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The San Diego Union-Tribune
Oct 24, 2004
by Dean Calbreath, STAFF WRITER
Fire victims are finding companies canceling, or declining to renew, their homeowners insuranceEver since wildfires devastated Southern California last October, insurers have been working to avoid too much risk in the next catastrophe -- and a growing number of homeowners are finding it hard to obtain insurance as a result.
In the past year, more than 110 San Diegans have filed written complaints with the California Department of Insurance, saying that insurers have either canceled or declined to renew their existing policies or declined to issue new policies.
"I have no insurance on my home. I'm really concerned," said Jill Francis, who recently learned that her insurer -- First American -- would not renew its coverage on her Scripps Ranch home, which has been rebuilt after the fires.
After incurring $2.04 billion in insurable damages through the wildfires, insurers are taking extra precaution to avoid future risks.
Some are using satellite images and computerized mapping to pinpoint and avoid fire-prone areas.
Others are tightening the rules on what kind of properties they will insure -- shying away from homes that are too close to brushland, for instance.
And others are being more stringent about ensuring that insurance policies more accurately reflect the value of the property.
Industry sources say that eventually, the tighter standards could lead to higher rates and more limited coverage for many homeowners.
"Insurers will charge higher rates if they perceive that there is a higher than anticipated risk of loss in the future," said Jeanne Salvatore, vice president of consumer affairs at the Insurance Information Institute.
"Some insurers, especially smaller companies, are realizing that they were overextended" in fire-prone areas, said Jerry Davies, spokesman for the Personal Insurance Federation of California, or PIFC. "They may start asking for rate increases, although they may be waiting to let the dust settle first."
But consumer groups say that most insurers should probably not raise rates by much, because current premiums already account for the possibility of a catastrophe. Despite the wildfires and other billion-dollar-plus disasters, insurers paid out only $1.03 in claims for every $1 they received in 2003 -- one of their best years since the mid-1990s, according to the institute. This year, they are projected to pay only 98 cents.
Typically, insurers pay out slightly more than their policyholders pay them, because they make most of their profits through investments rather than from premiums.
"The possibility of a catastrophic disaster has been built into homeowners' policies for many years," said Harvey Rosenfield, who heads the Foundation for Taxpayer and Consumers Rights in Santa Monica. "The biggest thing we've seen after any catastrophe is companies trying to evade writing policies in the areas that were affected or trying to limit the coverage they offer."
After the Oakland fires of 1991, most insurers abandoned their former practice of providing full coverage of homes and switched to providing coverage to a pre-specified amount, Rosenfield said. That practice led to major problems in the Southern California wildfires.
Nearly 250 burned-out homeowners in San Diego County have filed complaints with Insurance Commissioner John Garamendi alleging that their insurance did not provide enough coverage to rebuild their homes. As the one-year anniversary of the fire approaches, plaintiffs' attorneys estimate that between 250 and 300 homeowners will file suit against their insurers, claiming that they were underinsured.
In the meantime, insurers are tightening their underwriting standards.
Using satellite images, the Insurance Services Office, an industry support organization, last month unveiled a new tool for insurers, involving color-coded maps showing the density of dry grass, trees or dense brush near houses, the irregularities of the local terrain and road access for firefighters.
Bill Raichle, who oversees the organization's risk decision information services, said the maps should help insurers decide whether to underwrite a particular property and how high the policy should be priced.
Consumer groups fear that the maps will lead insurers to avoid some fire-prone areas altogether. But industry insiders disagree.
"This isn't going to be some sort of arbitrary blanket that an insurer will throw over some areas," PIFC spokesman Davies said. "Insurance Commissioner Garamendi has said he wouldn't allow a widespread pulling out of areas. He would prefer insurance agents to go in and look at each house, for whether they have wood roofs, (unfireproofed) decks and that kind of thing."
Most insurers have already tightened their policies on what homes to cover. In February, for instance, Farmers Insurance increased the amount it charges policy-holders with wooden roofs, while lowering rates for customers with more fireproof roofs.
In addition, many companies have become much more concerned about the distance between a dwelling and brush or any combustible material.
