By Steve Kilar, The Baltimore Sun
1:17 PM EST, January 31, 2013
In the six months that have passed since Margaret Fulcher received her most recent homeowners insurance policy, she has moved on from being shocked to simply incensed.
The premium to fully insure her Baltimore rowhouse increased fourfold last year — to a sum she can ill afford and one that she thinks does not accurately represent the cost of replacing her home.
"This is a case of homeowners insurance underwater," said Fulcher, comparing her premium to a mortgage that is worth more than the home to which it is attached.
Although Fulcher's skyrocketing increase — from $861 to $3,383 — is an extreme, premiums throughout Maryland have been increasing in recent years. It's a result of more payouts and higher building costs, experts say. And many homeowners might want to begin setting aside money to pay home insurance bills, which show no sign of leveling off.
"How many more people are they doing this to?" asks Fulcher, 60, who gets by on disability income after suffering several strokes in her 40s.
Fulcher's insurance story begins with the August 2011 earthquake. Part of her roof pulled away from the wall, causing a severe leak. She had the leak fixed, to the tune of $2,000 out of pocket (her policy didn't cover earthquake damage), but a claims agent came out and inspected her home.
After that inspection, she received a letter. Her three-story brick house near Little Italy and the Perkins Homes would cost more than $563,000 to rebuild if totally destroyed, the letter said.
Before that, her home's replacement value was $167,000. Her insurer, Travelers, declined to comment on her case, citing privacy issues.
"This is not a half-million dollars' worth of house," Fulcher said. "Whatever it would be replaced with would not cost half a million, you can bet on that."
'No expensive stuff'
She bought the house, at East Baltimore and North Caroline streets, from the city more than 30 years ago. It's big, about 3,400 square feet, but it's not fancy. The main kitchen area, on the first floor, still has harvest gold-colored appliances. The bathrooms are not bedecked in granite or marble. There is no heat in the stairwell.
"There is no expensive stuff in here," Fulcher said. "All I did was put down carpet because it was all tile. ... I have done nothing to it."
Built in 1920, according to tax records, the house's street level was designed as a storefront, as were the rest of the buildings on her block, which has long been on the cusp of gentrification. The state values the home for property tax purposes at less than $350,000, and Fulcher says that comparable homes in her neighborhood are selling for well under $300,000.
She refused to shell out the new premium, but it was paid by her mortgage company, so now she owes the money to her lender. A review of the policy by the Maryland Insurance Administration determined that nothing was amiss, and now Fulcher is awaiting a hearing on the administration's decision.
In the meantime, she called two other insurance companies, she said, but was quoted similar rates. She feels stuck with the new, expensive policy, she said.
"I don't need a half-million dollars' worth of insurance," Fulcher said.
Homeowners insurance rates have gone up moderately in the past few years, according to the state insurance administration. The average rate for the most common type of policy in Maryland went up less than $100 between 2005 and 2010, according to administration records. In 2005, the average homeowner paid $696; in 2010, the average was $784.
Replacement cost — the factor that increased so drastically on Fulcher's house — is only one component insurance companies use to calculate rates, according to the administration.
The replacement figure does not encompass the value of the land on which the home is built but is intended to cover the expense, minus any deductible, to return the home to the way it was before the loss occurred. It is not supposed to take into account the market value of the home.
Prior claims, the manner of construction, a home's age and the adequacy of municipal fire protection are other considerations insurance companies use to calculate rates, according to the insurance administration.
Plus, there are variables about the policy itself that can influence the premium, including the amount of coverage required by a mortgage lender and the deductible, the administration said.
At State Farm, a major insurer of homes in Maryland, rates are "based on each state's claims experience," said Anna Bryant, a regional spokeswoman for the company. "We take into account claims during previous years as well as projected losses, expenses and premiums," she said.
Increasing claims amounts are driving the rise in premiums, said David L. Corum, vice president of the Insurance Research Council, a nonprofit supported by property and casualty insurance companies and their associations.
Across the United States, the yearly average homeowners insurance claim payment per insured residence went up 173 percent between 1997 and 2011, according to a report the council published in September. In Maryland, the increase over the same period was 232 percent, the report said.
