After Mrs. O'Leary's cow tipped over a lantern in 1871, setting the great Chicago fire, insurers developed the National Building Code. The building standards were supposed to prevent a repeat of their $168 million payout--at the time, the biggest insurance loss ever. But last winter, Hurricane Andrew reminded underwriters of a lesson they had forgotten: Poorly constructed buildings will cost them mightily--in this case, as much as 25% of the $16 billion paid in claims.
Burned twice in 121 years, insurers vow it won't happen again. Spurred by a 1992 industry study citing poor compliance and enforcement of building codes, they've started a sweeping nationwide exam of the standards--a massive undertaking requiring thousands of reviews through 1997. Inspectors began this month with evaluations in California, Texas, Florida, and Illinois. New York City, among other areas, will follow later this year.
The result could be dramatic swings in home-policy premiums. If insurers uncover poor enforcement in a community, rates for local homeowners could jump as much as 20%. Some companies hint that, in certain areas, they may stop writing coverage altogether. That, they hope, will encourage consumers to press local governments and builders to shape up. "We really have to put some pressure on the builders," says Dean C. Flesner, a vice-president at State Farm Fire & Casualty Co., who is directing the exams. "How? By making it harder to insure poorly built homes."
On the books of virtually every U.S. town, city, or county, building codes are meant to ensure that homes and commercial buildings withstand natural disasters and fire damage. But enforcement has been spotty since insurers gave up control of the rules in 1980, relying instead on independent consultants to update specifications and on local governments to enforce them.Now, billions of dollars in payouts later, the industry has discovered that many municipalities have been lax on faulty construction, devoting more resources to health and public safety. Nowhere is the problem more evident than in Dade County, Fla., where a December, 1992, grand jury report critical of lax compliance and enforcement of building codes recommended that insurers play a role in improving construction quality through code enforcement.
MAKING A LIST. Homebuilders are closely watching insurers' moves, including an incipient attempt to compile national data bases on construction companies' quality records. If a storm exposes poor construction by a builder in one area, insurers could quickly check the contractor's homes in other locales to prevent future losses.
Builders, angered by such new attention, say they're being blamed for damage caused by stronger-than-predicted storms. And they question whether the construction of existing homes can be inspected. "It's a lot of Monday-morning quarterbacking and applying standards not applicable at the time these homes were built," says Ted R. Brown, general counsel for Arvida/JMB Partners, a Florida homebuilder.
Some homeowners side with the builders. Wendy Lyn, whose home in Dade County was damaged by Andrew, fears insurers will use code grading as a penalty for storm-prone areas. "I don't know the standards that should be used," she said. "Don't put the burden on me and have me pay higher premiums." State regulators say they want to ensure that owners of well-built homes in areas with poor enforcement will be able to escape higher premiums.
Despite the potential for big rate hikes, though, most local politicians and building-code departments welcome the push to improve regulation. "This is what we've been waiting for," says Jeffrey B. Stone, city manager for St. Petersburg Beach. "It's going to bring market discipline." Indeed, areas with sound codes could be rewarded with lower rates. In that way, the system should encourage better construction, which insurers hope will mean fewer claims--and in the end, lower premiums.
The alternative: more losses for homeowners and insurers alike. "If codes are not enforced, we will have more tragedies like Andrew," says Francis A. Mancini, counsel of the National Committee on Property Insurance, the industry-funded group reviewing the building codes. And with the hurricane season starting June 1, that's history the insurance industry doesn't want to repeat.