Hawaii hurricane
fund gets windfall

Some homeowners are delaying
purchases to avoid paying $300
for insurance they can't have

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By Lyn Danninger
Star-Bulletin

If you have bought a home since December, you've put money into a state fund to provide hurricane insurance for homeowners, even though you have not been allowed to buy into the plan.

Altogether, new homeowners will have added between $2 million and $2.5 million to the fund between December and July 1, essentially subsidizing the hurricane insurance policies of homeowners who bought insurance prior to December.

Under state law, homeowners must contribute 0.1 percent of the value of a new mortgage to the Hawaii Hurricane Relief Fund -- which no longer writes hurricane insurance policies, will cease operations at the end of the year and already has $2 billion in its coffers.

The "special mortgage recording fee" -- $300 on a $300,000 mortgage -- will be eliminated July 1. That has prompted a few new-home buyers to put off closing on their houses until after that date, said Realtor Maryanne Selander, owner of Selander Realty.

"I've had two sales recently where one person in each case put off the closing until July 2," she said.

Selander questions the logic of continuing to collect a fee from people who do not have the option to purchase insurance through the fund. She also wonders why legislators, who made the decision during the past legislative session to end the fund and stop collecting the fees, refused to consider refunding fees to those who paid into the fund.

Until legislators acted this year, the entire fund was supposed to dissolve and the money revert to the state general fund. Now, according to State Sen. Ron Menor (D-Mililani), the fund will be held separately.

"Any money deposited into the fund will be kept to cover future hurricane losses," Menor said. "It will ultimately benefit consumers."

The state created the Hawaii Hurricane Relief Fund to make affordable hurricane insurance available to homeowners after 1992's Hurricane Iniki caused billions of dollars in damages to Kauai and Oahu, and private insurance companies stopped writing hurricane coverage. Without the ability to obtain hurricane insurance, mortgage transactions would have ground to a halt.

The fund gets money from three sources, said its acting executive director, Lloyd Lim: those who purchase hurricane insurance policies from it, anyone who takes out a mortgage and fees collected from private property and casualty insurers, whether they write hurricane insurance policies or not.

At one time, people who re-financed their homes were assessed the fee, but that ceased about two years ago, Lim said.

Based on the re-emergence of private companies willing to issue hurricane insurance policies, Lim said he decided in July to recommend the fund's board of directors stop issuing polices.

While about 30,000 households remain covered through the fund, those policies will terminate by the end of the year, Lim said.

Lim said the fund's board also determined that property and casualty insurers will no longer have to pay into the fund after third quarter of this year. While the fund's board was able to expediently act on the recommendation to cease writing policies and phase out those in existence, legislative action was required to terminate fees collected from new mortgages.

Over the years, premiums for hurricane insurance provided through the fund have generally been comparable to or lower than those found in the private sector, Lim said.

He concedes that the fund may have created a market distortion, which was part of the board's reasoning to phase out of the market, he says. "The board is sensitive to that fact."

But until all policy holders move to private insurance policies, it is necessary to maintain adequate funds, he Lim said.

"There's about 5 to 6 billion dollars in aggregate exposure. At its peak when there were over 160,000 policy holders, we had $40 billion in aggregate exposure," he said.

In the event of a hurricane, Lim said, the fund could begin writing policies again if necessary.

Lim said when the hurricane fund was created, the collection of the fee never had anything to do with whether a person purchased insurance from the fund.

The separate assessment was set up by statute and attached to every mortgage recorded at the state's Bureau of Conveyances, he said.

"The fee has never been tied to the question of whether you participated in the fund. It's a separate revenue stream," he said.

State Insurance Commissioner Wayne Metcalf said he believes the fund should be retained as a hedge against the next natural disaster.

But Metcalf said he would prefer to see a rainy day fund set up, something Gov. Ben Cayetano had also proposed along with an idea to use interest from the fund to create a special university scholarship program.

"It's prudent that such a reserve be retained in a rainy day fund," Metcalf said. "That would offer a greater amount of flexibility, whether its wind or rain or lava damage."

Two legislative attempts were made to refund mortgage fees paid since December, but were killed in a Senate committee.

Mary Begier, chairwoman of the legislative committee for the Hawaii Association of Realtors, was one of those who argued in favor of refunding the fees.

"Our position was that we would love to see the money refunded to people who put it in, but if not, at least stop the fund collection as soon as is practically possible," she said.

Others who opposed the fee collection and argued in favor of refunds were Senate Republicans.

Jim Henshaw, a legislative researcher for Sen. Bob Hogue (R-Kaneohe) said the big fear was that lawmakers would eventually be tempted to raid the fund. He is convinced that as long as the fund remains available to lawmakers, it will eventually be raided.

Henshaw also questions how much money is needed to support the fund through the end of the year.

"It's one of the best insured funds in the nation. But no insurer could cover the worst case scenario such as if a hurricane would hit central Honolulu," he said.

He believes it has been wrong to go on collecting money from people who have received no benefit.

"It's simply a tax. You pay money in and get no money out. At least with an insurance policy, you had the promise of coverage," he said. "This is really about politicians taxing people so they can spend the money eventually."