Caught in a storm

In 20 years of homeownership, Barbara Bratcher had never filed a homeowners insurance claim. So when she returned from a two-week vacation last spring to find that a pipe under her kitchen sink had dripped and soaked the floor, warping her kitchen cabinets, she reported it to her State Farm agent.

“They came out and tore out the warped board, replaced a piece of wall behind my sink, dried up the puddle of water and sprayed for mold,” Bratcher recalled. “I paid the $500 deductible, and the company paid out all of $400.”

End of story?

Hardly. Bratcher, an emergency room nurse who owns a 1,400-square-foot, three-bedroom home in Modesto, had unknowingly put herself squarely in the center of an insurance crisis that the industry is calling “the perfect storm.”

Unexpectedly high underwriting losses for non-catastrophic events, increased litigation over so-called toxic mold, investment losses tied to the stock market and more expensive construction materials and methods have led to a near-shutdown of the homeowners insurance market.

State Farm, the nation’s largest personal insurer, is not writing any new homeowners policies in California or 17 other states. Allstate, which earlier this year was refusing to sell to new customers who had filed water damage claims, is now taking on new and renewal customers with one claim in the last three years, but only if they have good credit reports.

All of the major carriers have raised premiums this year, most by double digits and some by as much as 50% for certain customers, and they are all using much stricter standards for policy renewals.

The bottom line for consumers: higher premiums; tougher inspections, especially for older homes that do not have copper wiring, retrofitted plumbing and new roofs; increased scrutiny at renewal time, particularly for policyholders who have filed claims in the previous year; and difficulty securing new homeowners insurance.

The fat ‘90s, when overcapitalized insurance corporations were reaping high investment returns and competition kept rates artificially low, are long gone.

Experts say that consumers will simply have to get used to paying more for homeowners insurance and learn to be judicious about filing claims, treating homeowners insurance as they do automobile policies.

When Bratcher’s homeowners policy came up for renewal in August, she received a bill that was double what she normally paid. When she placed a shocked call to her longtime agent, he apologetically told her that because she had filed a claim for water damage, her premiums would be increased from $543 to $1,000 annually for the next three years. She approached Allstate and Farmer’s for comparison quotes, but they rejected her immediately when she told them she had filed a water-damage claim.

“It was outrageous. I hadn’t made a claim in 20 years,” Bratcher said. “Why do I even have insurance if I can’t make a claim?”

She wound up finding a smaller insurance carrier at a more reasonable $663 annually, with a promise of a reduction after two years, but some Californians have not been as lucky. First-time homeowners, particularly, are finding that the once-effortless task of buying insurance has become a chore.

Natasha Dierwechter, 34, purchased her first home in the Altadena foothills in August. She called her Allstate broker, who carries her auto insurance, to get a policy for the 1,750-square-foot, three-bedroom house with a pool.

“First they told me I’d have to buy renter’s insurance for the place I was living in with two housemates, cancel it and then they could convert it to a homeowners insurance policy,” Dierwechter said.

She complied, but the nightmare was just beginning.

“Because there’s a pool in the backyard, I had to certify that I do not have a child living in the house and will never take in a roommate with a child,” she said. “Next, the inspector came over and saw a pit bull in my backyard. It’s not my dog -- I don’t even know how it got back there -- but that raised all kinds of questions, and they were going to suspend my policy. I had to prove that was not my dog before they would issue the policy.”

Dierwechter began renovations recently and at one point had some concrete piled in the frontyard. Before she knew it, she received a warning that her policy would be canceled in 30 days if she didn’t “clear the clutter.”

“Now I have to take a photo of the house and e-mail it to them to prove that it’s cleaned up,” she said. “The whole thing has been a terrible hassle.”

Insurance insiders blame the industry’s clampdown in large part on attorneys who, they say, have taken advantage of public panic over mold-related health problems. They point to heavily publicized allegations that airborne illness has resulted from mold spores and to a large increase in mold claims in Texas, which cost the State Farm subsidiary there $625 million in capital reserves. State Farm recently received approval to put a cap of $5,000 on mold remediation damages nationwide.

In California, State Farm paid $92 million for 35,000 water-damage claims in 1997, according to company spokesman Bill Sirola. But it cost $190 million to handle 39,000 water-damage claims in 2001 because of the intensive cleanup required to prevent mold growth.

“In 1999, if a toilet would overflow or pipe would burst, it would cost $3,500 to mop up, make repairs and clean out the space with some bleach,” said Dan Dunmoyer, president of the Personal Insurance Federation of California Trade Assn., an insurance lobby group. “That same repair in 2002 now costs $38,000 because there’s such a fear of litigation and courtroom attacks that we have to bring in mold-remediation specialists and people to scrub the air so mold doesn’t develop.”

While the industry blames lawyers and a flighty public, insurance critics sympathize with annoyed consumers. “The idea that mold has caused all this crisis is ridiculous,” said Robert Hunter, director of insurance for the nonprofit Consumer Federation of America.

“There are manic and depressive periods in the insurance cycle. This is the depressive phase, in contrast to the mid- to late ‘90s, when companies were falling all over each other to write homeowners policies,” he said. “State Farm, in particular, was writing new business very aggressively and holding prices down ... so they could compete.”

Because homeowners insurance traditionally has not been a profitable line -- it’s often used as a loss leader for the far more lucrative auto insurance business -- the industry has tended to make up the gap between premiums and payouts by investing in equity markets. That strategy worked well during the ‘90s, when investments paid off handsomely and the large corporations were heavily capitalized, but it came to a crashing halt when the stock market turned sour, said Charlie Titterton, a personal insurance lines analyst and director at Standard & Poor’s corporate and debt ratings agency.

State Farm, which had enjoyed triple-A Standard & Poor’s ratings for years, suffered the largest underwriting loss of any insurance company in a single year -- $9 billion total, with a net loss to the firm of $5.3 billion -- in 2001. As a result, Standard & Poor’s lowered its rating one notch. State Farm’s reaction -- the moratorium on new homeowners policies and the closing of many claims centers in California -- caused a shudder throughout the industry, one that the public is now starting to feel.

Although homeowners insurance remains available, the lid on prices is coming off, Titterton said. “For the three years from 2001 to 2003, I’d say homeowners pricing may go up 40% on average,” he said.

What can consumers do? Shop around, do some research and don’t wait until the last minute before escrow closes to arrange for insurance. Repair or replace older pipes and washing machine hoses regularly, before they leak or burst. And if you have a relatively small loss, consider fixing it out of pocket rather than filing a claim and risking a huge increase or non-renewal.

Don Griffin, assistant vice president for business and personal lines for the National Assn. of Independent Insurers, recommends that policyholders check with their agents before their renewals come up to help avoid the kind of surprise that hit Bratcher.

“They should talk about what they can do to make sure they get renewed and consider taking a higher deductible that will keep their payments down despite the increases,” Griffin said. If a claim has been made and the premium is scheduled to go up substantially, the consumer can ask an agent to shop around for a better deal.

One thing is certain, Griffin said: “Getting homeowners insurance will be more time-consuming and more expensive than it has been in the past.”

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Karen E. Klein is a freelance writer living in Temple City.