Homeowners’ Defense Act Now Ready for Consideration by Full U.S. House of Representatives

The U.S. House of Representatives Financial Services Committee (“Committee”) approved H.R. 2555, also known as the “Homeowners’ Defense Act,” on April 27, 2010 by a vote of 39-26.

Authored by Representative Ron Klein (D-FL) and co-sponsored by 70 Members of Congress from more than 30 states, the measure would create a national catastrophe insurance pool to provide federal support for state-sponsored catastrophe insurance programs.   The bill’s sponsors say the measure would reduce property insurance premiums for homeowners and protect taxpayers from bearing the financial consequences of major disasters.  It also would allow participating states to share the financial risk of hurricanes, earthquakes, tornadoes, wildfires and other major disasters – which typically affect certain states more than others.

Further, H.R. 2555 also provides for the creation of a National Catastrophe Risk Consortium (“Consortium”) that would gather and maintain an inventory of catastrophe risk obligations held by state reinsurance funds.   The Consortium would have the power to issue securities and other financial instruments linked to the catastrophe risks insured or reinsured through Consortium members in the capital markets, as well as coordinate reinsurance contracts between participating, qualified reinsurance funds and private parties.

The Consortium also would act as a centralized database of catastrophe-risk information that would be made available to private insurers to encourage standardization of the risk-linked securities market.  Although a U.S. Secretary of the Treasury appointee would serve as chairperson, the Consortium would not be a federal agency.

At a House Financial Services subcommittee hearing in March 2010, Representative Klein said he was motivated to write H.R. 2555 because the devastating effects of Hurricane Andrew, which hit Miami-Dade County in 1992, are still being felt in the form of expensive and difficult-to-obtain homeowner’s insurance policies.

“Yet, this issue clearly extends far beyond just the state of Florida,” Representative Klein continued. “Increasingly, insurance companies are treating homeowners across the country like they have been treating Floridians for years – canceling policies and doubling or tripling rates in the wake of a single claim.”

Despite bipartisan political support, however, the measure has drawn criticism from insurance industry members and others:

• David A. Sampson, President and CEO of the Property Casualty Insurers Association of America has stated that the bill “would broadly shift” taxpayer resources from the entire country to benefit specific catastrophe-prone areas through the proposed federally subsidized bond guarantees and the reinsurance catastrophe fund provisions. “That approach is costly to all taxpayers and threatens to displace the private market,” he said, explaining that, by providing government subsidies to artificially suppress costs for coastal properties, “the bill would encourage development in high-risk and environmentally sensitive areas.”
• In an April 28 Web posting, National Underwriter Property and Casualty Insurance Magazine stated that the insurance industry “remains divided on legislation that would create a national catastrophe insurance pool.”
• Steve Ellis, testifying in March 2010 on behalf of Taxpayers for Common Sense, called the bill “fundamentally flawed” and said it would primarily benefit only Florida and California because it is a federal reinsurance program only for “eligible” state programs. Mr. Ellis added that “only Florida and California have programs that would meet the criteria specified in the legislation.”
• Eli Lehrer, a policy analyst at the Heartland Institute, Washington, D.C., derided the bill as a “beach-house bailout,” saying “There’s no other way to describe it. Although cloaked in the language of free markets and fairness, the legislation would be an enormous subsidy for people who choose to live in dangerous areas.”

To view a recent letter signed by insurers, consumer advocates and other interested parties to House Financial Services Committee Chairman Barney Frank expressing opposition to the bill, click here.

The Homeowners’ Defense Act now moves to the full House for consideration.  The most recent action taken on the bill’s Senate companion (S. 505), sponsored by Senator Bill Nelson (D-FL), was in February 2009, when it was referred to the Senate Committee on Banking, Housing and Urban Affairs.

To view a recap of amendments and actions on the bill at the April 27 House Financial Services Committee markup session, click here.   

Flood insurance reform-related legislation that would make multi-peril coverage available for damage resulting from windstorms or floods also was passed during the April 27 markup.

An archived Webcast of the meeting is available by clicking here.

Should you have any questions or comments, please contact Colodny Fass.

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