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December 4, 2002 - LOS ANGELES 12/04/2002 (BestWire)-California regulators have been investigating homeowners insurers with a suspicion that they might have caused an artificial availability crisis in the state. A hearing has been scheduled for Dec. 4 to discuss the issue.
State Sen. Jackie Speier, who chairs the Senate Select Committee on Government Oversight, has invited State Farm, Allstate and Farmers--the three top homeowners insurers in the state--to the hearing. Insurance Commissioner Harry Low brought the issue to the senator's attention, said Nanci Kramer, a spokeswoman for the Department of Insurance.
The department is concerned that insurers might be using a database called Claims Loss Underwriting Exchange, or CLUE, inappropriately, she said. The database is meant to share fraud-related information among insurers, but regulators suspect it might have been used to create an availability crisis.
Last spring and in the early summer, the department began receiving an increasing number of calls from consumers that their insurance companies had nonrenewed their policies for having as little as one water-related damage claim, and that they were subsequently turned down by several other companies. Some consumers even complained that they were nonrenewed for simply calling their insurance company to ask whether water damage was covered.
In addition, the state's insurer of last resort, the Fair Access to Insurance Requirements Plan, has seen a 50% increase in applications, Kramer said. In the past, the FAIR plan received about 300 applications a week, but the number has grown to 300 a day. One day, the plan received 900 applications. Consumers also are staying in the plan longer than they had in the past, with an 86% increase in retention, she said.
It appears insurers have been logging information about water damage claims in the CLUE database, Kramer said. Insurers might be moving toward not insuring anyone with a water damage claim, and they might be using the database as a marketing or underwriting tool to screen out certain consumers, she said. Although a majority of companies have filed for mold exclusions or limitations, attorneys have said the exclusions don't protect the companies from litigation, Kramer said.
Another concern is that consumers aren't being told they were nonrenewed because of a CLUE report or that their water-damage claims are being tracked.
Although the department is looking into all homeowners insurers, regulators understand that State Farm, Allstate and Farmers hold about 58% of the market in the state, Kramer said.
"We welcome (the investigation)," State Farm spokesman Bill Sirola said. "We've been asked to testify, and we're going to cooperate with the investigation. We have high hopes it will be factual and rational, and not just a political event." He said representatives of CLUE also would be testifying.
State Farm uses CLUE to verify past claims records, he said. Although it's been available for about 10 years, State Farm has been using it for about eight years. He also added that about 85% of insurers use CLUE as an anti-fraud device.
Generally, State Farm has a nonrenewal rate of two-tenths to three-tenths of 1% in any given year, Sirola said, and that hasn't changed this year. The company hopes the hearing determines whether or not California really is experiencing a homeowners crisis, and if so, why additional insurance capital isn't coming in to the state to relieve the availability gap, he said.
Meanwhile, the amount State Farm has paid out for water damage has more than doubled in the past five years, but the total number of claims has gone up barely 10%, Sirola said. The increase in water-damage claims is a result of the cost of home repair, modern home design and the impact of the fear of mold, but not necessarily mold itself, he said.
State Farm has a $5,000 limit for mold remediation, but the company is experiencing water-related losses--whether or not mold is involved--that the insurer hasn't capped. State Farm has placed a moratorium on new homeowners business in California and least 16 other states (BestWire, June 21, 2002).
The top five writers of homeowners insurance in California by market share in 2001, according to A.M. Best Co. state/line data, were State Farm Group, with a 22.2% share; Zurich/Farmers Group, with 19.1%; Allstate Insurance Group, with 14%; California State Auto Group, with 5%; and Nationwide Group, with 4.2%.
State Farm Group is rated A++ (Superior) and Allstate Insurance Group is rated A+ (Superior) by A.M. Best Co.
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