Cancellation/Nonrenewal
Short Cuts: The Peace of Mind of Home Insurance, Unless You Use It
To Claim or Not to Claim by David Shaffer
To Claim or Not to Claim by Larry Tencer
Short Cuts: The Peace of Mind of Home Insurance, Unless You Use It
by Alina Tugend (NYT)
as posted on www.nytimes.com
Published: October 1, 2005
THERE is a saying among consumer advocates regarding homeowner's insurance: “Use it and lose it.”
It is not a phrase that insurance companies are particularly fond of. But it sums up how all too many people feel about their homeowner's insurance: if you decide to make a claim, you are in danger of being dropped.
Take the case of Colin and Gabi Baigel of Mamaroneck, N.Y., who had a policy with a company for 12 years. A few years ago, they filed a claim for a few thousand dollars when a toilet overflowed and caused some damage.
Then, last year, during the winter ice storms, they put in another smallish claim — $3,000 — for some water leaks under the roof eaves. The next thing they knew, they were getting a call from their insurance broker telling them that their policy was not being renewed because of the two claims.
“I was frankly angry,” Mr. Baigel said. “I asked the broker, 'Why didn't you tell us not to file the second claim?' And he said, 'It's not our job.'”
The Baigels finally found new insurance, with difficulty, since their claim history went on a nationwide computer system with access open to all companies.
Consumer advocates like J.D. Howard, executive director of the Insurance Consumer Advocate Network (www.ican2000.com) and a former insurance agent and claims adjuster, say such stories have a familiar ring.
“This has been a chronic problem regarding homeowner's insurance, but over the past five years, it's gotten worse, and based on consumer inquiries, taking place with long-term policyholders,” Mr. Howard said.
There have been so many complaints that lawmakers in some states, like California, have introduced legislation making it more difficult for insurance companies to drop customers upon renewal.
A number of factors have combined to create the current atmosphere.
Hurricane Andrew in 1992 was the beginning of a series of natural and man-made disasters that hit the insurance industry hard.
“Hurricane Andrew was the first time we've seen those kind of losses,” said Loretta Worters, vice president of the Insurance Information Institute (www.iii.org), a trade organization. “It was the single most expensive loss” for the insurance industry until Hurricane Katrina, she said.
Other disasters like the Northridge earthquake in Southern California in 1994 and the Sept. 11 terrorist attacks piled on.
Before Hurricane Andrew, the industry assumed losses from any hurricane would top out at about $8 billion, Ms. Worters said. In 2004, losses totaled $23 billion just from the four storms that hit Florida, and overall insurance losses totaled a record $27.3 billion for the year.
The number of people living in vulnerable coastal areas has also escalated over the years, pushing up insurance prices, Ms. Worters said. Over the last two decades, the population in coastal counties — in Florida, Texas and Virginia, in particular — grew by 33 million people, or 28 percent.
“The homeowner thinks they're paying more and getting less, but a lot of people are living in harm's way,” she said.
Then there was the mold panic, which was a turning point in the insurance industry. It made headlines in 2001 when a jury awarded $32 million (later reduced to $4 million on appeal) to a Texas family — aptly from Dripping Springs — that sued its insurance company. The family asserted that the insurance company delayed making payments to repair a plumbing leak, which led to mold infestation. That, in turn, caused respiratory and neurological damage, they said, and made their 22-room house uninhabitable.
Mold claims started pouring in — one New Yorker sued for $400 million — shaking up the insurance industry and, although the Baigels could not have known this, making insurers particularly leery of water damage claims.
Another major culprit is, of course, the economy. Back in the mid-1990's, “when interest rates were approximately 5 percent and the equity market was robust, insurance companies were able to increase their financial strength despite generating underwriting losses,” said Anthony Diodato, vice president at the A.M. Best Company, one of the largest insurance rating and information agencies.
But after 2000, when the stock market began its downturn, insurance companies could not rely as much on their investment income and capital gains to offset the losses, and needed to refocus on underwriting profitability, Mr. Diodato said.
So insurers were, as he said, “willing to eliminate policies that generated unprofitable results.”
Consumer advocates say that another factor that led to the “use it and lose it” mentality is the greater use of databases that, much like a credit report, list a customer's claims history and how many claims have been made for a property.
