Insurers abandon coastal market

Bethany Beach Vice-Mayor Tony McClenny got a surprise recently, when the agent handling his homeowner’s insurance informed him that his policy was going to be reviewed. In a 47 year history as a customer of State Farm, McClenny said, it was the first time he had been notified that a review would be happening.

Accompanying the review, McClenny said, he was told about a new State Farm corporate policy that no new insurance policies would be written on properties within 2,000 feet of the beach. In Bethany Beach, that line is roughly along the west side of Kent Avenue, making many of the town’s most valuable homes ineligible for new policies with State Farm.

McClenny said the agent had emphasized that existing policies were not being dropped, but new policies for those near-shore properties would simply not be written.

The news came just as McClenny and other area officials met with Delaware Insurance Commissioner Matt Denn regarding plans for many insurers to entirely withdraw from the state’s coastal insurance market, and for many of those remaining to significantly raise their rates.

Denn informed those officials of a plan for Allstate to raise its rates by 20 percent, with the company citing the increasing expense for it to purchase reinsurance from other companies to back up its own policies.

“We want to let Delawareans in the coastal region of our state know that Delaware’s coastline, like coastlines up and down the Atlantic, is going to be facing some difficulties with respect to homeowners insurance in the coming months,” Denn announced Oct. 19.

“One of our major companies, which already declines to insure homes within 1,000 feet of the coast, is expanding that zone to 2,500 feet,” Denn said. “Another major insurer is placing a cap on the amount of new coastal homeowners insurance its agents can sell each month. A third one plans to stop new sales of homeowners insurance to homes within 2 miles of the coast.”

State takes steps as alternatives sought

While noting that the changes were not as dramatic as in other coastal areas in the United States, Denn said the state was taking steps to ensure the impact was not as significant for Delaware property owners as it might otherwise be and that some kind of insurance would be available to everyone.

“We are addressing the situation in a responsible, forward-looking way, so that these changes in the homeowners market have as little impact as possible on our homeowners and businesses,” Denn said.

Indeed, McClenny returned home with information for his constituents on co-insurance available to those at least one lot back from the beach.

He said he’d found out that co-insurance was available from both Farm Family (a former co-op group that is now open to the public for insurance purchases) and Windsor-Mount Joy Mutual (sold locally through Wilgus Insurance). Other companies may also offer such co-insurance, McClenny said, but those two were widely known to write policies in the area.

McClenny also brought back news from Denn on the Delaware FAIR Plan — described as “a pool for homeowners who cannot obtain insurance elsewhere.”

The FAIR Plan is managed by insurance companies and has had a limit of $250,000 in coverage for a house and its contents — a small portion of the value of some of the affected homes. Denn’s announcement included the doubling of that limit — up to $500,000.

“That puts us in line with the FAIR plans of other Atlantic coast states, and it means that people who can’t find insurance from in-state carriers will be able to buy more of their coverage from the FAIR plan and less of it from the very expensive out-of-state ‘excess lines’ carriers,” Denn noted.

The insurance commissioner said additional changes to the FAIR Plan were being made to make it more consumer-friendly and understandable for the increasing number of property owners who will need to take advantage of it.

“We have also required that the FAIR Plan eliminate a significant part of its ‘storm blackout’ rules that make it harder for homeowners to get into the FAIR Plan during storms elsewhere in the country,” Denn said.

“We’ve also required that the FAIR Plan be much more aggressive about informing policyholders and insurance agents about its availability, and we’ve clarified with the FAIR Plan that it also covers vacation homes and manufactured homes,” he added.

Nationwide trend now impacting Delaware

Overall, it’s a mixed bag of good and bad news for coastal homeowners: increasing insurance rates and reducing insurance options, offset by the promise of a bigger safety net for those who are most affected by the decisions of the insurance companies to pull out of the coastal markets nationwide in the wake of Florida’s recent devastating storm seasons and Hurricanes Katrina and Rita in 2005.

