Ruth Lauro has lived in her tiny New Port Richey home since Jimmy Carter was president. Today, the two-bedroom house is worth little more than the $33,500 she and her late husband paid in 1979.
Yet Citizens Property Insurance Corp. says it would cost $124,000 to replace the house — an amount that is driving up Lauro's costs of ownership to the point she fears she might have to move out.
"Since Citizens took over, it's been impossible to keep up with all the increases,'' says Lauro, who at 82 is actively looking for work. "They shouldn't be doing this to people.''
Like Lauro, many homeowners struggling to make ends meet have been examining their insurance bills and flinching at what they see: higher premiums based on replacement costs that seem way out of line with the property's market value.
Homeowners and one prominent legislative critic accuse state-run Citizens and other insurers of using replacement costs to circumvent rate caps.
"Truly this is a way for Citizens and the private companies to increase rates without having to get approval from the Florida Office of Insurance Regulation,'' says Sen. Mike Fasano, R-New Port Richey.
Citizens, which insures more Florida homeowners than any other company, insists that's not the case. "We do not have any incentive to overinsure," said spokeswoman Christine Ashburn.
To the contrary, she said, if Citizens has to pay for damage from a major hurricane, the last thing it wants to do is pay an excess amount per claim because of an inflated replacement value.
Nonetheless, Citizens has agreed to take a closer look at a small sample of Tampa Bay and South Florida homes whose replacement values it calculated with a software program called 360Value. The program was developed by the same company that Louisiana's attorney general sued in 2007 for its part in an alleged scheme to use damage-estimating software to enrich insurance companies at the expense of homeowners after Hurricane Katrina.
Though a judge dismissed the suit, questions linger about whether insurers tweak such software to help produce the financial results they want.
"I don't know what criteria goes into that software,'' says Shari Peterman, a certified residential appraiser in Pasco County. "It seems like that is their avenue to go ahead and increase coverage amount and ultimately the premiums at will.''
The dispute ratcheted up recently after Citizens told agents it would rely solely on 360Value and would no longer give weight to outside appraisals that homeowners previously used to negotiate for lower replacement estimates.
Allan Safranek III, an appraiser for Richey Realty in New Port Richey, said he understands Citizens' concerns that some outside appraisals were far too low. But the bigger problem, he said, lies with the software Citizens is using. On average, he said, he found Citizens inflated replacement costs by 25 or 30 percent, and it wasn't unusual to see cases where its estimate was 50 percent higher than his.
"Now they're not taking (our appraisals) at all. This isn't fair," Safranek said. "It's a monopoly. (Homeowners) should be given a right to use a third party to give you an evaluation."
'Out of whack'
Originally intended as insurer of last resort, Citizens has swelled to nearly 1.5 million Florida policyholders as State Farm and other private companies drop thousands of policies and shy away from writing new business.
Florida regulators have struggled for years with how to raise Citizens rates enough to pay hurricane claims without subjecting homeowners to huge rate hikes. One compromise was to cap the average rate increase for residential policies at 10 percent a year.
Based on increases approved by the Florida Office of Insurance Regulation, rates for the typical Citizens homeowners policy have risen a total of 23 percent since 2005, not including much sharper increases tied to sinkhole coverage.
Regardless of approved rate increases, however, rising replacement values could easily add hundreds of dollars or more to a homeowner's bill.
In the seven years since Lawrence Railey bought his 37-year-old, two-bedroom concrete block house in Holiday, the premium on his Citizens policy has soared from about $1,000 to nearly $4,000, he said. The latest increase prompted a call to his insurance agent, who told him Citizens put the replacement cost at $161,500 even though the market value is less than $50,000.
"Obviously their replacement cost calculator is out of whack,'' says Railey, 31, a Web developer. "I can get a brand-new, 3,000-square-foot palace built for $161,500.''
To reduce the premium, Railey is considering a higher deductible and dropping coverage for "other structures'' like fences and sheds. Citizens has automatically included — and charged for — such coverage even if there are no other structures except the house.
But Railey's agent told him to forget about getting an appraisal.
"No, Citizens doesn't accept that,'' Railey said. "It sounds like they're trying to back-door a rate increase.''
Through most of 2011, policyholders were able to challenge Citizens' replacement estimates by hiring their own appraisers. But Citizens thought some of the appraisals were coming in far too low. So the insurer first told insurance agents that the outside appraisals would be taken under consideration. Then, in November, it alerted agents that only Citizens' software would be used to establish a home's value.
The new rule of thumb for agents, Ashburn, the Citizens spokeswoman, says: If a homeowner says he already has an appraisal, Citizens will look at it. "But please do not tell them to get one." In other words, don't spend money needlessly.
Going too far?
