Insurers shrink from coasts

Legislators here, elsewhere aim to help homeowners as industry fears growing risk

February 18, 2007|By Laura Smitherman | Laura Smitherman,Sun reporter

As insurance companies retreat from their coverage of coastal areas along the Eastern Seaboard, legislators in Annapolis and other state capitals are stepping in to protect homeowners faced with fewer and fewer options.

Maryland legislators have grilled insurance executives at hearings and introduced bills that would force companies to cover all areas of the state. Lawmakers also are looking at granting the state's top regulator more authority over the industry, and offering tax breaks to encourage residents to safeguard their homes against storm damage.

The confrontation comes as Allstate Corp., State Farm Insurance Cos. and Nationwide Mutual Insurance Co. - three of the largest insurers in Maryland - have moved to limit their liability along the Atlantic Coast and in some cases near the Chesapeake Bay, areas feared to be at heightened risk from hurricanes. Similar changes have been made in other coastal areas; State Farm recently decided to stop selling new policies on homes and small businesses in all of Mississippi.

"We have to send the message you just can't pick and choose based on some prediction of what may happen in the future," said Sen. Norman R. Stone Jr., a Baltimore County Democrat. "If things were 100 percent guaranteed, you wouldn't need insurance."

Companies are not only refusing new policies in coastal areas; they are raising rates, imposing higher deductibles and dropping coverage for certain claims, such as mold damage. They are doing so even though many states, including Maryland, have taken on higher-risk homeowners through government-run insurers of last resort.

The changes by insurance companies follow devastating coastal storms in recent years, and an explosion of waterfront development such as expensive homes and condos. Also, some forecasters are making cataclysmic predictions of a hurricane costing $100 billion in insured losses, or twice as much as Hurricane Katrina, which pounded the Gulf Coast two years ago.

"Coastal exposure is potentially bankrupting exposure," said Joseph J. Annotti, spokesman for Property Casualty Insurers Association of America, which represents some of the nation's largest homeowner insurers.

Climate changes, and a warmer Atlantic Ocean, have led insurers to fear that more intense hurricanes could make landfall. Risk modelers, who forecast natural disasters for the insurance industry, have changed their methods to take into account the higher sea temperatures that fuel storms. While there is debate in the industry over whether global warming or a long-term cyclical trend is to blame, insurers are responding.

"There is a growing nervousness in the insurance community about global warming, and the more nervous they are, the more they charge for coverage," said Robert E. Litan, an economist and senior fellow at the Brookings Institution, a Washington think tank. "Consumers may say, `I've been in my home 20 years and never made a claim,' but insurance companies say that, unfortunately, the past is not prologue."

Industry attacked

The industry's retrenchment has been assailed by consumer advocates.

"These companies are making record profits, and it's not like there have been a lot of hurricanes in Maryland lately," said J. Robert Hunter, director of insurance at the Consumer Federation of America and a former federal insurance administrator. "If states don't act, then some people are going to get hurt."

Allstate announced in December that it would stop writing new policies in all or part of 11 Maryland counties while continuing to renew existing policies. It also said it would charge hurricane deductibles of up to 5 percent, which on a $500,000 condo would be $25,000. Last week, the company told lawmakers that it was voluntarily delaying the changes until it satisfies inquiries from state regulators.

Other insurers have made less-sweeping changes. State Farm decided to stop writing policies within 2,500 feet of the ocean, up from 1,000 feet, and to introduce a hurricane deductible of 2 percent. Nationwide capped new business in coastal areas and won't write new policies in some areas near Ocean City.

While regulators say that insurers are still available in every part of the state, choice is limited in some places. When Ellicott City retiree Jim Hagan bought a vacation home in Ocean City two years ago, he contacted his longtime insurance company for a homeowner's policy, only to be told it doesn't provide coverage in that area. He thumbed through the phone book for another insurer, with no luck. Eventually a broker found him a policy, but a year later, that insurer dropped him.

Now he has a policy through Lloyd's of London with an unregulated carrier, an option for those who can't find coverage elsewhere. "My worry is that suppose we do have a big storm in Ocean City and Lloyd's decides to pull out of the area," Hagan said. "Who's left? I don't know."

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