HOMEOWNERS 

INSURANCE

Multiple Challenges 

Make Expanding 

Private Coverage 

Difficult

Report to Congressional Requesters

January 2014

GAO-14-179

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-14-179, a report to 

congressional requesters

January 2014

HOMEOWNERS INSURANCE

Multiple Challenges Make Expanding Private 

Coverage Difficult

Why GAO Did This Study

Homeowners insurance protects 

against a range of perils, but policies 

do not insure against all risks. Owners

whose homes are damaged by natural 

and other disasters not covered by 

their insurance can be exposed to 

serious financial losses. Federal and 

state initiatives provide some 

assistance for catastrophes, which can 

involve significant taxpayer expense. 

With coastal populations growing and 

the possibility of more frequent and 

severe weather, more homeowners 

could experience heavy losses not 

covered by homeowners insurance, 

putting increasing financial pressure on 

government programs and thus on 

taxpayers. 

GAO was asked to study the possibility 

of private insurers providing more 

comprehensive insurance. This report 

addresses (1) what perils homeowners 

policies typically cover and exclude, (2) 

how exclusions impact homeowners 

and taxpayers and the potential 

benefits of more comprehensive 

coverage, and (3) what additional 

perils insurers might be willing to cover 

and what challenges are associated 

with expanding policies. GAO reviewed

homeowners insurance policies and 

conducted interviews with the National 

Association of Insurance 

Commissioners, other industry 

organizations, consumer advocates, 

and risk experts, among others.

GAO requested comments on a draft 

of this report from the Federal 

Insurance Office and the National 

Association of Insurance 

Commissioners. Both provided 

technical comments which we 

incorporated into the report as 

appropriate.

What GAO Found

Homeowners insurance policies typically protect homes, garages and other 

structures, and personal belongings from damage caused by perils such as fire, 

hail, lightning, explosion, and theft, among others. The insurance industry 

considers these perils insurable because they are accidental, predictable, and do 

not involve catastrophic losses. These policies also typically exclude losses from

a number of perils, including disasters caused by floods, earthquakes, and war. 

Industry officials said that such events are difficult to predict and involve

extensive losses that are a challenge for private insurers to cover. Insurers also 

exclude losses from defective products, which industry participants said could be 

addressed by manufacturer warranties and commercial general liability 

insurance. Intentional losses; damage from wear, tear, or neglect; and losses 

caused simultaneously by covered and uncovered perils, such as wind (covered) 

and flood (uncovered) during a hurricane are also generally excluded. 

Policy exclusions can impact homeowners, communities, and state and federal 

governments. When excluded losses occur, they can create significant costs for 

homeowners to repair homes and replace possessions. Wide-scale catastrophes 

can also cause shortages of building materials and contractors that delay 

reconstruction and substantially increase the costs of repairing homes. When 

damage to properties caused by excluded losses is not repaired, affected 

communities may experience blight and face reduced tax revenue. When federal 

and state governments have stepped in to cover what private insurers exclude, 

taxpayers may face a significant expense. In addition to federal disaster 

assistance, the National Flood Insurance Program (NFIP) paid more than $7 

billion in claims after Superstorm Sandy. In Florida, insurers and policyholders 

can be assessed extra charges to help pay for state efforts to cover wind 

damage where it is not covered by insurers. Industry participants suggested that 

expanded private coverage could provide additional protection for homeowners 

and reduce reliance on government programs, but the resulting policy premiums 

would likely be prohibitively expensive for many homeowners. 

Multiple factors make expanding private coverage challenging and several 

conditions would need to be addressed for insurers to offer more comprehensive 

insurance. A main challenge is that expanded coverage would have higher costs, 

potentially limiting consumer demand. Even if insurers charged higher rates that

were based on risk, the severity and unpredictability of catastrophic losses could

still jeopardize insurers’ solvency. Some industry participants said that insurers 

and others are discussing possibilities for expanding private homeowners

coverage, with a focus on risk-based premiums, mitigation efforts, effective

building codes, and sound land use policies. The challenging mix of financial risk, 

political and regulatory issues, policy cost, and consumer demand has thus far 

prevented private sector insurers in the U.S. from offering flood insurance to 

homeowners, let alone more comprehensive or all-perils policies. Because of this 

mix of factors, some in the insurance industry have suggested that a continuing 

financial role by federal and possibly state governments may be required, and 

that ensuring a response to the impact of disasters and other perils will require 

the cooperation and resources of government, homeowners, and insurers, as 

well as balance in the assumption of risk and cost by each of these parties.

View GAO-14-179. For more information, 

contact Alicia Puente Cackley at (202) 512-

8678 or Cackleya@gao.gov.
Page i GAO-14-179 Homeowners Insurance

Letter 1 

Background 2

Policies Cover and Exclude Various Perils Based on Policy 

Provisions and Other Factors 8

Policy Exclusion Impacts Could Be Reduced by Expanding 

Homeowner Coverage, but Premiums Would Likely Increase 16

Multiple Challenges Make Expanding Private Coverage Difficult 24

Agency Comments 28

Appendix I Objectives, Scope, and Methodology 31

Appendix II Information on the National Flood Insurance Program 33

Appendix III Information on the Citizens Property Insurance Corporation 35

Appendix IV Information on the California Earthquake Authority 38

Appendix V GAO Contact and Staff Acknowledgments 40

Tables

Table 1: Types of Homeowners Insurance Policies for SingleFamily Homes 4

Table 2: Perils Covered for Personal Property in the HO-3 9

Table 3: Perils Listed in the Exclusions Section of the HO-3 11

Table 4: Other Excluded Perils for Dwellings and Other Structures 

Listed in the HO-3 12

Figures

Figure 1: Damage Due to Floods 16

Figure 2: Damage Due to Sinkholes 17

Contents
Page ii GAO-14-179 Homeowners Insurance

Figure 3: Selected NFIP Flood Loss and Payment Information, 

2005 to 2012 21

Abbreviations

CEA California Earthquake Authority

FAIR Fair Access to Insurance Requirements

FEMA Federal Emergency Management Agency

FHCF Florida Hurricane Catastrophe Fund

FWUA Florida Windstorm Underwriting Association 

IHP Individuals and Households Program

III Insurance Information Institute

ISO Insurance Services Office

JUA Florida Residential Property and Casualty Joint 

 Underwriting Association

NAIC National Association of Insurance Commissioners

NFIP National Flood Insurance Program

This is a work of the U.S. government and is not subject to copyright protection in the 

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Page 1 GAO-14-179 Homeowners Insurance

441 G St. N.W.

Washington, DC 20548

January 30, 2014

Congressional Requesters

Homeowners in the United States are exposed to a wide range of 

disasters, including hurricanes, earthquakes, floods, and wildfires, and 

may also experience losses from lightning, hail, and fire, among other 

perils.1 When these and other catastrophes occur, they not only devastate 

individuals and communities by destroying homes and other possessions, 

but also have a significant financial impact on homeowners, insurers, and 

state and federal governments. Superstorm Sandy, for example, caused 

over $18 billion in privately insured property losses, according to industry 

estimates, and the Federal Emergency Management Agency (FEMA) has 

paid more than $7 billion in claims through the National Flood Insurance 

Program (NFIP).

At the same time, the population of coastal states facing possible weather 

risks such as floods and hurricanes is growing. As of 2010, approximately 

39 percent of the nation’s total population, approximately 123 million 

people, lived in coastal counties, a 39 percent increase since 1970.2 As of 

2012, properties in hurricane-prone areas on the coast had an insured 

value of about $15 trillion, with Florida, New York, and Texas having the 

greatest risk exposure. In addition to floods and hurricanes, some states

such as California face risks such as earthquakes and wildfires while 

Florida faces risks from sinkholes. With more people moving to coastal 

areas, the possibility of more frequent and severe weather could impact 

the ability of homeowners and insurers to protect homes and other 

property. These and other risks underscore the importance of insurance 

to help protect homes and property from various hazards. Homeowners 

insurance, however, does not cover all types of perils and some 

homeowners may not clearly understand what protection their policy 

includes and excludes until after an event occurs. Homeowners count on 

insurance to help rebuild their lives and minimize financial burdens and 

may suffer severe losses depending on the type of peril and the coverage 

offered in their policies.

 

1

A peril is a specific risk or event that may cause a loss. 

2

National Oceanic and Atmospheric Administration, National Coastal Population Report: 

Population Trends from 1970 to 2020 (Washington, D.C.: Mar. 2013).
 

Page 2 GAO-14-179 Homeowners Insurance

In light of recent concerns about homeowners’ ability to protect their 

assets, GAO was asked to examine issues associated with the possibility 

of more comprehensive homeowners insurance. This report addresses 

(1) the perils homeowners policies typically cover and exclude; (2) the 

impact of exclusions on homeowners, communities, and taxpayers and 

the potential benefits of more comprehensive coverage; and (3) the 

additional perils insurers might be willing to cover and the challenges 

associated with offering expanded coverage. To do this work, we 

reviewed a standard homeowners policy from the insurance industry and 

policies from select property/casualty insurers that were chosen by 

market share based on premiums written and participation in different 

geographic markets. We also interviewed insurance industry association 

officials, consumer advocates, and academic experts. Further, we 

interviewed selected state insurance regulators from states that 

experience major perils such as floods, hurricanes, and earthquakes, 

among others.3 Finally, we obtained information from a panel of insurance 

experts who participated in a roundtable discussion on issues associated 

with private insurers’ willingness and ability to cover floods and other 

natural catastrophes. We discuss our scope and methodology in more 

detail in appendix I.

We conducted this performance audit from December 2012 to January

2014 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

Homeowners insurance provides consumers with financial protection

against unexpected losses. Most homeowners policies provide a package 

of coverage that protects against damage to different types of property 

 

3

For the purposes of this report, “industry participants” refers to those entities with a role in 

the insurance industry, including regulators, consumer advocates, industry associations, 

insurance company officials, and academic experts. 

Background

Homeowners Insurance 

Policies
 

Page 3 GAO-14-179 Homeowners Insurance

and liability for injuries and property damage policyholders cause to 

others. The following are the main types of coverage:

• Dwelling. Pays for damage to a house and to attached structures, 

including plumbing, electrical wiring, heating, and permanently 

installed air-conditioning systems.

