,

the mold coverage has either been sharply reduced - such as by Allstate and

State Farm - or eliminated - such as by Farmers.

What's ahead?

The standard comprehensive policy that most homeowners have had for years -

the HO-B - is on the verge of extinction because it contained unlimited

coverage for water and mold damage. State Farm now markets a revised HO-B

with a $5,000 limit for mold damage, but it does not sell policies to new

customers.

Allstate and Farmers have dropped HO-B and are selling only the

less-comprehensive HO-A policies. They have added some coverage to make

those policies resemble their old HO-B plans.

SOURCE: Independent Insurance Agents of Texas; Dallas Morning News research

Not since Democrat Ann s used the issue to help her win the 1990

governor's race has insurance been such a hot topic in Texas.

Rate shock is what many homeowners are experiencing when they open their

latest bills, which are up at least a third and in some cases have more than

doubled from a year ago. Consumer complaints have surged at the Texas

Department of Insurance.

Insurers, meanwhile, are blaming the higher premiums on massive losses in

Texas, much of it from mold claims.

" This is a true pocketbook issue, and pocketbook issues always float to the

top, " said Tony Proffitt, a political consultant who worked for former GOP

Gov. Bill Clements and one-time Democratic Lt. Gov. Bob Bullock, among

others.

Insurance has become a big expense for most Texans, and Mr. Proffitt said

candidates who ignore that do so at their own peril.

" People are starting to realize their insurance bills are costing them too

much money, and they want the government to do something, " he said. " Whoever

can deliver a real solution to consumers could come out ahead in the

election. "

Mr. , a Democratic candidate for governor, was the first candidate to

claim the issue last week, launching TV ads that bemoan high insurance rates

and vowing to give the state more power over insurers.

" I'm tired of seeing insurance companies come into the state, take our

money, and then raise prices while they reduce coverage, " said Mr. ,

a banker and oilman who said Mr. has been ignoring the issue.

The governor rejected that criticism and blasted insurers. He cited runaway

premium increases of up to 200 percent this year, and asked the attorney

general to investigate the business practices of the state's three biggest

insurers - Allstate, Farmers and State Farm.

" I'm concerned that the big insurance companies may be misleading Texas

families about the changes in homeowners coverage and costs, " he said.

A spokesman for Democrat Dan Morales, the other major contender for

governor, agreed that insurance rates have become " inordinately and

unnecessarily high " in Texas. The former attorney general is developing

proposals to deal with the problem but has released no specifics.

Issues Watch: Insurance

Two of the leading candidates for governor offered proposals last week to

stem rising insurance costs. A spokesman for Democrat Dan Morales, the other

major contender for governor, said the former attorney general is also

developing proposals but has released no specifics.

A look at some of the ideas:

Gov. Rick

Mr. said the Legislature should consider two measures for bringing all

homeowners and auto insurance rates under state regulation:

A " file and use " system for premiums charged by insurance companies. Under

such a system, companies could increase their rates anytime, but they would

have to notify the Texas Department of Insurance, which could challenge

rates considered excessive. State regulators could block unjustified rate

increases.

A " prior approval " system for premiums in which companies would have to get

new rates approved by the insurance department. Such as system could be

helpful in an insurance market dominated by a few companies, such as in

Texas, Mr. said.

Democrat Tony

The Laredo businessman proposed:

New state laws that would force insurance companies to justify to regulators

premium increases. The law would put under state review insurance company

subsidiaries now exempt from rate regulation.

Closing loopholes in the law that have allowed insurers to shift most of

their homeowners policies into unregulated subsidiaries, called Lloyds

companies, over the last decade.

.. Requiring insurers to keep selling comprehensive homeowners coverage,

called HO-B policies.

Preventing insurance companies from using inappropriate underwriting

criteria for new or existing customers. The new rules would be aimed at

" redlining " practices in which companies decline to sell policies in certain

areas.

Increasing accountability requirements to ensure that companies handle

customer claims on a fair and timely basis. That should include a fast-track

appeals process.

- Terrence Stutz

The increased visibility of the issue is striking a chord with many Texas

homeowners.

Sara Lapham, a homeowner in Garland, has seen her insurance premium jump

from $790 last year to $1,411 this year, an increase of 78 percent.

" It's not right, " she said of her insurer's ability to raise rates so high.

