By Sandra Fleishman
Special to The Washington Post
Saturday, December 30, 2006
Major insurance companies are throwing cold water on America's new passion for living near the ocean and by the bay.
Recently, the biggest companies in the homeowners insurance business announced that they will stop writing new policies in some coastal areas of the mid-Atlantic and will otherwise limit coverage there. They have already reduced their coverage in states more prone to hurricanes.
Some real estate agents say they expect the situation will make it harder to sell second homes and investment properties on the waterfront. "We've already been experiencing problems since last year getting insurance for second-home buyers and the investment class, because many times the properties are more than five miles from the firehouse and there aren't any fire hydrants around, although they could just throw a hose in the pool or in the river," said Schuyler Benson, an owner of Benson & Mangold Real Estate, a brokerage on Maryland's Eastern Shore.
Benson said the insurers that will write policies are insisting that buyers also use their companies' coverage for their primary homes and cars, a problem for out-of-town shoppers. Some people, he said, are deciding not to buy.
Benson said he has not heard of any effect from the recent announcements that insurers are tightening coverage, "but I suspect that these changes won't help."
In Delaware, agents have been taking the changes in stride, said Camilla Conlon, the new president of the state Realtors association and a Rehoboth Beach agent with Jack Lingo Realtors. "What I have found in the last six months is that many agents are writing contingencies in their contracts for a week or 10 days so the buyers can see if they can get acceptable insurance."
She added, "Most of the time they can."
But, she said, "It has become a little less easy to do and a lot more expensive."
Allstate, the nation's second-largest home and auto insurer, told regulators in Maryland this month that beginning in February it would no longer sell new property insurance in all or part of 11 counties that are on or near water, mostly on the Chesapeake Bay and its tributaries. (Affected are Calvert, Dorchester, Somerset, St. Mary's, Talbot, Wicomico and Worcester counties and parts of Anne Arundel, Charles, Prince George's and Queen Anne's counties.)
Allstate also will no longer write new homeowners policies in 19 coastal counties of Virginia, said regional corporate relations manager Debbie Pickford. And in the coast-hugging states of Delaware, New Jersey and Connecticut, the company will not write new business no matter where the property is. There is no change in D.C. coverage, Pickford said.
She noted that Allstate agents, who are independent contractors, will still offer quotes from third-party carriers to those seeking new coverage.
Nationwide Mutual Insurance stopped writing new business in coastal areas two years ago, including two Zip codes near Ocean City.
State Farm Insurance, the largest insurer in the mid-Atlantic, recently moved to limit its coverage, too. About three months ago, the company said it would no longer write new business for properties within a mile of the water, spokesman Dick Luedke said. Previously, the rule was not to write within 1,000 feet.
The insurers say their actions are necessary to protect current customers in light of predictions that more strong hurricanes will strike the coast. Allstate's Pickford and other regional representatives of the company say the potential for loss is too high to ignore.
The reason State Farm changed its definition of a coastal area, Luedke said, "is that we have to manage our risks so we can keep the promises we've already made before we make any new promises."
But J. Robert Hunter, an insurance expert at the Consumer Federation of America, said Allstate's decision to limit coverage in the mid-Atlantic, and to take stronger actions on the Gulf Coast and elsewhere to drop existing policyholders, will cost consumers more everywhere because there is less competition.
"Allstate has been the Darth Vader in this story," Hunter said, "threatening first to non-renew some 300,000 policyholders in Florida right after Hurricane Andrew, which caused a huge crisis in that state." Now, he said, the company is "trying to lead others to walk away" from a consensus after the 1992 hurricane that insurers would cut risks in the future by raising rates "a lot" in coastal areas, increasing homeowner deductibles and moving the highest-risk residents into a state-backed fund.
Allstate's actions are "dramatic and unnecessary," Hunter said. "They will have an unbelievable profit this year, 50 percent more than they've ever earned." He estimated the company's profit for the year at more than $4 billion.
Allstate says its goal is to minimize risks in the wake of Katrina and other hurricanes that demolished Gulf Coast property and caused the company to lose $1.5 billion in the third quarter of 2005. Over the past few weeks it has steadily expanded the areas where it will not write new business up the East Coast.
"My answer to [comments about profiteering] is that we were making a profit in 2005, and then Katrina came along in the third quarter and we made no profit," Pickford said. For all of 2005, the company earned $1.8 billion.
Existing customers in the mid-Atlantic are not affected by the Allstate and State Farm changes, although Allstate recently dropped coverage for about 12,000 homeowners in South Carolina, 4,000 in North Carolina and an unspecified number in Alabama. Before that, the company had dropped customers in Florida and eight downstate New York counties, along with 26,000 Texas policyholders for wind damage, after limiting coverage in coastal areas of Texas, Louisiana and Mississippi.
Maryland regulators say consumers should not be alarmed by the announcements. "There are plenty of other companies to choose from," said Darlene Frank, director of public affairs for the Maryland Insurance Administration.
Ken Schrad, a spokesman for Virginia's insurance regulator, the State Corporation Commission, said: "Under Virginia law, underwriting standards are not regulated. So the state can't force insurers to write a risk they don't want to write." But the state "tries to help by maintaining a list of companies that are still willing to write along coastal areas."
Virginia's Bureau of Insurance two weeks ago issued a news release to alert residents that top writers of property insurance are imposing mandatory hurricane deductibles of 5 percent on new and renewal policies, up from 2 or 3 percent in the past. On a $500,000 house, that means the homeowner would be required to pay the first $25,000, instead of the first $10,000 or $15,000 as in the past.
The bureau also said that residents could contact their agents to see whether coverage is available with a lower deductible from what is known as the "surplus lines market," but the news release noted that these carriers are not subject to the same regulatory requirements as licensed insurers and that there is no coverage under the state guaranty fund for unpaid claims if a surplus lines carrier becomes insolvent.