01:00 AM EST on Sunday, February 6, 2005

BY KATIE MULVANEY
Journal Staff Writer

A trend that has stormed the coasts from Florida to Texas has begun to work its way up the coast of Rhode Island.

Insurers are declining to sell new policies near the water. Others are doubling premiums and making property owners responsible for wind-related damages.

Customers must also take extra -- often costly -- steps to protect their houses or risk being dropped altogether.

Rhode Islanders from South County to Aquidneck Island and Little Compton are feeling the impact.

George and Jane Lenihan learned in late September that the policy on their Great Island home would not be renewed.

The reason: some shingles and a handrail were missing on the house they built 30 years ago, Jane Lenihan says.

But the Lenihans -- who own Pancho O'Malley's bar in Narragansett -- are convinced another factor spurred their company's decision.

"It's got to do with being within 200 feet of the water," Jane Lenihan said. Their shingled Cape-style house sits a baseball's throw from Point Judith Pond.

"If [insurers] find any issues with a coastal property, they aren't going to insure it," said John Golembeski, president of the Rhode Island Joint Reinsurance Association.

THE TREND sweeping coastlines nationwide is being driven by a new storm model that predicts catastrophic losses from wind damage in a hurricane, insurance officials say.

The model estimates Rhode Island, for example, would suffer $12 billion to $15 billion in damage if a storm of the magnitude of the Hurricane of 1938 swept up Narragansett Bay, according Golembeski.

"We haven't been hit by a hurricane in 20 years. Statistically, we're overdue," said Dennis Charland, executive director of Rhode Island's Independent Insurance Agents Association.

Also at play are rising property values, increasing construction costs and the skyrocketing cost of reinsurance, which is essentially insurance for insurers. It protects insurance companies from staggering losses in a major storm.

Reinsurance companies have raised their rates dramatically, further stinging insurance companies.

As put by one insurance agent: "the companies themselves are having it put to them by their insurance companies."

And there is an impression, industry officials say, that storms are picking up in frequency and intensity.

The property insurance market has been hardening gradually since Hurricane Andrew caused $16 billion in insured losses in Florida in 1992. The damages far exceeded insurance companies' estimates. About a dozen insurers went insolvent.

The turmoil prompted Florida lawmakers to try to stabilize the market. The legislature passed a temporary moratorium on policy nonrenewals and cancelations. In addition, they created the Florida Hurricane Catastrophe Fund, which acts as a state administered reinsurer.

The four hurricanes that hit Florida last year caused an estimated $20 billion in damage, further whacking the industry. This time, only one company went under.

Rhode Island has not experienced such devastating losses, but hurricanes have left their mark.

The Hurricane of 1938, with winds of 121 mph, caused $10.7 million in damage and killed 262 Rhode Islanders. Carol, in 1954, wrought $90 million in losses in the Ocean State and $465 million throughout New England.

Hurricane Bob did an estimated $9 million worth of damage in 1991.

THE LENIHANS found coverage through the Rhode Island Joint Reinsurance Association, essentially the state's insurance carrier of last resort.

The association, known as the state's Fair Access to Insurance Requirements or FAIR Plan, is a pool of companies created by the federal government to provide insurance in high risk areas after the urban riots in the 1960s. Its purpose is to offer insurance to property owners unable to find coverage in the "normal" market.

By law, the plan's rates "shall not be excessive, inadequate or unfairly discriminatory." Yet, the Lenihans' premium rose from $500 to $1,138.

On Block Island, the Norfolk & Dedham Group stopped insuring properties in Rhode Island last year. The company had 330 policyholders on the island. Many of them ended up with insurance through the FAIR Plan.

"Many companies have withdrawn. It's impacted us the most dramatically," said Brian Neville, whose agency, Allen & Neville Insurance, issues many island policies.

Market restrictions hit Cape Cod almost two years ago. The area's largest property insurer, the Andover Companies, pulled out, leaving 14,000 homeowners in the lurch.

Many found other insurance companies reluctant to take on their policies. As a result, thousands went into that state's FAIR plan.

State lawmakers there are considering creating a catastrophe fund to stem insurers' retreat from the coast.

IN RHODE ISLAND, the FAIR plan's business has jumped by 21 percent, or 300 policies, in the past three months, Golembeski said. The growth is spread across the state, with slightly higher concentrations in coastal areas.

Just this month, the state FAIR plan increased the amount of coverage homeowners can get through the Rhode Island plan from $500,000 to $1 million in insurable value.

The coverage was adjusted to reflect rising property values and construction costs, Golembeski said.

"For coastal properties, the [FAIR Plan] is quickly becoming the insurer of choice," said Sandra Parrillo, president of CEO of Providence Mutual Fire Insurance Co.

Property and casualty insurers doing business in Rhode Island underwrite the FAIR Plan, based on their market share. When the fund runs a deficit -- as it typically does -- the companies are responsible for that shortfall. So, a big storm could even hurt companies that had shed their waterfront properties.

IN SOME CASES, customers along the water are being asked to assume wind and hurricance deductibles as high as 5 percent of a home's replacement costs. That would mean the owner would pay the first $15,000 on a house with an insured value of $300,000.

"[Insurance companies] are all scared to death because of those models," said Robert Hartnett, president of Interstate Insurance in Tiverton. "They're just saying that if it does happen, we could lose billions of dollars."

In December, the Quincy Mutual Fire Insurance Co. did not renew the policy on David Tyrrell's Snug Harbor home after 40 years.

"Does not meet underwriting guidelines: property is .20 miles or less from coastal tidal waters," the company wrote. The notice stated that the company found no proof that measures had been taken to mitigate risk.

Tyrrell, whose home sits about 700 feet from the water, admits he didn't install the hurricane shutters the company requested.

"It'd be an astronomical amount of money with all my windows. How could I afford that?" Tyrrell said. Costs run up to $35 per square foot.

He ultimately found coverage through Cambridge Mutual Fire Insurance Co., but, like the Lenihans, his rates doubled. Cambridge imposed a $1,000 wind deductible as well, he said. The FAIR Plan does not.

His agent, Robert Loiselle, of Loiselle Insurance Agency, in Pawtucket, said finding Tyrrell a carrier was a challenge.

"The majority of companies are not interested in insuring his house because of its proximity to the water," Loiselle said. "Little by little everybody's appetite for coastal exposure is diminishing."

STATE LAW BARS insurance companies from canceling a homeowner's policy based solely on a property's location. The law was originally intended to prevent insurance "redlining," or discrimination, based on ethnic neighborhoods.

And the Department of Business Regulation is looking into insurers' practices with respect to coastal risks, said Paula Pallozzi, chief property and casualty analyst with the department.

If a company was found to be in violation, it would be required to adjust its underwriting practices accordingly, she said.

The department expects to complete its investigation by the end of next month.