These databases are known as CLUE (Comprehensive Loss Underwriting Exchange) and A-PLUS (Automated Property Loss Underwriting System). Insurance companies use the databases all the time; consumer advocates say homeowners can — and should — obtain their reports to make sure their claims record is accurate.
Simply inquiring about filing a claim can be noted on your record. The Insurance Information Institute notes that “generally questions about coverage are not recorded in the database” but that if a policyholder reports damage, even if no payment is made — for whatever reason — it will show up in the file.
To get a copy of a CLUE report, which is the most prevalent type nationally, consumers can go to www.choicetrust.com. Under federal law, consumers can receive one copy of their reports at least once every 12 months; the frequency varies by state. Consumers whose insurance company uses A-PLUS can request a free copy from the carrier.
The reality is, the nature of insurance is now in flux. The time may have passed when consumers could unthinkingly put in a claim for a few thousand dollars.
“Is insurance changing — is it really just for catastrophes — in the way a lot of people's health insurance is changing?” asked Amy Bach, executive director of United Policyholders, a resource for insurance buyers (www.unitedpolicyholders.org). “If that's the case, then people should be paying less for it.”
Nationwide, the average annual homeowner's premium is now $677, up $17 from last year. And it is likely to rise again next year, because of Hurricane Katrina.
And though many consumers, like the Baigels, think that filing two minor claims within a few years is nothing, Ms. Worters said insurance companies expect an average of one claim every seven years. “So those who make more raise a red flag,” she said. Sometimes that means the company will not renew a policy after a second claim; sometimes it will raise the rate.
Those who can afford it should also avoid making any claims under $5,000. It is simply not worth the chance of a rate increase or losing a policy.
For the longer term, consumers need to look beyond price when buying a policy and find out what they will really get for their money, according to Ms. Bach. Agents serve two masters, she said: the insurance company and the customer. So they should advise consumers if it is unwise to put in a certain claim.
When shopping for a policy, do not be afraid to quiz the broker intensely.
“Give your agent a hypothetical,” Ms. Bach said. “O.K., Mr. Agent, if my pipe bursts next winter and my bathroom floods and the damage is $5,000, what will happen to my insurance? Will you jack up my rates or cancel? If they say they can't tell you, that's false. If you don't like their answer, go to another agent.”
“To Claim or Not To Claim…That is the question”
(Smart insurance decision making in the era of "Use it and Lose it")
by David Shaffer
The following are the views of Independent Insurance Agent David Shaffer, Owner, David Shaffer Mortgage & Insurance Services, Walnut Creek, CA. Mr. Shaffer was part of the working group that led to the establishment of United Policyholders in 1991:
UP: What rule of thumb can you offer for deciding when and when not to file a claim under a homeowner's policy?
Shaffer: In an ideal world, my advice would be that every time an insured event under your home insurance policy occurs, you should be able to simply turn it in. Unfortunately, over the years I have heard an earful from my clients who have faced having their home insurance coverage canceled due to claim activity.
For many years I have talked with insurance company underwriters and I have been told that their studies show that the typical homeowner has one claim every ten years. The underwriters tell me they like best those policyholders who meet this criteria and from my experience, I would say this is true. What is also true, and this is the part consumers don't appreciate, is that underwriters frown upon those policyholders who make more than one claim every ten years.
The fundamental problem here is the consumer expectation that each year he or she pays for the insurance, covered claims should simply be paid. This expectation clashes with the underwriters' position that they prefer to keep insuring those who make the fewest claims.
Here is how I believe consumers should decide when or when not to file a claim.
First, consumers must immediately wake up to the fact that for now, and until legislation or voluntary action changes things, we should simply "not claim the small stuff".
Second, take the biggest deductible amount you can afford. I represent companies that offer home insurance deductibles from $500 to $25,000. I have been recommending to my clients that small stuff is at least $5,000 or below and they should therefore consider this as the minimum deductible to carry. On a high-end policy, this typically saves $1,500 a year compared to a $500 deductible.
For many, these huge savings are not possible. I know of several large insurers who only offer up to a $1,000 deductible option. Everyone should call their agent and find out what is the maximum deductible they can get. Check with an independent agent if your current carrier can't offer you the deductible you desire. My message is that consumers need to proactively prevent small losses from happening since they are going to cover them if they do occur, pocket the savings over all of the years they will own a home, and truly view one's home insurance policy as a consumer product to cover major losses.
