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The San Diego Union-Tribune
Oct 25, 2002
by Dean Calbreath
Many in San Diego Stung by Insurance Rate IncreaseEarly this month, Dan Kenny signed the biggest insurance check he has ever written: $50,000 for just 30 days of coverage or about $250 per working hour.
Kenny whose business, Kenwall Fireplace Services, installs hearths and chimneys throughout the county won't be paying those rates for long.
In fact, when his policy expires in two weeks, Kenny won't be paying a dime for insurance. Why? Because he can't find an insurance company willing to sell him a policy.
"Going without coverage means that everything I've ever worked for is on the line," Kenny said. "My only hope is that we can survive until this insurance problem reaches crisis proportions so the public will finally do something about it."
For many people, construction firms, landlords and, increasingly, home buyers the sky-high rates and rapid-fire cancellations of insurance policies have already hit crisis proportions.
In the past year, rates for some homeowners have jumped more than 50 percent. Insurance for builders and subcontractors has also skyrocketed or disappeared altogether.
"There's no such thing as affordable insurance any more," said Marc Kaplan, President of Aspen Insurance Brokers in La Mesa.
Kaplan said several of his clients mostly in the construction industry are verging on bankruptcy because of their skyrocketing insurance rates.
"I can't remember a market where there's been this kind of crisis in every line of insurance," he said. "I've been in the business more than 20 years and I've never seen a market like this."
More rate increases are in store.
Since Sept. 1, the California Department of Insurance has approved more than 75 applications for double-digit increases in insurance rates. The biggest request came from Fireman's Fund, which applied for a 317 percent increase on some lines of insurance. The regulators whittled the request down to 41 percent.
"We're getting complaints about the increases," said department spokeswoman Nanci Kramer. "But the fastest-growing complaint comes from people who call in and say, 'My insurance company won't renew me. Is it legal?' The fact is that insurers decide who they're going to cover and who they won't."
Insurers cite a number of reasons why they are raising rates and abandoning customers: rampant litigation, investment losses, rising home prices, unforeseen costs from mold damage caused by flooding.
Indeed, insurance claims have been rising sharply. Last year, homeowners' claims doubled from $21.9 billion to $44.9 billion, fueled partly by a rise in claims over mold damage. Workers' compensation claims rose 74 percent, from $17.6 billion to $30.1 billion.
On average, insurers last year paid out $1.16 for every $1 they collected from clients, said Don Griffin, who oversees business and personal lines at the National Association of Independent Insurers. In a typical market, the insurers could withstand such losses by earning money on investments. But that hasn't been possible in the past two years.
"It's not just the stock market. It's the changes in bonds and interest rates," Griffin said. "We're not able to make up for costs through investments.
So companies are becoming a lot more selective in the policies they write. And they're re-examining the business that's already on the books."
To cut their losses, insurers are exiting areas they view as unprofitable.
State Farm, for instance, abandoned the homeowners market this spring, citing rising claims. Other companies are dropping clients who file claims particularly in water-damage cases, because litigation over mold is so costly.
Mary Anne Stevens, who owns a couple of condominium projects in San Diego, had a tenant who flooded a duplex by using her washing machine when the sewer was backed up. The flood cost $10,000, prompting Stevens to file her first claim with her insurer. The insurer paid the claim, but canceled Stevens' insurance not only on the flooded duplex, but on all her properties.
Stevens now has new insurance. But because of the claim, she is paying three times as much as before.
"If I had known they were going to cancel the policies, I would never have reported the problem. I would have taken care of it myself," she said. "It's a real racket. You pay a lot of money every year and then when something happens, they cancel you. What do you have insurance for, anyway?"
Critics say insurers brought some of their losses upon themselves. They say a large chunk of the industry's difficulties stem from risky investments the insurers made in the 1990s, as they strayed from their traditionally conservative practices.
"They went to Wall Street in the 1990s and got greedy," said Doug Heller, consumer advocate of the Foundation for Taxpayer and Consumer Rights, a watchdog group in Santa Monica.
In a recent study, the foundation found that as recently as 1998, the top 10 insurers in California held more than half their money in government bonds and other conservative investments. But by 2001, 57 percent of the money was invested in stocks and corporate bonds.
By investing so heavily in stocks, the insurers exposed themselves to greater risk. The foundation found that the top 10 insurers lost a quarter of a billion dollars this year in investments in just five companies: Enron, WorldCom, Adelphia, Global Crossing and Tyco International.
Insurers say consumers benefited from stock market investments during the 1990s, when rates were kept artificially low. But critics say the industry should do better at protecting their clients from sudden jolts in cost.
"It's a nightmare," said Lucy Harris, an insurance agent in La Mesa.
"Everybody's to blame. The insurers mismanaged things, trying to make up for their undercapitalization overnight. And the public has made matters worse by suing everyone in sight whether or not they've done anything wrong, since they know the insurance companies will pay."
Dan Kenny said litigation was one of the factors that pushed his company to the brink.
Just two years ago, Kenny was paying $ 40,000 a year to insure his fireplace company. Like most subcontractors, he was named in a series of lawsuits since construction suits often name all the contractors on a project, regardless of whether they were involved in the alleged damages. Kenny said his work was never in dispute.
Last year, as insurers began shying away from the litigation-prone construction field, Kenny's insurer dropped him as a client. He found a new insurer, but the premiums shot up to $ 267,000 per year.
Kenny said the insurance increased his costs to the point that he began losing contracts. His revenue dropped from $ 5 million to just $ 1 million, prompting him to cut his staff in half, from 25 workers to 12. But nothing prepared him for the insurer's decision to drop him.
"They waited until the day before our policy lapsed before telling us they weren't going to renew us," he said. "They told us they would extend the contract by an additional 30 days, so we could could finish the jobs we were currently working on if we paid them $ 50,000 in a cashier's check the next morning.
Given such short notice, we had no choice but to take the offer."
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