As weather disasters strike with more frequency, homeowners first get hit with the destruction or total loss of property. Many are then battered with the unexpected loss of homeowners insurance policies as insurance companies re-evaluate their financial liabilities.
After a tornado ripped through Springfield, Massachusetts, last year, Paula Lazzari's home was badly damaged. The retired teacher found broken windows, missing siding and a damaged roof. Her insurer offered to fund repairs for one broken window and some of the siding. It took nine months – and mediation services from an independent adjuster and the Massachusetts Division of Insurance – to get her bills paid, according to the parties involved.
In this era of unpredictable weather patterns, Lazzari's case is not unique. Insurance companies are raising rates, cutting coverage, balking at some payouts and generally shifting more expense and liability to homeowners, according to reports from the industry and its critics.
"Insurance companies have significantly and methodically decreased their financial responsibility for weather catastrophes like hurricanes, tornados and floods in recent years," the Consumer Federation of America said in a statement after studying industry data.
The industry concedes that it is trying to avoid getting trounced by those same punishing weather patterns.
"Last year (2011) was an extraordinary year for natural disasters," said Michael Barry of the Insurance Information Institute (III), an industry trade group. "Insurers have taken a step back to assess whether or not they can absorb severe losses."
Some insurance companies have pulled out of weather-challenged states in America – meaning they will not write new homeowners policies and may not renew contracts with current policyholders.
In the wake of Hurricane Irene last summer, for example, Allstate informed some 45,000 North Carolina policyholders that it would not renew contracts that were not bundled with auto insurance.
After a spate of tornadoes last April caused $11 billion of property damage in Alabama, Alfa Mutual Group announced it would not renew 73,000 Alabama property insurance policies.
"The increased frequency and severity of storms over the last decade have highlighted the need for Alfa to review its overall property portfolio," Alfa President Jerry Newby said in a statement.
Florida, where insurers have been dropping coverage since Hurricane Andrew in 1992, is a good example of where this can lead. With an annual average of $1,460 per home, homeowners' premiums there are second-highest in the country (Texas, at $1,511 is first), according to the most recent data available, a 2010 report from the Insurance Information Institute.
"Florida's off the charts when it comes to pricing," said Mike McCartin, an Ashton, Maryland, independent insurance agent.
The state has stepped in to cover some 1.5 million properties via its publicly funded Citizens Property and Insurance Corporation as insurers drop more and more homes.
"You simply have major private insurers that are unwilling to write policies in Florida," said Robin Westcott, the state's insurance consumer advocate.
"It's just a tough market to be in," said Phil Supple, a spokesman for State Farm, which was once Florida's largest property insurer. It stopped writing new homeowners' policies there in 2007.
Even though companies are not abandoning states at will, many opt to drop coverage on individual homes or customers that may seem prone to file claims. Insurers generally work on three-year contracts with homeowners, Barry said. At the end of those contracts, insurers can decide to raise rates or not renew.
When frozen pipes caused flooding in Phil Berger's Ijamsville, Maryland, home last year, he got a $6,000 check from Allstate for the damages – and a policy review. Berger said an Allstate contractor told him to make $100,000 in repairs to his home at his expense or he would lose his coverage. He refused, and instead found a less expensive policy with a company that required only one smaller repair before covering the home.
"You just need to be on your toes at all times," Berger said.
Allstate declined to comment on Berger's case, but sent an email response to general questions about the company's non-renewal policies.
"Allstate responsibly manages its risk by opting to not renew policies as warranted," company representative Kevin Smith wrote. "These actions are carefully considered, and help ensure Allstate's continued ability to provide a wide variety of insurance products to consumers at a competitive rate, while remaining financially strong in every community we serve."
Even homeowners that renew every year may find new limits buried in their policies. The Consumer Federation report said insurance companies have "sharply hollowed out the catastrophe coverage offered to consumers" by raising deductibles, capping replacement costs, and – significant for folks in the path of tornadoes and hurricanes – removing coverage for wind damage if another non-covered event (usually a flood) also occurs.
Industry groups say this mis-states the facts.
"The …(CFA) could not be more wrong," said Dr. Robert P. Hartwig, president of the Insurance Information Institute. "Cities such as Tuscaloosa, Birmingham and others are being rebuilt today because of private insurance companies paying losses – not from ‘hollowed out coverage' policies." Insurers have paid "literally billions" of dollars to "hundreds of thousands of claimants" affected by natural disasters, he said.
Hartwig also defended the practice by some insurance companies of leaving certain states or regions.
"If you tell an insurance company that they can't raise rates despite nine hurricanes in two years, obviously insurers are going to have to reduce exposure," he said.
But homeowners' insurance premiums have been rising sharply. They have increased an average 6.33 per cent annually between 2002 and 2009, according to the National Association of Insurance Commissioners (NAIC). This year, insurers have asked for rate increases of 18 per cent or more in 11 states, according to the Consumer Federation.
Robert Hunter, the author of the consumer report, has questioned whether limit-laden policies are worth the rising costs. But mortgage lenders require homeowners insurance, and anyone who has observed a devastating house fire or storm is unlikely to be willing to go without coverage.
This article was originally published by Reuters. Republished with permission.