In 2005, the average claim payment per insured residence in Maryland was just under $210 — and very few of the claims were related to catastrophes, according to the council's report. In 2011, the average payment was almost $615, and more than 40 percent of the claims were related to catastrophes, it said.
"Claim costs clearly are the biggest driver of the cost of insurance," Corum said. "There's a huge increase in catastrophe-related claims in Maryland."
Costs passed on
Fulcher's take on her rising premium coincides with Corum's explanation of the state's homeowners insurance trends. It's the increasing amount that insurers are paying out for natural disasters in recent years — such as Hurricane Irene in the summer of 2011 and the record snowfall in the winter of 2010 — that are encouraging insurers to find ways to increase consumers' rates, she said.
"I think the insurance companies have paid out a lot of money for various storms and so forth, and this is how they're getting their money back," Fulcher said. "It's a way to recoup money. ... You've got to get it off the back of somebody."
The most likely explanation for Fulcher's "unusual" premium spike is that her home's replacement value was too low to begin with, said Steven Weisbart, senior vice president and chief economist for the Insurance Information Institute, which has dozens of insurance companies as members.
Fulcher said the last time an inspector looked at her home and arrived at a replacement value was about a decade ago, when she first applied for a policy with Travelers. It could be that the original estimate was inaccurate, Weisbart said, but there are other factors that might also be contributing to the increase.
"There's all kinds of lesser costs that add up. Those get passed through, just as the price of leather would if you're selling shoes," he said.
For instance, because interest rates are so low, insurers are making less money on investing premium funds than they used to, he said, and they have to raise rates to compensate. Plus, the costs of building materials are rising faster than inflation and because the number of claims is increasing, the price of reinsurance (essentially, insurance for the insurer) is also rising, Weisbart said.
There's also the fact that instances of severe weather seem to be increasing, an indicator that the number of claims will stay elevated, he said.
Although most of what goes into calculating an insurance rate is outside a homeowner's control, Fulcher plans to argue for a reduction at her hearing. Characterizations that her home has a finished basement and a fireplace, for instance, are inaccurate and should not be used when calculating replacement value, she said.
But figuring that a reduction in her premium is unlikely and wondering where she's going to get the money to reimburse her mortgage company, she is contemplating reducing her coverage.
Travelers sent her a letter saying, "Our underwriting standards prohibit us from continuing a policy where the dwelling is not 100% insured to value," so she would have to change insurers if she were to choose to decrease her coverage.
That strikes Weisbart as a short-sighted solution. Although it might seem like a good idea to keep the premium down, when a home is destroyed, most homeowners see things differently and would want to be compensated for its full value, he said.
"If your entire house burns down, most people in that situation are not going to be rational economic actors," Weisbart said.
Shopping for insurance
Prepare to compare. Homeowners should prepare for their comparison shopping phone calls with insurers. Be ready with information about the home, including the type of construction and the distance to fire services. Give each insurer the same information, so that true comparisons can be made between policies.
Discounts. It never hurts to ask what discounts an insurer offers. Many insurers offer a markdown to consumers who bundle several types of policies. Installing smoke alarms or a security system might lead to a premium reduction. There may also be discounts for seniors, nonsmokers and membership in some associations.
Deductibles. Most policies involve more than one deductible. Hurricane and wind losses, for instance, might have a different deductible than fire loss. As storms become a greater threat in the Mid-Atlantic, it is more important for homeowners to understand how these varying deductibles will be applied.
Credit history. Insurers offering homeowners policies in Maryland are not allowed to take the applicant's credit history into account when pricing a policy or determining whether a policy should be canceled or renewed.
Loss history. Insurers may look at two types of loss history when pricing a homeowners policy. First, they may see if the applicant has filed homeowners insurance claims — on any property. Second, they may review whether prior owners have filed insurance claims on the applicant's home. An applicant can confirm the home's loss history by obtaining a free report from companies such as LexisNexis Risk Solutions and Insurance Services Office Inc.
Source: Maryland Insurance Administration