Homeowner Insurance Crisis

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Once upon a time, the stock market made money, mold was not considered a health hazard and homeowners insurance was something most of us simply took for granted.

But today we are in the midst of what many are calling an insurance crisis. Companies are raising homeowners' premiums across the board, and in some cases even tripling their rates. In many parts of the country issuers have completely shut their doors to new policies. Customers, meanwhile, are being scrutinized like never before and dropped if they file too many claims.

Insurance has even become a deal-breaker in real estate transactions. Without homeowners insurance, remember, it's virtually impossible to get a loan. Not only are insurers more picky about the risks posed by would-be buyers based on their record of prior claims and their credit history, they are looking closely at past claims made on the property itself. "I've heard from a lot of Realtors who have either seen transactions fall through or have had to really scramble to find their clients an insurer," said Marcia Salkin, who heads an insurance task force created by the National Association of Realtors in August.

"We're advising people to start shopping for an insurance policy the day they enter a contract," said Benny McMahan, CEO of the Texas Association of Realtors.

Insurers say escalating repair costs and the increase in mold-related claims (especially in warm, wet climates) among other things, are to blame for higher prices and more conservative underwriting practices. Of course, their sagging investment portfolios haven't helped matters either.

"For 19 years the homeowners market was a loser for the property and casualty companies, but they weren't increasing premiums because they were making up for it in other places, namely the stock market," said Madelyn Flannagan, vice president of education and research for Independent Insurance Agents & Brokers of America, an industry association. "Consumers are seeing price increases that should have been gradual over the last 10 years handed to them all at once." Worse than price increases are the increasing numbers of non-renewed policies and in some cases houses that are uninsurable. "The market is very hard and many companies aren’t writing homeowner policies or are writing policies with lots of restrictions. State Farm has stopped writing new homeowner policies, and Farmers Insurance won’t write policies on houses more than 70 years old."

Getting a Clue

Buying a house with a past history of claims can be especially difficult. Insurance carriers check a property’s claim record before they will write a policy on it. Water or mold claims are red flags, of course, but homeowners can also set off alarms simply by asking about their coverage, without ever filing a claim.

Most insurers research a house’s insurance history through a claims-sharing database called the Comprehensive Loss Underwriting Exchange, or CLUE, maintained by ChoicePoint in Alpharetta, Georgia. Because the information is shared, an MSI agent can find out if a claim was made against State Farm, for example. Homeowners can buy their own CLUE reports at www.choicetrust.com. (At the same site, you can also order a copy of your credit report and score.)

The CLUE report lists every claim filed against the house in the last five years, and even includes inquiries about potential claims. So you should file claims only for substantial losses. Making small claims can lead to higher premiums or cancellation. And if you ever need to call your insurance agent to see if you are covered for possible damage, be sure to start the conversation by saying something like, “Mary, this is a completely hypothetical inquiry.” Otherwise, Mary might open a file on the inquiry, which will show up in your CLUE report and cause trouble later on.

Good Maintenance Pays Off

The single most important way homeowners can avoid insurance hassles is by upgrading and maintaining their property. If the roof leaks, get it fixed. Then check your electrical, heating, and plumbing systems. “The house better have circuit breakers; fuses are a no-no,” says Brick. “We want to see forced-air heating. If you have a fireplace, how recently was it cleaned? Creosote in the chimney can burn, and smoke damage alone can trash a house.” The homeowner should show that a competent electrician upgraded the system to modern code and that all major appliances have their own outlets. Because of the threat of water and mold claims, insurers pay special attention to plumbing. “If you have old galvanized water lines, replace them,” he says. “Carriers want to see copper or plastic.”

What should the owner do when it comes time to sell? Says Brick: “My very first recommendation is this: If there have been any claims on the house, disclose them, and give the buyer as much information about the claims as possible, so the buyer can check them out.” If your CLUE report is clean, you can use it as a marketing tool. “And if you have had repair work done by licensed contractors, give the buyer all the paperwork,” says Brick. “That way, if problems turn up later, the buyer can go after the contractor.”

If you are a buyer, insist that the seller provide a CLUE report and share it with your agent. Only the owner can obtain the report, but you can request a copy as a condition of your purchase offer. If you are renting and thinking of buying a house, take out a renter’s insurance policy now. That way, you will already be a customer when the time comes to seek homeowner’s insurance. And if your purchase contract doesn’t include an insurance contingency, find out if you can get and afford insurance before you remove your inspection contingency.