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United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

January 2014: 

Homeowners Insurance: 

Multiple Challenges Make Expanding Private Coverage Difficult: 

GAO-14-179: 

GAO Highlights: 

Highlights of GAO-14-179, a report to congressional requesters. 

Why GAO Did This Study: 

Homeowners insurance protects against a range of perils, but policies 
do not insure against all risks. Owners whose homes are damaged by 
natural and other disasters not covered by their insurance can be 
exposed to serious financial losses. Federal and state initiatives 
provide some assistance for catastrophes, which can involve 
significant taxpayer expense. With coastal populations growing and the 
possibility of more frequent and severe weather, more homeowners could 
experience heavy losses not covered by homeowners insurance, putting 
increasing financial pressure on government programs and thus on 
taxpayers. 

GAO was asked to study the possibility of private insurers providing 
more comprehensive insurance. This report addresses (1) what perils 
homeowners policies typically cover and exclude, (2) how exclusions 
impact homeowners and taxpayers and the potential benefits of more 
comprehensive coverage, and (3) what additional perils insurers might 
be willing to cover and what challenges are associated with expanding 
policies. GAO reviewed homeowners insurance policies and conducted 
interviews with the National Association of Insurance Commissioners, 
other industry organizations, consumer advocates, and risk experts, 
among others. 

GAO requested comments on a draft of this report from the Federal 
Insurance Office and the National Association of Insurance 
Commissioners. Both provided technical comments which we incorporated 
into the report as appropriate. 

What GAO Found: 

Homeowners insurance policies typically protect homes, garages and 
other structures, and personal belongings from damage caused by perils 
such as fire, hail, lightning, explosion, and theft, among others. The 
insurance industry considers these perils insurable because they are 
accidental, predictable, and do not involve catastrophic losses. These 
policies also typically exclude losses from a number of perils, 
including disasters caused by floods, earthquakes, and war. Industry 
officials said that such events are difficult to predict and involve 
extensive losses that are a challenge for private insurers to cover. 
Insurers also exclude losses from defective products, which industry 
participants said could be addressed by manufacturer warranties and 
commercial general liability insurance. Intentional losses; damage 
from wear, tear, or neglect; and losses caused simultaneously by 
covered and uncovered perils, such as wind (covered) and flood 
(uncovered) during a hurricane are also generally excluded. 

Policy exclusions can impact homeowners, communities, and state and 
federal governments. When excluded losses occur, they can create 
significant costs for homeowners to repair homes and replace 
possessions. Wide-scale catastrophes can also cause shortages of 
building materials and contractors that delay reconstruction and 
substantially increase the costs of repairing homes. When damage to 
properties caused by excluded losses is not repaired, affected 
communities may experience blight and face reduced tax revenue. When 
federal and state governments have stepped in to cover what private 
insurers exclude, taxpayers may face a significant expense. In 
addition to federal disaster assistance, the National Flood Insurance 
Program (NFIP) paid more than $7 billion in claims after Superstorm 
Sandy. In Florida, insurers and policyholders can be assessed extra 
charges to help pay for state efforts to cover wind damage where it is 
not covered by insurers. Industry participants suggested that expanded 
private coverage could provide additional protection for homeowners 
and reduce reliance on government programs, but the resulting policy 
premiums would likely be prohibitively expensive for many homeowners. 

Multiple factors make expanding private coverage challenging and 
several conditions would need to be addressed for insurers to offer 
more comprehensive insurance. A main challenge is that expanded 
coverage would have higher costs, potentially limiting consumer 
demand. Even if insurers charged higher rates that were based on risk, 
the severity and unpredictability of catastrophic losses could still 
jeopardize insurers’ solvency. Some industry participants said that 
insurers and others are discussing possibilities for expanding private 
homeowners coverage, with a focus on risk-based premiums, mitigation 
efforts, effective building codes, and sound land use policies. The 
challenging mix of financial risk, political and regulatory issues, 
policy cost, and consumer demand has thus far prevented private sector 
insurers in the U.S. from offering flood insurance to homeowners, let 
alone more comprehensive or all-perils policies. Because of this mix 
of factors, some in the insurance industry have suggested that a 
continuing financial role by federal and possibly state governments 
may be required, and that ensuring a response to the impact of 
disasters and other perils will require the cooperation and resources 
of government, homeowners, and insurers, as well as balance in the 
assumption of risk and cost by each of these parties. 

View [hyperlink, http://www.gao.gov/products/GAO-14-179]. For more 
information, contact Alicia Puente Cackley at (202) 512-8678 or 
Cackleya@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Policies Cover and Exclude Various Perils Based on Policy Provisions 
and Other Factors: 

Policy Exclusion Impacts Could Be Reduced by Expanding Homeowner 
Coverage, but Premiums Would Likely Increase: 

Multiple Challenges Make Expanding Private Coverage Difficult: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Information on the National Flood Insurance Program: 

Appendix III: Information on the Citizens Property Insurance 
Corporation: 

Appendix IV: Information on the California Earthquake Authority: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Types of Homeowners Insurance Policies for Single-Family 
Homes: 

Table 2: Perils Covered for Personal Property in the HO-3: 

Table 3: Perils Listed in the Exclusions Section of the HO-3: 

Table 4: Other Excluded Perils for Dwellings and Other Structures 
Listed in the HO-3: 

Figures: 

Figure 1: Damage Due to Floods: 

Figure 2: Damage Due to Sinkholes: 

Figure 3: Selected NFIP Flood Loss and Payment Information, 2005 to 
2012: 

Abbreviations: 

CEA: California Earthquake Authority: 

FAIR: Fair Access to Insurance Requirements: 

FEMA: Federal Emergency Management Agency: 

FHCF: Florida Hurricane Catastrophe Fund: 

FWUA: Florida Windstorm Underwriting Association: 

IHP: Individuals and Households Program: 

III: Insurance Information Institute: 

ISO: Insurance Services Office: 

JUA: Florida Residential Property and Casualty Joint Underwriting 
Association: 

NAIC: National Association of Insurance Commissioners: 

NFIP: National Flood Insurance Program: 

[End of section] 

United States Government Accountability Office: 
GAO:
441 G St. N.W. 
Washington, DC 20548: 

January 30, 2014: 

Congressional Requesters: 

Homeowners in the United States are exposed to a wide range of 
disasters, including hurricanes, earthquakes, floods, and wildfires, 
and may also experience losses from lightning, hail, and fire, among 
other perils.[Footnote 1] When these and other catastrophes occur, 
they not only devastate individuals and communities by destroying 
homes and other possessions, but also have a significant financial 
impact on homeowners, insurers, and state and federal governments. 
Superstorm Sandy, for example, caused over $18 billion in privately 
insured property losses, according to industry estimates, and the 
Federal Emergency Management Agency (FEMA) has paid more than $7 
billion in claims through the National Flood Insurance Program (NFIP). 

At the same time, the population of coastal states facing possible 
weather risks such as floods and hurricanes is growing. As of 2010, 
approximately 39 percent of the nation's total population, 
approximately 123 million people, lived in coastal counties, a 39 
percent increase since 1970.[Footnote 2] As of 2012, properties in 
hurricane-prone areas on the coast had an insured value of about $15 
trillion, with Florida, New York, and Texas having the greatest risk 
exposure. In addition to floods and hurricanes, some states such as 
California face risks such as earthquakes and wildfires while Florida 
faces risks from sinkholes. With more people moving to coastal areas, 
the possibility of more frequent and severe weather could impact the 
ability of homeowners and insurers to protect homes and other 
property. These and other risks underscore the importance of insurance 
to help protect homes and property from various hazards. Homeowners 
insurance, however, does not cover all types of perils and some 
homeowners may not clearly understand what protection their policy 
includes and excludes until after an event occurs. Homeowners count on 
insurance to help rebuild their lives and minimize financial burdens 
and may suffer severe losses depending on the type of peril and the 
coverage offered in their policies. 

In light of recent concerns about homeowners' ability to protect their 
assets, GAO was asked to examine issues associated with the 
possibility of more comprehensive homeowners insurance. This report 
addresses (1) the perils homeowners policies typically cover and 
exclude; (2) the impact of exclusions on homeowners, communities, and 
taxpayers and the potential benefits of more comprehensive coverage; 
and (3) the additional perils insurers might be willing to cover and 
the challenges associated with offering expanded coverage. To do this 
work, we reviewed a standard homeowners policy from the insurance 
industry and policies from select property/casualty insurers that were 
chosen by market share based on premiums written and participation in 
different geographic markets. We also interviewed insurance industry 
association officials, consumer advocates, and academic experts. 
Further, we interviewed selected state insurance regulators from 
states that experience major perils such as floods, hurricanes, and 
earthquakes, among others.[Footnote 3] Finally, we obtained 
information from a panel of insurance experts who participated in a 
roundtable discussion on issues associated with private insurers' 
willingness and ability to cover floods and other natural 
catastrophes. We discuss our scope and methodology in more detail in 
appendix I. 

We conducted this performance audit from December 2012 to January 2014 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

Homeowners Insurance Policies: 

Homeowners insurance provides consumers with financial protection 
against unexpected losses. Most homeowners policies provide a package 
of coverage that protects against damage to different types of 
property and liability for injuries and property damage policyholders 
cause to others. The following are the main types of coverage: 

* Dwelling. Pays for damage to a house and to attached structures, 
including plumbing, electrical wiring, heating, and permanently 
installed air-conditioning systems. 

* Other structures. Pays for damage to fences, tool sheds, 
freestanding garages, guest cottages, and other structures not 
attached to the dwelling. 

* Personal property. Pays for the value of personal possessions, 
including furniture, electronics, appliances, and clothing damaged or 
lost even when they are not on the subject property--for instance, 
when they are in an off-site storage locker or with a child at college. 

* Loss of use. Pays some additional living expenses while a home is 
being repaired.[Footnote 4] 

* Personal liability. Pays for financial loss from lawsuits for 
injuries or damages to someone else. 

* Medical payments. Pays medical bills for people hurt on the property 
or by a pet.[Footnote 5] 

Homeowners can purchase several types of insurance policies. These 
policies differ based on the perils they cover (see table 1). For 
example, named perils policies insure against losses caused by perils 
that are specifically listed in the policies. Open peril policies are 
broader policies that insure against losses caused by all perils, 
except those that are specifically excluded. However, according to 
industry participants with whom we spoke, currently no homeowners 
policies are available that cover every possible peril a homeowner 
could face. 

