Unlimited FAIR Plan coverage may fade

The Massachusetts FAIR Plan would no longer have to provide unlimited replacement coverage for hurricane-damaged homes under legislation wending through the State House.

The reduction in coverage is one of several features of legislation that attempts to revise the publicly created FAIR Plan, after state regulators in May rejected its most recent request for double-digit rate increases. The FAIR Plan in 2006 had increased Cape and Islands premiums by 25 percent to cover the rising costs of insuring an area that is prone to storm damage.

Nearly two-thirds of the FAIR Plan's policyholders on Cape Cod and the Islands, some 39,000 homeowners, purchase additional coverage, called unlimited replacement cost, which offers protection from unexpected increases in building materials and other costs. These policies, which are available to all FAIR Plan policyholders, essentially guarantee that the insurer would pay to rebuild a home, up to $1 million.

FAIR Plan can drop that unlimited coverage under a bill that was approved by the state Senate last week. The legislation also clarifies how the insurer can charge higher rates for homes closer to the water and for second homes, by giving explicit approval to the state insurance commissioner to adopt differential rates. Another measure would freeze FAIR Plan's rates until March 2009, though it is unclear whether the insurer could gain permission for higher premiums before then anyway.

In the House, Representative Ronald Mariano, chairman of the Joint Committee on Financial Services and a Democrat of Quincy, said he hopes to vote on a version of the bill by the end of July.

Lawmakers said the aim of the legislation is to reduce the potential costs of a catastrophic hurricane to the FAIR Plan, which became the largest carrier on Cape Cod, Martha's Vineyard, and Nantucket after private insurance companies fled that market a few years ago. The plan insures some 150,000 homeowners statewide. The median FAIR Plan basic policy coverage is for $263,000, at a cost of $1,555, not including additional coverage.

FAIR Plan officials did not return calls seeking comment yesterday.

The legislation has created divisions.

Steve D'Amato, a consultant to the Center for Insurance Research in Cambridge, said some FAIR Plan customers may find they do not have enough coverage to rebuild their homes after a hurricane if the legislation passes.

"How is it proconsumer to tell people an option they currently have is being eliminated?" D'Amato said. The bill is "masquerading as a proconsumer bill" and it will eliminate the momentum to pass further insurance reform later, he said.

Senator Robert O'Leary, a Democrat from Barnstable, opposes eliminating the coverage because that would provide fewer options to consumers.

Homeowners would still be able to purchase other levels of additional coverage from the FAIR Plan. In those cases, homeowners can pay extra for protection against either a 25 or 50 percent increase in rebuilding costs over their basic coverage.

Charles Robinson, president of Rogers & Gray Insurance Agency of Cape Cod, said it would not hurt consumers, because extra coverage will still be available. Unlimited coverage, he said, "is unnecessary."

Mariano favors ending FAIR Plan's unlimited replacement coverage on the grounds that many policyholders are "over insured." The unlimited coverage exposes the FAIR Plan to excessive risks, he said, and by eliminating it, the plan would "not need as much reinsurance." Reinsurance, which is insurance for insurance companies, became more expensive in the wake of Hurricane Katrina.

Unlimited replacement coverage is not widely available among private insurance companies in Massachusetts.

Another measure in the legislation seeks to end the debate over whether the hurricane models that FAIR Plan uses to calculate its rates accurately represent the risks of catastrophic storms to Cape Cod. Industry models typically reflect severe weather patterns in Florida and other tropical climes. Critics, including the Massachusetts attorney general, have said these models result in Massachusetts homeowners paying far higher premiums than are justified by the risks.

The legislation would create and fund a Center for Hurricane Research at the University of Massachusetts at Lowell, which is known for its expertise in meteorology. The center would provide analyses of the industry's models to the insurance commissioner and attorney general, to better help them assess the accuracy of the projected risks and the insurers' requests for premium increases.

"The idea is to set it up and give it some real academic credibility and some real money so it can do the job," Senator O'Leary said. With more information, he said, "the insurance commissioner can say, 'Maybe these rate requests are excessive.' "

Kimberly Blanton can be reached at blanton@globe.com.