"It used to be that 500 feet of clearance, no problem, and some people would insure down to 200 feet," said Gene Brouilette, vice president of Brouilette Insurance Services in San Diego. "Now, a lot of insurers like to see 1,500 or 2,000 feet. Insurers are a little more frightened, and rightly so."
Those new requirements created problems for Jill Francis. Four months before last year's fire, she had no problem getting insurance for her home, which had only 70 feet of clearance from the underbrush. First American covered the cost of her rebuilding but has since canceled her policy.
But Francis, who owns several rental properties, said that because of the insurance crackdown, she is finding it harder to insure properties that were not destroyed by the fire.
One insurer, Encompass, dropped its policies on three of Francis' properties after one was nearly snagged by the fire. The back of the house, its landscaping, spa and outdoor patio caught fire and the interior walls suffered smoke damage, but it was the only house on its cul de sac not to be burned to the ground.
But though the house was still standing, Encompass dropped Francis, noting that she had filed a previous claim on another property -- for vandalism, not fire -- which made her a risky customer by its standards.
"I'm working with an insurance brokerage firm who is trying to find me new insurance, but they are having a hard time finding anybody," she said.
Dave Davies, an alpaca rancher in Crest, lost his insurance coverage two months after last year's wildfires when his insurer, Clarendon National, decided to pull out of the California homeowners market.
Davies spent months looking for a new insurer but could not find one, not even Allstate, which had insured him until he switched to Clarendon four months before the fire. One insurer drafted a policy but rejected it a week later over concerns about the clearance between Davies' house and the underbrush.
Finally, he turned to California's FAIR plan, a state-run insurer that underwrites homeowners who cannot find coverage from private insurers. But there are drawbacks to getting insurance from the agency.
"The insurance will cost me twice as much for a lot less coverage," Davies said. For instance, FAIR will not insure his barn or the equipment stored inside, which escaped last October's fires.
Brouilette said such experiences could be increasingly common for people living near the fire zone.
"A lot of people will have to go through excess and surplus lines," he said, using industry jargon for out-of-the-ordinary coverage. "They might not be able to get broad coverage or they may find they are being charged 50 to 75 percent higher than average. But if you're living on the edge of a canyon, is it right that somebody living on a broad city street should be subsidizing your insurance?"
Besides tightening their standards on what homes to insure, some insurers are redoubling their efforts to make sure their policies accurately reflect the value of the homes they insure.
Even before the wildfires, the Automobile Club of Southern California was studying whether its policies accurately reflected the value of the homes they covered.
Instead of relying on basic data, such as how many square feet the home has, the Auto Club is now using more precise questions about whether a home has hardwood floors or wall-to-wall carpeting, whether the carpets are nylon or wool and whether the bathrooms are standard or custom-designed.
"Some people have had the valuation of their homes go up, some have remained the same, and in a few cases the valuation has actually been lowered," said Alice Bisno, who oversees legislative and regulatory affairs at the Auto Club.
Although the changes were under way before last October, the fires gave them added impetus. The Auto Club, which insured 73 homes that were destroyed, had a policy to pay the full replacement cost, even if the cost exceeded the amount on the policy.
"Because we have a guaranteed replacement cost policy, it's in our own interests to make sure that our policyholders are not underinsured," Bisno said. "One reason we're able to offer the kind of full-replacement coverage we offer is that we're careful in what kind of risks we take. We don't want to change that."
Most other insurers, however, do not have a full-replacement policy, but instead cover homes only to the amount specified on the policy, which is often far lower than the actual cost.
The problem, critics say, is that many insurers do not ask detailed questions about the homes, such as whether they have French doors, bay windows, tile floors and so forth, but instead rely on basic information that understates the value.
"I understand that we have a responsibility to keep our policies up to date, but we're not in the insurance business so we don't have any clue about what our policy covers. That's what insurance agents are for," said Crest resident Davies, who complains that his home was insured for less than half its value.
"If I go to a doctor and ask for surgery, I don't expect them to ask me how they should conduct their surgery. And if I go to an insurance agent, I expect them to provide the information I need and to ask the right questions."
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