Insurers shrink from coasts

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."

On Smith Island, Maryland's most isolated island community and home to 400 people, Lloyd's of London is one of a few companies that will insure homes. The island has lost one-third of its landmass to rising sea level and erosion over the past 150 years and could be submerged by the end of the century.

"People who are trying to buy homeowner's insurance to protect their home are finding it extremely difficult to find someone to insure them, and if they do, it's prohibitively expensive," said Del. Susan L.M. Aumann, a Baltimore County Republican. "What they call it in the banking industry is redlining."


Maryland Insurance Commissioner R. Steven Orr, a former executive with an affiliate of insurer Zurich Financial Services Group appointed by then-Gov. Robert L. Ehrlich Jr., has cautioned legislators against passing a law that would require insurers to provide coverage in coastal areas, saying that it would only exacerbate the situation by prompting companies to leave the state entirely.

Sen. Thomas M. Middleton, chairman of the Finance Committee and a Charles County Democrat, said that he doesn't think the bill filed by Stone requiring coverage in coastal areas will pass but that other legislation, suggested by Orr, might have a better chance. Those proposals would allow Orr to pre-approve changes to an insurer's geographic perimeters and require that companies consider a certain amount of historical data in risk modeling. They would also give tax breaks to residents who take steps such as putting up storm shutters or anchoring home foundations.

Gov. Martin O'Malley's office is looking at Stone's bill and a companion measure by Del. Joseph J. "Sonny" Minnick, a Baltimore County Democrat, said O'Malley spokesman Rick Abbruzzese.

"Certainly if Isabel taught us anything, it's that people need a safety net," he said.

Many legislators working on the issue say their districts were hit hard by Tropical Storm Isabel in 2003, which spawned floods and caused more than $400 million in property damage in Maryland.

Lisa Ray of Pasadena said that insurers shortchanged her on claims from Isabel, which brought waves crashing through the ground floor of her home on Patapsco Bay, nearly destroying it. So when she heard about some insurers limiting their business in areas such as her neighborhood, she started contacting legislators. The insurers were not involved in her fight over flood insurance, which is underwritten by the federal government, but she was miffed nonetheless.


"It was immediately a hot button with me; I just saw this as another huge injustice and that the insurance companies are at it again," she said. "If they are allowed to choose only low-risk policies, they are going to make even more massive profits than they already make, while putting some homeowners at risk."

Other states have taken more drastic action.

In Connecticut, the attorney general has opened an investigation into attempts by some insurers to require that coastal homeowners install storm shutters, which can be costly, as a condition of continuing coverage. In Georgia, officials are investigating whether an insurer is trying to circumvent a law aimed at ensuring that coastal property owners get coverage. Several states also have fought rate increases, and California ordered several insurers to cut premiums by more than $400 million.

In Congress, legislators are investigating the insurance industry's handling of Hurricane Katrina claims. They are also considering a bill that would add wind coverage to the National Flood Insurance Program; this came after homeowner claims were denied by private insurers who determined damage from Katrina was the result of flooding, not wind.

Insurance companies say they could be on the hook for potentially huge payouts on natural disasters. According to the most recent hurricane study from A.M. Best Co., an insurance rating agency, a Category 4 hurricane plowing ashore near Atlantic City could cause $110 billion in damage throughout the Northeast and leave as many as 30 insurers "in severe financial stress." Category 5 is the strongest storm level.

Unprofitable business


While property and casualty insurers saw their profits rise 12 percent in 2005 to $43 billion despite record-high catastrophe losses, industry officials say other lines of business, including auto insurance, are included in that figure. At the same time, the cost of re-insurance, which is purchased by an insurer to protect against especially large risks, has increased sharply.

Homeowner insurance can be an unprofitable business - insurers paid out $10.4 billion more than they earned in Florida over the past 15 years, according to the Insurance Information Institute. In Maryland, Allstate has been asked by regulators to provide information on its premiums and payouts in the state.

Insurers also say that part of the blame must lie with developers and residents who build in vulnerable places. "I don't think the industry should be vilified for saying, 'You shouldn't be building in a place that floods every year or on those sand dunes, and if you still want to build, it will cost you this much for insurance,'" said Wendy A. Baker, president of Lloyd's America.

Insurance tips in coastal areas

If you are unable to get homeowner coverage in the private market, contact the Maryland Joint Insurance Association, the state insurer of last resort: 410-539-6808 or 800-492-5670;


To file a complaint about your homeowner insurance company, contact the Maryland Insurance Administration: 410-468-2000 or 800-492-6116;

Flood damage is not covered by a standard homeowner policy. Homeowners who live in areas prone to flooding can contact the National Flood Insurance Program: 888-379-9531;