What To Do When Your Homeowners Insurance Policy Won’t Protect You
Shortly after Aditi Haridat’s parents bought the home of their dreams, a lamp overheated while they were out of the house. Not only did they lose their pet cockatiel in the resulting fire, but the inside of their home was partially destroyed. That was only the beginning of their nightmare. After their insurance company arranged for a contractor to redo the inside of the house, that contractor ended up inadvertently causing a major flood in the basement, which led to a black mold infestation.
Haridat’s parents, who live in New Jersey, were frustrated when the insurance company offered less than the estimated cost to repair the home. The stress took a toll: “My poor parents couldn’t sleep. They were completely distraught,” says Haridat, a documentary filmmaker. Eventually, the family decided to hire a public adjuster to help them negotiate a higher settlement.
Since homeowners insurance is something many people buy but few are forced to actually use, the average consumer is far from being an expert in comparing policies in advance or navigating the claims process when the unexpected does happen. A new report from the Consumer Federation of America says consumers are often on the hook for more costs than they realized, including deductibles and coverage gaps for certain events, such as flooding, that private insurance rarely covers.
“It’s very difficult for consumers to read a policy and understand it,” says J. Robert Hunter, director of insurance for the Consumer Federation of America and head of the National Flood InsuranceProgram in the 1970s. That means many consumers don’t understand the details of their policies and can be unpleasantly surprised when disaster strikes.
A hard-to-decipher clause called “anti-concurrent causation,” for example, refers to the fact that if an event that is not covered by the policy, such as flooding, occurs at the same time as another event, such as wind damage, which is covered, then the policy might not cover damage from either event. CFA also says many insurance companies have increased their deductibles by 2 to 5 percent, along with increasing rates. In fact, according to CFA’s research, insurers in 11 states are currently requesting homeowners insurance rate increases of 18 percent or higher.
Michael Barry, spokesman for the Insurance Information Institute, a nonprofit funded by the insurance industry, says that the industry has paid out billions in claims in response to near record-breaking weather events over the past several years, including the 2011 Joplin, Mo., tornado. He adds that the anti-concurrent causation clause has been around for many years.
“Agents walk people through that,” Barry says, adding that consumers can ask questions if they don’t understand part of their policy. If consumers want earthquake coverage, for example, they probably need to take out an additional policy for that. Similarly, consumers who want flood insurance generally need to get it through the federal government’s National Flood Insurance Program, which is run by FEMA.
Six more tips to consider when shopping for homeowners insurance:
Check out buyer’s guides. Before buying homeowners insurance, Hunter suggests doing some reconnaissance work online. The National Association of Insurance Commissioners’ website offers a database that includes information about complaints filed against insurers, and many states offer buyer’s guides with additional information on their state websites.
Get at least three quotes. Barry suggests getting at least three different quotes before settling on one. “Sit down and compare each page side by side,” he suggests, so you understand what is covered and what isn’t. If you don’t understand something, Barry suggests asking your agent or the insurance company itself to explain how it arrived at the quote.
Online comparisons and websites that offer quotes can be useful, but Hunter says they are often paid for referrals, which means insurers that don’t pay commissions are left out, even though they might be the best company for you.
Check out the financial security of the insurer. While Barry says insurer insolvencies are rare, they do happen, particularly after big weather events that are extremely costly, such as the Joplin tornado. Check up on any financial news or reports on the stability of your insurer before committing to a policy. While states have funds designed to cover claims if insurers go under, consumers often find it harder to get claims paid if their insurer is bankrupt.
Keep detailed records. If you are filing an insurance claim, keep records (and take photos) of the damage, and make a note of any details about the claim and interactions with the insurer. If a claim is denied, ask for an explanation in writing. “If you do get into trouble later, you will have a record of what happened before,” says Hunter. This will make it easier to follow up and lodge any complaints, if necessary. He also suggests complaining to a supervisor early in the process. “The higher you go, the more likely their bonuses are related to consumer satisfaction,” says Hunter.
Get a second (and third) opinion. Aditi Haridat cautions that the first contractor recommended by the insurance company might not be the best one. She suggests getting competing bids, including bids from contractors not affiliated with the insurance company, before moving forward with any renovation.
Seek support. Experiencing major damage to one’s home, whether it’s from a fire or weather disaster, is traumatic. Haridat urges people to seek support from people who have had a similar experience through online forums and other networks. Sometimes, seeking out second opinions from legal advisors, public adjustors, or other professionals can also help, she adds.
Today, almost one year after the fire that destroyed their home, Haridat says her parents are close to reaching a settlement with the insurance company. They attribute their progress in part to the help of their public adjuster, who will receive up to 10 percent of the total settlement. The public adjuster suggested using an appraiser to estimate the damage, and doing so led to an offer from the insurance company that Haridat describes as “much closer to the number we were looking for.” For now, she’s happy that her parents can finally move on and start living in the home they worked so hard to buy.
New Study: Americans Pay More for Weather Catastrophes as Insurers Increasingly Shift Costs to Consumers and Taxpayers
–Insurance Commissioners Should Block Unjustified Homeowners’ Insurance Rate Increases–
The Consumer Federation of American (CFA) today released a new study with insurance industry data that found that insurance companies have significantly and methodically decreased their financial responsibility for weather catastrophes like hurricanes, tornados and floods in recent years, shifting much of the risk and costs for these events to consumers and taxpayers. The report is being released as insurers in eleven states have requested large homeowners’ insurance rate increases of 18 percent or more.