Table 1: Types of Homeowners Insurance Policies for Single-Family 
Homes: 

Policy type: HO-2: Broad Policy; 
Description of policy: A named peril policy, it covers the dwelling 
and personal property against 16 perils listed in the policy. 

Policy type: HO-3: Special Policy; 
Description of policy: The most commonly written policy, it is a 
combination of a named peril policy and an open peril policy. It 
covers the dwelling against all perils except those specifically 
excluded (such as flood and earthquake) and covers personal property 
against 16 named perils. 

Policy type: HO-5: Comprehensive Policy; 
Description of policy: More comprehensive than the HO-3, it is an open 
peril policy that covers the dwelling and personal property against 
all perils, except those that are specifically excluded (such as flood 
and earthquake). 

Policy type: HO-8: Modified Coverage Policy; 
Description of policy: A named peril policy, it is designed for older 
homes, where the cost to replace is greater than the market value. 

Source: Insurance Services Office (ISO), National Association of 
Insurance Commissioners, and Insurance Information Institute. 

Note: These policy types are examples of homeowners insurance policies 
developed by the ISO, which is a provider of data and analytics for 
the risk management industry, including property/casualty insurers. 
ISO has developed other policy types not included in this table, as 
have other companies. 

[End of table] 

In addition to different policy types, homeowners may choose between 
three different levels of coverage for their homeowners policies. 
[Footnote 6] These options are: 

* Actual cash value. This type of coverage pays to replace the home or 
possessions after deducting for depreciation. Value is determined by 
taking into consideration the age of the home and wear and tear. 
[Footnote 7] This level of coverage may not be enough to fully repair 
or replace the damage. 

* Replacement cost. This type of coverage pays the cost of rebuilding 
or repairing the home or replacing possessions, up to the coverage 
limit, without a deduction for depreciation. It allows for the repair 
or rebuilding of the home by using materials of similar kind and 
quality. 

* Guaranteed (or extended) replacement cost. This option is the most 
comprehensive and expensive. It pays a certain percentage, typically 
20 to 25 percent, over the coverage limit to rebuild the home in the 
event that materials and labor costs increase as a result of a 
widespread disaster.[Footnote 8] 

The HO-2, HO-3, and HO-5 policies typically provide replacement cost 
coverage on the structures.[Footnote 9] Contents coverage under 
homeowner policies is typically provided on an actual cash value 
basis, unless the replacement cost option is purchased. The HO-8 
typically provides coverage for older homes on an actual cash value 
basis. Full replacement cost policies may not be available for some 
older homes. 

Cost of Insurance to Homeowners: 

Several factors affect the premiums consumers pay for their homeowners 
policies, including the type and characteristics of the home. For 
example, homes that are primarily brick or masonry typically have 
lower premiums than wood frame homes, and older homes and homes in 
poor condition tend to have higher premiums than newer homes and homes 
in good condition. A homeowner's characteristics, such as a history of 
filing claims, and choices, such as the dollar amount of coverage 
selected, may also impact the premium cost. Other factors that impact 
the premium cost include the degree of exposure to catastrophes (such 
as hurricanes or earthquakes), the type of protection devices in the 
home (such as sprinkler or security systems), and the type of 
structures on the property (such as swimming pools or trampolines). 

In addition to paying premiums for their insurance policies, 
homeowners generally have to pay a deductible when they file a claim--
that is, an amount of money a policyholder must pay before an 
insurance policy will pay for a loss. The deductible applies to both 
home and personal property coverage and is paid on each claim. Higher 
deductibles generally mean lower policy premiums. In some locations, 
there are also catastrophe deductibles that a homeowner must pay when 
a major natural disaster occurs. They are expressed as a percentage of 
a claim instead of an insured amount. 

State Regulation of Insurance: 

Insurance in the United States is primarily regulated at the state 
level.[Footnote 10] State insurance regulators are responsible for 
enforcing state insurance laws and regulations, including through the 
licensing of agents, the review of insurance products and premium 
rates, and the examination of insurers' financial solvency and market 
conduct. The insurance regulators of the 50 states, the District of 
Columbia, and the U.S. territories created and govern the National 
Association of Insurance Commissioners (NAIC), which is the standard-
setting and regulatory support organization for the U.S. insurance 
industry. Through the NAIC, state insurance regulators establish 
standards and best practices, conduct peer review, and coordinate 
their regulatory oversight. NAIC staff supports these efforts and 
represents the collective views of state regulators domestically and 
internationally. NAIC members, together with the central resources of 
the NAIC, form the national system of state-based regulation in the 
United States. 

Risk Management by Insurers: 

Insurers assume some financial risk when writing policies, but also 
employ various strategies to manage risk so they can earn profits, 
limit potential financial exposures, and build the capital needed to 
pay claims. For example, insurance companies establish underwriting 
standards, such as refusing to insure customers who pose unacceptable 
levels of risk, or limiting coverage in particular geographic areas. 
Insurance companies may also purchase reinsurance, or insurance for 
insurance companies, to cover specific portions of their financial 
risk. For catastrophic losses, insurers may also sell financial 
instruments such as catastrophe bonds. Reinsurers use similar 
strategies to manage their risks. 

Both insurers and reinsurers must also predict the frequency and 
severity of insured losses with some reliability to best manage 
financial risk. In some cases, these events can be fairly predictable. 
For example, the incidence of most automobile claims is predictable, 
and losses generally do not occur to large numbers of policyholders at 
the same time. However, some infrequent events, such as hurricanes, 
are so severe that they pose unique challenges for insurers and 
reinsurers. The unpredictability and sheer size of these types of 
events can result in substantial losses that deplete insurers' and 
reinsurers' capital. If a company believes that the risk of loss is 
unacceptably high given the rate that can be charged, it may decide 
not to offer coverage. 

Government Involvement in Homeowners Insurance: 

If the private sector will not insure a particular type of risk, the 
public sector may create markets to ensure the availability of 
insurance. For example, several states have established Fair Access to 
Insurance Requirements (FAIR) plans, which pool resources from 
insurers doing business in the state to make property insurance 
available to property owners who cannot obtain coverage in the private 
insurance market, or cannot do so at an affordable rate. In addition, 
some states have established windstorm insurance pools that pool 
resources from private insurers to make insurance for wind risks 
available to property owners who cannot obtain it in the private 
insurance market.[Footnote 11] 

At the federal level, Congress established NFIP in 1968 to provide 
flood coverage to homeowners where voluntary markets do not readily 
exist.[Footnote 12] FEMA is responsible for the oversight and 
management of NFIP.[Footnote 13] Designed to help reduce the cost of 
federal assistance after floods, NFIP may be the sole source of 
insurance to some residents of flood-prone areas. Participating 
communities are required to adopt and enforce floodplain management 
regulations, thereby reducing the risks of flooding and the costs of 
repairing flood damage. Under the program, the federal government 
assumes the liability for covered losses and sets premium rates and 
coverage limitations. Like private insurance companies, federal and 
state government insurance programs also collect premiums, but their 
rates do not always reflect the risks that the programs assume, in 
part because they are designed to keep insurance affordable for most 
homeowners.[Footnote 14] 

Policies Cover and Exclude Various Perils Based on Policy Provisions 
and Other Factors: 

Homeowners policies provide protections against a number of perils 
that can impact individuals and families. Policies, however, do not 
protect against all perils that homeowners could face. Various 
sections of a homeowners insurance policy outline perils covered and 
those the policy excludes. Policy provisions and other factors, such 
as location, can impact the coverage insurers offer homeowners. 

Homeowners Policies Typically Cover a Range of Perils: 

Homeowners insurance policies typically cover a range of perils and 
are critical to providing financial protection against losses such as 
fire and theft, among others. According to many industry participants, 
the Insurance Services Office's (ISO) HO-3 policy is the most commonly 
purchased homeowners policy and outlines the typical coverage and 
exclusions found in most homeowners policies.[Footnote 15] The HO-3 
covers a person's dwelling or home and other structures--such as 
detached garage, or shed--against all perils except those specifically 
excluded. This is commonly known as "open perils" coverage. For 
possessions, or personal property, the HO-3 covers only those perils 
listed in the policy, typically the 16 outlined below in table 2. 
Insurers refer to this kind of coverage as "named peril" coverage. 

Table 2: Perils Covered for Personal Property in the HO-3: 

1. Fire or lightning; 
2. Windstorm or hail[A]; 
3. Explosion; 
4. Riot or civil commotion; 
5. Aircraft, including self-propelled missiles and spacecraft; 
6. Vehicles; 
7. Smoke[B]; 
8. Vandalism or malicious mischief; 
9. Theft; 
10. Falling objects[C]; 
11. Weight of ice, snow, or sleet; 
12. Accidental discharge or overflow of water or steam from within a 
plumbing, heating, air conditioning, or automatic fire-protective 
sprinkler system or from within a household appliance (with certain 
restrictions); 
13. Sudden and accidental tearing apart, cracking, burning, or bulging 
of a steam or hot water heating, air conditioning, or automatic fire 
protective sprinkler system, or an appliance for heating water[D]; 
14. Freezing of a plumbing, heating, air conditioning, or automatic 
fire-protective sprinkler system or a household appliance if 
reasonable care has been used to maintain heat in the building or shut 
off the water supply and drain all systems and appliances of water[E]; 
15. Sudden and accidental damage from artificially generated 
electrical current (with certain restrictions); 
16. Volcanic eruption, but not earthquake, land shock waves, or 
tremors. 

Source: ISO's HO-3 policy. 

[A] Some states have established windstorm insurance pools as private 
insurers sometimes exclude coverage for wind-related damage. In 
addition, this specifically excludes from coverage damage caused by 
rain, snow, sleet, sand, and dust unless the wind or hail damage to 
the building permits those perils to enter. 

[B] This only applies if it is sudden and accidental damage. 

[C] This only covers property in a building if a building is also 
damaged by the falling object. However, damage to the fallen object 
itself is not covered. 

[D] This does not include losses caused by or resulting from freezing. 

[E] This does not include a sump, sump pump, roof drains, gutters, 
downspout, or other similar equipment. 

[End of table] 

Private insurers determine which perils are insurable risks on the 
basis of certain characteristics or criteria of the losses associated 
with them, including the following:[Footnote 16] 

* Losses that are definite and measurable. The loss should be definite 
or determinate in time, place, and cause, and the insurer must be 
capable of setting a dollar value on the amount of the loss. 

* Losses that are sudden, random, and accidental. The loss must result 
from chance and not be something that is certain to happen. If a 
future loss were sure to occur, coverage would have to be priced at 
the full value of the loss plus an additional amount for the expenses 
incurred. 