When home prices soared in the mid 2000s, Citizens got the opposite complaint.
"Mortgage values were higher than replacement values and people were mad," Ashburn said. "People were begging us to insure the appraised value. They didn't understand. We don't insure the mortgage; we insure the structure."
Others agree that the amount of insurance coverage should not be based on market value, especially since prices have plunged so much since 2008 that many houses clearly are worth less than what it would cost to replace them.
"Just because a house is valued at $100,000 for market price doesn't mean it won't cost $200,000 to rebuild it if it's demolished in a hurricane," said Raymond Blacklidge, senior vice president of two Pinellas Park-based property insurers.
But some appraisers say Citizens goes too far.
Peterman, the Pasco appraiser, said Citizens is wrong to define "replacement cost'' as what it would take to rebuild with the "same materials and construction techniques'' used on the original house.
"That could be extremely expensive … and you couldn't do it anyway because codes change,'' Peterman said. "It's like saying you're going to go in and paint somebody's walls with lead paint. That's how ridiculous it is.''
Patrica Staebler, a certified general appraiser in Bradenton, has used Citizens-approved software as a tool in calculating replacement costs for condos and commercial properties. But in a "lot of cases,'' she said, the software contains replacement values higher than what local builders actually charge.
Citizens requires "you to calculate at 20 percent overhead and profit,'' Staebler said. "No one is working with 20 percent now.''
Complaints bubble up
Like other insurance companies, Citizens uses software programs to analyze various aspects of a home's construction and come up with an estimated replacement cost. In 2010, Citizens turned to the 360Value program offered by Insurance Services Office, awarding the company a contract worth $4.7 million over five years.
ISO is part of an industry-supported, publicly traded conglomerate called Verisk Analytics. Another Verisk subsidiary developed software that Louisiana's attorney general said was used by insurance companies to artificially hold down payouts on post-Katrina damage claims "with the intended goal of increasing'' the companies' profits.
Initially, Citizens portrayed the new 360Value program as a success. Asked by the Tampa Bay Times in early 2011 about a homeowner's and appraiser's concerns over inflated replacement estimates, Ashburn said Citizens had not received any other complaints.
As the year progressed, however, complaints continued to bubble up. Last month, Citizens announced it would review the accuracy of the 360Value software by taking a closer look at a sampling of 30 homes that had gone through the process: half in Tampa Bay and half in South Florida.
For the review, it is hiring independent contractors to inspect the homes. That's a change from the 360Value process, which doesn't require a site visit.
Peterman, the Pasco appraiser, doesn't understand why Citizens has been so resistant to outside appraisals.
"If they're saying more information is better, then why would they not want an appraiser to go out and take measurements and see the quality of construction and so forth?'' she asked. "It's no cost to (Citizens).''
In defense of 360Value, Ashburn notes that a similar software tool is used by State Farm, the largest private property insurer in Florida.
State Farm's use, though, is much more limited than that of Citizens, which is adding thousands of new policies every week. State Farm uses the estimating software primarily for customers who move inside the state and for new policies. But because it is not writing new business in Florida, relatively few policies are re-appraised.
Another big distinction: Unlike Citizens, "customers have a choice with us," State Farm spokeswoman Michal Connolly said. There are three options: Use the State Farm estimate, get a detailed contractor estimate on replacement costs, or seek an outside appraisal.
For Ruth Lauro, the high replacement cost Citizens set on her 840-square-foot Pasco home is putting pressure on an already lean budget.
Lauro and her husband, a retired detective, moved from Brooklyn to New Port Richey 33 years ago. After he died in 1999, she worked in a store at Gulf View Square mall that has since closed. Now she gets by on about $1,300 a month in Social Security, unemployment benefits and a small pension.
Lauro's house, which she shares with her son Patrick and dog Bock, is in a flood zone so her mortgage lender is requiring her to have flood insurance for the same $124,000 replacement value as in her Citizens policy. That means she will have to pay an extra $60 a month in mortgage escrow.
Right after Christmas, Lauro appealed to Fasano for help. He hired an appraiser, who calculated the replacement cost at $89,158. For the same amount, a construction company said it could build Lauro a bigger house than the one she has.
Fasano also wrote to Lauro's lender and asked it to lower the flood insurance requirement because she owes less than $20,000 on her mortgage. It has yet to reply.
In the meantime, the octogenarian keeps looking for work, ideally at the mall, "where I know all the people.'' She has to fill out 10 applications every two weeks to remain eligible for unemployment benefits.
"I'm a widow. I don't have money to throw around. I'm not happy with Citizens at all because they keep raising and raising. If I have to, I'll go to Tallahassee.''
Susan Taylor Martin can be reached at firstname.lastname@example.org. Jeff Harrington can be contacted at email@example.com.