Homeowner Policy Rates Up Sharply in California

Homeowner insurance premiums are rising sharply in California, but analysts say it’s unclear exactly why.

Two of the state’s largest insurers, Allstate and Farmers, have requested premium hikes of 20% or more in the last year, while State Farm, California’s No. 1, just received a 6.9% bump.

The insurers say rising construction and repair costs are fueling the rate increase binge. But analysts say California insurers have enjoyed better-than-average profits in recent years, and question whether costs have spiked enough to justify double-digit rate hikes.

“I can’t explain it,” said Brian Sullivan, an independent insurance analyst and editor of Property Insurance Report, which tracks industry trends. Insurers are “asking for rate increases now, but we’ll have to wait for 2001 data to understand why they’re asking.”

Claims costs in recent years have been relatively low, and California hasn’t had any natural or man-made disasters, which usually drive up rates, Sullivan said.

The real culprit may be mold--or rather, fear of mold. Rising mold claims and highly publicized lawsuits have nearly paralyzed the insurance market in Texas in the last year, and experts say the trend is spreading.

“Texas has had very severe mold claims, and it’s cropping up as a major problem in California,” said Charlie Titterton, an analyst with Standard & Poor’s rating service.

In June, Farmers lost a $32-million lawsuit filed by a Texas family over toxic mold in their home. The family said the mold caused severe health problems. The jury in the case said the insurer failed to pay for needed repairs for a water leak, which allowed mold to grow rampant in the house, making it uninhabitable.

Since then, Texas’ top three home insurers, Farmers, Allstate and State Farm, have stopped selling comprehensive homeowners policies in the state.

The new, bare-bones coverage the insurers now offer does not cover mold caused by maintenance problems such as unrepaired roof leaks or dripping faucets.

Legal experts say mold lawsuits, virtually unheard of two years ago, are now a thriving industry in both states. Lawyers in California filed lawsuits representing hundreds of alleged mold victims this year.

How mold concerns are affecting claims in California is still unclear. Many insurers did not even begin to track mold claims until recently, and comprehensive claims cost data won’t be available until next year, said Candysse Miller, executive director of the Insurance Information Network of California, a trade group.

Miller said mold-related claims are a factor in rising rates but not the sole cause. Most analysts expect more rate hikes to come as lawsuits and claims continue to rise, however.

Insurers say the premium hikes are making up for years when they held rates steady while their costs, particularly for home repairs and construction, climbed. Construction costs in the West, for example, have risen about 15% since 1994, the last time many insurers made a rate hike request, according to the National Assn. of Home Builders.

Insurers say they also are seeing a rise in the number and severity of repair claims for water damage--typically from 1980s-era housing. Water pressure regulators are wearing out, leading to more pipes bursting, Miller said.

Bigger houses with more bathrooms and the trend of putting laundries on the second floor are also causing trouble, she said.

“Washing machines used to be in the garage. Now they’re on the second floor,” so burst water lines do more damage, Miller said.

Water-related claims at Farmers “started to spike in 1999 and have gotten more prevalent every year since,” said Jerry Carnahan, the insurer’s director of personal lines. Carnahan said 30% of Farmers’ homeowner claims are now water-related.

But again, mold fears could be a factor in the increased number of claims. Publicity over mold lawsuits has increased homeowners’ awareness about how water damage can provide conditions where mold can flourish, analyst Titterton said.

“If you’re a homeowner and you had mold, it didn’t occur to you to file a claim” before the publicity, Titterton said.

If mold is causing a large increase in claims costs, however, analysts have yet to see the evidence. Claims costs have risen somewhat in recent years, but the California homeowner market has remained profitable.

California insurers paid out about 51.7 cents in homeowners’ claims for each premium dollar they collected in 2000, Sullivan said, compared with 66.4 cents in claims nationwide. In 1999, state insurers paid out 48.2 cents, compared with 63.7 cents nationwide.

These figures are known as “loss ratios,” and any number in the lower 50s or high 40s is considered quite good for the insurance companies, Sullivan said.

It’s possible that claims have suddenly spiked in 2001, or that other market trends--such as the willingness of competitors to raise rates--have encouraged the spate of rate filing increases, he said.

Rate changes of less than 7% do not require a regulatory hearing and usually are approved by the state Department of Insurance. State Farm’s 6.9% increase was granted this week, and Farmers received approval for two 6.9% requests earlier this year. Farmers is awaiting approval for a third rate hike request of 5% made in September.

Larger increases typically get more scrutiny, and Allstate in particular is expected to have to vigorously defend the 22.3% it asked for in October.

Insurers are required to justify increases, and the Department of Insurance is carefully scrutinizing all rate hike applications, said Deputy Commissioner Scott Edelen.