Can you tell your customers how their premiums will be impacted if they file a claim?
Basically one of two things will happen. First, your home insurance premiums may more than double after filing claims. From research I've learned that it appears the Department of Insurance has approved rate filings that will allow an insurance company to surcharge your home insurance for filing claims. In some ways this is a good thing. It allows an insurance company to keep renewing your policy instead of getting dropped and ending up with an inferior product at a higher cost for a few years.
The other way your premiums will be impacted if you get canceled for filing claims is that you will need to find someone willing to offer you insurance with your particular claims history. When this happens you can expect to pay a lot more in premiums and other fees, be insured by a carrier in the Surplus Lines Market, and have an insurance product that protects your home but may not be fully adequate to pay all your costs of rebuilding following a catastrophic loss.
Here's a scenario: My babysitter lets the bath overflow and the water damages our bathroom floor and dining room ceiling below. A contractor estimates the damage at $5,000. My deductible is $1,000. I filed a storm damage claim a little less than three years ago for a hole in my roof made by a tree branch and a theft claim last year for $6,000. Should I file a claim for the floor and ceiling or pay for the repairs myself?
Based upon my advice above, that consumers should "not claim" the small stuff the answer is do not make this claim. More than likely this third claim will either result in a huge rate increase for several years that will be higher than the $4,000 net received or the policy will be canceled upon the next renewal date and will be followed by higher premiums in the Surplus Lines Market for inferior coverage. This consumer also needs to shop for a company that offers deductibles above $1,000 if their current carrier does not.
Are companies using CLUE (Comprehensive Loss Underwriting Exchange) auto applications/ renewals as well as homeowners?
Yes. Insurance companies want to know as much as possible about you in order to determine the likelihood you will file a claim. CLUE is basically a huge database of every claim ever filed by you and everyone else and is one of many tools used by insurance companies to evaluate your insurability.
Is the increased use of CLUE by insurers causing problems for your customers?
Not unless they told me no claims could be recalled and the CLUE report revealed otherwise. Most admitted insurers would not accept you as a new applicant if you have been non-renewed due to claim activity. However, an insurance marketplace does exist, the Surplus Lines Market, which will provide insurance to many consumers who have been canceled due to claim activity.
When a company gets a clean CLUE report back on a new applicant it can actually help getting coverage placed with a great company at great rates.
Do the claims of a previous owner of a home count against you even if they weren't water related?
They can count against you if they have not been remedied. It may be an indication your home is likely to have more than one claim every ten years. It would also be prudent to find out why this house is having these problems before you buy it.
Do you think insurers are deliberately creating a climate where people are afraid to use their product?
This climate was created a long time ago and continues to this very day. I have never understood why insurance companies have created this "climate." I am glad it has the attention of our current insurance commissioner and I hope our legislature. Consumers need to get really organized around these issues. They also need to change their fundamental expectations about how their home insurance policy is to be used.
I think there are real simple solutions. First, companies should simply come out and explain what actions will be taken against you for filing claims against a policy at the time you are thinking about buying a policy from that company and upon each renewal. Maybe those that claim more than once every ten years should be paying a lot more than the rest of us who rarely make claims. Second, I am sure insurance companies can find a way to offer more alternatives for "higher risk" policyholders and make money at it. Finally, I think the policies are too broad given the current climate. If we can't turn in claims for the small stuff for fear of being canceled or getting huge rate increases, why not take out all the coverage built in for the small stuff such as $1,000 for coins, $2,500 for jewelry, $500 for Food Spoilage, etc? With this coverage eliminated, the premiums should be lower. In addition, the policy should have a minimum deductible of $10,000. This "catastrophic" policy should in theory, end up costing a fraction of what many of us now pay. If home insurance policies should only be used for catastrophes, they need to be redesigned with this in mind and be priced accordingly.
Consumers are paying for insurance, why can't they use it without losing it?
You can use it only once about every ten years. In fact, I can't recall any insurance company I have worked with over the past twenty years that has canceled a home insurance policy for just one claim.
Unfortunately for years, there seems to have been an unwritten policy of canceling accounts with claim activity greater than one within a certain period of time. I wish the insurance companies would address this issue in a positive way without the need for any legislation in order to change this policy in a positive way for both carriers and consumers.
But haven't premiums increased correspondingly to the increased coverage?