• Other structures. Pays for damage to fences, tool sheds, freestanding 

garages, guest cottages, and other structures not attached to the 

dwelling.

• Personal property. Pays for the value of personal possessions, 

including furniture, electronics, appliances, and clothing damaged or 

lost even when they are not on the subject property—for instance, 

when they are in an off-site storage locker or with a child at college.

• Loss of use. Pays some additional living expenses while a home is 

being repaired.4

• Personal liability. Pays for financial loss from lawsuits for injuries or 

damages to someone else.

• Medical payments. Pays medical bills for people hurt on the property 

or by a pet.5

Homeowners can purchase several types of insurance policies. These 

policies differ based on the perils they cover (see table 1). For example, 

named perils policies insure against losses caused by perils that are 

specifically listed in the policies. Open peril policies are broader policies 

that insure against losses caused by all perils, except those that are 

specifically excluded. However, according to industry participants with 

whom we spoke, currently no homeowners policies are available that 

cover every possible peril a homeowner could face.

 

4

Additional living expenses are extra charges covered by homeowners policies over and 

above the policyholder’s customary living expenses. They kick in when the policyholder 

requires temporary shelter due to damage by a covered peril that makes the home 

temporarily uninhabitable.

5

See National Association of Insurance Commissioners (NAIC), A Consumer’s Guide to 

Home Insurance (Kansas City, MO: 2010) and Insurance Information Institute (III), 

Insurance Handbook: A Guide to Insurance: What it Does and How it Works (New York, 

N.Y.: 2010). 
 

Page 4 GAO-14-179 Homeowners Insurance

Table 1: Types of Homeowners Insurance Policies for Single-Family Homes 

Policy type Description of policy

HO-2: Broad Policy A named peril policy, it covers the dwelling and personal property against 16 perils listed in 

the policy. 

HO-3: Special Policy The most commonly written policy, it is a combination of a named peril policy and an open 

peril policy. It covers the dwelling against all perils except those specifically excluded (such 

as flood and earthquake) and covers personal property against 16 named perils. 

HO-5: Comprehensive Policy More comprehensive than the HO-3, it is an open peril policy that covers the dwelling and 

personal property against all perils, except those that are specifically excluded (such as flood 

and earthquake).

HO-8: Modified Coverage Policy A named peril policy, it is designed for older homes, where the cost to replace is greater than 

the market value. 

Source: Insurance Services Office (ISO), National Association of Insurance Commissioners, and Insurance Information Institute.

Note: These policy types are examples of homeowners insurance policies developed by the ISO, 

which is a provider of data and analytics for the risk management industry, including property/casualty 

insurers. ISO has developed other policy types not included in this table, as have other companies.

In addition to different policy types, homeowners may choose between 

three different levels of coverage for their homeowners policies.6 These 

options are:

• Actual cash value. This type of coverage pays to replace the home or 

possessions after deducting for depreciation. Value is determined by 

taking into consideration the age of the home and wear and tear.7

This level of coverage may not be enough to fully repair or replace the 

damage.

• Replacement cost. This type of coverage pays the cost of rebuilding 

or repairing the home or replacing possessions, up to the coverage 

limit, without a deduction for depreciation. It allows for the repair or 

rebuilding of the home by using materials of similar kind and quality.

 

6

The amount of coverage available under a homeowners policy is subject to limits, which 

are the maximum amounts the insurance policy will pay in the event of a loss. The limit for 

the dwelling is typically selected by the policyholder. The limits for other structures, 

personal property, and loss of use are expressed as percentages of the dwelling limit. 

7

According to industry participants, the valuation method used to determine the value of a 

home depends on the language in the insurance policy. For example, the home’s value 

may be determined by the insurer or may be based on an appraisal. Each structure may 

also require a different valuation method. 
 

Page 5 GAO-14-179 Homeowners Insurance

• Guaranteed (or extended) replacement cost. This option is the most 

comprehensive and expensive. It pays a certain percentage, typically 

20 to 25 percent, over the coverage limit to rebuild the home in the 

event that materials and labor costs increase as a result of a 

widespread disaster.8

The HO-2, HO-3, and HO-5 policies typically provide replacement cost 

coverage on the structures.9 Contents coverage under homeowner 

policies is typically provided on an actual cash value basis, unless the 

replacement cost option is purchased. The HO-8 typically provides 

coverage for older homes on an actual cash value basis. Full replacement 

cost policies may not be available for some older homes.

Several factors affect the premiums consumers pay for their homeowners 

policies, including the type and characteristics of the home. For example, 

homes that are primarily brick or masonry typically have lower premiums 

than wood frame homes, and older homes and homes in poor condition 

tend to have higher premiums than newer homes and homes in good 

condition. A homeowner’s characteristics, such as a history of filing 

claims, and choices, such as the dollar amount of coverage selected, may 

also impact the premium cost. Other factors that impact the premium cost 

include the degree of exposure to catastrophes (such as hurricanes or 

earthquakes), the type of protection devices in the home (such as 

sprinkler or security systems), and the type of structures on the property 

(such as swimming pools or trampolines).

In addition to paying premiums for their insurance policies, homeowners 

generally have to pay a deductible when they file a claim—that is, an 

amount of money a policyholder must pay before an insurance policy will 

pay for a loss. The deductible applies to both home and personal property 

coverage and is paid on each claim. Higher deductibles generally mean 

lower policy premiums. In some locations, there are also catastrophe 

 

8

See NAIC, A Consumer’s Guide to Home Insurance and III, Insurance Handbook: A 

Guide to Insurance: What it Does and How it Works.

9

According to information from a state insurance department, many insurance companies 

require policyholders to purchase coverage for at least 80 percent of the home’s 

replacement cost, and some require 100 percent. If a homeowner is underinsured and 

suffers a total loss, the homeowner may be reimbursed up to the coverage limit the 

homeowner purchased. 

Cost of Insurance to 

Homeowners
 

Page 6 GAO-14-179 Homeowners Insurance

deductibles that a homeowner must pay when a major natural disaster 

occurs. They are expressed as a percentage of a claim instead of an 

insured amount.

Insurance in the United States is primarily regulated at the state level.10

State insurance regulators are responsible for enforcing state insurance 

laws and regulations, including through the licensing of agents, the review 

of insurance products and premium rates, and the examination of 

insurers’ financial solvency and market conduct. The insurance regulators 

of the 50 states, the District of Columbia, and the U.S. territories created 

and govern the National Association of Insurance Commissioners (NAIC), 

which is the standard-setting and regulatory support organization for the 

U.S. insurance industry. Through the NAIC, state insurance regulators 

establish standards and best practices, conduct peer review, and 

coordinate their regulatory oversight. NAIC staff supports these efforts 

and represents the collective views of state regulators domestically and 

internationally. NAIC members, together with the central resources of the 

NAIC, form the national system of state-based regulation in the United 

States.

Insurers assume some financial risk when writing policies, but also 

employ various strategies to manage risk so they can earn profits, limit 

potential financial exposures, and build the capital needed to pay claims. 

For example, insurance companies establish underwriting standards, 

such as refusing to insure customers who pose unacceptable levels of 

risk, or limiting coverage in particular geographic areas. Insurance 

companies may also purchase reinsurance, or insurance for insurance 

companies, to cover specific portions of their financial risk. For 

catastrophic losses, insurers may also sell financial instruments such as 

 

10The federal government retains the authority to regulate insurance, but has given 

primary responsibility for insurance regulation to the states in accordance with the 

McCarran-Ferguson Act of 1945. See Pub. L. No. 79-5, ch. 20, 59 Stat. 33 (1945) codified 

as amended at 15 U.S.C. §§ 1011-1015. See also GAO, Ultimate Effects of McCarranFerguson Federal Antitrust Exemption on Insurer Activity Are Unclear, GAO-05-816R

(Washington, D.C.: July 28, 2005). Nevertheless, the federal government is involved in a 

wide range of areas with respect to the insurance sector, including operation of the 

National Flood Insurance Program, and crop and terrorism insurance programs. In 

addition, the Federal Reserve Board supervises insurers designated by the Financial 

Stability Oversight Council.

State Regulation of 

Insurance

Risk Management by 

Insurers
 

Page 7 GAO-14-179 Homeowners Insurance

catastrophe bonds. Reinsurers use similar strategies to manage their 

risks. 

Both insurers and reinsurers must also predict the frequency and severity 

of insured losses with some reliability to best manage financial risk. In 

some cases, these events can be fairly predictable. For example, the 

incidence of most automobile claims is predictable, and losses generally 

do not occur to large numbers of policyholders at the same time. 

However, some infrequent events, such as hurricanes, are so severe that 

they pose unique challenges for insurers and reinsurers. The 

unpredictability and sheer size of these types of events can result in 

substantial losses that deplete insurers’ and reinsurers’ capital. If a 

company believes that the risk of loss is unacceptably high given the rate 

that can be charged, it may decide not to offer coverage.

If the private sector will not insure a particular type of risk, the public 

sector may create markets to ensure the availability of insurance. For 

example, several states have established Fair Access to Insurance 

Requirements (FAIR) plans, which pool resources from insurers doing 

business in the state to make property insurance available to property 

owners who cannot obtain coverage in the private insurance market, or 

cannot do so at an affordable rate. In addition, some states have 

established windstorm insurance pools that pool resources from private 

insurers to make insurance for wind risks available to property owners 

who cannot obtain it in the private insurance market.11

At the federal level, Congress established NFIP in 1968 to provide flood 

coverage to homeowners where voluntary markets do not readily exist.12

FEMA is responsible for the oversight and management of NFIP.13

Designed to help reduce the cost of federal assistance after floods, NFIP 

may be the sole source of insurance to some residents of flood-prone 

areas. Participating communities are required to adopt and enforce 

floodplain management regulations, thereby reducing the risks of flooding

and the costs of repairing flood damage. Under the program, the federal 

 

11Examples of wind risks include hurricanes and tornadoes. 

12Pub. L. No. 90-448, Title XIII, § 1302, 82 Stat. 476, 572 (1968). 

13FEMA is part of the Department of Homeland Security. 

