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Post-Katrina Home Insurance Hard to Get

May 9, 2006 at 12:00 AM EST
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LEE HOCHBERG, NewsHour Correspondent: Last week, a star-studded jazz festival at the New Orleans fairgrounds, with music legends Dr. John, Bob Dylan and Bruce Springsteen tried to send the message that New Orleans is back on its feet.

But elsewhere in town, the obstacles the city faces are acutely clear: Miles of houses sit gutted and empty, some still strewn on their sides in the low-income Ninth Ward, others like rows of empty doll houses in upscale Lakeview. Little is being done to restore them.

Difficulty getting insurance

Still unresolved, damage claims are one problem, but acquiring homeowners insurance to help residents purchase new homes has become another. Thousands of New Orleanians simply can't get insurance. And without it, they're unable to qualify for a mortgage.

INSURANCE BROKER: Louisiana Department of Insurance?

CALLER: Yes, I need help.

LEE HOCHBERG: Workers at the Louisiana Insurance Commission are receiving some 15,000 complaint calls per month.

CALLER: We're desperate here.

INSURANCE BROKER: OK.

CALLER: And I can't get insurance. And I need to find out: Who do I talk to about it?

LEE HOCHBERG: New Orleans needs families like Nelson Alexander's to return if it's going to recover. His wife and kids are 300 miles away in Shreveport. He's living in a FEMA trailer; there's not much left to his house.

NELSON ALEXANDER, Katrina Victim: But if you were to pull that wall, that wall would come tumbling down. It's barely hanging on.

LEE HOCHBERG: But Alexander's insurance company of 20 years, Allstate, refused to sell him homeowners insurance after he put down money for a new house. Other insurers refused, as well.

NELSON ALEXANDER: We just want to come home. We want to come home and start our lives again. We want to be normal. Give us the insurance that we need to come home.

Homes vital to city's rebirth

MARY ANN CASEY, Owner, RE/MAX New Orleans Properties: There's no reason that we should be experiencing that.

LEE HOCHBERG: New Orleans real estate broker Mary Ann Casey says she lost several recent sales when home buyers were unable to acquire insurance.

MARY ANN CASEY: You can beg people to come home. You can spend any amount of effort and energy that you want, but if you can't put properties back into commerce and repopulate the part of the city, it's going to be virtually impossible to rebuild the city.

Reducing risk in hurricane areas

LEE HOCHBERG: Allstate and State Farm, the two companies that dominate the New Orleans insurance market, have stopped writing new policies in most of its neighborhoods. It's part of a move by the insurance industry to reduce its risk in hurricane-prone areas.

For those Allstate already insures, premiums have soared as much as 52 percent. The New Orleans Times-Picayune called the increases "devastating" and said they could well hamper the redevelopment of greater New Orleans.

Bill Davis is an insurance industry spokesman.

BILL DAVIS, Insurance Information Institute: The problem here is the huge amount of payouts that we've had to make, 25 years' worth of premiums, homeowners premiums wiped out with Hurricanes Katrina and Rita. And that's a major, major problem that has to be dealt with.

LEE HOCHBERG: The way Allstate and other top insurers dealt with the problem was to stop writing policies in New Orleans and along much of the Gulf Coast. Davis said the Gulf Coast is in a new cycle of violent weather.

BILL DAVIS: A lot of this now looks like, instead of every 10 years or so, we're into this cycle where the storms are going to be hitting more and more frequently, so a lot of the companies are concerned about this. They are trying to make sure that the risk they have, they can meet.

LEE HOCHBERG: But some Louisiana officials argue the industry should already be able to meet that risk. Since Hurricane Andrew in 1992, the industry has collected increased premiums based on 100 years of weather records that reflect how often hurricanes occur.

Steven Ruiz of the State Insurance Rating Commission argues the industry had a $427 billion pre-Katrina surplus last year and $43 billion in earnings. He says it's really trying to maximize its profits.

STEVEN RUIZ, Louisiana Insurance Rating Commission: For the last 10 years, I've been giving a rating for each based on the fact that some day we were going to have this hurricane and we were going to have this kind of devastation. But what did they did with the money, you know?

They pay out a lot of bonus money to high executives; I know that. They don't want to talk about that, and that's private. These guys need to make money in this business, but they don't need to gouge people.

BILL DAVIS: We don't believe we're gouging. We're just -- we're prohibited from that. But we have to take the necessary financial steps to insure that we can pay our future obligations.

And we're helping the people down here. We've paid out billions of dollars in claims, over millions of claims, and we're continuing to pay out. And we're working to try to solve all of these problems and continue to do business down here.

JIM DONELON, Commissioner of Insurance, Louisiana: It keeps me awake at night.

LEE HOCHBERG: The state's top insurance regulator, Jim Donelon, says he can't do much about the availability and affordability issues. He notes a few insurers are underwriting niche markets, like homes valued at $500,000 or more.

And some 75,000 Louisiana residents have turned to the state-sponsored Louisiana Citizens Plan, a policy that offers insurance for those who can't find it elsewhere. That policy by law is more expensive than the marketplace average and Donelon says, really, a choice of last resort.

JIM DONELON: It's not a pretty picture; it's not a cheap or inexpensive route, but it's there by law for anyone who needs it.

LEE HOCHBERG: He says prospective home buyers may just have to wait one to four years for new players to enter the insurance market.

JIM DONELON: I truly do believe that this crisis is going to create opportunities for new entrepreneurs, for companies that we're not aware of here today, that are going to come to Louisiana and make money writing homeowners in those abandoned markets by the big guys. But if we have bad hurricanes again, that will scare the Dickens out of them again, no doubt.

LEE HOCHBERG: And then your one- to four-year....

JIM DONELON: Goes longer. Goes longer.

LEE HOCHBERG: Ruiz says New Orleans can't wait that long.

STEVEN RUIZ: When you have this type of situation, you need to have regulation to make insurance affordable and available to the people here.

LEE HOCHBERG: And it's not.

STEVEN RUIZ: And if you don't have it, they're going to leave; they're going to go where they can afford it. They're not going to come back to this area.

Taking financial risks to come home

LEE HOCHBERG: Those determined to come back may need to take a financial risk. Paul Varisco and his wife have lived in 15 homes since Katrina destroyed their house.

Though he says he continued to pay Allstate $700 a month on his damaged house, the company refused to underwrite this new house. Unable then to get a mortgage, he and his son ended up buying it with $400,000 cash. He's angry at his insurer of 36 years but doubts any new companies that come to town would be any better.

PAUL VARISCO, Katrina Victim: I don't have a lot of confidence in that. You know, it may have to happen. But, again, if you don't know who they are and how strong they are financially, you know, what are we doing? We're spending money in hopes that they'll have enough money if something should happen.

LEE HOCHBERG: Darlene Schnatz says she's just thankful her family decided to repair their damaged home rather than buy a new one. She thus was covered by a state emergency declaration that prevents insurers from dropping her coverage until the repairs are complete. She's also glad she didn't cancel her policy on her own, even as her house sat under 12 feet of water.

DARLENE SCHNATZ, Katrina Victim: I think that I was given some inspiration there to just not make any rash decisions, and I'm very grateful I did not cancel the policy, because I don't think I would be able to have insurance.

LEE HOCHBERG: Late last week, there was a solution in at least one case. After many phone calls, Nelson Alexander and his wife were granted homeowners insurance by the AAA Auto Club. The couple hopes to close on their new house soon. Some insurers say the only larger solution is a proposed federal catastrophe fund to back them up, but a plan to create one is stalled in Congress.