* Losses that are not catastrophic. The losses should not affect a 
very large percentage of an insurance company's policyholders at the 
same time in, for example, a limited geographic area.[Footnote 17] The 
losses should be independent of each other in order to spread and 
minimize risk. Additionally, the peril should not be so catastrophic 
that the insurer would be unable to charge a sufficient premium to 
cover the exposure. 

* Losses for which the law of large numbers applies. There must be a 
sufficiently large number of homogeneous units exposed to random 
losses, both historically and prospectively, to make the future losses 
reasonably predictable. This principle works best when there are many 
losses with similar characteristics spread across a large group. The 
greater the experience with losses, the better insurers can estimate 
both the frequency and severity of future losses. 

When these criteria are generally satisfied, the insurer can add other 
expenses and profits to the expected losses and determine a price that 
is appropriate for the risk. Insurers may still decide to offer 
insurance for risks that deviate from these ideal characteristics. 
However, as one or more deviations occur, the ability of the insurer 
to estimate future losses decreases, the risk increases, and the 
insurer's capital is more exposed to inadequate prices for the 
coverage that the insurer offers. 

Homeowners Policies Also Exclude Other Perils: 

Despite covering a range of perils, insurers also exclude a number of 
perils. Insurance companies may determine that a peril is uninsurable 
and exclude it from an insurance policy by inserting a provision that 
excludes coverage. These provisions can be located in different 
sections of a homeowners policy. For example, the HO-3 contains a 
section titled "Exclusions," but other policy provisions that exclude 
coverage are located elsewhere. Table 3 lists typical perils excluded 
under this section. 

Table 3: Perils Listed in the Exclusions Section of the HO-3: 

1. Ordinance or law (such as an ordinance or law requiring or 
regulating the construction, demolition, remodeling, renovation, or 
repair of property); 
2. Earth movement (such as earthquakes, landslides, mudslides, or 
sinkholes)[A]; 
3. Water (including flood, waves, water which backs up through sewers 
or drains or overflows or is otherwise discharged from a sump, sump 
pump or related equipment, or water below the surface of the 
ground)[B]; 
4. Power failure; 
5. Neglect (failure to use reasonable means to save and preserve 
property at and after the time of loss); 
6. War; 
7. Nuclear hazard; 
8. Intentional loss (an action the insured commits or conspirers to 
commit with intent to cause loss); 
9. Government action (such as the destruction, confiscation, or 
seizure of property by order of any governmental or public 
authority)[C]; 
10. Weather conditions (only if the weather conditions contribute in 
any way with a cause or event excluded above to produce the loss)[D]; 
11. Acts or decisions, including the failure to act or decide, of any 
person, group, organization, or governmental body[D]; 
12. Faulty, inadequate or defective: planning, zoning, development, 
surveying, siting; design, specifications, workmanship, repair, 
construction, renovation, remodeling, grading, compaction; materials 
used in repair, construction, renovation, or remodeling; or 
maintenance;[D]. 

Source: ISO's HO-3 policy. 

[A] A direct loss by fire, explosion, or theft resulting from an earth 
movement is covered. 

[B] A direct loss by fire, explosion, or theft resulting from water 
activity is covered. 

[C] This excludes acts taken by the government at a time of a fire to 
prevent spread of the fire if the loss caused by the fire is covered 
under the policy. 

[D] These three items are specific to dwellings and other structures. 

[End of table] 

Other policy provisions that exclude coverage are located under 
"Perils Insured Against" in the HO-3 policy. Under this section, which 
applies to the dwelling and other structures, but not to personal 
property, damage caused by certain perils will not be covered (see 
table 4). 

Table 4: Other Excluded Perils for Dwellings and Other Structures 
Listed in the HO-3: 

1. Collapse (including abrupt falling down or caving in; loss of 
structural integrity; or any cracking, bulging, sagging, bending, 
shrinking, leaning, settling, or expansions related to the falling or 
loss of structural integrity); 
17. Freezing of a plumbing, heating, air conditioning, or automatic 
fire-protective system or of a household appliance, or by discharge, 
leakage, or overflow from within the system or appliance caused by 
freezing, unless reasonable care has been used to maintain heat in the 
building or shut off the water supply and drain all systems and 
appliances of water[A]; 
18. Freezing, thawing, pressure, or weight of water or ice, whether 
driven by wind or not, to a fence, pavement, patio, swimming pool, and 
other listed structures; 
19. Theft in or to a dwelling under construction, or of materials and 
supplies for use in the construction until the dwelling is finished and 
occupied; 
20. Vandalism and malicious mischief and any ensuing loss caused by 
any intentional and wrongful act committed in the course of the 
vandalism or malicious mischief, if the dwelling has been vacant for 
more than 60 consecutive days immediately before the loss; 
21. Mold, fungus, or wet rot (except under certain circumstances); or; 
22. Wear and tear, marring, deterioration; mechanical breakdown, latent 
defect, inherent vice, or any quality in property that causes it to 
damage or destroy itself; smog, rust, or other corrosion, or dry rot; 
smoke from agricultural smudging or industrial operations; discharge, 
dispersal, seepage, migration, release or escape of pollutants (except 
under certain circumstances); settling, shrinking, bulging or 
expansion, including resultant cracking, of bulkheads, pavements, 
patios, footings, foundations, walls, floors, roofs, or ceilings; 
birds, rodents, or insects; nesting or infestation, or discharge or 
release of waste products or secretions, by any animals; or animals 
owned or kept by an insured. 

Source: ISO's HO-3 policy. 

[A] The term plumbing does not include a sump, sump pump, roof drain, 
gutter, downspout, or similar equipment. 

[End of table] 

Insurers exclude these perils from homeowners policies for various 
reasons. According to some industry participants, some perils are 
excluded because they do not meet the criteria for insurable risks. 
For example, perils that result in catastrophic losses are generally 
infrequent, high-impact events that are difficult to predict and 
measure. The chances of these events occurring are difficult to 
calculate, and the losses can be so large and simultaneously impact so 
many homeowners that they could jeopardize a company's solvency 
because the insurer may not have sufficient capital to pay out the 
large number of claims. Examples of these types of risks include 
flood, earthquake, war, and nuclear hazard. 

Other risks are excluded because they could raise moral hazard issues 
if they were covered and because they are not accidental. Moral hazard 
is an increase in the probability of loss caused by the policyholder's 
behavior--for example, intentional loss, neglect, deterioration, and 
lack of maintenance. According to some industry participants, if these 
risks were covered, homeowners could, for example, neglect their roofs 
or not address mold problems and then file claims for replacement and 
remediation. Further they noted that these types of risks also fall 
outside the realm of insurance because they are not sudden or 
accidental and are generally unpredictable. 

Some industry participants also said that homeowners policies list 
defective products as exclusions for a couple of reasons. First, they 
said that defective products are listed as exclusions because insurers 
would find it difficult and impractical to evaluate the wide range of 
manufactured products to determine the likelihood and extent of 
defects and price this risk for policies accordingly. Second, they 
suggested that manufacturers are responsible for defects in their 
products, and product warranties and commercial general liability 
insurance can help affected homeowners.[Footnote 18] For example, some 
homeowners affected by defective drywall may receive compensation from 
settlements partly funded by commercial general liability insurance 
policies held by companies responsible for the distribution or 
installation of defective drywall.[Footnote 19] Additionally, some 
homeowners impacted by defective drywall have filed insurance claims 
through their homeowners' insurance policies, and litigation in 
multiple states will determine the extent to which coverage for this 
drywall is covered by homeowners insurance. 

Coverage Depends on Several Factors, Including Policy Provisions and 
Location: 

Certain provisions found in homeowners policies can also affect 
coverage. Some industry participants cited as an example 
anticoncurrent causation clauses. For example, under these clauses, if 
damage is simultaneously caused by both an excluded peril (such as 
flood) and a covered peril (wind), coverage is excluded for that loss. 
They noted that these clauses presented a particular challenge for 
owners of coastal properties when hurricanes occurred. Cases 
challenging the enforceability of the anticoncurrent clause arose 
after the 2005 hurricane season because damage to properties may have 
resulted from a combination of high winds and flooding. According to 
reports, this clause may similarly become an issue for homeowners in 
the aftermath of Superstorm Sandy. In addition to the anticoncurrent 
causation clause, policies may also contain conditions that 
policyholders are required to comply with in order to maintain 
coverage. Under the HO-3 policy, for example, homeowners must provide 
prompt notice to their insurance company or agent following a loss and 
are also required to protect property from further damage once a loss 
has occurred. Failure to comply with these types of requirements may 
result in a loss of coverage. 

In addition, the facts and conditions surrounding the loss event--
including the cause of the damages and court decisions--may also 
impact coverage. For example, according to some industry participants, 
an HO-3 policy typically excludes mold damage. However, mold damage 
that is hidden within walls or ceilings, or beneath the floors of a 
structure, that results from the accidental discharge or overflow of 
water or steam from within a plumbing or heating system may be 
covered, among other things. Further, the HO-3 policy typically covers 
theft of personal property from a home. However, theft in a home that 
is under construction, for example, may not be covered. Court 
decisions may also impact coverage when disputes between policyholders 
and insurers end up in litigation, something that can take time to 
resolve. Ultimately, whether a loss is covered in these cases may 
depend on how the court interprets the policy. Following Hurricane 
Katrina, for example, some coverage disputes raised the question of 
whether a policy's flood exclusion language clearly excluded a water-
related event, such as storm surge, that caused the damage at issue. 
[Footnote 20] 

Coverage may also depend on where homeowners live and whether they 
have purchased endorsements--optional coverage that alters a policy's 
terms and conditions that can be added at an additional cost--or have 
other insurance policies.[Footnote 21] For example, homeowners 
policies typically do not cover flood damage, but flood insurance may 
be available through NFIP, depending on where a home is located. 
[Footnote 22] Additionally, private insurers sometimes exclude 
coverage for wind-related damage to properties in coastal areas, 
requiring policyholders to either pay an additional premium for wind-
related risks or purchase a supplemental policy for wind-related 
damages. In such cases, this supplemental coverage is typically 
provided by a state-sponsored wind insurance pool that has been 
created to address shortages in the availability of private insurance 
for wind-related risks. In Florida, for example, coverage is provided 
through its state insurance entity, the Citizens Property Insurance 
Corporation (Citizens).[Footnote 23] 

Earthquakes and sinkholes are two other perils that are also typically 
excluded from homeowners policies but that may be covered by a 
separate policy or an endorsement in some states. In California, for 
example, state law requires all residential property insurance 
companies to offer earthquake coverage to homeowners. In offering 
earthquake coverage, insurance companies can manage the risk 
themselves, contract with an affiliated or non-affiliated insurer, or 
become members of the California Earthquake Authority (CEA), a 
publicly-managed but privately funded entity that offers residential 
earthquake policies.[Footnote 24] Similarly, sinkhole coverage is 
typically excluded under the earth movement exclusion found in 
standard homeowners policies, but in Florida, the state requires 
insurers to offer catastrophic ground cover collapse, which is a 
narrow form of coverage that protects against the total loss of a home 
due to sinkholes. Florida does not require any other sinkhole coverage 
to be included in homeowners policies, but insurers are required to 
offer additional sinkhole coverage. Homeowners in some states may also 
be able to purchase coverage through endorsements for other perils 
typically excluded from homeowners policies, including ordinance and 
law, sewer or drain backup, and mold. 

