Citizens Property Insurance drops out of builders’ risk market, affecting new home prices and stalling projects

Insurance agents say the change could raise new home prices by up to 1.5 percent as builders are required to buy more costly coverage from the unregulated “surplus lines” market, where rates can be two to four times those charged by state-run Citizens.

Adding roughly $4,500 to the cost of a new $300,000 home could be a deal killer in a tight market where any price increase can be significant, and where builders are struggling to compete with cheap foreclosures and deep price cuts on existing homes, experts say.

The decision to pull out of the builder’s risk market is the latest twist in an aggressive new push by state leaders to shrink Citizens.

Supporters say downsizing the state’s largest insurer is critical to making sure it can pay claims after a major disaster without resorting to taxes on most other policies in the state.

But some industry experts say the higher insurance costs could deal a blow to Florida’s lagging building sector, long a key driver for the state’s economy.

Critics also say efforts to shrink Citizens are an overreaction because the insurer has $6 billion in cash reserves and can easily pay claims in all but the most catastrophic hurricane.

The number of construction jobs in Florida has been cut in half over the last six years, to 319,0000.

New housing starts were down 86 percent statewide last year from the 2006 peak of nearly 300,000, according to a November report by BMO Financial Group that called Florida’s housing market “extremely depressed.”

State economists have forecast that construction jobs will not approach pre-recession levels until after 2020.

“You don’t want to see anything that’s going to push you backwards,” said Alan Anderson, executive vice president of the Home Builders Association Manatee-Sarasota. “We’re not excited about the fact this is going to change and probably put some deals at risk.”

Hit harder here

The change could hit areas such as Sarasota County particularly hard because the region where Citizens typically sells insurance — known as the “wind pool” — is much larger and extends farther from the coast than in many communities.

Builder’s risk insurance pays for damage to a structure while it is under construction. Prices depend on the home’s value.

The policies cover various types of damage and become much more expensive for projects near the coast that are under construction during hurricane season.

Homeowners who pay cash can get away without having the insurance, but banks financing construction require coverage.

Many private companies are active in the market but few write policies near the coast, where Citizens is the dominant carrier, insurance agents say.

Insurance agents and building industry professionals say projects will be delayed and some may not go forward in coastal areas as builders struggle to find affordable coverage.

In some areas, builder’s risk insurance may be hard to find at any price because surplus lines companies cap how much coverage they offer in each region, agents say, a problem that could kill bank-financed projects where insurance is mandatory.

“It’s a very big shock,” said Sarasota insurance agent Russ Bobbitt, who specializes in policies for the construction industry. “It’s going to hurt the economy.”

Controversy over Citizens

Citizens’ involvement in the industry has caused controversy in the past.

Critics say that by subsidizing construction in high-risk coastal areas, Citizens creates a cycle that feeds into the company’s growth.

Citizens was established to be the “insurer of last resort” for the riskiest policies — typically those on barrier islands and other coastal areas with the most exposure to hurricanes.

A previous group of Citizens board members determined that the company does not have statutory authority to offer builder’s risk coverage and canceled the program in 2006, but an outcry from the homebuilding industry and top political leaders reversed the decision.

Tom Gallagher, Florida’s chief financial officer at the time, said in a letter to the Citizens board then that “many projects would be jeopardized and the impact to local communities and businesses could be devastating” if the company ended coverage.

Sarasota insurance agent John Dauenheimer said he is surprised that the real estate and construction industries have not been more vocal this time around.

“This builder’s risk thing kind of snuck in there,” Dauenheimer said. “There really hasn’t been much advertisement that there’s no coverage available or else I think the industry would be squawking right now.”

The decision largely affects construction in coastal areas within Citizens’ wind pool. In most regions — including Manatee County — the wind pool includes barrier islands and property within 1,000 feet of the water. The properties in these areas tend to be high-end homes, condominium projects and commercial buildings.

Many wealthy buyers may not balk at the extra cost. Dauenheimer estimated that builder’s risk insurance on a $500,000 home near the coast could increase from $3,500 under Citizens to more than $10,000 on the private market.

But some buyers may find the cost exorbitant. Others may be unable to obtain a construction loan without Citizens coverage. Builders may also be wary of starting homes on speculation if the costs are greater.

“If you’re a buyer looking to get a mortgage to fund your project in some cases it might be the difference between whether you can or can’t do it,” Anderson said.

Sarasota County’s wind pool encompasses a much broader territory than most other regions.

It includes the entire city of Sarasota and inland areas around Osprey, Venice and Englewood where medium and lower priced home construction would also be affected.

The economic impact could be more significant.

“I think it’s basically going to slow a small recovery down as far as construction goes,” Dauenheimer said.

Gov. Rick Scott has made shrinking Citizens a top priority. The company has stopped covering structures like car ports and pool cages and is preparing to cap coverage on condo buildings with a significant number of vacation rentals.

Citizens had 775 active builder’s risk policies covering $460 million in property at the end of February, down dramatically from the height of the building boom in mid 2006 when the company had 6,000 active policies covering $4.5 billion in property.

“We have seen very little demand for this product line which seems to indicate there is private market capacity available,” Citizens spokeswoman Christine Ashburn wrote in an email.

But insurance agents say demand is down because of the economy and private policies are still scarce.

The construction industry could be in for a rude awakening when building starts to pick up again, Dauenheimer said.

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