Tight insurance market squeezes homeowners.

Two years ago, water leaking in from a weathered kitchen window did damage to Marie Wagstaff's kitchen. Last year she had water damage to her ceiling after the roof leaked during a storm.

In both cases she paid big bucks Out of her own pocket to redo the kitchen and replace the roof after being told that her insurance company, Prudential Insurance Co., would not cover the damage.

But then came the big surprise: Prudential refused to renew her homeowners coverage.

The reason? The insurer cited the two "claims" she had made, even though she said she filed no paperwork, no adjuster came to her Glendale house--and no money changed hands.

"I can understand if they want to drop you if you have one claim after another, but when they do something like this for somebody who isn't trying to make money on the deal and they haven't paid out anything I can't' she said. "All I did was make telephone calls."

Wagstaff and other California homeowners are becoming victims of an insurance market that has been battered by years of under-pricing, a reduction in corporate investment income, and escalating water damage claims driven by a rising fear of mold.

She did get picked up by Mercury Insurance Group, which agreed to cover her after being shown evidence of the repairs. But others have been forced into the pricey California FAIR plan, the market of last resort for homeowners who can't find coverage elsewhere. Adding to the rush was the decision last April by State Farm Insurance Cos., the state's No. 1 homeowners' carrier, to stop writing new policies and tightening its underwriting standards for existing policyholders.

Since the first week in May, the plan, which is financed by all state carriers, has has seen a 34 percent increase in the number of homeowners seeking coverage while at the same time the plan's retention rate, or the percentage of policy holders seeking to renew their coverage, has risen to 86 percent from 75 percent.

"Underwriting standards have gotten a lot tighter and when they get tighter people come to us," said Mike Harris, the plan's vice president of public affairs.

Homeowners insurance is getting both harder to get and more expensive - largely due to rising water damage claims from fear of mold.

The Insurance Information Network of California, a non-profit trade group, found that water damage claims accounted for 24 percent of all state homeowners claims in 1997, but grew to 32 percent in 2001. At the same time, cost of the average claims rose from $2,537 to $4,730.

All told, the industry paid $1.7 billion for water damage claims over the four-year period, with costs rising an average of $56 million annually. Much of the costs go for more extensive repair or "remediation" of water damage than consumers ever demanded before.

"Mold has been with us since the beginning of time, and now suddenly it has taken on this crisis," said Candysse Miller, executive director of the trade group. "Mold remediators encourage you to use their services. A whole cottage industry has sprung up that is quickly becoming a mansion."

Texas is considered to be the ground zero when it comes to mold, even though there is conflicting evidence, at best, on just how dangerous it can be for people who do not have specific allergies to it.

State Farm stopped writing new homeowners coverage in Texas over a year ago and Los Angeles-based Farmers Insurance, which was hit by a $32 million verdict for improperly handling a mold claim, announced last month it was pulling out of the market entirely.

Much of the problem in Texas arose because the state allowed homeowners to file claims due to on-going maintenance issues. California allows claims to be filed only for sudden accidental losses, such as a burst pipe.

The problem here appears to be driven more by a growing hysteria, fueled by high-profile mold lawsuits brought against insurers by prominent names like Ed McMahon, who claims that toxic mold in his Beverly Hills home killed his dog, Muffin.

"People say the problem is mold, but the real problem is the fear of mold," said insurance analyst Brian Sullivan, editor of the Property Insurance Report, a trade journal. "The consumers' fear of mold is driving them to demand more things in a claim and the insurers fear of the court is driving them to say yes."

Just a few years ago, a leaky dishwasher hose may have prompted an insurer to replace some dry wall and blow dry a carpet. Now, big sections of dry wall are torn out, tile floors are being ripped up and carpets replaced wholesale - all while a family is put up in another living space and the air is tested for mold spores, he said.

Price Increases

The response by insurers has been to seek rate hikes, and to make insurance much harder to get, leading to the rush to the FAIR plan.

State Farm, Allstate Insurance Co., Farmers Insurance Group and the Automobile Club of Southern California, the four largest underwriters of homeowner insurance in the state, have sought price increases ranging from 6.6 percent to over 20 percent this year.

The insurers also are asking the state Department of Insurance to be allowed to write standard homeowners insurance without mold coverage. The department has approved 250 such requests for insurers, who must ask for the exclusions for each of their insurance lines, said Nanci Kramer, a department spokeswoman.

At the same time, the state is receiving more complaints about customers whose insurers refuse to renew them, especially from homeowners who have filed two or more water claims in the last five years.

"An increasing number of homeowners are being non-renewed for using their insurance. It's the No. 1 complaint to our hotline," said Kramer. "Filing a water claim is like the Scarlett Letter of the insurance companies."

Wagstaff complained to the department, which is investigating whether it was fair for Prudential to treat her inquiries like a claim.

A Prudential spokeswoman declined to discuss the case, but said it has not changed underwriting standards for existing policyholders, though it has tightened them for new business. "I would say we are looking very carefully at new business," said spokeswoman Laurita Warner.

However, Wagstaff's broker, David Jones of Alandale Insurance Agency, of Glendale, said a few years ago calls such as the one Wagstaff made to Prudential would not have been treated so severely.

"They are definitely cracking down if there has been any loss activity," he said, an indication to insurers that there might be a problem with a house, whether or not any claim was paid.

That has forced brokers like Jones to put more and more clients into the FAIR plan, which only provides for basic fire, vandalism, wind and other property damage. To get additional liability coverage - in case a guest is injured or a homeowner gets sued - the plan has to be packaged with other insurance, often from out-of-state carriers, which aren't as tightly regulated.

The cost of such a package might be 30 percent higher or more than traditional coverage, which itself has skyrocketed from annual premiums of $400 to $800 a few years ago to $700 to $1,300 now, Jones said.

Meanwhile, there is no likelihood that the FAIR plan is itself in any financial danger. It is only providing coverage to about 2.5 percent of the California market, whereas after the Northridge Earthquake when it became nearly impossible in some areas that rose to about 5 percent, Harris said.

FAIR Membership Grows

         Number of
       policy holders

May       181,851
June      181,917
July      182,400
Aug.      183,785
Sept.     184,997

Source: FAIR Plan