Policy Exclusion Impacts Could Be Reduced by Expanding Homeowner 
Coverage, but Premiums Would Likely Increase: 

Losses due to policy exclusions can financially impact homeowners by 
causing significant out-of-pocket expenses. Communities can also be 
impacted by perils excluded from homeowners policies, particularly if 
unrepaired homes result in blight and affect whether others in a 
neighborhood rebuild. Expanded coverage could offer homeowners more 
protection, potentially reducing the cost of repairs that homeowners 
would have to cover with their own resources. However, policies that 
offered expanded coverage would likely be much more expensive than 
current policies. 

Policy Exclusions Can Impact Homeowners and Communities: 

According to industry participants, the biggest and most significant 
impact on homeowners from policy exclusions is out-of-pocket costs to 
cover losses. If a loss occurs that is excluded by insurers, and 
coverage is not available through an endorsement or federal or state 
program, homeowners will have to use their own resources to rebuild 
and replace what they had. Some industry participants said that 
excluded losses can cause significant damage to homes and possessions. 
In some cases, homeowners may not have the means to rebuild after a 
disaster. Figures 1 and 2 illustrate the damage caused by two perils, 
floods and sinkholes, which are typically excluded from homeowners 
policies. 

Figure 1: Damage Due to Floods: 

[Refer to PDF for image: 2 photographs] 

Residential flooding examples: 
Above: Waynesville, MO. 
Right: Greenville, NC. 

Source: FEMA. 

[End of figure] 

Figure 2: Damage Due to Sinkholes: 

[Refer to PDF for image: 2 photographs] 

Sinkholes may range widely in terms of size and impact. The sinkhole 
in Winter Park, FL (above left) was eventually stabilized and turned 
into an urban lake by the city. In Bulan, KY (above right), a 
residential property is in danger of collapsing due to a sinkhole. 

Source: National Oceanic and Atmospheric Administration 
(NOAA)/National Geophysical Data Center (NGDC), A.S. Navory (left 
photo); FEMA (right photo). 

[End of figure] 

In addition to paying for excluded losses on their own, one industry 
organization said that homeowners may have to pay additional out-of-
pocket expenses for temporary housing or a car rental that may not be 
covered by a homeowners policy.[Footnote 25] When impacted by a 
disaster, homeowners may need these types of rentals for many months, 
and they can be costly. 

Further, industry participants said that rebuilding after a disaster 
can present additional challenges for homeowners. One industry 
organization said that catastrophes can cause shortages of building 
contractors and building supplies that can delay reconstruction. This 
phenomenon is known as "demand surge." In these circumstances, the 
short-term costs of repairing and rebuilding homes can escalate 
substantially. Another industry participant noted that homeowners can 
also have their policies canceled if home repairs are not adequate. 

Disasters and excluded perils also sometimes highlight differences 
between consumers' expectations for insurance and actual policy 
coverage, resulting in added frustrations for homeowners. According to 
some industry participants with whom we spoke, some consumers may not 
learn what their policy actually covers until losses occur. For 
example, one industry association recalled that some consumers who had 
recent problems with drywall sourced from China filed insurance claims 
through their homeowners policies. As noted earlier, litigation in 
multiple states may determine the extent to which homeowners insurance 
applies to losses associated with this drywall. 

Others may not understand their coverage well enough to know what is 
covered, what is excluded, and what loss events and circumstances 
might result in paid, partially paid, or denied claims. For example, 
according to a 2013 survey conducted by one industry organization, 
many homeowners mistakenly believe that their homeowners policies 
cover flooding from a hurricane.[Footnote 26] According to some 
industry participants, homeowners policies can be difficult to 
understand because they often are long, technical, legal documents. 
One consumer advocate we spoke with suggested that few tools exist to 
help consumers understand their coverage, and noted that even though 
some states have policy readability requirements and disclosure rules 
about coverage and exclusions, these measures do not help consumers 
understand their policies. Other participants said that many 
homeowners do not read their policies or study them closely. 
Additional analysis would be needed to determine to what extent 
readability requirements, disclosure rules, or other factors impact 
homeowners' ability to understand their policies. 

In addition to the devastation disasters may cause homeowners, 
neighborhoods and communities can also be impacted if some homeowners 
are unable to rebuild because they do not have coverage for a loss. 
Damaged homes that are not rebuilt can result in blight and affect the 
willingness of others to rebuild. A neighborhood where property is 
vacant or deteriorated will also likely impact the property value of 
surrounding homes. In addition, when some homeowners do not rebuild, 
communities may experience a diminution of the tax base. Collecting 
less in property taxes can impact the ability of communities to fund 
schools, libraries, parks, and roads, among other uses. 

Government Coverage of Excluded Losses Can Involve Costs and Risks to 
Taxpayers: 

Both the federal and some state governments offer disaster assistance 
and other programs to help homeowners with some of the perils that 
private insurers do not cover, and this support can rely on taxpayer 
as well as policyholder resources. At the federal level, the 
government provides a range of assistance to individuals after major 
disasters. This assistance is generally made available after the 
President issues a disaster declaration under the authority of the 
Robert T. Stafford Disaster Relief and Emergency Assistance Act (the 
Stafford Act), and is administered by various federal agencies through 
various programs.[Footnote 27] FEMA, for example, provides disaster 
relief and recovery assistance to individual citizens through its 
Individuals and Households Program (IHP), which is intended to provide 
money and services, including assistance in repairing and replacing 
damaged homes, to people in a disaster area when losses are not 
generally covered by insurance.[Footnote 28] The growing number of 
major disaster declarations has contributed to an increase in federal 
expenditures for disaster assistance, however. For example, through 
January 31, 2012, FEMA obligated $80.3 billion in disaster relief, 
including $23.5 billion in individual assistance, for 539 disasters 
declared during fiscal years 2004 through 2011.[Footnote 29] More 
recently, Superstorm Sandy has also involved significant federal 
disaster assistance. In January 2013, Congress passed and the 
President signed the Disaster Relief Appropriations Act of 2013 and 
the Sandy Recovery Improvement Act of 2013, which provided about $50 
billion in federal assistance to support rebuilding efforts.[Footnote 
30] 

In addition to providing disaster assistance, the federal government 
also offers flood insurance to homeowners through NFIP, a program that 
involves significant costs for the government and ultimately for 
taxpayers. According to FEMA information, as of September 2013, there 
were 5.6 million flood insurance policies in force in almost 22,000 
communities across the United States. In years when losses were high, 
NFIP has used statutory authority to borrow funds from the Department 
of the Treasury (Treasury) to pay claims and keep the program solvent. 
For example, NFIP borrowed $16.8 billion from Treasury to cover claims 
for the 2005 hurricanes--primarily Hurricane Katrina--and received 
additional borrowing authority in the amount of $9.7 billion following 
Superstorm Sandy in 2012. As of October 2013, NFIP owed Treasury $24 
billion. NFIP is generally expected to cover its claim payments and 
operating expenses with the premiums it collects. However, NFIP has 
sold some flood insurance policies at subsidized rates to help keep 
flood insurance affordable, and these subsidized policies have been a 
financial burden on the program because of their relatively high 
losses and premium rates that are not actuarially based. As a result, 
the annual amount that NFIP collects in both full-risk and subsidized 
premiums is generally not enough to cover its operating costs, claim 
payments, and principal and interest payments for the debt owed to 
Treasury, especially in years of catastrophic flooding, such as 
2005.[Footnote 31] This arrangement results in much of the financial 
risk of flooding being transferred to the federal government and 
ultimately the taxpayer. As shown in figure 3 below, NFIP has handled 
a significant number of claims and paid losses for flood events caused 
by hurricanes and a superstorm since 2005.[Footnote 32] 

Figure 3: Selected NFIP Flood Loss and Payment Information, 2005 to 
2012: 

[Refer to PDF for image: illustrated table] 

Event: Katrina; 
Year: 2005; 
Number of losses: 167,730
Total claims paid: $16,278,367,593
Average paid loss: $97,051. 

Event: Rita; 
Year: 2005; 
Number of losses: 9,510
Total claims paid: $472,816,662
Average paid loss: $49,718. 

Event: Paul; 
Year: 2006; 
Number of losses: 1,507
Total claims paid: $37,261,864
Average paid loss: $24,726. 

Event: Gustav; 
Year: 2008; 
Number of losses: 4,541
Total claims paid: $112,501,771
Average paid loss: $24,775. 

Event: Ike; 
Year: 2008; 
Number of losses: 46,464
Total claims paid: $2,670,428,882
Average paid loss: $57,473. 

Event: Irene; 
Year: 2011; 
Number of losses: 44,057
Total claims paid: $1,320,880,851
Average paid loss: $29,981. 

Event: Sandy; 
Year: 2012. 
Number of losses: 127,579; 
Total claims paid: $7,360,969,215; 
Average paid loss: $57,697, 

Total: 
Number of losses: 401,388
Total claims paid: $28,253,226,838. 

Source: FEMA. 

[End of figure] 

Some states, such as Florida, have created residual insurance pools to 
cover what the private market will not, sometimes at a cost to 
policyholders and taxpayers across the state.[Footnote 33] In Florida, 
Citizens provides homeowners coverage, including for wind damage, for 
those who cannot find coverage from private insurers. If Citizens' 
funds are depleted by paying claims after a catastrophic event, 
Florida law requires that Citizens charge assessments until any 
deficits are eliminated. Citizens' policyholders are the first to be 
assessed, and if necessary, additional assessments can be levied 
against certain private insurance companies, who can then pass the 
cost of these assessments on to their policyholders. [Footnote 34] 
This ability to levy assessments provides Citizens with resources to 
pay claims to policyholders. 