Yes and no. Premiums for the top of the line policies have increased but they also offer great insurance coverage for homeowners. Too often the focus is on "home insurance premiums have gone up dramatically" and no attention is being given to what a consumer is getting for those premiums being paid. Even with higher rates and higher deductibles, it is money well spent for what is given in return if you have the right policy in place.
In contrast, there are a number of companies that have had dramatic rate increases in the last few years with reduction in policy benefits. These carriers have eliminated their guaranteed replacement policies, added other restrictive language to their policies and have raised their rates while reducing total benefits paid.
How do insurers set their customers' policy limits?
Insurers use a variety of tools to set the amount of insurance on the dwelling. For very large and expensive homes, these tools include actual appraisers who are sent to your home by the insurance company to determine its replacement value.
For homes valued at insurance purposes at $500,000 or below, typically agents are given software to use which is different for every insurance company selling home insurance. There is hardly any training on how to use the software properly but it must be used to calculate the maximum amount to insure the home. The agent asks the homeowner a series of questions, enters all the answers, and hits the calculate key. The software program ends up giving you a printout of how much the home should be insured for.
Once the value of the dwelling is determined, typically the rest of the coverage is based upon a percentage of the dwelling amount and is additional coverage. Companies use 10-20% for other structures, from 25% to 100% for personal property and up to 30% for additional living expenses. There are all kinds of variations and some policies can be fine tuned more than others.
Everyone I have ever sold home insurance to has always told me they wanted to be fully covered. I can't understand why the insurance industry hasn't figured out a way to solve the problem of underinsurance.
Most homeowners need to pull out their policies and carefully review their current dwelling and other coverage limits, understand how they were determined, and change them if they are not adequate.
TO CLAIM OR NOT TO CLAIM,
(THAT IS THE QUESTION…)
An Agent's Perspective on Claims for Moderate Damage
by Larry Tencer
The phrase "use it and lose it" has been coined to describe a bad trend in the insurance world. It means if you use your insurance you will lose your insurance, or… file a claim and your rates will increase or your policy will be non-renewed. The causes of "use it and lose it" have been discussed in prior issues of What's UP http://www.unitedpolicyholders.org/newsletters/spring_03.html#hiUpdate.
For most consumers, the phrase is more hype than reality, but the problem has been serious enough to require action by some state regulators and legislators, most notably. A new California law requires insurers who non-renew policyholders to disclose their reasons and invite a response (See "CA Enacts New Ins. Protections" page 6). CA Insurance Commissioner John Garamendi issued issued emergency regulations barring insurers from using improper criteria to nonrenew customers. Insurers sued the Commissioner to keep the regulations from taking effect and won, so the Commissioner revised and reissued them and they're currently pending.
In this article UP will offer the perspective of Larry Tencer, a 29 year Farmers agent in Petaluma, CA and member and one of the Board of Directors of the United Farmers Agents Association, on factors to weigh when making the financial decision whether or not to file an insurance claim. The following is for educational purposes only and is not intended as legal advice:
UP: What rule of thumb can you offer for deciding when and when not to file a claim under a homeowners policy?
TENCER: First look at your deductible.If the total claim is less than twice your deductible, consider paying it yourself. That assumes your company charges for claims. Call your agent and ask a "what if" question. As an example you could call your agent and ask "If I have a fence or water damage claim, how would that effect my rates?" If you don't have an agent you can try calling the company's customer service line or claim center, but that can often lead to problems. I have heard horror stories of people that call their 24-hour claim centers just to ask about a possible claim and that inquiry can end up appearing on their record as a claim. That's why having an agent that you can talk to is so important today.
UP: Can you tell your customers how their premiums will be impacted if they file a claim?
TENCER: Definitely. If an agent has the company rating software he or she can plug in information and tell the customer what will happen to their rates if they submit a claim.
UP: Here's a scenario: My babysitter lets the bath overflow and the water damages our bathroom floor and dining room ceiling below. A contractor estimates the damage at $5,000. My deductible is $1,000. I filed a storm damage claim a little less than three years ago for a hole in my roof made by a tree branch and a theft claim last year for $6,000. Should I file a claim for the floor and ceiling or pay for the repairs myself?
