Texas Commissioner Orders Farmers to Cease Homeowners Non-Renewal

Texas Insurance Commissioner Jose Montemayor ordered Farmers Insurance Group to stop all activities related to the company’s recent announcement that it would non-renew all of its most-common homeowners (HO-B) policies in Texas until the company’s plans were clarified. In directing Farmers to cease its non-renewal plans, Montemayor suggested that the company may be in danger of violating state law if it proceeds with those plans.

Montemayor explained that clear information about Farmer’s non-renewal plans was needed to determine whether the company is in violation of state law and Texas Department of Insurance (TDI) rules. He also clearly expressed his dissatisfaction with Farmers’ move. “I have expressed to the company my strong disappointment in its action, particularly when my decision on mold-related coverage is close at hand,” Montemayor said. “I would have appreciated the common courtesy of the company’s waiting to learn of my decision before taking such an extreme action that could be detrimental to its policyholders.”

Along with Allstate and State Farm, Farmers had already stopped selling new comprehensive homeowners coverage earlier this year due to costs associated with mold claims. An outright withdrawal from the market by any one of these companies could drastically reduce capacity.

Citing increasing losses due to mold-related claims, Farmers notified its Texas agents on Nov. 9 that they could not renew HO-B policies as of Dec. 30, 2001. State law requires companies to file plans of orderly withdrawal before exiting markets. Montemayor said that Farmers must either file such a plan or clarify that it would continue issuing homeowners policies.

A TDI proposal being floated would cap mold-related claims at $5,000 per one-year policy period, but policyholders would have the option to buy additional coverage. “I fully understand Farmers’ concerns about the recent skyrocketing of mold-related losses,” Montemayor said, “but apparently they did not listen to my many calls for restraint pending my decision. I’m stunned that Farmers Insurance would consider turning their back on loyal Texas customers in these times of economic uncertainty and national crisis.”

TDI has been considering several actions aimed at shielding insurers from heavy mold-related losses. These include establishing standards and best practices for responding to water and mold claims, evaluating alternative homeowners coverage to ensure availability of such policies, and evaluating possible changes to building codes to maximize mold suppression. Montemayor intends to submit comprehensive recommendations to the 2003 Texas legislature. He had even been considering allowing carriers to exclude mold coverage altogether from their policies, for which they had initially pressed.

But according to an Independent Insurance Agents of Texas (IIAT) analysis, that may be too little, too late. The IIAT stated that perpetually increasing claims costs have already led carriers to seek exclusion of all water-related claims, primarily because of the difficulties involved in adjusting covered water claims for mold damage, which is not covered.

As stated in a company press release sent to TDI, Farmers’ plan is to offer its 600,000 affected customers “named perils” policies with “limited coverage for water damage” in place of the HO-B policy. The insurance department claims, however, that “some news media reports indicated Farmers was withdrawing completely from the homeowners market.”

According to the IIAT website, Farmers has a 20 percent market share of Texas homeowner premiums, making it the second largest property carrier in the state.

John Hageman, executive director of Farmers in Texas, explained the company’s position: “Farmers cannot ignore the losses it has suffered, and therefore decided we could no longer renew the ‘all-risk’ policy…we must limit our exposure from foundation, water, and mold claims. However, we are investigating other alternatives and are hopeful a solution will eventually emerge which will allow us to again offer broad coverage.”

The Austin American Statesman and The Dallas Morning News both reported that Farmers’ water and mold losses increased 158 percent between August 2000 and August 2001.

Mold claims this year total 8,000 so far, compared to 499 last year. Homeowner lawsuits are also a factor in the company’s decision: A state judge recently upheld a $32 million award to the Ballard family of Dripping Springs after their house was contaminated with toxic mold. Farmers plans to appeal the ruling, however, saying it properly handled the Ballards’ claim.

The company has said it will sell a more limited homeowners policy in Texas, the HO-A, which provides no coverage for water, mold, slab damage, or replacement value.

Like Montemayor, consumer groups decried Farmers’ announcement. Dan Lambe, spokesman for public advocacy organization TexasWatch, stated, “The insurance industry is trying to hold the state and innocent families hostage…This is another reflection of the serious problems in our homeowners insurance market, which are compounded by the insurance commissioner’s lack of authority and oversight over these companies.” Consumer groups also favor larger mold coverage limits, up to $15,000.

Commenting on Farmers’ decision, the Alliance of American Insurers also decried the disruption of in the homeowners market due to mold coverage issues. “The recent announcement by Farmers of its intent to cease writing a certain type of homeowners insurance policy in Texas is only the latest example of how the uncertainties over mold coverage can disrupt the insurance market, and highlights the need for action,” Alliance director of claims, Kirk Hansen, said. Hansen urged the insurance industry and regulators to act together “to bring a bring a sense of certainty as to the coverage of this peril.”

Topics Texas Agribusiness Homeowners Market