“Nationally, insurance companies have been not renewing homeowners policies in the coastal areas or have been putting new restrictions on policies,” Denn said. “These actions are being taken by companies seeking to reduce their potential losses from future hurricanes and coastal storms following financial payouts from Hurricanes Katrina and Rita.”

“After those storms, more than 600,000 homeowners policies were canceled or not renewed in Florida and Louisiana and more than 80,000 coastal policies were cancelled in Massachusetts and New York,” he noted.

During the period of historical records, Delaware has never taken a direct hit from a hurricane, though it has been brushed by a number of tropical storms and is routinely affected by nor’easters. Lying close to sea level, the area’s coastal towns also routinely see problems with tidal flooding.

But damage has largely been limited, with the area’s most devastating storm in modern history being the “1962 storm,” a nor’easter that destroyed many of Bethany Beach’s beachfront structures and carved the Ocean City Inlet.

Still, property owners have learned the lessons of Katrina and place a high value on the ability to insure their coastal homes against the worst Mother Nature might throw at them.

In addition to flood insurance available through the federal government’s National Flood Insurance Plan, which addresses the flood damage most homeowners’ policies don’t cover, property owners are looking to maintain their regular homeowners’ insurance to protect more than the $250,000 of value currently covered for flooding damage on residential properties, $500,000 on commercial properties.

While legislation to increase those limits is pending in the U.S. Congress, most property owners in coastal Delaware have homes valued significant above those amounts or justifiably fear damage by something other than floods.

Thus the ability to obtain affordable insurance — or any insurance at all — is a vital one, and one fraught with even more urgency after the striking visual reminders rendered by Hurricane Katrina.

Changes praised, long-term future unknown

“I’m pleased the Commissioner has succeeded in getting the coverage limits increased,” said Dewey Beach Mayor Dell Tush, whose own insurance for her ocean-block home in Dewey is through the FAIR Plan. “Otherwise, the cost can be astronomical.”

“The inability to find homeowners insurance affects homes in all price ranges and is not just centered on high-priced resort properties,” Phil McGinnis of the Delaware Association of Realtors said. “Affordable housing is affected as well.”

“It’s important for insurance companies to remain stable by reevaluating their risk and making adjustment, but it’s also important for the Commissioner to recognize this issue early and address these coastal issues,” Mary Rowland of the Independent Insurance Agents of Delaware said.

There, McClenny had a bone to pick with the insurance industry. “They’re having record profits and we’re paying for it,” he said, noting a recent report in the Wall Street Journal of industry-wide record profits for insurance companies, despite the pinch of payoffs from the 2005 hurricane season.

The industry was reported as having a 40 percent profit in 2005 — roughly an 18 percent increase in profit over the previous year. At the same time, the industry increased its surplus to $476 billion — a 7 percent increase.

On the other side of the debate, insurance companies have said the profit and surplus margins were needed to ensure their businesses are operating on a solid financial basis that will keep them functioning despite such catastrophic events as Hurricane Katrina. And they’ve cited that same increasing cost of reinsurance after the devastating storms of recent years.

As a result, insurance companies have increasingly shifted the cost of risk in the business to policy holders — resulting in increased rates for those who can still obtain insurance and leaving some looking for other alternatives.

Denn’s office has moved to help some of those people as the shift begins to significantly impact Delaware properties and property owners. Along with the revisions for the FAIR Plan, Denn announced on Oct. 19 the following additional steps:

• Coastal homeowners who lose their coverage and need to discuss options should call the Insurance Commissioner’s consumer hotline at 1-800-282-8611;

• Denn will meet with legislators in November to discuss the need for any legislative action to address the coastal insurance situation; and

• The Department of Insurance will continue to fight a lawsuit brought by the insurance industry seeking to overturn a regulation that bans companies from not renewing homeowners policies after one or two small weather-related claims.