Storms in 2004 and 2005, for example, resulted in more than $30 
billion in insured damage in Florida. Citizens sustained deficits of 
$515 million and $1.8 billion, respectively, in those years. To fund 
its 2004 deficit, Citizens assessed insurance companies and surplus 
lines policyholders over $515 million in regular assessments.[Footnote 
35] To fund the 2005 deficit, the Florida legislature appropriated 
$715 million from the Florida general revenue fund, reducing the size 
of the regular assessment from $878 million to $163 million. In 2005, 
the Florida legislature also directed Citizens to amortize the 
collection of the emergency assessment for the remaining $888 million 
deficit over a 10-year period, resulting in an emergency assessment 
levied beginning in June 2007. According to two industry 
organizations, Florida's property/casualty policyholders generally 
bear the cost of having Citizens provide coverage to participating 
Florida residents, regardless of whether they live inland or on the 
coast. 

Expanding Private Coverage Could Offer Benefits, but Homeowner 
Premiums Would Likely Rise: 

If private insurers offered expanded homeowners coverage, homeowners 
could see a number of benefits. First, according to some industry 
participants homeowners would have more protection because more perils 
would be covered under their policy. Second, some industry 
participants noted that more comprehensive coverage could lead to less 
ambiguity for consumers seeking to understand their policies. Policies 
with fewer exclusions and conditions for coverage would be simpler and 
more efficient for insurers to write and consumers to understand than 
having separate policies for homeowners, flood, and in some states, 
wind coverage. Third, some industry participants said that enhanced 
coverage could reduce litigation and disputes between policyholders 
and insurers over coverage. For example, a policy that offered more 
comprehensive coverage could reduce disputes over the anticoncurrent 
causation clause, often over whether wind or water caused residential 
damage, something some industry participants noted is a particular 
challenge for homeowners when hurricanes occur. 

Assuming homeowners purchased expanded private coverage without 
government subsidies, these policies could also reduce reliance on 
federal and state programs.[Footnote 36] According to some industry 
participants, if homeowners policies covered flooding, for example, 
fewer taxpayer resources may be needed for paying NFIP's claims and 
subsidized premiums. In addition to having benefits at the federal 
level, greater private coverage could also reduce or eliminate the 
need for state-based insurance mechanisms, such as state wind pool 
coverage, and the insurer and policyholder assessments they can 
involve. Moreover, expanded coverage could encourage more informed 
decisions by homeowners. For instance, expanded coverage with more 
accurate pricing for risk could provide beneficial information to 
consumers on the risk associated with their housing location decisions 
and could encourage more consumers to mitigate risks to their property 
or to not locate to high-risk areas. 

Notwithstanding these potential benefits, expanded coverage would 
likely increase insurance premiums for homeowners. According to some 
industry participants with whom we spoke, the increase could amount to 
several times what some homeowners currently pay. For example, one 
industry organization said that a policy that covered flood, 
earthquake, sinkholes, and some other perils could cost homeowners 
anywhere from three to five times what homeowners pay now, while 
another estimated that the cost of a policy that covered nearly all 
the currently excluded perils could exceed $15,000 annually. Other 
industry participants said the cost for this coverage would be so high 
that many homeowners would be unable to afford it. Additionally, FEMA 
information on the changes to the cost of flood insurance following 
the Biggert-Waters Act and the elimination of some subsidized rates 
may further illustrate how costly expanded coverage could potentially 
be for some homeowners. According to FEMA information, the cost of a 
NFIP policy for a home located in a very high-risk area without a 
subsidy could exceed $20,000 in annual premiums for certain 
policyholders.[Footnote 37] 

Multiple Challenges Make Expanding Private Coverage Difficult: 

Several factors make it challenging for private insurers to offer all-
perils homeowners insurance, or even more comprehensive policies. 
These include consumer demand for greater coverage and the higher 
premiums such coverage would involve, the ability of insurers to 
adequately price policies that covered more perils, and the regulatory 
challenges associated with getting approval for risk-based rates. A 
few industry participants with whom we spoke said that insurers and 
others are discussing possibilities for expanding private homeowners 
insurance, but cautioned that policy premium rate, affordability, and 
other conditions would need to be addressed. 

Insurance Cost and Risk Pricing Are Issues for Consumers and Insurers: 

Consumer Demand and Incentives: 

Higher premiums for more comprehensive homeowners insurance are not 
only an affordability challenge for homeowners, they also represent a 
key challenge for insurers. Some industry participants said that the 
higher premiums required for more comprehensive coverage raises 
questions about whether sufficient demand would make expanded coverage 
impractical in the private market. Some said that many homeowners try 
to keep expenses for insurance as low as possible, citing as evidence 
low participation in NFIP, despite federal subsidies. They also 
questioned whether consumers would buy much more expensive expanded 
coverage even if it were offered by insurers. 

Additionally, many industry participants with whom we spoke said that 
adverse selection--or the tendency for those who live in places most 
prone to risk to be most likely to purchase insurance--could challenge 
insurers' ability to expand policy coverage. Insurers manage risk by 
charging appropriate rates and diversifying their risk pool. Industry 
participants with whom we spoke said that if only riskier households--
for example, those located near the coasts or rivers--were the primary 
purchasers of expanded coverage, insurers might end up with an 
insurance pool with concentrated risk and policies that could cause 
losses that may jeopardize insurers' profitability and solvency. 

A requirement that insurers offer and homeowners purchase more 
comprehensive coverage may reduce this problem but raises questions 
about how such a requirement would be implemented.[Footnote 38] 
Further, some questioned whether it would be fair to require those 
living in low-risk areas to purchase expanded coverage they may not 
need, in effect subsidizing those living in high-risk areas. One 
industry organization said that legislative or regulatory attempts to 
mandate all-perils coverage could destabilize the insurance 
marketplace in certain high-risk areas such as coastal regions and 
floodplains. It could also cause private insurers to further limit 
their exposures in disaster-prone areas, and some insurers may 
withdraw from the market altogether. Industry participants suggested 
that offering policies that covered all losses could also raise issues 
of moral hazard, or incentivize risky behavior by homeowners. For 
example, comprehensive policies may encourage people to locate their 
homes in high-risk areas. Others said that higher premiums associated 
with more comprehensive policies would send a better signal to 
homeowners about the risk associated with their housing location, 
something that could prompt homeowners to properly insure their homes 
or take steps to mitigate their risk. 

Risk Pricing and Claims Processing: 

Industry participants said that another important challenge is the 
difficulty of pricing catastrophic risks and handling the claims that 
they cause. Some industry participants said that accurately modeling 
the broader range of risks that more comprehensive policies would 
cover was critically important. Having loss data and accurately 
modeling risk is necessary for appropriately pricing insurance 
policies and for ensuring insurer solvency. Some industry participants 
said that because expanded coverage would be new to the private 
domestic market, modeling experience would need to be developed over 
time and could be challenging, particularly for multiple catastrophic 
losses. Others said that insurers might also lack the expertise to 
handle claims for perils that were typically excluded, and that it 
could take time for insurers and adjusters to develop the expertise to 
handle some disaster situations and subsequent claims. 

Approval for Risk-based Rates and Insurer Capital Pose Additional 
Concerns: 

Regulatory Rate Approval: 

Industry participants said that insurers could also face critical 
regulatory challenges in offering more comprehensive coverage. One 
important challenge is that state regulatory approval for the higher 
premiums more comprehensive coverage would likely demand is uncertain. 
Insurers need to charge risk-based rates that are determined on an 
actuarial basis in order to stay solvent and meet their policy 
obligations to homeowners. However, some industry participants with 
whom we spoke said that getting regulators to approve rates that 
insurers determined would be appropriate for certain risks has been 
difficult and that getting approval for rates that could be several 
times more expensive than those currently in force would be an 
important challenge. One regulator, however, said that inability to 
charge higher risk-based rates might not be an issue because loss 
experience is a critical factor that drives rates. If insurers faced 
greater losses by covering more perils, they would likely be able to 
justify and gain approval for higher premiums. Industry participants 
also said that different state insurance laws and regulations and 
different rate-setting and approval processes could make it difficult 
for insurers to sell more comprehensive policies with risk-based rates 
across states. 

Insurer Capital: 

Offering coverage for a broader set of perils would also require 
insurers to have the capital necessary to pay claims without risking 
insolvency. The greater the risk, the more capital insurers need to 
hold. Insurers may not be willing to maintain the higher capital 
levels needed for insuring against higher risk events if that capital 
could be used for other insurance or investment purposes. In addition, 
disasters such as floods and earthquakes are relatively infrequent but 
often severe events, so that insurers cannot always know how much they 
will need in reserves. Industry participants said that the 
unpredictability of catastrophes could prevent insurers from 
accurately calculating and setting aside the sums necessary to cover 
losses. One insurance regulator suggested that even if insurers could 
charge rates that reflected the full risk of disasters, they still may 
not be able to offer coverage for additional perils. 

Several Conditions Would Be Needed for Insurers to Expand Private 
Coverage: 

For additional coverage to be possible, insurers would need the 
ability to conduct actuarial analyses and accurately model risks 
involved with greater homeowners coverage. Some industry participants 
thought this capability may already exist or could be developed for 
floods and earthquakes, the two perils they said hold some promise for 
greater private insurer involvement. In order to offer coverage for 
flood or other perils, insurers would have to be able to charge risk-
based rates, a critical part of meeting their policy obligations to 
consumers and staying solvent, but something that would also raise 
concerns about higher premium costs, policy affordability, and 
consumer demand. 

Two industry organizations said that mitigation efforts, effective 
building codes, and sound land-use policies could also help reduce 
risks from natural catastrophes. Another highlighted how building 
codes set by states can differ, which can lead to inconsistencies that 
make it difficult to ensure properties can withstand loss events. 
Others said that it is important for the insurance industry to 
encourage consumers to become better informed about their risks and 
insurance so that they could take available steps depending on where 
they live to mitigate losses. 

