Florida Home Insurance - Bad Time to Come up Short When Even Feds Are Broke

This week the financial crisis brought more shocking news. General Motors, Ford, and Chrysler executives landed in Washigton on with their corporate jets seeking a share of the $700 billion Troubled Asset Relief Program.

In a shameless display of arrogance and entitlement, leaders of what used to be "best in class" companies begged for billions of dollars with their tin cups outstretched in front of the US Congress. Before the Big Three ever arrived in Washington, billions had already been committed to AIG and some of the largest financial institutions in the country.

During this financial meltdown we're seeing something we never expected to see in our lives - broken promises from major corporations and government institutions on an unprecedented scale. The day has arrived when large companies and large states like Florida can't raise the cash they need to meet their promises.

If you are a Florida home insurance consumer the financial crisis has put your biggest asset at risk - your Florida home.

Can you name a more sacred promise than the one a home insurance company makes to you when it takes your money and agrees to insure your home?

When you buy homeowners insurance in Florida the insurance company is promising you fast and fair payment of your claim. Florida insurance companies buy reinsurance to help them make good on this promise to you. Reinsurance is backup coverage that insurance companies buy to help protect themselves from big losses above certain levels.

The Florida Hurricane Catastrophe Fund was formed as a way to help stabilize the Florida home insurance market after Hurricane Andrew caused billions in damage to Florida in 1992. By offering reinsurance at affordable rates, the fund helped to make homeowners insurance available and affordable for many years.

That all changed after the Florida hurricanes of 2004 and 2005 when Florida home insurance became overpriced and hard to find again.

The Florida legislature responded to the Florida home insurance crisis by voting in 2007 to expand the reinsurance sold by the Cat Fund by $12 billion - raising its total risk to a total of $28 billion. Florida home insurance companies were required to purchase this additional reinsurance from the state and to pass along the savings realized on reinsurance to home owners.

In spite of this law, as a Florida homeowner you didn't get the rate reductions you were supposed to get. Your rate cuts never came close to the 24% predicted when the legislation passed. And to make things worse, the Florida Cat Fund took on an additional $12 billion in risk.

Now the Florida Cat Fund has stated that it does not have the money or the borrowing capacity needed to meet its present commitment to the insurance companies after a major Florida hurricane. It recently estimated that it could pay out $13 billion over the next twelve months - That's $15 billion less than the $28 billion it is on the hook to pay!

What does all of this mean to you as a Florida home insurance consumer?

You didn't get the rate relief you expected and your state took on financial obligations that it has no hope of paying.

You are at risk if Florida experiences a major hurricane in the next year. Once the losses of your Florida home insurance company exceed certain levels, your company will ask the Florida Cat Fund to reimburse them in order to pay your claim. Since the Florida Cat Fund is short on cash, you might have a long delay in getting your claim paid.

The promise to pay your Florida home insurance claim has never been more at risk than it is today.

Now that you know that the Florida Cat Fund can't meet its obligations, let's look at the idea of a National Hurricane Catastrophe Fund that some in Florida have been pushing in Washington for many years. This National Cat fund would offer an additional layer of loss protection above and beyond the obligations of the Florida Cat Fund.

In theory a National Cat Fund would be funded by setting aside a portion of insurance premiums paid by policyholders in the states participating in the fund. A National Cat Fund would be a separate fund that would earn interest and grow during the years when there aren't any claims.

Supporters claim that no taxpayer money would be needed to sustain a National Cat Fund. History tells us there would be storms so large that federal tax dollars would have to be used to cover major losses.

And everyone knows that the federal government can't keep its funds separate. Just ask someone in Washington to show you the billions that are supposed to be in the Social Security Trust Fund. You won't be shown any cash - just a drawer full of T-Bills and IOU's.

Now that the Big Three Auto makers and other shameless Fortune 500 companies have beaten Florida to the punch in Washington, it is very unlikely that a National Hurricane Catastrophe Fund will pass anytime soon. Even President Elect Obama will shy away from any additional federal obligations as he faces all of the red ink in Washington today. So don't look to the federal government to make good on the promise that was made to pay your Florida home insurance claim.

Finally, Citizens Property Insurance Corporation has consistently reported that it doesn't have anywhere near the money it needs to pay out the almost half a trillion dollars in hurricane exposure it after a major Florida hurricane.

A large hurricane would mean that Citizens can't pay even its primary obligations - those that it must pay even before losses reach levels where Florida Hurricane Catastrophe Fund reinsurance kicks in. And as a Citizen policyholder, you'll also pay more in special assessments than someone with a private home insurance company after a major Florida hurricane - special charges tacked on to your annual insurance bill.

In this new brave world where even governments can't keep their promises here are some steps you should take as a Florida home insurance consumer right now:

Get a Florida wind inspection done and harden your home as much as possible.

Stay out of Citizens Property Insurance Corporation if you can.

Find a home insurance company that is strong financially and one that has spread its risk across both Florida and other states. Fewer policyholders will mean faster payment of your claim.

Call in your insurance claim on the same day the Florida hurricane damages your home. This will make it more likely that you will get paid before your insurance company looks to the Florida Cat fund for reimbursement.

Last but not least. The fact that the Florida Cat Fund is short on money has not been lost on Florida home insurance companies. They are being charged for reinsurance by an entity that has publicly stated that it can't meet its obligations. That means insurance companies are not getting what they paid for.

You should expect Florida home insurance companies to try to buy more of their reinsurance in the private market and not from the State of Florida in 2009. And they will look to pass that cost through to you in the form of higher insurance rates. If they don't get the rate increases they need, your Florida home insurance policy might be cancelled.

As the Florida home insurance crisis continues, it has never been more important for you to stay on top of the Florida home insurance market for private insurance. You never know when you might have to shop for a new Florida home insurance company.