[StBernard] State Farm will raise rates for mom-and-pop landlords, drop their wind coverage

[Westley Annis]

State Farm will raise rates for mom-and-pop landlords, drop their wind
coverage

Published: Sunday, January 16, 2011, 9:03 AM

 By Rebecca Mowbray, The Times-Picayune 

State Farm Fire and Casualty Co. is raising insurance rates on nearly 30,000
small rental properties by a statewide average of 19 percent and dropping
wind and hail coverage in the New Orleans area and other coastal parishes.

The move is expected to put pressure on small landlords, who are already
dealing with rising taxes and sanitation rates, at a time when affordable
housing for renters is in short supply in the New Orleans area.

"I think it's clearly disastrous," said James Perry, executive director of
the Greater New Orleans Fair Housing Action Center. "Every single cost that
a landlord has, the landlord has no choice but to pass that on to the
renter. This will give an across-the-board increase to the type of rentals
that are most important in New Orleans: the mom and pop rentals."

Losing wind and hail coverage could also force small property owners to turn
to Louisiana Citizens Property Insurance Co., the state-sponsored insurer of
last resort, for coverage at a time when state officials are trying to
whittle down the number of properties Citizens insures.

State Farm, Louisiana's largest residential insurer, began increasing rates
for new policies to cover single-family homes, duplexes and condominiums for
rent on Dec. 15. Starting on Feb. 1, some 29,034 existing customers will
lose their wind coverage and see rates rise on those same types of rental
properties as their policies renew.

The increases are the first rate changes in State Farm rental policies since
2004. State Farm spokeswoman Molly Quirk said that part of the rate increase
calculation is the value of cutting the wind and hail policy.

59% increase

While the statewide average rate increase is 18 percent, actual increases in
South Louisiana can be much higher.

In Orleans, Jefferson and protected parts of St. Bernard and Plaquemines,
the average increase will be 59.2 percent, according to State Farm; in areas
outside of levees in Plaquemines it will be 93.8 percent; and in areas
outside of levees in St. Bernard, it will be 21.1 percent. In St. Charles
Parish, the average increase will be 19.2 percent. In St. James and St. John
the Baptist, it will be 22.6 percent. In St. Tammany rental policies will go
up by an average of 7.3 percent. Other coastal parishes will also see
increases.

But to help ease customers into the elevated rates, State Farm is capping
premium increases at 30 percent the first year, and will phase in any
additional increase in the second year.

Wind and hail coverage is being dropped on rental policies in Orleans,
Jefferson, St. Bernard, Plaquemines, St. Tammany, St. Charles, St. John the
Baptist, Terrebonne, Lafourche, St. Mary, Vermilion, Iberia and Cameron
parishes.

Not homeowners

State law limits the types of changes insurers can make in homeowners
policies once a customer has been with a company for more than three years,
but Rich Piazza, chief actuary at the Louisiana Department of Insurance,
said that State Farm is free to drop wind and hail coverage on rental
property owners, no matter how long they've been with the company, because
the properties are not owner-occupied.

"This is not homeowners," Piazza said. "This is more like a commercial
policy if someone owns a rental property. It's not owner-occupied."

When landlords lose their wind and hail coverage, they can either keep doing
business with State Farm and purchase a separate wind and hail policy from
Louisiana Citizens Property Insurance Corp., or hunt for a new coverage with
wind and hail from another carrier, or go without wind and hail coverage if
they own the buildings outright.

Some landlords might not want to leave State Farm if they also have their
own homes and cars insured with the property, and State Farm agents have
strong incentives to try to hang onto the business by writing a wind policy
with Citizens. But getting a tandem wind-and-hail policy from Citizens is
generally more expensive than having a complete policy with another company.

Shifting to Citizens

Having tens of thousands of people seeking wind and hail coverage through
Citizens would concentrate the greatest risk on the backs of the public,
since Citizens has the right to bill all owners of insured property in the
state for costs if it runs out of money in paying claims, and by extension,
the taxpayers at large, since property owners can claim credit on their
state taxes for any assessments paid to Citizens. And increasing the number
of properties insured by Citizens also runs counter to efforts to reduce its
policy count.

Richard Robertson, chief executive officer of Citizens, said that Citizens
was notified a few weeks ago of State Farm's change, and Citizens is
prepared to take whatever rental or wind-only business comes its way.
Citizens believes it will be about 7,000 policies.

Landlords have options

Independent insurance agents say landlords do have other options.

Marc Eagan, president of the Eagan Insurance Agency in Metairie, says there
is plenty of capacity to write new small rental properties with surplus
lines companies, meaning companies that are not backed by the Louisiana
Insurance Guaranty Association, but Eagan notes that surplus lines policies
are generally more expensive. Regular insurers that are backed by the
guaranty fund probably wouldn't take on small rental units unless they got
the landlord's house or car to make it worthwhile, Eagan said.

"I think there is a market other than Citizens," Eagan said.

Jim Moore, a former State Farm agent who now has an independent insurance
agency in Destrehan, said he can think of three insurers who would write
small landlord policies. "With an independent agent? No problem," Moore
said. "What will hurt these people is if they get complacent and stay with
the State of Louisiana," Moore said, referring to Citizens.

Tammy Esponge, association executive for the Apartment Association of
Greater New Orleans, said the ultimate impact of the State Farm increases
will depend on how much financial cushion small landlords have. "It could
raise rental rates, they may have to sell, they may have to foreclose," she
said.

Esponge said she's concerned that other insurers may decide to follow State
Farm's example. "I guarantee you, if other companies follow State Farm,
there will be problems," she said.

Squeezing out tenants

Don Vallee, a Louisiana Housing Finance Agency board member and former head
of the Housing Authority of New Orleans's landlord association, has been a
State Farm customer for 25 years. Like other landlords, he's trying to
figure out how bad the increases will be on his properties and what other
options he has.

"Between the city raising taxes, and sanitation charges, this is all on the
backs of the people who truly can't afford it," he said. "Are we now going
to deter any future growth in rental, when we desperately need it?"

Vallee notes that there are limits to how much landlords can charge because
wages in the area are low. Others note that rental issues are potential
blight issues for the city, because if units become vacant, landlords are
unlikely to reinvest in them if they can't cover their costs.

Other rate increases

Meanwhile, the increases in the rental dwelling policies come as State Farm
is raising prices on other major lines of business.

As other companies rushed to raise rates after Hurricane Katrina or
aggressively trim their policy counts, State Farm won accolades from
Insurance Commissioner Jim Donelon for coming in with only a 3.3 percent
statewide average rate increase on homeowners insurance in 2006.

But more recently, State Farm has been actively raising rates on several
lines of business.

It won an overall increase on homeowners policies of 8.3 percent in 2009.
State Farm immediately came back with a proposed 19.1 percent increase, but
the Louisiana Department of Insurance rejected it. The company eventually
won a more modest 9.9 percent statewide average rate increase; renewals
started in August 2010, and will raise $38.1 million from 301,048
policyholders.

In April 2010, State Farm began raising rates on condominium associations
and other types of commercial buildings with a statewide average rate
increase of 16.3 percent. The move cost 20,487 policyholders $9.3 million.

The latest one, the increase in rental dwelling policies and condominium
unit owner policies, will raise $4.87 million from landlords with State Farm
coverage.

Quirk, the State Farm spokeswoman, said the moves are all about making sure
that rates are "adequate" and "properly priced" so that the company can
remain in Louisiana over the long term. "State Farm is here to stay," she
said.