Washington’s next fiscal giveaway: a bailout for wealthy homeowners living along risky, hurricane-prone coastlines.  Attempting to find a solution to rising homeowners’ insurance rates, the House Financial Services Subcommittee on Oversight and Investigations held a hearing on July 2, 2009 to discuss the Homeowners’ Defense Act as a possible solution.

The Homeowners’ Defense Act was initially proposed by Rep. Ron Klein (D-Fla.) in August, 2007 as a response to the hurricanes that caused more than $50 billion in insured losses to homeowners in 2005 (not including the $80 billion losses from Hurricane Katrina alone).  The bill passed the House in November 2007 by a vote of 258-155, but did not reach the floor of the Senate.  The gist of the Homeowners’ Defense Act is to make homeowners’ insurance coverage affordable for catastrophic events by having the federal government provide the states catastrophe reinsurance funds with lines of credit and loan guarantees. 

While homeowners’ insurance is more expensive for beach houses because they are in disaster-prone areas, the Homeowners’ Defense Act would subsidize the insurance rates of costal properties to keep the premiums at below-market rates.  Of course, this would only encourage individuals to build more houses in risky, hurricane-prone areas.  The bill would increase liabilities for all Americans in order to help insure beach houses owned by celebrities like Tiger Woods, John Travolta, and Sylvester Stallone, all of whom hold property near Florida’s coast, according to the Competitive Enterprise Institute’s (CEI) website, nobeachhousebailiouts.org. 

In addition to the plethora of legislation containing increases in spending that the 111th Congress has already passed, the Homeowners’ Defense Act guarantees an increase in the national debt.  Currently, Florida’s state-run reinsurance company, the Hurricane Catastrophe Fund (Cat Fund), has $3 billion in assets, but at least $28 billion in potential liabilities.  This means Florida could face bankruptcy if a major hurricane hits; a likely scenario given the state’s history with catastrophic storms.

However, the Cat Fund has no revenue-making mechanism to insure its $28 billion potential liabilities.  Therefore, any loans to Florida through the Homeowners’ Defense Act “would become grants unless Florida raises taxes,” according to insurance policy expert Eli Lehrer from CEI.  Instead of enacting an income tax for Florida residents or increasing the beach house insurance rates, Rep. Klein, along with Florida Governor Charlie Crist (R), have come to the federal government hat in hand, asking for subsidies.

Providing Florida with this option will only further exacerbate the problem that started this mess in the first place.  According to Lehrer, “nearly every major private insurer in the country either stopped writing new insurance policies in Florida or significantly cutback,” after Governor Crist’s reform in 2007.  Governor Crist’s reform permitted Florida Citizens’ Property Insurance Corporation, the state insurance agency, to provide insurance for residents whose alternative insurance quote was more than 15 percent than what Citizens’ could offer, which crowded out Florida’s private insurance companies.  Florida is now left with state-run insurance and reinsurance companies that do not take in enough premiums to cover their liabilities.

But the story does not end with Florida.  At least 20 coastal states have a similar state-backed insurance and reinsurance fund that takes on risky liabilities and low premiums in an attempt to provide “affordable” catastrophic insurance.  Once these other coastal states grasp that they can reap the benefits from the Homeowners’ Defense Act, they too will follow suit.  As more states demand this deal, the more unfortunate it becomes for taxpayers who will become burdened with insuring beach houses. 

The individual choices of homeowners living in risky, hurricane-prone areas should not be an encumbrance on the rest of the nation.  Making homeowners’ insurance affordable for those who choose to live in dangerous, costal areas is the homeowners’ problem. 

- Liya Palagashvili