The catastrophic nature of flood and other natural catastrophe losses, 
according to industry participants, may require a continuing role for 
federal and state government in financing coverage. We recently 
reported on strategies to encourage greater private-sector involvement 
in flood insurance that included the possibility of insurers charging 
homeowners full risk rates with the government providing targeted 
subsidies to help with affordability. Private insurers could play a 
greater role in coverage with the federal government possibly serving 
as an insurer for only the highest risk properties. Yet another option 
is the combination of greater private-sector involvement and the 
government acting as a reinsurer by providing a backstop to private 
insurers for losses over a certain amount.[Footnote 39] 

The size of the losses and the magnitude of the risk associated with 
more comprehensive policies underscore the complex challenges of 
addressing the costs of catastrophes and other perils that place 
homeowners' properties at risk. A mix of factors--financial risk, 
large potential losses, political and regulatory issues, policy 
affordability, and consumer demand--has thus far made it challenging 
for private-sector insurers in the U.S. to offer flood insurance to 
homeowners, let alone more comprehensive or all-perils policies. The 
possibility of improved data, better risk modeling, and emerging 
private-sector interest, however, suggest that some additional 
coverage may be possible. For this to happen, private insurers must be 
able to assess and diversify risk and charge rates adequate for the 
risk they are assuming. At the same time, consumers will need to 
better recognize the risk and cost of their housing decisions and the 
likely higher rates that come with protecting homes and possessions in 
certain locations. One of the most fundamental challenges is achieving 
a policy premium rate that allows insurers to stay solvent and meet 
their obligations to consumers, yet is affordable enough so that 
consumers are willing and able to buy insurance. Addressing this 
important challenge and ensuring a collective response to losses 
caused by disasters and other perils will require the cooperation and 
resources of government, homeowners, and insurers, as well as balance 
in the assumption of risk and cost by each of these parties. 

Agency Comments: 

We provided a draft of this report for review and comment to the 
National Association of Insurance Commissioners (NAIC) and the Federal 
Insurance Office (FIO) at the Department of the Treasury. Both 
provided technical comments which we incorporated into the report as 
appropriate. 

We are sending copies of this report to the appropriate congressional 
committees, NAIC, and FIO. In addition, the report is available at no 
charge on the GAO website at [hyperlink, http://www.gao.gov]. 

If you have any questions about this report, please contact me at 
(202) 512-8678 or cackleya@gao.gov. Contact points for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this report. GAO staff who made key contributions to this 
report are listed in appendix V. 

Signed by: 

Alicia Puente Cackley: 
Director, Financial Markets and Community Investment: 

List of Addressees: 

The Honorable Gerry Connolly: 
Ranking Member: 
Subcommittee on Government Operations: 
Committee on Oversight and Government Reform: 
House of Representatives: 

The Honorable Corrine Brown: 
House of Representatives: 

The Honorable G.K. Butterfield, Jr.
House of Representatives: 

The Honorable Theodore E. "Ted" Deutch: 
House of Representatives: 

The Honorable Luis V. Gutierrez: 
House of Representatives: 

The Honorable Jim Moran: 
House of Representatives: 

The Honorable Scott Rigell: 
House of Representatives: 

The Honorable Dennis A. Ross: 
House of Representatives: 

The Honorable Jan Schakowsky: 
House of Representatives: 

The Honorable Robert C. "Bobby" Scott: 
House of Representatives: 

The Honorable Debbie Wasserman Schultz: 
House of Representatives: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

In this report we examined (1) the perils homeowners policies 
typically cover and exclude; (2) the impacts of exclusions on 
homeowners and taxpayers and the potential benefits of more 
comprehensive coverage for homeowners; and (3) the additional perils 
insurers might be willing to cover and the challenges associated with 
such coverage. 

To determine what perils homeowners policies typically cover and 
exclude, we analyzed the Insurance Services Office's (ISO) standard 
homeowners insurance policy (HO-3) and examples of private insurers' 
homeowners policies. We reviewed documents by insurance industry 
organizations and professional associations, including the National 
Association of Insurance Commissioners (NAIC) and the Insurance 
Information Institute (III). We also interviewed a nongeneralizable, 
judgmental sample of property/casualty insurance companies and state 
insurance regulators, insurance and reinsurance associations, an 
insurance agent and broker association, consumer groups, academic 
insurance and risk experts, and the Federal Insurance Office (FIO) at 
the Department of the Treasury. We selected our sample of insurers 
based on market share by direct premiums underwritten and 
participation in different geographic markets. We selected our sample 
of state regulators based on geographic diversity and experience 
overseeing insurers with portfolios of different perils, including 
floods, hurricanes, and earthquakes. 

To determine the impacts of exclusions on homeowners and taxpayers and 
the benefits of more comprehensive coverage, we spoke with consumer 
groups, including the Center for Economic Justice, academic experts, 
selected state insurance regulators, NAIC and FIO officials, and other 
insurance association officials. To illustrate some of the financial 
impacts of policy exclusions on taxpayers, we obtained publicly 
available data from the Federal Emergency Management Agency (FEMA) on 
the National Flood Insurance Program's (NFIP) claims costs. For the 
NFIP data we used, we interviewed officials on usability and 
reliability. We determined that these data were sufficiently reliable 
for our intended purposes. In addition, we reviewed our previous work 
on natural catastrophe insurance, academic and other studies, and 
results from an annual survey conducted by Insurance Information 
Institute (III) on homeowners insurance, flood insurance, and disaster 
preparedness. 

To identify the additional perils that insurers might be willing to 
insure and the challenges associated with such coverage, we spoke with 
a sample of insurance companies and state insurance regulators, 
insurance and reinsurance associations, an insurance agent and broker 
association, NAIC and FIO officials, consumer groups, academia, and 
others. We also reviewed our previous work on natural catastrophe 
insurance, Congressional Research Service (CRS) reviews, and academic 
and other studies on these issues. We gathered additional perspectives 
on all perils policies from a round table discussion on privatizing 
flood insurance that we organized and conducted at GAO headquarters in 
Washington, D.C. Participants in the round table included insurance 
industry association representatives, select state regulators, and 
NAIC and FEMA officials. 

We conducted this performance audit from December 2012 to January 2014 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Information on the National Flood Insurance Program: 

Established in 1968, the National Flood Insurance Program (NFIP) makes 
federally backed flood insurance available to residential property 
owners and to owners of nonresidential property such as businesses, 
churches, governments and nonprofits. Under NFIP, the federal 
government generally assumes the liability for the insurance coverage 
and sets rates and coverage limitations, among other responsibilities, 
while the private insurance industry sells the policies and 
administers the claims.[Footnote 40] The Federal Emergency Management 
Agency (FEMA) is responsible for administering NFIP. 

Community participation in NFIP is voluntary. However, communities 
must join NFIP and adopt FEMA-approved building standards and 
floodplain management strategies in order for their residents to 
purchase flood insurance through the program. Additionally, 
communities with Special Flood Hazard Areas (SFHA)--areas at high risk 
for flooding--must participate in NFIP to be eligible for any form of 
assistance for acquisition or construction purposes in connection with 
a flood.[Footnote 41] Participating communities can receive credits on 
premium rates on flood insurance if they establish floodplain 
management programs that go beyond the minimum requirements of NFIP. 
FEMA can suspend communities that do not comply with the program, and 
communities can withdraw from the program. As of September 2013, 
almost 22,000 communities voluntarily participated in NFIP. 

Consumers can purchase flood insurance to cover both buildings and 
contents for residential and commercial properties. NFIP's maximum 
coverage for residential policyholders is $250,000 for building 
property and $100,000 for contents. This coverage includes replacement 
value of the building and its foundation, electrical and plumbing 
systems, central air and heating, furnaces and water heater, and 
equipment considered part of the overall structure of the building. 
Personal property coverage includes clothing, furniture, and portable 
electronic equipment. For commercial policyholders, the maximum 
coverage is $500,000 per unit for buildings and $500,000 for contents 
(for items similar to those covered under residential 
policies).[Footnote 42] Coverage for personal property and coverage 
for nonresidential buildings is written on an actual cash value basis. 

NFIP offers two types of flood insurance premiums to property owners 
who live in participating communities: subsidized and full-risk. The 
National Flood Insurance Act of 1968 authorized NFIP to offer 
subsidized premiums to owners of certain properties. Congress 
originally mandated the use of subsidized premiums to encourage 
communities to join the program and mitigate concerns that charging 
rates that fully and accurately reflected flood risk would be a burden 
to some property owners. According to FEMA, Congress made changes to 
the program over the years to encourage further participation in NFIP 
through low premiums. FEMA estimated that in 2012 more than 1 million 
of its residential flood insurance policies--about 20 percent--were 
sold at subsidized rates; nearly all were located in high-risk flood 
areas.[Footnote 43] 

Since 2000, NFIP has experienced several years with catastrophic 
losses--losses exceeding $1 billion--and has needed to borrow money 
from the Treasury to cover claims in some years. The losses resulting 
from Superstorm Sandy, which caused extensive damage in several states 
on the eastern coast of the United States in October 2012, also are 
catastrophic, reaching over $7 billion. As of October 2013, FEMA owed 
Treasury $24 billion. As a result of the program's importance, level 
of indebtedness to Treasury, substantial financial exposure for the 
federal government and taxpayers, and FEMA's management challenges, 
NFIP has been on our high-risk list since 2006.[Footnote 44] 

[End of section] 

Appendix III: Information on the Citizens Property Insurance 
Corporation: 

Established in 2002, Florida Citizens Property Insurance Corporation 
(Citizens) is a not-for-profit and tax-exempt government entity that 
provides property insurance to homes and businesses that cannot get 
coverage in the private sector.[Footnote 45] It consolidated two 
residual market mechanisms: the Florida Windstorm Underwriting 
Association (FWUA), created in 1970 to provide high-risk, windstorm, 
and hail residual market coverage in select areas of Florida, and the 
Florida Residential Property and Casualty Joint Underwriting 
Association (JUA), created in December 1992 following Hurricane Andrew 
to provide residual market residential-property multiperil insurance 
coverage, excluding wind if the property was within FWUA-eligible 
areas. A primary driver for the merger was that the combined entity 
obtained federally tax-exempt status, allowing it to save federal 
income taxes that otherwise would have been paid by FWUA and JUA. 
[Footnote 46] As an integral part of the state rather than a private 
insurance company, Citizens is also able to issue tax-exempt post-
event bonds and taxable pre-event bonds, which can help finance loss 
payments in the event of a major disaster. 

Florida law determines the standards Citizens uses to establish its 
premium rates. Citizens' rates are required to be actuarially sound, 
but at the beginning of 2007, an approved rate increase was rescinded 
and rate levels were frozen by the Florida legislature at the 2006 
rate levels. The rate freeze remained in effect through December 31, 
2009. On January 1, 2010, Citizens began implementation of a 
statutorily required path to achieve actuarially sound rates over 
time. Except for sinkhole coverage, the path limits annual rate 
increases to 10 percent for any single policy issued by the 
corporation, excluding coverage changes and surcharges. According to 
Citizens officials, Citizens' rates are moving towards actuarial 
soundness, but are not yet there. 

