By Molly Parker
Staff Writer

The U.S. House of Representatives earlier this month passed a controversial proposal to expand the National Flood Insurance Program to include wind damage, even as President Bush threatened to veto the plan, saying it would encourage people to build in vulnerable coastal areas.

House Majority Whip James Clyburn, D-S.C., said in a statement it is “legislation designed to hold insurance companies more accountable and prevent the denials of coverage that so many Katrina and Rita (hurricane) survivors were rightfully entitled (to).”

In the wake of Hurricanes Katrina and Rita, scores of homeowners sued their insurance providers, claiming they passed off the wind damage for which they would be liable as flood damage, the federal government’s domain. The legislation was aimed at eliminating that headache for homeowners seeking claims after a weather catastrophe, said Clyburn spokeswoman Kristie Greco.

In the aftermath of Katrina, insurance premiums rose dramatically in coastal regions, even in those areas that escaped massive storm damage, and politicians of all stripes have been peddling solutions.

A report released earlier this year by the S.C. Department of Insurance showed that between 2001 and 2005, the average premium for coastal property increased 63% for

private insurance and 29% for commercial lines.

“For a region like Charleston, it could mean a lot in terms of regulating the industry and

protecting homeowners,” Greco said of the federal proposal. 

Partially to blame for locally rising premiums is a lack of companies willing to underwrite coastal properties, the report shows. While the population during the same time period increased 9%, building activity 27%, and property values 28%, there was only a 3% increase in the number of policies written by standard insurers.

Kathy McKay, chairman-elect of the Independent Insurance Agents and Brokers of South Carolina, said the viability of adding wind to the government’s flood program lies in the details, though such an addition gives her pause.

Clients don’t always realize the restrictive nature of the National Flood Insurance Program until they try to file a claim after a storm, she said, noting they usually end up disappointed after learning that the federal program will not reimburse them enough to repair damage.

“Unfortunately, it usually isn’t until something happens that the client realizes this,” she said.

Russ Parker of Riley & Associates Inc., a commercial insurance agency in Charleston, said he believes adding wind coverage would spur competition in this region.

“If you had a government-backed policy for wind and flood, there wouldn’t be any confusion as to who has to pay the loss, and, no question, it would increase the competitive market,” he said.

In the years following Katrina, Parker said, he has had to secure more and more insurance policies for businesses through surplus market lines, essentially those offered by insurance companies approved to write policies in the state but that are not subject to the rate restrictions of admitted companies.

“It’s not a good thing, but it’s happening up and down the coast,” he said.

Parker said he believes more standard companies would write policies if wind damage was removed from the equation.

South Carolina does have a program similar to the federal proposal, called the South Carolina Wind and Hail Underwriting Association. In the program’s 30-year-plus existence, it had been historically available only to homeowners living on the beach, but was extended this summer through legislative efforts to include vulnerable inland areas, including portions of James Island, Johns Island, Edisto Island, Wadmalaw Island and the city of Charleston, McKay said.

The peninsula was excluded, however, amid concerns that the insurance pool could not support rebuilding the high-value homes in that area in the case of a hurricane the scale of Katrina. Parker said it has made a small difference, but downtown still suffers, and starting Oct. 1, premiums for the program rose an average of 35%, negating much of the savings. 

The legislation passed by the General Assembly earlier this year and signed by Gov. Mark Sanford in June also provided the ability for homeowners to set up tax-free catastrophe savings accounts and created a tax write-off for weather- and wind-related improvements made to homes.

Changing the federal flood program is not the only proposal being pitched.

Just a day prior to that vote, the U.S. House Financial Services Committee debated and passed another controversial insurance measure dubbed the Homeowners Defense Act, which would support states’ efforts to plan for disasters before they occur. The bill would allow participating states to bundle their catastrophe risks, and then transfer that risk to the private markets through the use of catastrophe bonds and reinsurance contracts, according to a statement from Rep. Tim Mahoney, a Florida Democrat and co-sponsor of the measure.

Supporters argue it would allow state-sponsored insurance funds the ability to more easily and affordably provide service for those who cannot find insurance on their own because it would disperse the insurance risk across states, thereby driving down costs.

Former Montana Gov. Marc Racicot, president of the American Insurance Association, urged Congress in a statement to “proceed cautiously and deliberately as it takes on homeowners’ insurance challenges.

“This legislation continues to cause serious concerns for AIA and its more than 350 member companies (that) do not want to see Congress go down the road of incenting the creation of more state mechanisms that would interfere with the private market,” Racicot said in his statement.

The private insurance system, he wrote, is “well-positioned to manage natural catastrophe risk, and we believe the best course is to improve, not displace, the private sector’s ability to serve homeowners and businesses that could face losses from natural catastrophes.”

Molly Parker is a staff writer for the Business Journal. E-mail her directly at mparker@setcommedia.com.

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