Rebecca Mowbray – "Insurance may not cover as much under Gustav"

Sop passed this on as he headed back outside – and 100 or so miles north of him, I’ve got a little more time and insurance on my mind. Actually, I’ve had reinsurance on my mind – wondering just what risk there was to transfer. According to Mowbray’s story, a lot of risk has transferred to homeowners since Katrina.

If Hurricane Gustav hits Louisiana, homeowners will discover that they have less insurance coverage than they did during Hurricanes Katrina and Rita, and they’ll be reaching into their own pockets to cover damage.

In the past three years, the use of hurricane, windstorm or named-storm deductibles, which means that insurance doesn’t kick in until homeowners have paid a percentage of the insured value of the home as a deductible when a storm hits, have become commonplace, and can easily add up to the cost of a new roof.

At the same time, some 20,000 homeowners and 6,500 businesses find themselves with insurance policies that don’t cover wind damage at all, forcing them to buy “wind-only” policies from Louisiana Citizens Property Insurance Corp., the state-sponsored insurer of last resort.

“That’s a huge difference in coverage this time for the property owner, compared with 2005, but it’s the world we live in these days,” said Insurance Commissioner Jim Donelon. “No question about it, that will adversely affect policyholders.”

Hurricane deductibles, as they are known, help keep annual insurance premiums down by forcing homeowners to cover the first share of damage in the type of catastrophe of greatest concern to insurers. As insurance prices skyrocketed after the storm, hurricane deductibles became more common to help keep insurance costs within reach.

Before the storm, they were merely a choice for homeowners, but now they’re mandatory in many cases. And what used to be a deductible option of 1 percent to 2 percent is now more commonly 2 percent to 5 percent. Meanwhile, insurers revised the insured value of people’s homes after Katrina, so those deductibles are being calculated from a bigger base.

Donelon said a majority of homeowners policies in the state now carry hurricane deductibles.

The cost to homeowners can be substantial. A person with a 5 percent named storm deductible on a $300,000 home would have to pay for the first $15,000 of damage. The average payout on a Katrina claim was $15,399, according to the insurance department, so this time many people could be entirely on their own.

Bob Hunter, director of insurance at the Consumer Federation of America, said people are paying more to get less coverage, making it harder for people to recover from a disaster. “All the risk is being shifted back to the people. I don’t think that’s a good situation,” said Hunter, who is originally from New Orleans.

Citizens, the state’s insurance plan, has been subject to considerable critical comment since Katrina. The most recent we’ve posted was the column by former Commissioner Jim Brown. Be sure to review his column after finishing Mowbray’s article.

The wind-only policies from Citizens are another post-Katrina development that is a raw deal for consumers.

The policies also don’t offer additional living expenses, or money to cover the cost of being displaced from home.

Wind-only policies at Citizens were virtually nonexistent before the storm, but they became common as companies such as Allstate, State Farm, Farm Bureau and AAA dropped wind coverage or started selling new policies without wind coverage after Katrina.

Amy Bach, executive director of United Policyholders, a California advocacy group, said that means that many people will have three policies to deal with when Gustav hits: homeowners, wind and flood.

“There is going to be more paperwork, more bureaucracy and more hoops to jump through,” she said. “What we would like to see is a move in the opposite direction, with one all-perils policy so that they’re not in this situation. Having to deal with different insurance companies after a disaster is a nightmare. People shouldn’t have to do it.”

John Wortman, chief executive of Citizens, said that the company is in the process of trying to upgrade the coverage options on wind-only policies but they’ve run into some computer glitches, so policyholders are out of luck for this storm.

Donelon said that the deductible issue could get better, because the Legislature passed a law this summer allowing “zoned” deductibles. Until the legislative session, insurers couldn’t add mandatory deductibles to existing policies unless they were the same throughout the state. In some cases companies such as Allstate, the state’s second-largest residential insurer, tacked on 5 percent hurricane deductibles all across Louisiana.

The new law lets insurers set deductibles according to a property’s proximity to the coast up to a maximum of 4 percent, but to try to encourage insurers to resume selling new policies, the law also says that insurers can’t avail themselves of zoned deductibles unless they start writing new policies.

So far, no insurers have taken advantage of the new terms, Donelon said, but State Farm is working on a zoned deductible plan. “I got a little pushback from the companies,” Donelon said.

In the current economic climate, where homeowners are squeezed by elevated gas, food and utility bills while they’re getting fewer hours at work, Bach worries that the hurricane deductibles could be especially hard on people if Gustav hits.

“There’s no question that a lot of people are hurting, and covering the deductible portion of the repairs is going to be a strain to impossible for people,” she said.

Lenders and insurers say they expect that many people will turn to disaster loans from the U.S. Small Business Administration to cover the hurricane deductibles if Gustav hits.

Carol Chastang, a spokeswoman for the SBA, said that while the agency looks at a homeowner’s credit and ability to repay a loan, just like a bank would, the agency views the program as disaster aid and is more flexible than a private lender might be in approving a loan.

Because it is a direct government loan, the program isn’t subject to the same lending constraints that banks are because of the national credit crisis. If people already have a disaster loan from Katrina or Rita, they are not precluded from getting another.