TENCER:Here are the considerations. If you file that third claim the vast majority of companies will non-renew you and you will have difficulty finding replacement coverage, even at a much higher premium. I'm sure there are a few companies like Farmers, that will continue your policy, and just keep increasing your premiums as the number of claims increase, at least up to four, our current limit. As an example, take a 15 year old home insured for $250,000 in Petaluma with no losses and a $1000 deductible. That premium could range from $670 to $780 a year depending on available discounts. Let's use the $780 premium and look at what it would increase to with one, two, three or four losses in a three-year period. With the first claim it increases to $1160, and after the second it goes to $1330, after the third, $2300 and if there are four it jumps to $2850. I'm sure your readers can do the math. Most of your main street companies will not write a homeowner who has been canceled, non-renewed or is coming to them with one loss. While replacement coverage can be found the cost will undoubtedly be several times higher, probably require a $2500 or $5000 deductible and in some cases may only be offered by a nonadmitted company—a company not licensed or regulated by the Dept. of Ins.
UP: Are companies using CLUE (Comprehensive Loss Underwriting Exchange) auto applications/renewals as well as homeowners?
TENCER: Not on renewals but definitely on new business. Almost all the majors are. Some of the smaller players may instead require you to write a letter to your former insurance company asking them to release your claim history. see TO FILE CLAIMS OR NOT page 11 TO FILE CLAIMS OR NOT from page 1
UP: Is the increased use of CLUE by insurers causing problems for your customers?
TENCER: As mentioned earlier, the most common problem now is that most insurers won't accept new business applications if there were claims on the property within the past three years, even claims by a previous property owner.
UP: Do the claims of a previous owner of a home count against you even if they weren't water related?
TENCER: Yes. Most companies don't want to deal with it and don't care about the circumstances. I'm not saying it's right. Farmers will insure the home you are buying even if the property owner had a claim, but we'll surcharge you for that loss.
UP: Do you think insurers are deliberately creating a climate where people are afraid to use their product?
TENCER: I think insurers are trying to figure out how to make a return on their investment. If you're not collecting enough premium to cover your losses you won't stay in business long. Ever since the stock market tanked a couple of years ago, the insurance companies' haven't had the financial gains they previously enjoyed and used to offset their underwriting losses.
UP: Consumers are paying for insurance, why can't they use it without losing it?
TENCER: Insurance is indemnity - it's supposed to put you back to where you were. Today, especially with property policies, everything is done on a replacement cost basis. They provide benefits that weren't originally contemplated. It used to be everything was ACV (Actual Cash Value), now its replacement cost, so instead of getting the value of a 10 year old sofa, you now get a new one which may be several time more expensive than what your originally paid.
UP: But haven't premiums increased correspondingly to the increased coverage?
TENCER: I doubt you would find that to be the case.
UP: How do insurers set their customers' policy limits?
TENCER: Almost all insurers use some type of property Replacement Cost Estimator, generally computerized, that calculates what the minimum cost would be to replace your home. The Estimator considers such factors as the number stories, bedrooms, baths, fireplaces, size and type of garage, the type of roof, year built, etc. In addition, the Estimator factors in your zip code to adjust for the difference in labor and material costs between rural, suburban and metropolitan areas.
UP: Is there currently a "crisis" inhomeowners insurance?
TENCER: Because of CLUE, it is certainly more difficult today than it was a few years ago to get property insurance. This is especially true if CLUE turns anything up or you are buying a 30 year or older home and can't tell when certain systems, such as the heating, plumbing or electrical, have been updated. No, coverage is available, its just far more involved then it was in past years. Let me close with what I think your readers should keep in mind about insurance, forgetting all the catchy advertising slogans they hear. First you can't trade dollars with your insurance company and expect them to keep you. Secondly, insurance was developed to help offset the losses that individuals or businesses couldn't afford to pay themselves.
UP thanks Larry Tencer for providing the above answers. The Larry Tencer Insurance Agency has been serving Sonoma and Marin County customers for over 29 years, www.tencerinsurance.com.
United Policyholders is a non-profit organization founded in 1991 and dedicated to educating the public on insurance issues and consumer rights. UP publishes educational materials and serves as a resource for individual and business policyholders and residents of communities with insurance problems. UP’s Amicus Project provides information to courts of law to support policyholders’ legal rights. UP unites policyholders and their advocates by sharing information. Write to UP at 110 Pacific Ave., PMB 262, San Francisco, CA. 94111, call us at (510) 763-9740, or visit our website at www.unitedpolicyholders.org.
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