Government Involvement 

in Homeowners Insurance
 

Page 8 GAO-14-179 Homeowners Insurance

government assumes the liability for covered losses and sets premium 

rates and coverage limitations. Like private insurance companies, federal 

and state government insurance programs also collect premiums, but 

their rates do not always reflect the risks that the programs assume, in 

part because they are designed to keep insurance affordable for most 

homeowners.14

Homeowners policies provide protections against a number of perils that 

can impact individuals and families. Policies, however, do not protect 

against all perils that homeowners could face. Various sections of a 

homeowners insurance policy outline perils covered and those the policy 

excludes. Policy provisions and other factors, such as location, can 

impact the coverage insurers offer homeowners.

Homeowners insurance policies typically cover a range of perils and are 

critical to providing financial protection against losses such as fire and 

theft, among others. According to many industry participants, the 

Insurance Services Office’s (ISO) HO-3 policy is the most commonly 

purchased homeowners policy and outlines the typical coverage and 

exclusions found in most homeowners policies.15 The HO-3 covers a 

person’s dwelling or home and other structures—such as detached 

garage, or shed—against all perils except those specifically excluded. 

This is commonly known as “open perils” coverage. For possessions, or 

personal property, the HO-3 covers only those perils listed in the policy, 

typically the 16 outlined below in table 2. Insurers refer to this kind of 

coverage as “named peril” coverage.

 

14For more information on NFIP, see Appendix II and recent GAO work, including GAO, 

Flood Insurance: Implications of Changing Coverage Limits and Expanding Coverage, 

GAO-13-568 (Washington, D.C.: July 3, 2013); Flood Insurance: More Information 

Needed on Subsidized Properties, GAO-13-607 (Washington, D.C.: July 3, 2013) and 

Flood Insurance: Strategies for Increasing Private Sector Involvement, GAO-14-127

(Washington, D.C.: Jan. 22, 2014).

15In addition to providing data and analytics services, ISO develops standard insurance 

policy language for use in the insurance industry. According to some industry participants, 

insurers may develop their own proprietary policies that deviate from the HO-3, but the 

covered perils and exclusions in those policies typically remain the same. 

Policies Cover and 

Exclude Various 

Perils Based on 

Policy Provisions and

Other Factors

Homeowners Policies 

Typically Cover a Range 

of Perils
 

Page 9 GAO-14-179 Homeowners Insurance

Table 2: Perils Covered for Personal Property in the HO-3 

1. Fire or lightning

2. Windstorm or haila

3. Explosion

4. Riot or civil commotion

5. Aircraft, including self-propelled missiles 

and spacecraft

6. Vehicles

7. Smokeb

8. Vandalism or malicious mischief

9. Theft

10. Falling objectsc

11. Weight of ice, snow, or sleet

12. Accidental discharge or overflow of water or steam from within a plumbing, 

heating, air conditioning, or automatic fire-protective sprinkler system or from 

within a household appliance (with certain restrictions)

13. Sudden and accidental tearing apart, cracking, burning, or bulging of a steam or 

hot water heating, air conditioning, or automatic fire protective sprinkler system, or 

an appliance for heating waterd

14. Freezing of a plumbing, heating, air conditioning, or automatic fire-protective 

sprinkler system or a household appliance if reasonable care has been used to 

maintain heat in the building or shut off the water supply and drain all systems and 

appliances of watere

15. Sudden and accidental damage from artificially generated electrical current (with 

certain restrictions)

16. Volcanic eruption, but not earthquake, land shock waves, or tremors

Source: ISO’s HO-3 policy.

a

Some states have established windstorm insurance pools as private insurers sometimes exclude 

coverage for wind-related damage. In addition, this specifically excludes from coverage damage

caused by rain, snow, sleet, sand, and dust unless the wind or hail damage to the building permits 

those perils to enter.

b

This only applies if it is sudden and accidental damage.

c

This only covers property in a building if a building is also damaged by the falling object. However,

damage to the fallen object itself is not covered.

d

This does not include losses caused by or resulting from freezing.

e

This does not include a sump, sump pump, roof drains, gutters, downspout, or other similar

equipment.

Private insurers determine which perils are insurable risks on the basis of 

certain characteristics or criteria of the losses associated with them, 

including the following:16

• Losses that are definite and measurable. The loss should be definite 

or determinate in time, place, and cause, and the insurer must be 

capable of setting a dollar value on the amount of the loss.

 

16For more information on insurable risk criteria, see GAO, Terrorism Insurance: 

Measuring and Predicting Losses from Unconventional Weapons Is Difficult, but Some 

Industry Exposure Exists, GAO-06-1081 (Washington, D.C.: Sept. 25, 2006) and George 

E. Rejda, Principles of Risk Management and Insurance, 8th ed. (Boston, Mass.: Pearson 

Education, Inc., 2003).
 

Page 10 GAO-14-179 Homeowners Insurance

• Losses that are sudden, random, and accidental. The loss must result 

from chance and not be something that is certain to happen. If a 

future loss were sure to occur, coverage would have to be priced at 

the full value of the loss plus an additional amount for the expenses 

incurred.

• Losses that are not catastrophic. The losses should not affect a very 

large percentage of an insurance company’s policyholders at the 

same time in, for example, a limited geographic area.17 The losses 

should be independent of each other in order to spread and minimize 

risk. Additionally, the peril should not be so catastrophic that the 

insurer would be unable to charge a sufficient premium to cover the 

exposure.

• Losses for which the law of large numbers applies. There must be a 

sufficiently large number of homogeneous units exposed to random 

losses, both historically and prospectively, to make the future losses 

reasonably predictable. This principle works best when there are 

many losses with similar characteristics spread across a large group. 

The greater the experience with losses, the better insurers can 

estimate both the frequency and severity of future losses.

When these criteria are generally satisfied, the insurer can add other 

expenses and profits to the expected losses and determine a price that is 

appropriate for the risk. Insurers may still decide to offer insurance for 

risks that deviate from these ideal characteristics. However, as one or 

more deviations occur, the ability of the insurer to estimate future losses 

decreases, the risk increases, and the insurer’s capital is more exposed 

to inadequate prices for the coverage that the insurer offers.

Despite covering a range of perils, insurers also exclude a number of 

perils. Insurance companies may determine that a peril is uninsurable and 

exclude it from an insurance policy by inserting a provision that excludes 

coverage. These provisions can be located in different sections of a 

homeowners policy. For example, the HO-3 contains a section titled 

“Exclusions,” but other policy provisions that exclude coverage are 

located elsewhere. Table 3 lists typical perils excluded under this section.

 

17Alternatively, a catastrophic loss is one that is extraordinarily large relative to the 

number of properties at risk in a given insurance pool. 

Homeowners Policies Also 

Exclude Other Perils
 

Page 11 GAO-14-179 Homeowners Insurance

Table 3: Perils Listed in the Exclusions Section of the HO-3 

1. Ordinance or law (such as an ordinance or law 

requiring or regulating the construction, demolition, 

remodeling, renovation, or repair of property)

2. Earth movement (such as earthquakes, landslides, 

mudslides, or sinkholes)a

3. Water (including flood, waves, water which backs up 

through sewers or drains or overflows or is otherwise 

discharged from a sump, sump pump or related 

equipment, or water below the surface of the ground)b

4. Power failure

5. Neglect (failure to use reasonable means to save and 

preserve property at and after the time of loss)

6. War

7. Nuclear hazard

8. Intentional loss (an action the insured commits or conspires to commit 

with intent to cause loss)

9. Government action (such as the destruction, confiscation, or seizure 

of property by order of any governmental or public authority)c

10. Weather conditions (only if the weather conditions contribute in any 

way with a cause or event excluded above to produce the loss)d

11. Acts or decisions, including the failure to act or decide, of any person, 

group, organization, or governmental bodyd

12. Faulty, inadequate or defective: planning, zoning, development, 

surveying, siting; design, specifications, workmanship, repair, 

construction, renovation, remodeling, grading, compaction; materials 

used in repair, construction, renovation, or remodeling; or 

maintenanced

Source: ISO’s HO-3 policy.

a

A direct loss by fire, explosion, or theft resulting from an earth movement is covered.

b

A direct loss by fire, explosion, or theft resulting from water activity is covered.

c

This excludes acts taken by the government at a time of a fire to prevent spread of the fire if the loss

caused by the fire is covered under the policy.

d

These three items are specific to dwellings and other structures.

Other policy provisions that exclude coverage are located under “Perils 

Insured Against” in the HO-3 policy. Under this section, which applies to 

the dwelling and other structures, but not to personal property, damage 

caused by certain perils will not be covered (see table 4).
 

Page 12 GAO-14-179 Homeowners Insurance

Table 4: Other Excluded Perils for Dwellings and Other Structures Listed in the HO-3 

1. Collapse (including abrupt falling down or caving in; loss of structural integrity; or any cracking, bulging, sagging, bending, 

shrinking, leaning, settling, or expansions related to the falling or loss of structural integrity);

2. Freezing of a plumbing, heating, air conditioning, or automatic fire-protective system or of a household appliance, or by 

discharge, leakage, or overflow from within the system or appliance caused by freezing, unless reasonable care has been used 

to maintain heat in the building or shut off the water supply and drain all systems and appliances of water;a

3. Freezing, thawing, pressure, or weight of water or ice, whether driven by wind or not, to a fence, pavement, patio, swimming 

pool, and other listed structures;

4. Theft in or to a dwelling under construction, or of materials and supplies for use in the construction until the dwelling is finished 

and occupied;

5. Vandalism and malicious mischief and any ensuing loss caused by any intentional and wrongful act committed in the course of 

the vandalism or malicious mischief, if the dwelling has been vacant for more than 60 consecutive days immediately before the

loss;

6. Mold, fungus, or wet rot (except under certain circumstances); or

7. Wear and tear, marring, deterioration; mechanical breakdown, latent defect, inherent vice, or any quality in property that causes 

it to damage or destroy itself; smog, rust, or other corrosion, or dry rot; smoke from agricultural smudging or industrial 

operations; discharge, dispersal, seepage, migration, release or escape of pollutants (except under certain circumstances); 

settling, shrinking, bulging or expansion, including resultant cracking, of bulkheads, pavements, patios, footings, foundations, 

walls, floors, roofs, or ceilings; birds, rodents, or insects; nesting or infestation, or discharge or release of waste products or 

secretions, by any animals; or animals owned or kept by an insured.

Source: ISO’s HO-3 policy.

a

The term plumbing does not include a sump, sump pump, roof drain, gutter, downspout, or similar 

equipment.