“We’re going to do all we can to take everything into consideration given what’s occurred in the last three years,” Chastang said. “This is about recovering.”

But Hunter said having to get an SBA loan to gain access to insurance payments is still a bad deal for consumers. “An SBA loan is a loan. It’s not like insurance,” he said.

The policies offer only actual cash value, or depreciated value coverage, instead of the replacement cost value that their insurance policies would have had before the storm, meaning that insurers discount for wear and tear on the property rather than paying the homeowner what it would cost to replace the damaged portions of the structure.

Seems to me that even with Gustav getting smaller, the risk to homeowners has never been greater and in that sense Nagin’s point is well taken. This may very well prove to be the “mother of all storms”.

7 thoughts on “Rebecca Mowbray – "Insurance may not cover as much under Gustav"”

  1. Awesome post, one of the best I’ve seen. These named storm deductibles are the most extreme form of an adhesionary contract and must be challenged as being against public policy (see my post from about 2 weeks ago.).

  2. You’d be amazed how many people seem to agree with you. I’ve been reading the cases filed in August in the southern district federal court and all so far have been on that very issue – the mandatory change in policies and folks paid nothing!

  3. I strongly disagree with the previous poster. Just who is supposed to step in if the insurance industry is deemd to be “against public policy”. Does that mean people in coastal areas have a right to subsidized insurance coverage. The purpose of “Named Storm” deductibles was to share the damage costs so private insurers could stay in the marketplace. There is a tendency to think insurance is an entitlement, no it is a product provided by the private sector with the ultimate goal to make a profit while providing a needed service.

    My thoughts and prayers are with the good people in LA, MS and TX. The reality of the situation is that if people choose to live in coastal areas the cost of insurance will be higher. Also, higher deductibles must be accepted as part of the reality. I have watched the evolution of percentage deductibles in coastal SC. They are now accepted, not always willingly, but worth living in their own piece of paradise.

    Another reality is the folks in your state who are not hurricane prone are not willing to subsidize insurance cost on the coast. This is not any different in Shreveport, LA, Tupelo, MS, or Greenville, SC.

  4. The problem Sup is the people in Tupelo are subsidizing insurance costs on the coast to the tune of $70MM for overpriced reinsurance.

    And we are not living on barrier islands like the wealthy people you refer in South Carolina the coastline of which is very nice by the way.

    I know of the trend in private insurance with named storm deductibles to which you refer. I always paid more to eliminate it but now that is no longer an option on the coast.

    The trend you did not mention is that of private insurers dumping risks they once took on the US taxpayer. In my mind the least we could do is let Uncle Sam collect the premium since he has the ri$k.

    Katrina cost the US taxpayer billions of dollars. It would have been much less had a functional model to cover Hurricane perils been in place on August 29, 2005.

    We appreciate your thoughts and prayers. It appears the coastal areas of Louisiana that largely escaped the worst of Katrina and Rita will be hit directly.


  5. Typical insurance shill response. I write “named storm deductibles” are against public policy, he/she reads “the insurance industry” is against public policy.

    Only the insurance industry could defend a situation whereby if my house is destroyed by a non-hurricane tornado, my deductible would be $1,000; but if my house is destroyed by a tornado spawned by a named storm, my deductible is $25,000.

    Time to re-post the “insurance company rules” video.

  6. I think what is missing in the arguement for a dysfunctional insurance model like we currently have in the CAT hurricane model is that it actually becomes the problem.

    IE by providing a worthless piece of paper which cost a fortune every year – yet pays nothing when the event happens – you actually are PREVENTING people from pre-paying for their own disaster needs.

    Typically these shortfalls in preperation will be transfered in some hugely expensive manner to the federal government and to church groups.

    Better to let responsible consumers pay their own nickle than try to do like the insurance industry is doing—sticking to the tax payers.

    Why do they want to stick the risk to the tax payers??? Because they are lobbing Congress for a new insurance model. Thats what is going on here. Simple game. Charge more and take on less risk.

    They don’t care if Congress steps in and changes the game. That is their goal. They will continue on this path of shifting the risk untill Congress acts.

  7. I had to edit in some spacing to make certain I didn’t miss a point – practicing on your comment before tackle Beau’s.

    I think your on to something, Steve. In fact, I think that more with each passing day. There’s almost no risk involved with what companies are claiming they cover in some of the most recently filed cases.

    I finally figured out just reading this last batch that reading also will shoot your blood pressure up.

    It’s so obvious that some of the hurricane coverage people bought or were forced to accept, was a string bikini covering a very large a$$.

    If I were a judge or a Congressman – or someone with any sort of power, I’d be showing insurance companies videos that clearly define the various ways hurricanes damage property. Then I’d line up and make them tell me exactly what they did cover and on what basis claiming they provided hurricane coverage was not fraud.

    I’d be too ashamed to show my face in court, much less attempt to defended what is so obviously indefensible.

    If Congress comes up with a new model that just changes the way the game is played, then I think we just have a bigger problem and either higher taxes or less spending on critical human and infrastructure needs – and the result will be a little too third world for my taste.

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