If there is a housing bubble, as many believe while money ebbs from the stock market and into real estate, then the insurance industry is standing by with a large, sharp pin to prick it.

Home insurance rates have as much as doubled in Texas and California, where homeowners are finding that insurers are not only raising rates but using tactics such as credit scoring to determine insurability and switching homeowners to policies with higher premiums and less coverage. Insurers blame heavy losses for the premium hikes, but the upshot is that it is harder to qualify for insurance, and harder-to-get insurance means fewer buyers get the home of their dreams.

Homeowner advocate groups say that insurers are covering their stock losses - not losses from claims. While justifying premium hikes to consumers over alleged losses, they are reporting profits to their shareholders.

And that's prompted the State of Texas to lay the smackdown on one insurer, in the first of what some say will be more suits against other insurers with the same practices. The Texas Attorney General has filed a multimillion-dollar lawsuit against Farmers Group of Insurance Cos., alleging that Farmers charged Texas homeowner policy holders higher premiums to pay for "disasters in other states, improperly used credit histories to set rates and wrongly limited coverage for water damage," said one news report.

Texas insurance regulators and consumer protection agencies aren't alone in their outrage. Others are bringing attention to the issue including a rising tide of consumer advocate groups, among them Consumer Union, publisher of Consumer Reports, and The Center For Justice and Democracy, a group which is looking into price-gouging and reduced coverage insurance practices.

Explains Joanne Doroscow, executive director of the Center for Justice And Democracy, "You are paying for a weak economy. The cause is the economic cycle of the insurance industry. They raise prices when interest rates and stock prices drop, when they stop making income off of investments. In years when they do well, they keep prices artificially low, and then they will raise rates 200 percent all of a sudden."

"The way to stop this from happening is to force regulators to freeze rates and force the insurers to justify rate increases. They need to keep better tabs on what the industry is doing," she continues. "The insurance industry has no federal regulation, and regulation at the state levels is weak. They are getting away with murder. It's price-gouging, and the regulators are negligent for not stopping it.

The Center is part of a coalition of consumer advocacy organizations called Americans for Insurance Reform. In July, 2002, the coalition wrote insurance commissioners in all 50 states calling for tougher regulation of insurance companies.

Rob Schneider, attorney for Consumer Union, says his organization is working closely with the Texas Association of REALTORS, and is keeping a close eye on the issue.

"We are an advocacy office," explains Schneider. "We buy products and test them and give information to consumers. Our office is unique in that we lobby legislatures on issues that impact consumers."

While Consumer Union has no part in the Texas suit, Schneider agreed to comment for Realty Times.

"I expect there to be other suits, because the insurance department has been investigating for many months now," says Schneider. "so this is not unexpected."

He's intrigued by paragraph 11 of the plaintiff's petition. "One portion of the suit describes a practice that Farmers is alleged to engage in. The AG is alleging they are losing money in Texas, but in their SEC filings they are touting the profits they are making. The specific allegation is the management fee that subsidiary companies pay of $438 million that is shifted from one company to another," says Schneider. "This petition is available on www.oag.state.tx.us. See paragraph #11.

"The suit has a broad-brush attack on a number of Farmer's practices, charging too much, unfair guidelines using credit scores, shifting people to policies with less coverage and raising rates inappropriately," explains Schneider, "but ultimately this case isn't going to solve the problem. It may result in a penalty and certain practices being enjoined by Farmers, but raising rates is legal in Texas, using credit scoring and moving policyholders to less coverage is legal, so it is not the fact they did it, but the way they did it."

Texas' response is not an isolated one, says Doroscow. "New York has just refused a price increase to insurers," she says. But, she adds, that reforms have to be legislative as well as regulatory.

"They (regulators) need to implement changes in the way we regulate insurance and the standards in underwriting," says Schneider, "and to make sure that people can get coverage at a reasonable rate."

Published: August 8, 2002

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