Insurers exclude these perils from homeowners policies for various 

reasons. According to some industry participants, some perils are 

excluded because they do not meet the criteria for insurable risks. For 

example, perils that result in catastrophic losses are generally infrequent, 

high-impact events that are difficult to predict and measure. The chances 

of these events occurring are difficult to calculate, and the losses can be 

so large and simultaneously impact so many homeowners that they could 

jeopardize a company’s solvency because the insurer may not have 

sufficient capital to pay out the large number of claims. Examples of these 

types of risks include flood, earthquake, war, and nuclear hazard.

Other risks are excluded because they could raise moral hazard issues if 

they were covered and because they are not accidental. Moral hazard is 

an increase in the probability of loss caused by the policyholder’s 

behavior—for example, intentional loss, neglect, deterioration, and lack of 

maintenance. According to some industry participants, if these risks were 

covered, homeowners could, for example, neglect their roofs or not 

address mold problems and then file claims for replacement and 

remediation. Further they noted that these types of risks also fall outside 
 

Page 13 GAO-14-179 Homeowners Insurance

the realm of insurance because they are not sudden or accidental and are 

generally unpredictable.

Some industry participants also said that homeowners policies list 

defective products as exclusions for a couple of reasons. First, they said 

that defective products are listed as exclusions because insurers would 

find it difficult and impractical to evaluate the wide range of manufactured 

products to determine the likelihood and extent of defects and price this 

risk for policies accordingly. Second, they suggested that manufacturers 

are responsible for defects in their products, and product warranties and 

commercial general liability insurance can help affected homeowners.18

For example, some homeowners affected by defective drywall may 

receive compensation from settlements partly funded by commercial 

general liability insurance policies held by companies responsible for the 

distribution or installation of defective drywall.19 Additionally, some 

homeowners impacted by defective drywall have filed insurance claims 

through their homeowners’ insurance policies, and litigation in multiple 

states will determine the extent to which coverage for this drywall is 

covered by homeowners insurance.

Certain provisions found in homeowners policies can also affect 

coverage. Some industry participants cited as an example anticoncurrent 

causation clauses. For example, under these clauses, if damage is 

simultaneously caused by both an excluded peril (such as flood) and a 

covered peril (wind), coverage is excluded for that loss. They noted that 

these clauses presented a particular challenge for owners of coastal 

properties when hurricanes occurred. Cases challenging the 

enforceability of the anticoncurrent clause arose after the 2005 hurricane 

season because damage to properties may have resulted from a 

combination of high winds and flooding. According to reports, this clause 

may similarly become an issue for homeowners in the aftermath of 

Superstorm Sandy. In addition to the anticoncurrent causation clause, 

 

18Commercial general liability insurance is a standard insurance policy issued to business 

organizations to protect them against liability claims for bodily injury and property damage 

arising out of premises, operations, products, and completed operations, as well as 

advertising and personal injury liability. 

19For more information on defective drywall and alternative methods of providing relief 

from damage associated with it, see GAO, Information on Defective Drywall, 

GAO-13-735R (Washington, D.C.: July 31, 2013). 

Coverage Depends on 

Several Factors, Including 

Policy Provisions and 

Location
 

Page 14 GAO-14-179 Homeowners Insurance

policies may also contain conditions that policyholders are required to 

comply with in order to maintain coverage. Under the HO-3 policy, for 

example, homeowners must provide prompt notice to their insurance 

company or agent following a loss and are also required to protect 

property from further damage once a loss has occurred. Failure to comply 

with these types of requirements may result in a loss of coverage.

In addition, the facts and conditions surrounding the loss event—including 

the cause of the damages and court decisions—may also impact 

coverage. For example, according to some industry participants, an HO-3 

policy typically excludes mold damage. However, mold damage that is 

hidden within walls or ceilings, or beneath the floors of a structure, that 

results from the accidental discharge or overflow of water or steam from 

within a plumbing or heating system may be covered, among other things. 

Further, the HO-3 policy typically covers theft of personal property from a 

home. However, theft in a home that is under construction, for example, 

may not be covered. Court decisions may also impact coverage when 

disputes between policyholders and insurers end up in litigation, 

something that can take time to resolve. Ultimately, whether a loss is 

covered in these cases may depend on how the court interprets the 

policy. Following Hurricane Katrina, for example, some coverage disputes 

raised the question of whether a policy’s flood exclusion language clearly 

excluded a water-related event, such as storm surge, that caused the 

damage at issue.20

Coverage may also depend on where homeowners live and whether they 

have purchased endorsements—optional coverage that alters a policy’s 

terms and conditions that can be added at an additional cost—or have 

other insurance policies.21 For example, homeowners policies typically do 

not cover flood damage, but flood insurance may be available through 

NFIP, depending on where a home is located.22 Additionally, private 

 

20For more information on wind and flood damage determinations following Hurricane 

Katrina, see GAO, National Flood Insurance Program: Greater Transparency and 

Oversight of Wind and Flood Damage Determinations Are Needed, GAO-08-28

(Washington, D.C.: Dec. 28, 2007). 

21An endorsement is sometimes called a rider. In addition to buying back coverage for 

certain risks, endorsements can also be used by insurers to limit coverage in a policy.

22Some property owners may also purchase excess flood insurance from private insurers 

if the value of their home exceeds the coverage limits offered by NFIP.
 

Page 15 GAO-14-179 Homeowners Insurance

insurers sometimes exclude coverage for wind-related damage to 

properties in coastal areas, requiring policyholders to either pay an 

additional premium for wind-related risks or purchase a supplemental 

policy for wind-related damages. In such cases, this supplemental 

coverage is typically provided by a state-sponsored wind insurance pool 

that has been created to address shortages in the availability of private 

insurance for wind-related risks. In Florida, for example, coverage is 

provided through its state insurance entity, the Citizens Property 

Insurance Corporation (Citizens).23

Earthquakes and sinkholes are two other perils that are also typically 

excluded from homeowners policies but that may be covered by a 

separate policy or an endorsement in some states. In California, for 

example, state law requires all residential property insurance companies 

to offer earthquake coverage to homeowners. In offering earthquake 

coverage, insurance companies can manage the risk themselves, 

contract with an affiliated or non-affiliated insurer, or become members of 

the California Earthquake Authority (CEA), a publicly-managed but 

privately funded entity that offers residential earthquake policies.24

Similarly, sinkhole coverage is typically excluded under the earth 

movement exclusion found in standard homeowners policies, but in 

Florida, the state requires insurers to offer catastrophic ground cover 

collapse, which is a narrow form of coverage that protects against the 

total loss of a home due to sinkholes. Florida does not require any other 

sinkhole coverage to be included in homeowners policies, but insurers 

are required to offer additional sinkhole coverage. Homeowners in some 

states may also be able to purchase coverage through endorsements for 

other perils typically excluded from homeowners policies, including 

ordinance and law, sewer or drain backup, and mold.

 

23Citizens is a not-for-profit, tax-exempt government corporation that provides insurance 

protection to Florida property owners throughout the state. The corporation insures 

hundreds of thousands of homes, businesses, and condominiums whose owners 

otherwise might not be able to find coverage. For more information on Citizens, see 

appendix III. 

24The base CEA policy, known as a “mini-policy,” is a reduced-coverage, catastrophic 

earthquake insurance policy intended to protect a dwelling, while excluding coverage for 

costly nonessential items, such as swimming pools, patios, and detached structures. For 

more information about CEA and other state insurance entities, see appendix IV and 

GAO, Natural Disasters: Public Policy Options for Changing the Federal Role in Natural 

Catastrophe Insurance, GAO-08-7 (Washington, D.C.: Nov. 26, 2007).
 

Page 16 GAO-14-179 Homeowners Insurance

Losses due to policy exclusions can financially impact homeowners by 

causing significant out-of-pocket expenses. Communities can also be 

impacted by perils excluded from homeowners policies, particularly if 

unrepaired homes result in blight and affect whether others in a 

neighborhood rebuild. Expanded coverage could offer homeowners more 

protection, potentially reducing the cost of repairs that homeowners would 

have to cover with their own resources. However, policies that offered 

expanded coverage would likely be much more expensive than current 

policies.

According to industry participants, the biggest and most significant impact 

on homeowners from policy exclusions is out-of-pocket costs to cover 

losses. If a loss occurs that is excluded by insurers, and coverage is not 

available through an endorsement or federal or state program, 

homeowners will have to use their own resources to rebuild and replace 

what they had. Some industry participants said that excluded losses can 

cause significant damage to homes and possessions. In some cases, 

homeowners may not have the means to rebuild after a disaster. Figures 

1 and 2 illustrate the damage caused by two perils, floods and sinkholes, 

which are typically excluded from homeowners policies.

Figure 1: Damage Due to Floods

Policy Exclusion 

Impacts Could Be 

Reduced by 

Expanding 

Homeowner 

Coverage, but 

Premiums Would 

Likely Increase

Policy Exclusions Can 

Impact Homeowners and 

Communities
 

Page 17 GAO-14-179 Homeowners Insurance

Figure 2: Damage Due to Sinkholes

In addition to paying for excluded losses on their own, one industry 

organization said that homeowners may have to pay additional out-ofpocket expenses for temporary housing or a car rental that may not be 

covered by a homeowners policy.25 When impacted by a disaster, 

homeowners may need these types of rentals for many months, and they 

can be costly.

Further, industry participants said that rebuilding after a disaster can 

present additional challenges for homeowners. One industry organization 

said that catastrophes can cause shortages of building contractors and 

building supplies that can delay reconstruction. This phenomenon is 

known as “demand surge.” In these circumstances, the short-term costs 

of repairing and rebuilding homes can escalate substantially. Another 

industry participant noted that homeowners can also have their policies 

cancelled if home repairs are not adequate.

 

25Some industry participants have emphasized that data to quantify out-of-pocket losses 

due to excluded perils are currently unavailable because insurers generally track the 

amounts they pay out in claims but not uninsured loss amounts. 
 

Page 18 GAO-14-179 Homeowners Insurance

Disasters and excluded perils also sometimes highlight differences 

between consumers’ expectations for insurance and actual policy 

coverage, resulting in added frustrations for homeowners. According to 

some industry participants with whom we spoke, some consumers may 

not learn what their policy actually covers until losses occur. For example, 

one industry association recalled that some consumers who had recent 

problems with drywall sourced from China filed insurance claims through 

their homeowners policies. As noted earlier, litigation in multiple states 

may determine the extent to which homeowners insurance applies to 

losses associated with this drywall.

