Joe Sixpack shouldn’t have to pay for Rosie O’Donnell’s home insurance. Yet as crazy as it sounds, the House Financial Services Committee next week is expected to consider lending a helping hand to the owners of some of the most exclusive properties in the country. If bailing out homeowners with upside-down mortgages was bad, this idea is much worse because it redistributes wealth from the middle class to benefit the superrich.
Sen. Bill Nelson and Rep. Ron Klein, both Florida Democrats, introduced the Homeowners’ Defense Act. According to Mr. Klein, this proposal would “spread the risk” of natural disasters, which means mitigating his constituents’ risk by putting the rest of the country on the hook. The motive is clear, as Florida has a track record of racking up billions in damage from hurricanes. In 2004, Hurricane Charley caused $13 billion in destruction, and Hurricane Wilma’s price tag reached $20 billion the following year.
The state has attempted to tackle the problem on its own. After a number of small insurance firms went under in the wake of Hurricane Andrew in 1992, Florida introduced the equivalent of a public option for property insurance. The state-run Citizens Property Insurance Corp. has since become the largest insurer, covering $400 billion in property.
Not surprisingly, the political pressure to keep rates low has placed the system on an unsound financial footing. In the event of a major catastrophe, claims under state policies would be backed by a state re-insurance fund. This fund, according to a report released earlier this month by the nonprofit Florida TaxWatch, has just $11 billion in assets to cover liabilities that could reach $29 billion.
Mr. Klein and Mr. Nelson want taxpayers around the country to make up the difference. Their plan creates a federal reinsurance scheme for states that have a public option – that is, for Florida and California. States could borrow $200 billion to cover their claims. A “national catastrophe risk consortium” would also spread the risk among other states. Mr. Klein calls this a “private-market solution to bring down the cost of homeowners’ insurance.” It’s hardly a private-market solution when Congress would have to legislate it, and this desired outcome is exactly why the proposal should be rejected.
Eliminating or subsidizing the risk of living in disaster-prone areas only encourages development in those locations, compounding the financial hit the public would be left to absorb in the event of a hurricane. Market forces, if left to act on their own, would force homeowners to evaluate whether a beach house really is worth the risk. In addition, if builders know that Uncle Sam is going to come to their rescue, they will have no incentive to invest in costly construction techniques that harden buildings against high winds.
The worst aspect of the bill is that, in many cases, it puts federal taxpayers in the lurch for the wealthy owners of multiple properties. For example, Matt Damon’s Miami beachfront property reportedly includes nine- and four-bedroom homes worth a total of $14.3 million. Rosie O’Donnell owns a 10,000-square-foot mansion that rests on a man-made island in Biscayne Bay.
With the public already $12.8 trillion in debt, it makes no sense to lower insurance rates – at public risk – to protect celebrities.