Citizens allocates approximately 18 percent of every premium dollar it 
collects to pay hurricane and catastrophe claims, but in the event 
that losses exceed its surplus, it is required by statute to levy 
assessments to recover the deficit. Assessments can be charged in up 
to three tiers, policyholder surcharge, regular, and emergency. Each 
additional tier is charged only if the level before is insufficient to 
eliminate Citizens' deficit. Citizens' policyholder surcharge is the 
first tier of assessments and can be levied one time for up to 45 
percent of the policyholder's premium in a single year. If a deficit 
remains in one of Citizens' three types of accounts, Citizens can levy 
regular assessments of up to two percent against certain private 
insurance companies, who can then pass the cost of these assessments 
on to their policyholders.[Footnote 47] Finally, if a deficit 
persists, Citizens can impose an emergency assessment on both Citizens 
and non-Citizens policyholders.[Footnote 48] This ability to levy 
assessments provides Citizens with resources to pay claims to 
policyholders. For example, following the 2004 storms, Citizens had to 
levy over $515 million in regular assessments to fund its deficit. 

Citizens' resources also come from its reinsurance arrangement with 
the Florida Hurricane Catastrophe Fund (FHCF). Established in 1993 by 
the Florida legislature, FHCF is a state-run reinsurer created to 
provide additional insurance capacity and help stabilize the property 
insurance market by reimbursing insurers for a portion of their 
catastrophic hurricane losses. As a tax-exempt entity, FHCF can 
accumulate premium payments on a tax-free basis. If the revenue 
generated from premiums is insufficient following a loss event, FHCF, 
like Citizens, is required by state law to levy assessments on a broad 
base of property/casualty insurance lines to fund revenue bonds to pay 
the losses. For example, FHCF issued bonds in the amount of $1.35 
billion in 2006 and $625 million in 2008, which are being financed by 
a 1 percent assessment levied on property/casualty insurers in the 
state. 

As of October 2013, Citizens had more than 1.2 million policies in 
force, most of which were homeowners policies. According to a Citizens 
official, Citizens has recently engaged in depopulation efforts by 
seeking ways to return policies to the private market, but these 
efforts have been met with challenges. For example, Citizens has faced 
challenges with establishing rates higher than those available in the 
private market. The insurance distribution process is also a 
challenge. For example, according to a Citizens official, private 
insurers that decline to sell a homeowner a policy may refer that 
homeowner to Citizens instead of recommending they shop the market for 
coverage, which has impeded a freely competitive insurance market. 

[End of section] 

Appendix IV: Information on the California Earthquake Authority: 

Established in 1996, the California Earthquake Authority (CEA) is an 
instrumentality of the state that sells earthquake insurance policies 
for residential property throughout California. CEA is a publicly 
managed, privately funded entity. After the Northridge Earthquake that 
struck the San Fernando Valley in January 1994, insurers in California 
began to limit their exposure to earthquakes by writing fewer or no 
new homeowners insurance policies.[Footnote 49] In 1995, California 
lawmakers passed a bill that allowed insurers to offer a reduced-
coverage earthquake insurance policy. In offering earthquake coverage, 
insurance companies can manage the risk themselves, contract with an 
affiliated or non-affiliated insurer, or become a CEA-participating 
insurance company and offer CEA's residential earthquake policies. CEA 
is the largest earthquake insurer in California, with approximately 
840,000 policies in force as of 2011, which represent approximately 70 
percent of the residential earthquake insurance policies in the state. 

CEA offers a basic residential earthquake policy to homeowners, which 
includes coverage for the insured dwelling and limited coverage for 
contents and loss-of-use if the residence is uninhabitable due to an 
earthquake. For an additional premium, CEA policyholders can 
significantly increase insured limits on contents and for loss-of-use, 
and homeowners can lower their CEA policy deductible from 15 percent 
to 10 percent.[Footnote 50] CEA coverage is available to homeowners 
only from the insurance company that provides their residential 
property insurance and only if that company is a CEA-participating 
insurance company. Participating insurance companies process all CEA 
policy applications, policy renewals, invoices, and payments and 
handle all CEA claims. 

In determining premium rates, CEA is required by law to use the best 
science available and is permitted by law to use earthquake computer 
modeling, to establish actuarially sound rates. CEA will examine 
rating factors, such as the rating territory (determined by ZIP code), 
age, and type of construction of a home, in determining the premium 
rate.[Footnote 51] The CEA governing board establishes premium rates, 
subject to the prior approval of the Insurance Commissioner. In 2011, 
for example, a request for a 12.5 percent average statewide rate 
decrease was approved beginning with new and renewal policies that 
became effective on and after January 1, 2012. The change was a result 
of a reduction in the estimated average annual loss, as derived from 
new scientific information, according to CEA information. Given that 
the rate decrease is expressed as an average statewide rate impact, 
individual policyholders may have seen their rates increase or 
decrease, depending on CEA product, location of the risk, and other 
rating factors. 

CEA is funded principally from policyholder premiums, contributions 
from and assessments on participating insurers, returns on invested 
funds, borrowed funds, and reinsurance. Assessments on participating 
insurers may not be directly passed through to policyholders. CEA is 
authorized to issue bonds, and may not cease to exist so long as its 
bonds are outstanding. As of 2012, CEA had approximately $10.2 billion 
in claims-paying capacity, but if an earthquake causes insured damage 
greater than CEA's claims-paying capacity, then policyholders affected 
will be paid a prorated portion of their covered losses or may be paid 
in installments. 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Alicia Puente Cackley, (202) 512-8678 or cackleya@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Paul Schmidt (Assistant 
Director); Emily Chalmers; Alma Laris; Marc Molino; Erika Navarro; 
Steve Ruszczyk; Jessica Sandler; and Andrew Stavisky made key 
contributions to this report. 

[End of section] 

Footnotes: 

[1] A peril is a specific risk or event that may cause a loss. 

[2] National Oceanic and Atmospheric Administration, National Coastal 
Population Report: Population Trends from 1970 to 2020 (Washington, 
D.C.: Mar. 2013). 

[3] For the purposes of this report, "industry participants" refers to 
those entities with a role in the insurance industry, including 
regulators, consumer advocates, industry associations, insurance 
company officials, and academic experts. 

[4] Additional living expenses are extra charges covered by homeowners 
policies over and above the policyholder's customary living expenses. 
They kick in when the policyholder requires temporary shelter due to 
damage by a covered peril that makes the home temporarily 
uninhabitable. 

[5] See National Association of Insurance Commissioners (NAIC), A 
Consumer's Guide to Home Insurance (Kansas City, MO: 2010) and 
Insurance Information Institute (III), Insurance Handbook: A Guide to 
Insurance: What it Does and How it Works (New York, N.Y.: 2010). 

[6] The amount of coverage available under a homeowners policy is 
subject to limits, which are the maximum amounts the insurance policy 
will pay in the event of a loss. The limit for the dwelling is 
typically selected by the policyholder. The limits for other 
structures, personal property, and loss of use are expressed as 
percentages of the dwelling limit. 

[7] According to industry participants, the valuation method used to 
determine the value of a home depends on the language in the insurance 
policy. For example, the home's value may be determined by the insurer 
or may be based on an appraisal. Each structure may also require a 
different valuation method. 

[8] See NAIC, A Consumer's Guide to Home Insurance and III, Insurance 
Handbook: A Guide to Insurance: What it Does and How it Works. 

[9] According to information from a state insurance department, many 
insurance companies require policyholders to purchase coverage for at 
least 80 percent of the home's replacement cost, and some require 100 
percent. If a homeowner is underinsured and suffers a total loss, the 
homeowner may be reimbursed up to the coverage limit the homeowner 
purchased. 

[10] The federal government retains the authority to regulate 
insurance, but has given primary responsibility for insurance 
regulation to the states in accordance with the McCarran-Ferguson Act 
of 1945. See Pub. L. No. 79-5, ch. 20, 59 Stat. 33 (1945) codified as 
amended at 15 U.S.C. §§ 1011-1015. See also GAO, Ultimate Effects of 
McCarran-Ferguson Federal Antitrust Exemption on Insurer Activity Are 
Unclear, [hyperlink, http://www.gao.gov/products/GAO-05-816R] 
(Washington, D.C.: July 28, 2005). Nevertheless, the federal 
government is involved in a wide range of areas with respect to the 
insurance sector, including operation of the National Flood Insurance 
Program, and crop and terrorism insurance programs. In addition, the 
Federal Reserve Board supervises insurers designated by the Financial 
Stability Oversight Council. 

[11] Examples of wind risks include hurricanes and tornadoes. 

[12] Pub. L. No. 90-448, Title XIII, § 1302, 82 Stat. 476, 572 (1968). 

[13] FEMA is part of the Department of Homeland Security. 

[14] For more information on NFIP, see Appendix II and recent GAO 
work, including GAO, Flood Insurance: Implications of Changing 
Coverage Limits and Expanding Coverage, [hyperlink, 
http://www.gao.gov/products/GAO-13-568] (Washington, D.C.: July 3, 
2013); Flood Insurance: More Information Needed on Subsidized 
Properties, [hyperlink, http://www.gao.gov/products/GAO-13-607] 
(Washington, D.C.: July 3, 2013) and Flood Insurance: Strategies for 
Increasing Private Sector Involvement, [hyperlink, 
http://www.gao.gov/products/GAO-14-127] (Washington, D.C.: Jan. 22, 
2014). 

[15] In addition to providing data and analytics services, ISO 
develops standard insurance policy language for use in the insurance 
industry. According to some industry participants, insurers may 
develop their own proprietary policies that deviate from the HO-3, but 
the covered perils and exclusions in those policies typically remain 
the same. 

[16] For more information on insurable risk criteria, see GAO, 
Terrorism Insurance: Measuring and Predicting Losses from 
Unconventional Weapons Is Difficult, but Some Industry Exposure 
Exists, [hyperlink, http://www.gao.gov/products/GAO-06-1081] 
(Washington, D.C.: Sept. 25, 2006) and George E. Rejda, Principles of 
Risk Management and Insurance, 8TH ed. (Boston, Mass.: Pearson 
Education, Inc., 2003). 

[17] Alternatively, a catastrophic loss is one that is extraordinarily 
large relative to the number of properties at risk in a given 
insurance pool. 