Others may not understand their coverage well enough to know what is 

covered, what is excluded, and what loss events and circumstances 

might result in paid, partially paid, or denied claims. For example, 

according to a 2013 survey conducted by one industry organization, many 

homeowners mistakenly believe that their homeowners policies cover 

flooding from a hurricane.26 According to some industry participants, 

homeowners policies can be difficult to understand because they often 

are long, technical, legal documents. One consumer advocate we spoke 

with suggested that few tools exist to help consumers understand their 

coverage, and noted that even though some states have policy readability 

requirements and disclosure rules about coverage and exclusions, these 

measures do not help consumers understand their policies. Other 

participants said that many homeowners do not read their policies or 

study them closely. Additional analysis would be needed to determine to 

what extent readability requirements, disclosure rules, or other factors 

impact homeowners’ ability to understand their policies.

In addition to the devastation disasters may cause homeowners, 

neighborhoods and communities can also be impacted if some 

homeowners are unable to rebuild because they do not have coverage for 

a loss. Damaged homes that are not rebuilt can result in blight and affect 

the willingness of others to rebuild. A neighborhood where property is 

vacant or deteriorated will also likely impact the property value of 

surrounding homes. In addition, when some homeowners do not rebuild, 

communities may experience a diminution of the tax base. Collecting less 

 

26According to the Insurance Information Institute’s 2013 Annual Pulse Survey, about 21 

percent of the public believes flooding from a hurricane is covered. This proportion rises 

by 8 percentage points in the south, an area of the United States typically impacted by 

hurricanes.
 

Page 19 GAO-14-179 Homeowners Insurance

in property taxes can impact the ability of communities to fund schools, 

libraries, parks, and roads, among other uses.

Both the federal and some state governments offer disaster assistance 

and other programs to help homeowners with some of the perils that 

private insurers do not cover, and this support can rely on taxpayer as 

well as policyholder resources. At the federal level, the government 

provides a range of assistance to individuals after major disasters. This 

assistance is generally made available after the President issues a 

disaster declaration under the authority of the Robert T. Stafford Disaster 

Relief and Emergency Assistance Act (the Stafford Act), and is 

administered by various federal agencies through various programs.27

FEMA, for example, provides disaster relief and recovery assistance to 

individual citizens through its Individuals and Households Program (IHP), 

which is intended to provide money and services, including assistance in 

repairing and replacing damaged homes, to people in a disaster area 

when losses are not generally covered by insurance.28 The growing 

number of major disaster declarations has contributed to an increase in 

federal expenditures for disaster assistance, however. For example, 

through January 31, 2012, FEMA obligated $80.3 billion in disaster relief, 

including $23.5 billion in individual assistance, for 539 disasters declared 

during fiscal years 2004 through 2011.29 More recently, Superstorm 

Sandy has also involved significant federal disaster assistance. In 

January 2013, Congress passed and the President signed the Disaster 

Relief Appropriations Act of 2013 and the Sandy Recovery Improvement 

 

27The Stafford Act is codified as amended at 42 U.S.C. § 5121 et seq. Federal disaster 

assistance is also provided to state, territorial, and local governments as well as 

nongovernmental entities.

28For more information on federal disaster assistance for individuals and households, see 

GAO-08-7. The Stafford Act specifies that federal agencies providing financial assistance 

after a major disaster cannot provide assistance to an individual for the same loss for 

which another federal program or private insurance company has provided compensation.

29GAO, Federal Disaster Assistance: Improved Criteria Needed to Assess a Jurisdiction’s 

Capability to Respond and Recover on Its Own, GAO-12-838 (Washington, D.C.: Sept. 

12, 2012). 

Government Coverage of 

Excluded Losses Can 

Involve Costs and Risks to 

Taxpayers
 

Page 20 GAO-14-179 Homeowners Insurance

Act of 2013, which provided about $50 billion in federal assistance to 

support rebuilding efforts.30

In addition to providing disaster assistance, the federal government also 

offers flood insurance to homeowners through NFIP, a program that 

involves significant costs for the government and ultimately for taxpayers. 

According to FEMA information, as of September 2013, there were 5.6 

million flood insurance policies in force in almost 22,000 communities 

across the United States. In years when losses were high, NFIP has used 

statutory authority to borrow funds from the Department of the Treasury 

(Treasury) to pay claims and keep the program solvent. For example, 

NFIP borrowed $16.8 billion from Treasury to cover claims for the 2005 

hurricanes—primarily Hurricane Katrina—and received additional 

borrowing authority in the amount of $9.7 billion following Superstorm 

Sandy in 2012. As of October 2013, NFIP owed Treasury $24 billion. 

NFIP is generally expected to cover its claim payments and operating 

expenses with the premiums it collects. However, NFIP has sold some 

flood insurance policies at subsidized rates to help keep flood insurance 

affordable, and these subsidized policies have been a financial burden on 

the program because of their relatively high losses and premium rates 

that are not actuarially based. As a result, the annual amount that NFIP 

collects in both full-risk and subsidized premiums is generally not enough 

to cover its operating costs, claim payments, and principal and interest 

payments for the debt owed to Treasury, especially in years of 

catastrophic flooding, such as 2005.31 This arrangement results in much 

of the financial risk of flooding being transferred to the federal government 

and ultimately the taxpayer. As shown in figure 3 below, NFIP has 

 

30For more information on these rebuilding efforts, see Hurricane Sandy Rebuilding Task 

Force, Hurricane Sandy Rebuilding Strategy: Stronger Communities, A Resilient Region

(Washington, D.C.: Aug. 2013).

31The Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act) 

reauthorized NFIP through 2017 and made some significant changes to the program, such 

as eliminating premium subsidies for certain properties, creating a reserve fund, and 

eliminating the grandfathering of properties to old rates after remapping. However, 

implementation of certain changes was delayed by provisions in the Consolidated 

Appropriations Act, 2014. While these Biggert-Waters Act changes may help increase 

NFIP’s long-term financial stability when they are implemented, the program still faces 

challenges in implementing the changes and their ultimate effect is not yet known. BiggertWaters Flood Insurance Reform Act of 2012, Pub. L. No. 112-141, 126 Stat. 405, 916 

(2012). See also GAO-13-568 and GAO, National Flood Insurance Program: Continued 

Attention Needed to Address Challenges, GAO-13-858T (Washington, D.C.: Sept. 18, 

2013).
 

Page 21 GAO-14-179 Homeowners Insurance

handled a significant number of claims and paid losses for flood events 

caused by hurricanes and a superstorm since 2005.32

Figure 3: Selected NFIP Flood Loss and Payment Information, 2005 to 2012

Some states, such as Florida, have created residual insurance pools to 

cover what the private market will not, sometimes at a cost to 

policyholders and taxpayers across the state.33 In Florida, Citizens 

provides homeowners coverage, including for wind damage, for those 

who cannot find coverage from private insurers. If Citizens’ funds are 

depleted by paying claims after a catastrophic event, Florida law requires 

that Citizens charge assessments until any deficits are eliminated. 

Citizens’ policyholders are the first to be assessed, and if necessary, 

additional assessments can be levied against certain private insurance 

companies, who can then pass the cost of these assessments on to their 

 

32Data are current as of September 30, 2013.

33Residual insurance pools serve as a coverage source of last resort for firms and 

individuals unable to find insurance offered by private market insurers. Residual markets 

require insurers writing specific coverage lines in a given state to assume the profits or 

losses accruing from insuring that state’s residual risks in proportion to their share of the 

total voluntary market premiums written in that state.
 

Page 22 GAO-14-179 Homeowners Insurance

policyholders. 34 This ability to levy assessments provides Citizens with 

resources to pay claims to policyholders.

Storms in 2004 and 2005, for example, resulted in more than $30 billion 

in insured damage in Florida. Citizens sustained deficits of $515 million 

and $1.8 billion, respectively, in those years. To fund its 2004 deficit, 

Citizens assessed insurance companies and surplus lines policyholders 

over $515 million in regular assessments.35 To fund the 2005 deficit, the 

Florida legislature appropriated $715 million from the Florida general 

revenue fund, reducing the size of the regular assessment from $878 

million to $163 million. In 2005, the Florida legislature also directed 

Citizens to amortize the collection of the emergency assessment for the 

remaining $888 million deficit over a 10-year period, resulting in an 

emergency assessment levied beginning in June 2007. According to two 

industry organizations, Florida’s property/casualty policyholders generally 

bear the cost of having Citizens provide coverage to participating Florida 

residents, regardless of whether they live inland or on the coast.

 

34Citizens has three types of internal accounts: Personal lines account (for personal 

residential policies); Commercial lines account (for commercial residential and 

nonresidential policies); and Coastal account (for personal residential policies and 

commercial residential and commercial nonresidential policies issued by Citizens, which 

provide coverage for the peril of wind in certain designated areas. Citizens can levy three 

types of assessments: policyholder surcharge, regular, and emergency. Citizens’ 

policyholders are the first to be assessed if a deficit occurs. It is a one-time surcharge of 

up to 45 percent of the policyholder’s premium depending on the deficit size. For the 

Coastal account, if a deficit remains after the policyholder assessment, Citizens can levy 

regular assessments that include a broad base of licensed Florida property/casualty 

insurance companies. The insurers may recoup this assessment amount by passing it on 

to policyholders. Finally if deficits still remain for the coastal account or if any deficit 

remains after the policyholder assessment for the personal and commercial lines 

accounts, a broad range of property/casualty policyholders, including Citizens 

policyholders, are assessed directly by their insurance companies. For each account, this 

assessment can be up to 10 percent of the amount needed to cover the deficit or 10 

percent of the aggregate statewide direct written premium for the subject lines of business 

and all accounts of the corporation for the prior year–plus for both interest, fees, 

commissions, required reserves, and other costs.

35The term “surplus lines” refers to any type of insurance for which there is no available 

market within a state and which the state allows nonadmitted insurers to offer. A 

nonadmitted insurer is not licensed to do standard business in the state. 
 

