ACIC: Legislation Would Drive Up Homeowners Insurance Costs

May 4, 2004

Pending legislation purported to be pro-consumer would in fact hurt consumers by mandating insurance practices that in the long run would drive up the cost of homeowners insurance, according to the Association of California Insurance Companies.

“The package of bills, dubbed the ‘Homeowners’ Bill of Rights’ by the insurance commissioner, are an ill-advised attempt to quash what have been long-standing, proven business practices that benefited policyholders over the years in California and throughout the country,” ACIC President Sam Sorich said.

On May 5, legislative committees will consider several bills that are part of the package. Two – SB 1474 and SB 1855 – will be heard in the Senate Insurance Committee and one, AB 2962, will be before the Assembly Insurance Committee.

SB 1474 by Sen. Martha Escutia (D-Los Angeles) would require insurers to accept and retain applicants and policyholders with extraordinary high loss frequency. A similar bill, SB 1323, has been authored by Sen. Deborah Ortiz (D-Sacramento).

“The provisions of these bills, if enacted, would come at the expense of other policyholders, requiring those with no claims, or infrequent claims, to pay higher rates to subsidize those policyholders with multiple claims,” Sorich said.

“It should be noted that insurers turn down very few applications for insurance and, while the numbers vary by insurer, once written, approximately 97 percent of homeowner policies are renewed each year. These numbers would indicate that insurance is readily available in the state and that it is unnecessary to mandate acceptance and retention of those with multiple claims,” he added.

Sorich noted that “guaranteeing” multiple claims would be a disincentive for policyholders to take steps to prevent losses to their property.

SB 1323 also has a provision that would prohibit the use of credit-based insurance scores, a practice authorized under the federal Fair Credit Reporting Act. The National Conference of Insurance Legislators (NCOIL) has adopted a model law that regulates how insurers may use credit information. Many states have enacted versions of the NCOIL model.

“Credit-based insurance scores have been proven to be an accurate predictor of future loss and the use of this tool by insurers benefits a majority of consumers who maintain a good credit history. Insurers should be allowed to use this tool in their underwriting and rating practices,” Sorich said.

AB 2962, sponsored by Assemblywoman Fran Pavley (D-Agoura Hills), would attempt to change the definition of actual cash value – the cost of an insured item minus depreciation.

In one provision, AB 2962 would change the definition of actual cash value to prohibit insurers from depreciating, or deducting labor costs for an insured loss. If that change becomes law, premiums for homeowner policies would dramatically increase to cover the significant change in coverage.

“When depreciation is warranted, depreciation logically applies to the entire repair job which includes labor. A prohibition against depreciating labor cost would increase the cost of insurance for homeowners,” Sorich said.

SB 1855 by Sen. Dede Alpert (D-San Diego): This bill would impose new disclosure requirements on insurers.

For instance, the bill would require insurers to provide a disclosure statement with a cost comparison of each of the different categories of coverage offered by the insurer. This would require insurers to print a lengthy notice ultimately at considerable cost to the policyholder.

The bill also would require insurers to be responsible for the full replacement cost of a home in the event of a loss if the insurer fails to mail all disclosures mandated in the bill.

“This section in and of itself would create incredible uncertainty in the marketplace since it is not possible for insurers to set premiums on losses they cannot predict,” Sorich said.

Was this article valuable?

Here are more articles you may enjoy.