Insurance

 

Robert Dubie was paying around $1,100 a year to insure his Paradise, Calif., home before it burned down in a wildfire five years ago. He rebuilt it with a host of fire protections, but it costs 10 times as much to insure.

He couldn’t get a policy that covers fires, so he turned to California’s insurer of last resort for fire insurance. The cost for that policy is more than $9,600 a year. He pays around $1,200 a year for a policy to cover other risks. 

“The insurance is more than my mortgage,” Dubie said. “The cost is astronomical and the coverage is not as good as it used to be.” He said he and his wife will struggle to keep their home.

Hundreds of thousands of people nationally are signing up with state insurers of last resort as home insurers pull back from disaster-prone areas. 

More than 30 states have some form of last-resort plan for people who can’t get coverage elsewhere. Plans can be statewide or restricted to coastal regions. Coverage varies between states, ranging from all-perils policies to those that cover wind, hail or fire only.

The plans were designed to be temporary safety nets. As the private market shrinks, however, the plans are becoming insurers of first, not last, resort in some high-risk areas. In Florida, the Citizens Property Insurance last-resort plan is the biggest home insurer in the state with 1.4 million policies.

Florida, California and Louisiana have each seen policyholder numbers for their last-resort plans more than double within the past five years, according to plan representatives, and there’s no sign of a letup.

The California Fair Access to Insurance Requirements Plan is piling on policies, adding what a spokesman called a historic 25,000 policyholders in August—more than three times the 7,000 monthly cap on new home policies Farmers Insurance imposed recently in the state. 

The exodus to last-resort plans is leaving many people saddled with what can be high-cost, bare-bones coverage. 

“These plans were really only supposed to be a ‘break glass in emergency’ type of a product,” said Douglas Heller, director of insurance at the Consumer Federation of America. “Now that the insurance industry is walking away from communities, we’d better have a much more robust and healthy public backstop.”

“This is such an obvious slow motion train wreck,” said Rex Frazier, president of the Personal Insurance Federation of California, an industry body.

Insurers are concerned they will have to pick up the tab if the California Fair Plan can’t meet its claims, and may not be allowed to recover that cost through rate increases, Frazier said. That’s helping drive the pullback from the state, he added. 

Michael Soller, California’s deputy insurance commissioner, said, “The growing Fair Plan is a problem not just for people in the Fair Plan, but for everybody in the state.”

Robert Dubie has used wood from fallen trees from his old property that was destroyed in the fire to make things, including a wooden base for a fan.

Even in states where the last-resort plan offers fairly comprehensive home-insurance coverage, such as Citizens in Florida, the risk of an additional charge levied on insurers, policyholders or taxpayers can be a significant downside. Floridians with Citizens policies could get hit with a surcharge of up to 45% of their premiums if the plan is wiped out by a big storm.

“Policyholders are much better off being with a private insurance company than Citizens, not only for better coverage but to escape the potential ‘tax’ that can happen,” said Lisa Miller, a former Florida insurance regulator.

Another downside to the plans, consumer advocates say: Most are actively trying to shrink, so have little incentive to handle claims efficiently.