Page 23 GAO-14-179 Homeowners Insurance

If private insurers offered expanded homeowners coverage, homeowners 

could see a number of benefits. First, according to some industry 

participants homeowners would have more protection because more 

perils would be covered under their policy. Second, some industry 

participants noted that more comprehensive coverage could lead to less 

ambiguity for consumers seeking to understand their policies. Policies 

with fewer exclusions and conditions for coverage would be simpler and 

more efficient for insurers to write and consumers to understand than 

having separate policies for homeowners, flood, and in some states, wind 

coverage. Third, some industry participants said that enhanced coverage 

could reduce litigation and disputes between policyholders and insurers 

over coverage. For example, a policy that offered more comprehensive 

coverage could reduce disputes over the anticoncurrent causation clause, 

often over whether wind or water caused residential damage, something

some industry participants noted is a particular challenge for homeowners

when hurricanes occur.

Assuming homeowners purchased expanded private coverage without 

government subsidies, these policies could also reduce reliance on 

federal and state programs.36 According to some industry participants, if 

homeowners policies covered flooding, for example, fewer taxpayer 

resources may be needed for paying NFIP’s claims and subsidized 

premiums. In addition to having benefits at the federal level, greater 

private coverage could also reduce or eliminate the need for state-based 

insurance mechanisms, such as state wind pool coverage, and the 

insurer and policyholder assessments they can involve. Moreover, 

expanded coverage could encourage more informed decisions by 

homeowners. For instance, expanded coverage with more accurate 

pricing for risk could provide beneficial information to consumers on the 

risk associated with their housing location decisions and could encourage 

more consumers to mitigate risks to their property or to not locate to highrisk areas.

 

36Although one industry participant we spoke with suggested that expanding private 

coverage for perils such as mold and nuclear hazard may be possible, most participants 

discussed the possibility of expanding private coverage for natural catastrophes, such as 

flood and earthquakes. According to one participant, industry discussions about 

expanding homeowners coverage tend to center on natural catastrophes because these 

are the perils that most affect homeowners.

Expanding Private 

Coverage Could Offer 

Benefits, but Homeowner 

Premiums Would Likely 

Rise
 

Page 24 GAO-14-179 Homeowners Insurance

Notwithstanding these potential benefits, expanded coverage would likely 

increase insurance premiums for homeowners. According to some 

industry participants with whom we spoke, the increase could amount to 

several times what some homeowners currently pay. For example, one 

industry organization said that a policy that covered flood, earthquake, 

sinkholes, and some other perils could cost homeowners anywhere from 

three to five times what homeowners pay now, while another estimated 

that the cost of a policy that covered nearly all the currently excluded

perils could exceed $15,000 annually. Other industry participants said the 

cost for this coverage would be so high that many homeowners would be 

unable to afford it. Additionally, FEMA information on the changes to the 

cost of flood insurance following the Biggert-Waters Act and the 

elimination of some subsidized rates may further illustrate how costly 

expanded coverage could potentially be for some homeowners. 

According to FEMA information, the cost of a NFIP policy for a home 

located in a very high-risk area without a subsidy could exceed $20,000 in 

annual premiums for certain policyholders.37

Several factors make it challenging for private insurers to offer all-perils 

homeowners insurance, or even more comprehensive policies. These 

include consumer demand for greater coverage and the higher premiums 

such coverage would involve, the ability of insurers to adequately price 

policies that covered more perils, and the regulatory challenges 

associated with getting approval for risk-based rates. A few industry 

participants with whom we spoke said that insurers and others are 

discussing possibilities for expanding private homeowners insurance, but 

cautioned that policy premium rate, affordability, and other conditions 

would need to be addressed.

Higher premiums for more comprehensive homeowners insurance are not 

only an affordability challenge for homeowners, they also represent a key 

challenge for insurers. Some industry participants said that the higher 

 

37Information is as of October 2013. 

Multiple Challenges 

Make Expanding 

Private Coverage 

Difficult

Insurance Cost and Risk 

Pricing Are Issues for 

Consumers and Insurers

Consumer Demand and 

Incentives
 

Page 25 GAO-14-179 Homeowners Insurance

premiums required for more comprehensive coverage raises questions 

about whether sufficient demand would make expanded coverage 

impractical in the private market. Some said that many homeowners try to 

keep expenses for insurance as low as possible, citing as evidence low 

participation in NFIP, despite federal subsidies. They also questioned 

whether consumers would buy much more expensive expanded coverage 

even if it were offered by insurers.

Additionally, many industry participants with whom we spoke said that 

adverse selection—or the tendency for those who live in places most 

prone to risk to be most likely to purchase insurance—could challenge

insurers’ ability to expand policy coverage. Insurers manage risk by 

charging appropriate rates and diversifying their risk pool. Industry 

participants with whom we spoke said that if only riskier households—for 

example, those located near the coasts or rivers—were the primary 

purchasers of expanded coverage, insurers might end up with an 

insurance pool with concentrated risk and policies that could cause losses 

that may jeopardize insurers’ profitability and solvency.

A requirement that insurers offer and homeowners purchase more 

comprehensive coverage may reduce this problem but raises questions 

about how such a requirement would be implemented.38 Further, some 

questioned whether it would be fair to require those living in low-risk 

areas to purchase expanded coverage they may not need, in effect 

subsidizing those living in high-risk areas. One industry organization said 

that legislative or regulatory attempts to mandate all-perils coverage could 

destabilize the insurance marketplace in certain high-risk areas such as 

coastal regions and floodplains. It could also cause private insurers to 

further limit their exposures in disaster-prone areas, and some insurers 

may withdraw from the market altogether. Industry participants suggested 

that offering policies that covered all losses could also raise issues of 

moral hazard, or incentivize risky behavior by homeowners. For example, 

comprehensive policies may encourage people to locate their homes in 

 

38As we previously reported, requiring insurers to offer an all-perils policy could be 

challenging. It is unclear how private insurers would be encouraged to underwrite all risks 

and it might not be cost effective for the federal government if low-income residents 

require government subsidies to address affordability issues. If expanded coverage did 

not sufficiently reduce post event disaster relief, these subsidies could cause significant 

costs for taxpayers. Furthermore, such a requirement could be challenging for the federal 

government to enforce, as has been seen with mandatory flood insurance in communities 

in designated floodplains. See GAO-08-7. 
 

Page 26 GAO-14-179 Homeowners Insurance

high-risk areas. Others said that higher premiums associated with more 

comprehensive policies would send a better signal to homeowners about 

the risk associated with their housing location, something that could 

prompt homeowners to properly insure their homes or take steps to 

mitigate their risk.

Industry participants said that another important challenge is the difficulty 

of pricing catastrophic risks and handling the claims that they cause. 

Some industry participants said that accurately modeling the broader 

range of risks that more comprehensive policies would cover was critically 

important. Having loss data and accurately modeling risk is necessary for 

appropriately pricing insurance policies and for ensuring insurer solvency. 

Some industry participants said that because expanded coverage would 

be new to the private domestic market, modeling experience would need 

to be developed over time and could be challenging, particularly for 

multiple catastrophic losses. Others said that insurers might also lack the 

expertise to handle claims for perils that were typically excluded, and that 

it could take time for insurers and adjusters to develop the expertise to 

handle some disaster situations and subsequent claims.

Industry participants said that insurers could also face critical regulatory 

challenges in offering more comprehensive coverage. One important 

challenge is that state regulatory approval for the higher premiums more 

comprehensive coverage would likely demand is uncertain. Insurers need 

to charge risk-based rates that are determined on an actuarial basis in 

order to stay solvent and meet their policy obligations to homeowners. 

However, some industry participants with whom we spoke said that 

getting regulators to approve rates that insurers determined would be 

appropriate for certain risks has been difficult and that getting approval for 

rates that could be several times more expensive than those currently in 

force would be an important challenge. One regulator, however, said that 

inability to charge higher risk-based rates might not be an issue because 

loss experience is a critical factor that drives rates. If insurers faced 

greater losses by covering more perils, they would likely be able to justify 

and gain approval for higher premiums. Industry participants also said 

that different state insurance laws and regulations and different ratesetting and approval processes could make it difficult for insurers to sell 

more comprehensive policies with risk-based rates across states.

Risk Pricing and Claims 

Processing

Approval for Risk-based 

Rates and Insurer Capital 

Pose Additional Concerns

Regulatory Rate Approval
 

Page 27 GAO-14-179 Homeowners Insurance

Offering coverage for a broader set of perils would also require insurers to 

have the capital necessary to pay claims without risking insolvency. The 

greater the risk, the more capital insurers need to hold. Insurers may not 

be willing to maintain the higher capital levels needed for insuring against 

higher risk events if that capital could be used for other insurance or 

investment purposes. In addition, disasters such as floods and 

earthquakes are relatively infrequent but often severe events, so that 

insurers cannot always know how much they will need in reserves. 

Industry participants said that the unpredictability of catastrophes could 

prevent insurers from accurately calculating and setting aside the sums 

necessary to cover losses. One insurance regulator suggested that even 

if insurers could charge rates that reflected the full risk of disasters, they 

still may not be able to offer coverage for additional perils.

For additional coverage to be possible, insurers would need the ability to 

conduct actuarial analyses and accurately model risks involved with 

greater homeowners coverage. Some industry participants thought this

capability may already exist or could be developed for floods and 

earthquakes, the two perils they said hold some promise for greater 

private insurer involvement. In order to offer coverage for flood or other 

perils, insurers would have to be able to charge risk-based rates, a critical 

part of meeting their policy obligations to consumers and staying solvent, 

but something that would also raise concerns about higher premium 

costs, policy affordability, and consumer demand.

Two industry organizations said that mitigation efforts, effective building 

codes, and sound land-use policies could also help reduce risks from 

natural catastrophes. Another highlighted how building codes set by 

states can differ, which can lead to inconsistencies that make it difficult to 

ensure properties can withstand loss events. Others said that it is 

important for the insurance industry to encourage consumers to become 

better informed about their risks and insurance so that they could take 

available steps depending on where they live to mitigate losses.