“Insurance commissioners should block many of these pending rate increases because they place an unwarranted financial burden on homeowners, many of whom are coping with severe financial difficulties in a bad economy,” said J. Robert Hunter, CFA’s Director of Insurance and former federal insurance administrator and state insurance commissioner. “In the last twenty years, insurers have been so successful at shifting costs to consumers and taxpayers that they are currently overcapitalized and cannot justify higher homeowners’ rates.”
Insurance executives frequently remind the public and regulators of the frequency and severity of catastrophic events. CFA’s study, “The Insurance Industry’s Incredible Disappearing Weather Catastrophe Risk,” found that some of the savings insurers have achieved are legitimate, the result of the use of reinsurance and wise risk diversification strategies.
However, the study found that the bulk of the savings that insurers have realized has been through shifting costs to taxpayers and consumers. Insurers have hollowed out the coverage they offer to homeowners by increasing deductibles and capping the amount they will pay if the home is damaged or destroyed. These coverage reductions expose taxpayers to higher disaster assistance payouts because homeowners have less money available to help themselves. Additionally, insurers have significantly raised rates over the years, sometimes using questionable computer rate “models” developed by other companies. Insurers have also used fine print tricks, such as the “anti-concurrent causation clause,” which allows insurers to refuse to pay for wind losses if any flood damage occurs at about the same time, even if the wind losses occurred first. Finally, insurers have shifted coverage for homes in high-risk areas to state insurance pools.
When insurers do not pay, consumers do. To demonstrate how much more consumers are paying for catastrophe coverage in recent years, the study offered a hypothetical example of how much the owner of a home worth $100,000 with a typical policy would have paid for losses after Hurricane Katrina in 2005, compared to after Hurricane Andrew in 1992. Assuming that the home had a $500 deductible under Andrew and a 5 percent deductible during Katrina, if $10,000 in damages occurred, the homeowner would have paid $500 to repair the damage after Andrew, but $5,000 after Katrina. If the homeowner had to upgrade the home’s electrical system, the insurance policy would have fully paid for these costs after Andrew, but paid nothing after Katrina. If some water damage occurred at the same time, the policy would have fully covered the wind claim of $9,500 after Andrew, but paid nothing after Katrina.
The study provided extensive data showing that insurers today are significantly overcapitalized. The traditional measure of adequate financial solidity for property/casualty insurers was whether they carried $1 of surplus for every $2 they made in premiums. Most observers think that the appropriate ratio today, given the risk of catastrophic weather events, should be $1.50 of surplus to $1 in premium. At 78¢ of premium for every dollar of surplus, insurers now have about double the required surplus. Even if insurers had to pay for all of the ten most costly catastrophic events in United States history, the property/casualty industry surplus would still be at an ultra safe ratio of 1.2 to 1. (This would include the cost of the September 11, 2001 attack, the Northridge Earthquake, and the eight most expensive hurricanes, a total of $162 billion in after-tax 2010 dollars.)
“Insurers’ surplus would have risen by $15 billion in 2011 even with the tornadoes and floods that caused huge losses, if they had not paid stockholder dividends,” Hunter said.
The study concludes that the insurance industry has moved from its historic role as a calculated risk-taker to one of a risk-avoider, exposing consumers and taxpayers to much higher costs. Not only have insurers insulated themselves from their historic share of hurricane risk, they have made no serious effort to cover risks associated with floods or terrorism, which are entirely backed by federal taxpayers.
The study recommended that state insurance departments take several actions to stop insurers from unjustifiably shifting costs and risk to consumers and taxpayers, including:
- Carefully examine national data on limited catastrophe losses and excessive surplus before approving any insurer requested rate increases.
- Be on guard against unwarranted attempts by insurers to use catastrophe losses as part of their rationale for jacking up rates.
- Ban use of fine print tricks that unjustifiably deny policyholders coverage when they need it the most, such as anti-concurrent causation clauses.
- Coastal states form an interstate compact to spread risk and lower costs by developing common insurance pools and provide consumers and insurers with consistent requirements. A common approach would also better position states – especially small ones – to resist coercive efforts by insurers to weaken regulatory protections for consumers.
The study offered a number of recommendations for federal taxpayer savings in the National Flood Insurance Program (NFIP), and regarding potential taxpayer losses in the event of a terrorist attack:
- Congress should limit the exposure of taxpayers to terrorism risk to only extreme events, such as nuclear, chemical or biological attacks that result in more than $100 billion in losses.
- Congress should amend pending legislation to extend the NFIP to require a study on how the private sector could start covering flood losses, perhaps by requiring insurers that currently service NFIP policies to pick up a small, but increasingly larger, percentage of flood risk. The Federal Emergency Management Agency (FEMA) should also reduce the excessive servicing fees that it pays, which create a windfall for insurance companies at taxpayer expense.
“The fact that insurers do not take financial risk for either flood or terrorism insurance is a huge policy error. Taxpayers are required to pick up huge risks that private insurers are more than capable of identifying and backing,” said Hunter. “The lack of financial involvement by insurers in the flood program tempts them to illegitimately shift hurricane related costs that they should pay to the taxpayer-funded flood program. Taxpayers deserve to have at least some of the financial risk for flood and terrorism losses removed from their shoulders, particularly because so many Americans are under economic stress and lawmakers are searching for ways to cut federal spending.”
The Consumer Federation of America is an association of nearly 280 nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education.
For More Information:
February 21, 2012 Bob Hunter, 703-528-0062
Jack Gillis, 202-737-0766