State Farm proposes new deductible setup, rate hike for home insurance customers in Texas

Mark Henricks

State Farm plans to stop offering Texas homeowner’s insurance policies with dollar-amount deductibles and offer deductibles based only on a percentage of the value of an insured property. The minimum deductible will be 1 percent, State Farm spokesman Kevin Davis says.

In a Sept. 1 rate filing with the Texas Department of Insurance, State Farm — the state’s largest home insurer — requested other changes in homeowner’s insurance policies, including a base rate increase of 9.6 percent and an increase in the discount for holders of multiple policies from 20 percent to 25 percent.

The net increase in premiums to policyholders is 1.4 percent, Davis says. That’s calculated by taking into account the base rate increase, plus the higher discount for customers who have at least two policies.

The rate change can be nixed by Texas insurance regulators if they find it doesn’t comply with state law, Department of Insurance spokesman Jerry Hagins says. For that to happen, it would have to be deemed unreasonable, excessive, unfairly discriminatory or not adequate to cover the risk.

If the Department of Insurance has no objections, the State Farm changes would go into effect automatically. Davis says State Farm would apply the changes to new customers starting Oct. 15, 2011. For existing customers, the changes would affect policy renewals beginning Dec. 1, 2011.

The change in deductibles from dollar amount to percentage means that for a home valued at the Texas average of $145,000, the new minimum deductible would be $1,450. As it stands now, a typical flat-amount deductible is $1,000.

Regarding premiums, the 1.4 percent net increase comes out to an extra $14 a year for the average homeowner’s policyholder, assuming a $1,000 annual premium. This is an average, however, and some policyholders — such as those who can’t take advantage of the higher discount for having multiple policies — would pay more.

Davis says 97 percent of new State Farm customers already are choosing percentage deductibles on homeowner’s policies. Overall, he says, 43 percent of Texas homeowner’s insurance policyholders would see no jump in their premiums as a result of the base rate increase combined with the higher multipolicy discount.

Davis says the rate and deductible changes are necessary because of a rise in overall claims as well as in higher-dollar claims in Texas. “Those are trends we have to prepare for,” he says.

Springtime hailstorms and wildfires contributed to the trend, Davis says. The proposed rate increase doesn’t take into account the September wildfires in Texas.

With 1.2 million Texas policyholders, State Farm is the state’s top home insurer. The State Farm changes are bad news for those policyholders, says Alex Winslow, executive director of Texas Watch, a consumer advocacy group. The deductible change is the biggest issue, he says.

“By eliminating entirely dollar deductibles and going to a percentage-based deductible of up to 5 percent of the value of a home, it means that consumers are going to have to pay more out of pocket,” Winslow says.

For many policyholders, common claims such as hail damage and roof damage wouldn’t be worth making because they wouldn’t exceed the new, higher deductible, Winslow says.

Experience indicates that homeowners whose policies specify percentage-based deductibles rather than dollar-amount deductibles often are unclear what the percentage applies to, Winslow says. “Most think it’s the insured value of the claim, not the home,” he says. “When they do file a claim and find out the percentage is applied to the much larger amount, they’re taken aback.”

Winslow contends that the changes add complexity to an already mystifying insurance marketplace. “You’ve got all these different options that make it hard to shop,” he says. “Now you have more confusion piled on with this deductible issue.”

If insurers want to require percentage deductibles, Winslow suggests making it plain what the out-of-pocket amount is likely to be, rather than specifying percentage only. “They should be required to list a dollar amount next to it so policyholders know how much they’ll be required to pay,” he says.