The catastrophic nature of flood and other natural catastrophe losses, 

according to industry participants, may require a continuing role for 

federal and state government in financing coverage. We recently reported 

on strategies to encourage greater private-sector involvement in flood 

insurance that included the possibility of insurers charging homeowners 

full risk rates with the government providing targeted subsidies to help 

with affordability. Private insurers could play a greater role in coverage 

with the federal government possibly serving as an insurer for only the 

Insurer Capital

Several Conditions Would 

Be Needed for Insurers to 

Expand Private Coverage
 

Page 28 GAO-14-179 Homeowners Insurance

highest risk properties. Yet another option is the combination of greater 

private-sector involvement and the government acting as a reinsurer by 

providing a backstop to private insurers for losses over a certain 

amount.39

The size of the losses and the magnitude of the risk associated with more 

comprehensive policies underscore the complex challenges of addressing 

the costs of catastrophes and other perils that place homeowners’ 

properties at risk. A mix of factors—financial risk, large potential losses, 

political and regulatory issues, policy affordability, and consumer 

demand—has thus far made it challenging for private-sector insurers in 

the U.S. to offer flood insurance to homeowners, let alone more 

comprehensive or all-perils policies. The possibility of improved data, 

better risk modeling, and emerging private-sector interest, however, 

suggest that some additional coverage may be possible. For this to 

happen, private insurers must be able to assess and diversify risk and 

charge rates adequate for the risk they are assuming. At the same time, 

consumers will need to better recognize the risk and cost of their housing 

decisions and the likely higher rates that come with protecting homes and 

possessions in certain locations. One of the most fundamental challenges 

is achieving a policy premium rate that allows insurers to stay solvent and 

meet their obligations to consumers, yet is affordable enough so that 

consumers are willing and able to buy insurance. Addressing this 

important challenge and ensuring a collective response to losses caused 

by disasters and other perils will require the cooperation and resources of 

government, homeowners, and insurers, as well as balance in the 

assumption of risk and cost by each of these parties.

We provided a draft of this report for review and comment to the National 

Association of Insurance Commissioners (NAIC) and the Federal 

Insurance Office (FIO) at the Department of the Treasury. Both provided 

technical comments which we incorporated into the report as appropriate.

We are sending copies of this report to the appropriate congressional 

committees, NAIC, and FIO. In addition, the report is available at no 

charge on the GAO website at http://www.gao.gov. 

 

39See GAO-14-127. 

Agency Comments 
 

Page 29 GAO-14-179 Homeowners Insurance

If you have any questions about this report, please contact me at (202) 

512-8678 or cackleya@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff who made key contributions to this report are 

listed in appendix V. 

Alicia Puente Cackley

Director, Financial Markets and Community Investment
 

Page 30 GAO-14-179 Homeowners Insurance

List of Addressees

The Honorable Gerry Connolly

Ranking Member

Subcommittee on Government Operations

Committee on Oversight and Government Reform

House of Representatives

The Honorable Corrine Brown

House of Representatives

The Honorable G.K. Butterfield, Jr.

House of Representatives

The Honorable Theodore E. “Ted” Deutch

House of Representatives

The Honorable Luis V. Gutierrez

House of Representatives

The Honorable Jim Moran

House of Representatives

The Honorable Scott Rigell

House of Representatives

The Honorable Dennis A. Ross

House of Representatives

The Honorable Jan Schakowsky

House of Representatives

The Honorable Robert C. “Bobby” Scott

House of Representatives

The Honorable Debbie Wasserman Schultz

House of Representatives
Appendix I: Objectives, Scope, and 

Methodology

Page 31 GAO-14-179 Homeowners Insurance

In this report we examined (1) the perils homeowners policies typically 

cover and exclude; (2) the impacts of exclusions on homeowners and 

taxpayers and the potential benefits of more comprehensive coverage for 

homeowners; and (3) the additional perils insurers might be willing to 

cover and the challenges associated with such coverage.

To determine what perils homeowners policies typically cover and 

exclude, we analyzed the Insurance Services Office’s (ISO) standard 

homeowners insurance policy (HO-3) and examples of private insurers’ 

homeowners policies. We reviewed documents by insurance industry 

organizations and professional associations, including the National 

Association of Insurance Commissioners (NAIC) and the Insurance 

Information Institute (III). We also interviewed a nongeneralizable, 

judgmental sample of property/casualty insurance companies and state 

insurance regulators, insurance and reinsurance associations, an 

insurance agent and broker association, consumer groups, academic 

insurance and risk experts, and the Federal Insurance Office (FIO) at the 

Department of the Treasury. We selected our sample of insurers based 

on market share by direct premiums underwritten and participation in 

different geographic markets. We selected our sample of state regulators 

based on geographic diversity and experience overseeing insurers with 

portfolios of different perils, including floods, hurricanes, and earthquakes.

To determine the impacts of exclusions on homeowners and taxpayers 

and the benefits of more comprehensive coverage, we spoke with 

consumer groups, including the Center for Economic Justice, academic 

experts, selected state insurance regulators, NAIC and FIO officials, and 

other insurance association officials. To illustrate some of the financial 

impacts of policy exclusions on taxpayers, we obtained publicly available 

data from the Federal Emergency Management Agency (FEMA) on the 

National Flood Insurance Program’s (NFIP) claims costs. For the NFIP 

data we used, we interviewed officials on usability and reliability. We 

determined that these data were sufficiently reliable for our intended 

purposes. In addition, we reviewed our previous work on natural 

catastrophe insurance, academic and other studies, and results from an 

annual survey conducted by Insurance Information Institute (III) on 

homeowners insurance, flood insurance, and disaster preparedness.

To identify the additional perils that insurers might be willing to insure and 

the challenges associated with such coverage, we spoke with a sample of 

insurance companies and state insurance regulators, insurance and 

reinsurance associations, an insurance agent and broker association, 

NAIC and FIO officials, consumer groups, academia, and others. We also 

Appendix I: Objectives, Scope, and 

Methodology
Appendix I: Objectives, Scope, and 

Methodology

Page 32 GAO-14-179 Homeowners Insurance

reviewed our previous work on natural catastrophe insurance, 

Congressional Research Service (CRS) reviews, and academic and other 

studies on these issues. We gathered additional perspectives on all perils 

policies from a round table discussion on privatizing flood insurance that 

we organized and conducted at GAO headquarters in Washington, D.C.

Participants in the round table included insurance industry association 

representatives, select state regulators, and NAIC and FEMA officials.

We conducted this performance audit from December 2012 to January 

2014 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.
Appendix II: Information on the National Flood 

Insurance Program

Page 33 GAO-14-179 Homeowners Insurance

Established in 1968, the National Flood Insurance Program (NFIP) makes 

federally backed flood insurance available to residential property owners 

and to owners of nonresidential property such as businesses, churches, 

governments and nonprofits. Under NFIP, the federal government 

generally assumes the liability for the insurance coverage and sets rates 

and coverage limitations, among other responsibilities, while the private 

insurance industry sells the policies and administers the claims.1 The 

Federal Emergency Management Agency (FEMA) is responsible for 

administering NFIP.

Community participation in NFIP is voluntary. However, communities 

must join NFIP and adopt FEMA-approved building standards and 

floodplain management strategies in order for their residents to purchase 

flood insurance through the program. Additionally, communities with 

Special Flood Hazard Areas (SFHA)—areas at high risk for flooding—

must participate in NFIP to be eligible for any form of assistance for 

acquisition or construction purposes in connection with a flood.2

Participating communities can receive credits on premium rates on flood 

insurance if they establish floodplain management programs that go 

beyond the minimum requirements of NFIP. FEMA can suspend 

communities that do not comply with the program, and communities can 

withdraw from the program. As of September 2013, almost 22,000 

communities voluntarily participated in NFIP.

Consumers can purchase flood insurance to cover both buildings and 

contents for residential and commercial properties. NFIP’s maximum 

coverage for residential policyholders is $250,000 for building property 

and $100,000 for contents. This coverage includes replacement value of 

the building and its foundation, electrical and plumbing systems, central 

air and heating, furnaces and water heater, and equipment considered 

part of the overall structure of the building. Personal property coverage 

includes clothing, furniture, and portable electronic equipment. For 

 

1

Some of these same insurers also provide coverage for flood insurance above the limit of 

NFIP coverage. A number of private insurers that do not sell and administer NFIP policies 

also offer flood insurance. Flood insurance purchased above current NFIP coverage limits 

generally is referred to as excess flood insurance. 

2

The National Flood Insurance Reform Act of 1994 requires individuals, including in 

SFHAs, who receive disaster assistance for flood disaster losses to real or personal 

property to purchase and maintain flood insurance coverage for as long as they live in the 

dwelling. 

Appendix II: Information on the National 

Flood Insurance Program
Appendix II: Information on the National Flood 

Insurance Program

Page 34 GAO-14-179 Homeowners Insurance

commercial policyholders, the maximum coverage is $500,000 per unit for 

buildings and $500,000 for contents (for items similar to those covered 

under residential policies).3 Coverage for personal property and coverage 

for nonresidential buildings is written on an actual cash value basis.

NFIP offers two types of flood insurance premiums to property owners 

who live in participating communities: subsidized and full-risk. The 

National Flood Insurance Act of 1968 authorized NFIP to offer subsidized 

premiums to owners of certain properties. Congress originally mandated 

the use of subsidized premiums to encourage communities to join the 

program and mitigate concerns that charging rates that fully and 

accurately reflected flood risk would be a burden to some property 

owners. According to FEMA, Congress made changes to the program 

over the years to encourage further participation in NFIP through low 

premiums. FEMA estimated that in 2012 more than 1 million of its 

residential flood insurance policies—about 20 percent—were sold at 

subsidized rates; nearly all were located in high-risk flood areas.4

Since 2000, NFIP has experienced several years with catastrophic 

losses—losses exceeding $1 billion—and has needed to borrow money 

from the Treasury to cover claims in some years. The losses resulting 

from Superstorm Sandy, which caused extensive damage in several 

states on the eastern coast of the United States in October 2012, also are 

catastrophic, reaching over $7 billion. As of October 2013, FEMA owed 

Treasury $24 billion. As a result of the program’s importance, level of 

indebtedness to Treasury, substantial financial exposure for the federal 

government and taxpayers, and FEMA’s management challenges, NFIP 

has been on our high-risk list since 2006.5

 

3

For information on the implications of changing coverage limits and expanding coverage, 

see GAO, Flood Insurance: Implications of Changing Coverage Limits and Expanding 

Coverage, GAO-13-568 (Washington, D.C.: July 3, 2013). 

