AG Martha Coakley calls for FAIR plan cut

The home insurer of last resort is seeking to raise rates by as much as 9.9 percent in some coastal communities, Worcester and Springfield, though any rate change will need approval from Insurance Commissioner Joe Murphy.

The FAIR Plan, an insurance entity created by statute with the state’s insurers chipping in according to market share, has asked to push rates on owner-occupied homes up an average of 7 percent, and to increase rates on all types of property an average of 6.8 percent, though the state’s consumer advocate believes a rate decrease is in order.

The plan insures 140,000 homes and underwrites about 200,000 policies.

“The FAIR Plan must demonstrate in this hearing that its proposed rates hikes are fair and not excessive,” Attorney General Martha Coakley wrote in testimony delivered to the Division of Insurance, which held a hearing on the rate request last Thursday. “Based on the Office of the Attorney General’s preliminary review of the FAIR Plan’s filing, we believe a rate decrease is warranted.”

Coakley said the insurer is after more profits. With the conclusion of public hearings, both sides will move into an adversarial proceeding before the Division of Insurance this summer with both sides given the chance to call expert witnesses.

“The hurricane models have changed,” FAIR Plan general counsel Robert Tommasino told the News Service. Noting massive storms that have wracked the interior of the country, including Hurricanes Ivan and Sandy, Tommasino said, “It’s not about the water. It’s the wind, wind damage. We don’t cover for water damage.”

Policyholders in Lynn, Boston, New Bedford, the Cape and Islands as well as Springfield and Worcester would receive 9.9 percent increases under the insurance entity’s plan. Tommasino said the FAIR Plan, which increased rates in some places by 25 percent in 2006, has capped increases at 9.9 percent this year, though models indicate they should go up by 31 percent in Lynn and New Bedford.

In the case of a policy for a home and its contents close to $500,000, a homeowner would likely be paying between $1,400 and $1,800 a year under the FAIR Plan, depending on where the person lives, Tommasino said. The FAIR Plan, which is funded by insurance giants Liberty Mutual, Travelers, Arbella and Andover Company, among others, pays the first $200 million in insurance damages before its reinsurance policy kicks in.

“The FAIR Plan has been remarkably profitable,” Coakley wrote in her testimony presented by assistant attorney general Monica Brookman.

The insurance regulators held a hearing in Barnstable on Wednesday that attendees said included testimony from several local politicians. No one testified at the hearing in Boston on Thursday.

For the past six years ending in September 2012, the FAIR Plan has reaped profits of $40 million a year on average, through premiums and investments, according to Coakley.

“Yet, even with these significant profits, quite unusual for a residual market, the FAIR Plan is attempting to include in its filing an explicit add-on, referred to as an ‘underwriting profit provision,’ designed to further add to the FAIR Plan’s coffers,” Coakley wrote. “Without this add-on, which alone would generate more than $15 million in additional annual profit for the FAIR Plan, the indicated rate increase would actually vanish. The last set of approved FAIR Plan rates, enacted in 2006, included no such provision.”

The last increase in rates was in 2006. A FAIR Plan official said the insurer stipulated a 1 percent decrease in 2010, and its attempt at an increase in 2011 was rejected by the commissioner. The Division of Insurance scheduled some dates in June and July where the FAIR Plan’s witnesses can be cross-examined. The FAIR Plan has received 130 to 140 requests for discovery ahead of the cross-examination.

The plan was created for homeowners who, by dint of their coastal location or residence in an area undesirable to insurance companies, were unable to purchase a policy from one of the insurance companies. The FAIR Plan may make demands on a homeowner to improve a property and has the ability to deny coverage in cases of run-down houses, according to an official with the FAIR Plan, also known as the Massachusetts Property Insurance Underwriting Association.