California Insurance Commissioner John Garamendi testified before the Assembly Insurance Committee recently, discussing the impact of water damage and mold on consumers and the insurance industry. Below is the text of his testimony, in which he discusses his plans to implement a homeowners bill of rights, regulation of CLUE, and other issues affecting the industry.
Just like mold in a home, the current homeowners insurance crisis is growing into a toxic problem that threatens to envelop homeowners and the real estate industry in a debilitating sickness and worse yet, threaten the financial well-being of homeowners throughout this state. Over the past months, the Department of Insurance has witnessed a dramatic change in the homeowners insurance marketplace: in many places in this state, it is now easier to get a mortgage than homeowners insurance. Consumers who seek to file claims covered by their policies are finding that if they ‘use it,’ they can ‘lose it.’
Realtors tell us that home sales have fallen through because buyers are unable to secure homeowners insurance on the open market because the house had previous claims activity. State Farm, which insures one out of five homes in this state, is no longer writing new policies and 21st Century has completely pulled out of the homeowners market.
Between 2001 and 2002, more than a dozen insurers withdrew from the California homeowners insurance market, while many others dramatically tightened their underwriting practices. Rates have risen over the past two years. It’s increasingly difficult fro consumers to secure affordable coverage.
Does it beg the obvious to say, we are fast approaching a crisis in homeowners insurance?
We must stabilize the market, find ways to assure a healthy insurance industry and protect consumers with a homeowner’s bill of rights.
To put this in context—we do experience insurance cycles related to the economy.
During the robust economic times of the late 90s, insurers focused on increasing market share in homeowners insurance with competitive rates, but they relied heavily on very high investment returns to support the rate reductions.
The market began to tighten as the economy experienced a downturn in the first quarter of 2001. By the second quarter the Department began to see changes in the insurance marketplace overall as investment income decreased, underwriting losses continued to increase and companies began submitting requests for rate increases and coverage exclusions.
The situation worsened following the 9/11 tragedy. Investment yields continued their steep decline, and insurers were hit with capital losses and reinsurance capacity problems.
Coupled with economic downturn and 9/11 was the emerging issue of mold, as water and mold claims dramatically increased. Insurers have specifically identified water and mold claims as being responsible for the dramatic increases in their losses.
Not only have the number of claims increased, but also loss-related costs increased due to more aggressive mitigation efforts.
Mold has been around for centuries, but did not become an insurance issue until multi-million dollar jury awards gained national attention.
Over the past two years, we have received 138 filings from insurers seeking to limit or exclude mold coverage.
The Insurance Commissioner does not have clear authority to disapprove mold exclusions. However, where a requested mold exclusion has an impact on an insurer’s potential losses, I do have clear authority to require a rate adjustment and seek information on underwriting guidelines used by the company.
Nevertheless, I believe that mold has always been a covered peril when it results from a covered loss. Under the Proximate Cause Doctrine, California law requires that any loss resulting from a covered loss must also be covered by an insurer, for instance, mold resulting from covered water damage would be covered by the typical insurance policy.
Early last summer, the Department began hearing from a number of policyholders who complained they were non-renewed by their insurer for claim activity and were also unable to secure insurance on the open market.
By June of last year, the fastest growing complaint into our hotline was from consumers who either could not find affordable homeowners insurance or were non-renewed by their existing insurer.
Likewise, the Fair Plan experienced a dramatic increase in new applications for insurance from homeowners unable to find other coverage.
As the Department investigated the reasons behind insurance non-renewals, dramatic price increases and outright denials we found a clue: the Claims Loss Underwriting Exchange Database. Commonly referred to as CLUE, insurers report claims and claim inquiries to this database where information is compiled by individual claimant and property location. The information is then used to determine the potential risk a consumer or property poses.
CLUE was originally designed to ferret out fraud. I have always supported the use of CLUE for that purpose—its use in underwriting, however, is new and ominous. It must be tightly regulated.
The Insurance Commissioner does not regulate CLUE itself, but I do have broad authority to regulate the manner in which CLUE is used by insurance companies.
As if all this is not enough to enrage consumers, and even more obnoxious underwriting practice has emerged. Credit scoring.
In meetings with Insurance Commissioners from around the nation, I learned of studies done on the East Coast, which indicate that credit scoring leads to discrimination by race and income. Therefore, credit scoring can be a surrogate for redlining. I fought redlining in the early 90s and I will now too. We cannot allow redlining to exist under the cloak of credit scoring.
Does all this mean we have a crisis of affordability and availability in the homeowners market? While we may not have a crisis yet, I believe we need to act quickly to avert one.
We must have a homeowners bill of rights.
As Insurance Commissioner, I can do some of this. As legislators, you can complete the protection that homeowners need and our economic and social progress demand.
Elements of the homeowners bill of rights should include dealing with CLUE. I will issue a bulletin putting insurers on notice that they must inform consumers when they use CLUE; Federal law requires that.
Other elements include:
·Requiring insurers to allow consumers an opportunity to respond to and correct any adverse information in their report.
·Add information concerning a prior claim that was repaired.
·Prohibit insurance companies from using claim inquires as underwriting tools when no claim is filed.
·For those companies that choose to use CLUE as an underwriting tool, require them to submit a detailed report on how they intend to use it.
We need to get our arms around what is real and what is hype with regard to mold.
Legislation is on the books calling for studies by the Department of Health Services, but it is unfounded and going nowhere. Understanding this problem is critical to the home building and insurance industries as well as consumers. I believe that it is possible to obtain funding from the interested parties to fund the study.
With the information from the study, a second element can be added to the homeowners bill of rights: health standards for mold.
I will write regulations to restrict or eliminate credit scoring, however, I expect that this will be challenged. Therefore, Mr. Chairman, your bill, AB 227, to outlaw its use is the best way to add this important element to the homeowners bill of rights.
I will issue a bulletin, followed by a regulation that requires insurers to show that a substantial increase in future risk exists when a homeowner files a claim and only then can a customer be dropped or face a rate increase. This could also be a good subject for a law, as it is in other states.
Insurance companies should be required to provide consumers with information on their rights as described in new and existing laws and regulations. The California Department will also undertake efforts to provide this information.
Using the regulations I wrote in 1991 to implement Proposition 103, justified rate increases arte allowed. I recognize that costs have risen and investment income ahs fallen. It is not in the interest of consumers to have insolvent companies or force companies to leave the state. However, I will monitor and require that the average rate increases allowed are not excessive.
I will act on each of these issues, but I will not act precipitously.
We need an in-depth understanding of the problem so the solutions we design will work. We have enough information to identify the issues, but not enough to complete the solutions.
We also need to study factors that are driving homeowner rates up:
·We are initiating research to examine the role of underwriting guidelines in relation to availability and access to homeowners insurance. Our regulations will be based on information obtained in this study.
·We will also be conducting quarterly surveys of the market to track the cost and availability of insurance.
·As we study these issues, we must fully understand the dynamics of the marketplace so that our solutions address the real problems, and we must be balanced in our solutions. The marketplace is in a tenuous state; therefore, our actions should be carefully calibrated to solve the real problems that create unfair situations for consumers making insurance unaffordable or unavailable.
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