4

The Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act) introduced 

many changes intended to strengthen the future solvency of NFIP. In particular, the act 

eliminated subsidized premium rates for several types of properties. However, certain 

changes were delayed by provisions in the Consolidated Appropriations Act, 2014. For 

more information on subsidized properties, see GAO, Flood Insurance: More Information 

Needed on Subsidized Properties, GAO-13-607 (Washington, D.C.: July 3, 2013).

5

GAO regularly reports on government operations that it identifies as high risk. For the 

most recent high risk report, see GAO, High-Risk Series: An Update, GAO-13-283

(Washington, D.C.: Feb. 2013).
Appendix III: Information on the Citizens 

Property Insurance Corporation

Page 35 GAO-14-179 Homeowners Insurance

Established in 2002, Florida Citizens Property Insurance Corporation 

(Citizens) is a not-for-profit and tax-exempt government entity that 

provides property insurance to homes and businesses that cannot get 

coverage in the private sector.1 It consolidated two residual market 

mechanisms: the Florida Windstorm Underwriting Association (FWUA), 

created in 1970 to provide high-risk, windstorm, and hail residual market 

coverage in select areas of Florida, and the Florida Residential Property 

and Casualty Joint Underwriting Association (JUA), created in December 

1992 following Hurricane Andrew to provide residual market residentialproperty multiperil insurance coverage, excluding wind if the property was 

within FWUA-eligible areas. A primary driver for the merger was that the 

combined entity obtained federally tax-exempt status, allowing it to save 

federal income taxes that otherwise would have been paid by FWUA and 

JUA.2 As an integral part of the state rather than a private insurance 

company, Citizens is also able to issue tax-exempt post-event bonds and 

taxable pre-event bonds, which can help finance loss payments in the 

event of a major disaster.

Florida law determines the standards Citizens uses to establish its 

premium rates. Citizens’ rates are required to be actuarially sound, but at 

the beginning of 2007, an approved rate increase was rescinded and rate 

levels were frozen by the Florida legislature at the 2006 rate levels. The 

rate freeze remained in effect through December 31, 2009. On January 1, 

2010, Citizens began implementation of a statutorily required path to 

achieve actuarially sound rates over time. Except for sinkhole coverage, 

the path limits annual rate increases to 10 percent for any single policy 

issued by the corporation, excluding coverage changes and surcharges.

According to Citizens officials, Citizens’ rates are moving towards 

actuarial soundness, but are not yet there.

Citizens allocates approximately 18 percent of every premium dollar it 

collects to pay hurricane and catastrophe claims, but in the event that 

losses exceed its surplus, it is required by statute to levy assessments to 

recover the deficit. Assessments can be charged in up to three tiers, 

 

1

State government insurance programs, like Citizens, have typically been created after 

disasters because homeowners insurance coverage for catastrophic events is often not 

available from private insurers at prices deemed affordable by state legislators and 

insurance regulators. 

2

The merger also resulted in some overhead cost savings by having a single organization. 

Appendix III: Information on the Citizens 

Property Insurance Corporation
Appendix III: Information on the Citizens 

Property Insurance Corporation

Page 36 GAO-14-179 Homeowners Insurance

policyholder surcharge, regular, and emergency. Each additional tier is 

charged only if the level before is insufficient to eliminate Citizens’ deficit. 

Citizens’ policyholder surcharge is the first tier of assessments and can 

be levied one time for up to 45 percent of the policyholder’s premium in a 

single year. If a deficit remains in one of Citizens’ three types of accounts, 

Citizens can levy regular assessments of up to two percent against 

certain private insurance companies, who can then pass the cost of these 

assessments on to their policyholders.3 Finally, if a deficit persists, 

Citizens can impose an emergency assessment on both Citizens and 

non-Citizens policyholders.4 This ability to levy assessments provides 

Citizens with resources to pay claims to policyholders. For example, 

following the 2004 storms, Citizens had to levy over $515 million in 

regular assessments to fund its deficit.

Citizens’ resources also come from its reinsurance arrangement with the 

Florida Hurricane Catastrophe Fund (FHCF). Established in 1993 by the 

Florida legislature, FHCF is a state-run reinsurer created to provide 

additional insurance capacity and help stabilize the property insurance 

market by reimbursing insurers for a portion of their catastrophic 

hurricane losses. As a tax-exempt entity, FHCF can accumulate premium 

payments on a tax-free basis. If the revenue generated from premiums is 

insufficient following a loss event, FHCF, like Citizens, is required by state 

law to levy assessments on a broad base of property/casualty insurance 

lines to fund revenue bonds to pay the losses. For example, FHCF issued 

bonds in the amount of $1.35 billion in 2006 and $625 million in 2008, 

which are being financed by a 1 percent assessment levied on 

property/casualty insurers in the state.

As of October 2013, Citizens had more than 1.2 million policies in force, 

most of which were homeowners policies. According to a Citizens official, 

Citizens has recently engaged in depopulation efforts by seeking ways to 

 

3

Citizens has three types of internal accounts: Personal lines account (for personal 

residential policies); Commercial lines account (for commercial residential and 

nonresidential policies); and Coastal account (for personal residential policies and 

commercial residential and commercial nonresidential policies issued by Citizens which 

provides coverage for the peril of wind on risk that is located in areas eligible for coverage 

by the Florida Windstorm Association). The regular assessment is only applicable to the 

coastal account, and can be levied on private-market policyholders, including but not 

limited to homeowners, auto, and specialty and surplus lines policies.

4

This assessment can be charged at a rate of up to 30 percent of premium (up to 10 

percent per account with a deficit) per year until any remaining deficit is eliminated. 
Appendix III: Information on the Citizens 

Property Insurance Corporation

Page 37 GAO-14-179 Homeowners Insurance

return policies to the private market, but these efforts have been met with 

challenges. For example, Citizens has faced challenges with establishing 

rates higher than those available in the private market. The insurance 

distribution process is also a challenge. For example, according to a 

Citizens official, private insurers that decline to sell a homeowner a policy 

may refer that homeowner to Citizens instead of recommending they 

shop the market for coverage, which has impeded a freely competitive 

insurance market.
Appendix IV: Information on the California 

Earthquake Authority

Page 38 GAO-14-179 Homeowners Insurance

Established in 1996, the California Earthquake Authority (CEA) is an 

instrumentality of the state that sells earthquake insurance policies for 

residential property throughout California. CEA is a publicly managed, 

privately funded entity. After the Northridge Earthquake that struck the 

San Fernando Valley in January 1994, insurers in California began to limit 

their exposure to earthquakes by writing fewer or no new homeowners 

insurance policies.1 In 1995, California lawmakers passed a bill that 

allowed insurers to offer a reduced-coverage earthquake insurance 

policy. In offering earthquake coverage, insurance companies can 

manage the risk themselves, contract with an affiliated or non-affiliated 

insurer, or become a CEA-participating insurance company and offer 

CEA’s residential earthquake policies. CEA is the largest earthquake 

insurer in California, with approximately 840,000 policies in force as of 

2011, which represent approximately 70 percent of the residential 

earthquake insurance policies in the state. 

CEA offers a basic residential earthquake policy to homeowners, which 

includes coverage for the insured dwelling and limited coverage for 

contents and loss-of-use if the residence is uninhabitable due to an 

earthquake. For an additional premium, CEA policyholders can 

significantly increase insured limits on contents and for loss-of-use, and 

homeowners can lower their CEA policy deductible from 15 percent to 10 

percent.2 CEA coverage is available to homeowners only from the 

insurance company that provides their residential property insurance and 

only if that company is a CEA-participating insurance company. 

Participating insurance companies process all CEA policy applications, 

policy renewals, invoices, and payments and handle all CEA claims.

In determining premium rates, CEA is required by law to use the best 

science available and is permitted by law to use earthquake computer 

modeling, to establish actuarially sound rates. CEA will examine rating 

factors, such as the rating territory (determined by ZIP code), age, and 

 

1

California insurers had collected $3.4 billion in earthquake premiums in the 25-year 

period prior to the Northridge Earthquake and paid out more than $15 billion on Northridge 

claims alone.

2

In July 2011, the “Homeowners Choice” product was approved and became available to 

consumers beginning July 1, 2012. According to CEA information, this product enhances 

availability and affordability as it offers more choice in coverage options and allows 

consumers to manage their residential earthquake insurance premium.

Appendix IV: Information on the California 

Earthquake Authority
Appendix IV: Information on the California 

Earthquake Authority

Page 39 GAO-14-179 Homeowners Insurance

type of construction of a home, in determining the premium rate.3 The 

CEA governing board establishes premium rates, subject to the prior 

approval of the Insurance Commissioner. In 2011, for example, a request 

for a 12.5 percent average statewide rate decrease was approved 

beginning with new and renewal policies that became effective on and 

after January 1, 2012. The change was a result of a reduction in the 

estimated average annual loss, as derived from new scientific 

information, according to CEA information. Given that the rate decrease is 

expressed as an average statewide rate impact, individual policyholders 

may have seen their rates increase or decrease, depending on CEA 

product, location of the risk, and other rating factors.

CEA is funded principally from policyholder premiums, contributions from 

and assessments on participating insurers, returns on invested funds, 

borrowed funds, and reinsurance. Assessments on participating insurers

may not be directly passed through to policyholders. CEA is authorized to 

issue bonds, and may not cease to exist so long as its bonds are 

outstanding. As of 2012, CEA had approximately $10.2 billion in claimspaying capacity, but if an earthquake causes insured damage greater 

than CEA’s claims-paying capacity, then policyholders affected will be 

paid a prorated portion of their covered losses or may be paid in 

installments. 

 

3

CEA applies a 5 percent premium discount to dwellings that meet the following 

requirements: the dwelling was built before 1979, the frame is tied to the foundation, it has 

cripple walls braced with plywood or its equivalent, and the water heater is secured to the 

building frame.
Appendix V: GAO Contact and Staff 

Acknowledgments

Page 40 GAO-14-179 Homeowners Insurance

Alicia Puente Cackley, (202) 512-8678 or cackleya@gao.gov

In addition to the contact named above, Paul Schmidt (Assistant 

Director); Emily Chalmers; Alma Laris; Marc Molino; Erika Navarro; Steve 

Ruszczyk; Jessica Sandler; and Andrew Stavisky made key contributions 

to this report.

Appendix V: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(250697)
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