[18] Commercial general liability insurance is a standard insurance 
policy issued to business organizations to protect them against 
liability claims for bodily injury and property damage arising out of 
premises, operations, products, and completed operations, as well as 
advertising and personal injury liability. 

[19] For more information on defective drywall and alternative methods 
of providing relief from damage associated with it, see GAO, 
Information on Defective Drywall, [hyperlink, 
http://www.gao.gov/products/GAO-13-735R] (Washington, D.C.: July 31, 
2013). 

[20] For more information on wind and flood damage determinations 
following Hurricane Katrina, see GAO, National Flood Insurance 
Program: Greater Transparency and Oversight of Wind and Flood Damage 
Determinations Are Needed, [hyperlink, 
http://www.gao.gov/products/GAO-08-28] (Washington, D.C.: Dec. 28, 
2007). 

[21] An endorsement is sometimes called a rider. In addition to buying 
back coverage for certain risks, endorsements can also be used by 
insurers to limit coverage in a policy. 

[22] Some property owners may also purchase excess flood insurance 
from private insurers if the value of their home exceeds the coverage 
limits offered by NFIP. 

[23] Citizens is a not-for-profit, tax-exempt government corporation 
that provides insurance protection to Florida property owners 
throughout the state. The corporation insures hundreds of thousands of 
homes, businesses, and condominiums whose owners otherwise might not 
be able to find coverage. For more information on Citizens, see 
appendix III. 

[24] The base CEA policy, known as a "mini-policy," is a reduced-
coverage, catastrophic earthquake insurance policy intended to protect 
a dwelling, while excluding coverage for costly nonessential items, 
such as swimming pools, patios, and detached structures. For more 
information about CEA and other state insurance entities, see appendix 
IV and GAO, Natural Disasters: Public Policy Options for Changing the 
Federal Role in Natural Catastrophe Insurance, [hyperlink, 
http://www.gao.gov/products/GAO-08-7] (Washington, D.C.: Nov. 26, 
2007). 

[25] Some industry participants have emphasized that data to quantify 
out-of-pocket losses due to excluded perils are currently unavailable 
because insurers generally track the amounts they pay out in claims 
but not uninsured loss amounts. 

[26] According to the Insurance Information Institute's 2013 Annual 
Pulse Survey, about 21 percent of the public believes flooding from a 
hurricane is covered. This proportion rises by 8 percentage points in 
the south, an area of the United States typically impacted by 
hurricanes. 

[27] The Stafford Act is codified as amended at 42 U.S.C. § 5121 et 
seq. Federal disaster assistance is also provided to state, 
territorial, and local governments as well as nongovernmental entities. 

[28] For more information on federal disaster assistance for 
individuals and households, see [hyperlink, 
http://www.gao.gov/products/GAO-08-7]. The Stafford Act specifies that 
federal agencies providing financial assistance after a major disaster 
cannot provide assistance to an individual for the same loss for which 
another federal program or private insurance company has provided 
compensation. 

[29] GAO, Federal Disaster Assistance: Improved Criteria Needed to 
Assess a Jurisdiction's Capability to Respond and Recover on Its Own, 
[hyperlink, http://www.gao.gov/products/GAO-12-838] (Washington, D.C.: 
Sept. 12, 2012). 

[30] For more information on these rebuilding efforts, see Hurricane 
Sandy Rebuilding Task Force, Hurricane Sandy Rebuilding Strategy: 
Stronger Communities, A Resilient Region (Washington, D.C.: Aug. 2013). 

[31] The Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-
Waters Act) reauthorized NFIP through 2017 and made some significant 
changes to the program, such as eliminating premium subsidies for 
certain properties, creating a reserve fund, and eliminating the 
grandfathering of properties to old rates after remapping. However, 
implementation of certain changes was delayed by provisions in the 
Consolidated Appropriations Act, 2014. While these Biggert-Waters Act 
changes may help increase NFIP's long-term financial stability when 
they are implemented, the program still faces challenges in 
implementing the changes and their ultimate effect is not yet known. 
Biggert-Waters Flood Insurance Reform Act of 2012, Pub. L. No. 112-
141, 126 Stat. 405, 916 (2012). See also [hyperlink, 
http://www.gao.gov/products/GAO-13-568] and GAO, National Flood 
Insurance Program: Continued Attention Needed to Address Challenges, 
[hyperlink, http://www.gao.gov/products/GAO-13-858T] (Washington, 
D.C.: Sept. 18, 2013). 

[32] Data are current as of September 30, 2013. 

[33] Residual insurance pools serve as a coverage source of last 
resort for firms and individuals unable to find insurance offered by 
private market insurers. Residual markets require insurers writing 
specific coverage lines in a given state to assume the profits or 
losses accruing from insuring that state's residual risks in 
proportion to their share of the total voluntary market premiums 
written in that state. 

[34] Citizens has three types of internal accounts: Personal lines 
account (for personal residential policies); Commercial lines account 
(for commercial residential and nonresidential policies); and Coastal 
account (for personal residential policies and commercial residential 
and commercial nonresidential policies issued by Citizens, which 
provide coverage for the peril of wind in certain designated areas. 
Citizens can levy three types of assessments: policyholder surcharge, 
regular, and emergency. Citizens' policyholders are the first to be 
assessed if a deficit occurs. It is a one-time surcharge of up to 45 
percent of the policyholder's premium depending on the deficit size. 
For the Coastal account, if a deficit remains after the policyholder 
assessment, Citizens can levy regular assessments that include a broad 
base of licensed Florida property/casualty insurance companies. The 
insurers may recoup this assessment amount by passing it on to 
policyholders. Finally if deficits still remain for the coastal 
account or if any deficit remains after the policyholder assessment 
for the personal and commercial lines accounts, a broad range of 
property/casualty policyholders, including Citizens policyholders, are 
assessed directly by their insurance companies. For each account, this 
assessment can be up to 10 percent of the amount needed to cover the 
deficit or 10 percent of the aggregate statewide direct written 
premium for the subject lines of business and all accounts of the 
corporation for the prior year-plus for both interest, fees, 
commissions, required reserves, and other costs. 

[35] The term "surplus lines" refers to any type of insurance for 
which there is no available market within a state and which the state 
allows nonadmitted insurers to offer. A nonadmitted insurer is not 
licensed to do standard business in the state. 

[36] Although one industry participant we spoke with suggested that 
expanding private coverage for perils such as mold and nuclear hazard 
may be possible, most participants discussed the possibility of 
expanding private coverage for natural catastrophes, such as flood and 
earthquakes. According to one participant, industry discussions about 
expanding homeowners coverage tend to center on natural catastrophes 
because these are the perils that most affect homeowners. 

[37] Information is as of October 2013. 

[38] As we previously reported, requiring insurers to offer an all-
perils policy could be challenging. It is unclear how private insurers 
would be encouraged to underwrite all risks and it might not be cost 
effective for the federal government if low-income residents require 
government subsidies to address affordability issues. If expanded 
coverage did not sufficiently reduce post event disaster relief, these 
subsidies could cause significant costs for taxpayers. Furthermore, 
such a requirement could be challenging for the federal government to 
enforce, as has been seen with mandatory flood insurance in 
communities in designated floodplains. See [hyperlink, 
http://www.gao.gov/products/GAO-08-7]. 

[39] See [hyperlink, http://www.gao.gov/products/GAO-14-127]. 

[40] Some of these same insurers also provide coverage for flood 
insurance above the limit of NFIP coverage. A number of private 
insurers that do not sell and administer NFIP policies also offer 
flood insurance. Flood insurance purchased above current NFIP coverage 
limits generally is referred to as excess flood insurance. 

[41] The National Flood Insurance Reform Act of 1994 requires 
individuals, including in SFHAs, who receive disaster assistance for 
flood disaster losses to real or personal property to purchase and 
maintain flood insurance coverage for as long as they live in the 
dwelling. 

[42] For information on the implications of changing coverage limits 
and expanding coverage, see GAO, Flood Insurance: Implications of 
Changing Coverage Limits and Expanding Coverage, [hyperlink, 
http://www.gao.gov/products/GAO-13-568] (Washington, D.C.: July 3, 
2013). 

[43] The Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-
Waters Act) introduced many changes intended to strengthen the future 
solvency of NFIP. In particular, the act eliminated subsidized premium 
rates for several types of properties. However, certain changes were 
delayed by provisions in the Consolidated Appropriations Act, 2014. 
For more information on subsidized properties, see GAO, Flood 
Insurance: More Information Needed on Subsidized Properties, 
[hyperlink, http://www.gao.gov/products/GAO-13-607] (Washington, D.C.: 
July 3, 2013). 

[44] GAO regularly reports on government operations that it identifies 
as high risk. For the most recent high risk report, see GAO, High-Risk 
Series: An Update, [hyperlink, http://www.gao.gov/products/GAO-13-283] 
(Washington, D.C.: Feb. 2013). 

[45] State government insurance programs, like Citizens, have 
typically been created after disasters because homeowners insurance 
coverage for catastrophic events is often not available from private 
insurers at prices deemed affordable by state legislators and 
insurance regulators. 

[46] The merger also resulted in some overhead cost savings by having 
a single organization. 

[47] Citizens has three types of internal accounts: Personal lines 
account (for personal residential policies); Commercial lines account 
(for commercial residential and nonresidential policies); and Coastal 
account (for personal residential policies and commercial residential 
and commercial nonresidential policies issued by Citizens which 
provides coverage for the peril of wind on risk that is located in 
areas eligible for coverage by the Florida Windstorm Association). The 
regular assessment is only applicable to the coastal account, and can 
be levied on private-market policyholders, including but not limited 
to homeowners, auto, and specialty and surplus lines policies. 

[48] This assessment can be charged at a rate of up to 30 percent of 
premium (up to 10 percent per account with a deficit) per year until 
any remaining deficit is eliminated. 

[49] California insurers had collected $3.4 billion in earthquake 
premiums in the 25-year period prior to the Northridge Earthquake and 
paid out more than $15 billion on Northridge claims alone. 

[50] In July 2011, the "Homeowners Choice" product was approved and 
became available to consumers beginning July 1, 2012. According to CEA 
information, this product enhances availability and affordability as 
it offers more choice in coverage options and allows consumers to 
manage their residential earthquake insurance premium. 

[51] CEA applies a 5 percent premium discount to dwellings that meet 
the following requirements: the dwelling was built before 1979, the 
frame is tied to the foundation, it has cripple walls braced with 
plywood or its equivalent, and the water heater is secured to the 
building frame. 

[End of section] 

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