" They [candidates] keep talking about bringing this up in the next

legislative session in 2003, but we can't wait that long. Something's got to

be done sooner. This is a financial nightmare for homeowners. "

Higher and higher

Recent increases come on top of rates that already had made Texas the state

with the highest homeowners insurance premiums in the country.

Industry spokesmen say they have been warning consumers for several months

that rates were going to jump because of the massive losses that insurers

have sustained during the last year. Most of those losses are attributed to

soaring claims for water and mold damage.

" Insurers have reported staggering homeowners insurance losses to the Texas

Department of Insurance, and anyone who takes the time to review that

information should understand the financial crisis facing the insurance

industry, " said Jerry s of the Southwestern Insurance Information

Service.

State Farm, the largest home insurer in Texas with about a third of the

market, said its losses in Texas last year were about $800 million. In 2000,

losses were less than half that, about $300 million.

Androff, a company spokesman, said the cost of a State Farm homeowners

policy has gone up an average 34.5 percent statewide this year. The Dallas

area is close to the average, but other parts of the state - including

southeast Texas - have seen premiums go up 50 percent or more.

Last year, the annual State Farm premium on an $80,000 brick veneer home in

Dallas County with a 1 percent deductible was $624.

Farmers, the second-largest insurer, reported that its policies have gone up

an average 46.5 percent, and Allstate, the third-largest insurer, said its

policies have gone up an average 53.5 percent. Actual premiums can vary

significantly depending on factors such as location, construction materials

in the house and various discounts.

Also, policies now being sold across Texas do not have the same level of

protection as policies in force a year ago. Namely, the mold coverage has

either been sharply reduced - by Allstate and State Farm - or eliminated -

by Farmers.

The standard comprehensive policy that most homeowners have had for years -

the HO-B - is on the verge of extinction because it contained unlimited

coverage for water and mold damage.

State Farm is marketing a revised HO-B with a $5,000 limit for mold damage,

but it is not selling policies to new customers.

Allstate and Farmers have dropped HO-B and are selling only the

less-comprehensive HO-A policies. They have added some coverage to make

those policies resemble their old HO-B plans.

Schmitt of Allstate said insurers had been spending far more to cover

losses and expenses than they were collecting in premiums.

He said those losses were fueled by increasing claims for mold damage - the

number jumped more than 500 percent in 2001 from a year earlier - as well as

the increased costs in treating mold claims - from an average $3,000 per

claim two years ago to $38,000 last year.

Out with the mold

As the public has become more aware about potential health hazards from

mold, homeowners are demanding that all mold contamination found in their

homes be eliminated - an expensive process.

Texas Insurance Commissioner Montemayor tried to defuse the situation

by limiting the amount of mold coverage that insurers must provide -

including a cap of $5,000 per home - but few insurers are following his

lead.

Further, the commissioner can do nothing about the soaring insurance rates

that have drawn the wrath of Gov. , Mr. and a host of other

politicians.

That's because insurers have switched most of their homeowners policies to

" Lloyds " subsidiaries, whose rates are not regulated by the state. Lloyds

companies were intended to serve high-risk or hard-to-insure properties, but

insurers used a loophole in the law to put virtually all their homeowners

business in those companies - freeing them of state regulation.

Consumer groups that have battled with the industry over mold and other

topics said they are pleased to see insurance being debated in the campaign.

" It is heartening to see the candidates address some of the real problems

Texans have been seeing in the homeowners insurance market, " said Rob

Schneider of Consumers Union, noting that homeowners insurance has become a

" budget buster " for many families.

Mr. has not yet endorsed any proposal to deal with the situation. But

he has suggested two types of rate regulation be considered by the next

Legislature. One would require state approval of all premium increases, and

another would allow the state insurance commissioner to challenge rates

deemed excessive.

Mr. , a board member and principle shareholder of a Texas bank that

has an insurance agency, has unveiled a list of proposals to beef up

regulation of insurance companies. A spokeswoman said there is no

inconsistency in the Democrat's call for reform as the IBC Insurance Agency

has only two agents who sell homeowners policies - and they have no control

over the premiums.

One of the proposals would close the loophole in state law that gives Lloyds

companies free rein over their rates. Several attempts to regulate Lloyds

companies have failed in the Legislature.

Both Mr. and Mr. Morales have pledged to appoint a pro-consumer

insurance commissioner if they are elected governor. Mr. appointed Mr.

Montemayor.