Proposed Missouri Homeowners Fair Play Act

SB 539 - Sen. Joan Bray
HB 532 - Reps. Clint Zweifel, Dan Bishop, et.al.

Changes in the homeowners market

Nonrenewals/cancellations

After an April 2001 hailstorm inflicted $1 billion in damage, largely in north St. Louis County, the Missouri Department of Insurance began receiving a growing stream of complaints from homeowners who had received nonrenewal notices after filing claims. These types of complaints also accelerated after a major ice storm damaged Kansas City homes and businesses in January 2002 and smaller storms occurred in outstate Missouri.

Although a renewal cycle lasts an entire year, the changes in company guidelines had an immediate effect on complaints to MDI. In 2001, nonrenewal and cancellation complaints (many companies refer to nonrenewals as cancellations) on homeowners insurance totaled 59. In 2002, the total jumped to 192, or by 225 percent.

MDI now has a better gauge than simply complaints on total nonrenewals, based on new reports from insurers. Partial results (covering more than 400,000 homes) indicate nonrenewals alone increased 49 percent in 2001 and another 59 percent in early 2002. Overall, nonrenewals rates have almost tripled: 1.9 percent of homeowners in this sample were nonrenewed in the first half of 2002 - compared to only 0.7 percent for 1999.

That nonrenewal pace compares to a claims-filing rate of less than 10 percent of policyholders in 2000, the last full year of normal data before the massive 2001 storm.

An industrywide, not Missouri, pattern

Although insurers occasionally nonrenewed policyholders with excessive claims before, the past two years represents the first time in which carriers have placed homeowners generally at risk of nonrenewal for filing claims for weather-related or "Act of God" damages.

In a nutshell, persons who filed any claim - regardless of cause, such as a windstorm or tornado - were considered greater risks to file another. Some carriers automatically nonrenewed homeowners for filing a single claim (especially during the first year), indicating they based their rates on dropping anyone with claims. Other companies have discontinued coverage for homeowners who filed more than one claim in as much as 13 years; others were nonrenewing policyholders who filed their first claim after decades of business with the carrier. In general, the homeowners insurance industry appears to have adopted a minimum, de facto standard for nonrenewals ‐ or heightened review ‐ of any multiple claims in a five-year period.

These kinds of odds are daunting for all homeowners, each of whom could face the need to file a claim, particularly because of weather-related causes in Missouri. On the other hand, the relatively small number of cases - at most, less than 2 percent of all policyholders - means that reforms protecting consumers would be manageable and should not threaten insurers' operations or solvency.

Although the difficulties originally appeared to be limited to Missouri because of the massive hailstorm, other states soon had similar problems as insurers nationwide began shedding risks en masse that they considered most likely to file future claims. These higher requirements for new coverage or renewals combine with increasing rates to form what is currently known as the country's "hard" market for homeowners and other lines of insurance.

Because this type of underwriting behavior was unprecedented in Missouri, state law contains no protections for homeowners who may be nonrenewed. For example, Missouri has not enacted legal protections for policyholders who file claims, such as the storm-prone Plains states like Texas, Oklahoma and Arkansas have done.

The policyholder has no ability to influence whether a tornado or hailstorm or severe winds hits the neighborhood; they have few if any means to limit their risk. Most importantly, they are not a greater risk to the insurer for future losses; a claim for one tornado does not mean a specific policyholder is more likely to suffer damage from a future tornado or hailstorm. If a large geographic area is subject to more frequent tornados, insurers should factor that into basic rates for all homeowners, not by nonrenewing those who happen to suffer damage or by surcharging only claimants.

In surcharges and nonrenewals for weather-related claims, a policyholder is penalized for simply exercising his or her legal rights under the contract - by submitting a claim. Such renewal guidelines verge on intimidation of persons who have legitimate claims and undermine public confidence in the insurance industry.

After non-renewals

Normally, nonrenewed homeowners have little difficulty in finding coverage in 30 days, or the minimum notice prescribed by current state law. But in a "hard" market, a homeowner is hard-pressed to obtain coverage in one month, particularly if the property must undergo an inspection when agents or inspectors are available or if the first companies contacted decline.

The time squeeze is compounded if many large companies adopt guidelines that tend to bar new policies,[1] for example, for anyone with more than one claim in five years. Although insurers are prohibited by law from asking whether an applicant has been nonrenewed by another carrier, these companies file their claims data with ChoicePoint, a firm that produces so-called CLUE Reports detailing claims activity for each person and location; consequently, insurers are aware of not only the claims history of the applicant, but also of the home. Simply put, homeowners cannot escape their claims record, not matter where they seek coverage.

For homeowners forced to seek coverage in the state's homeowners pool, the 30 days notice has become even more inadequate because the pool recently has been unable to finish inspections within 60 days for many applicants; the homeowner cannot risk allowing such a large investment to go unprotected.

Alternatives to the regular market

Homeowners who cannot find coverage after nonrenewals are left with four choices - none of them desirable:

The FAIR Plan's inadequacies

When homeowners are declined or nonrenewed, state law requires that they receive notice of how to contact the FAIR Plan or Missouri Property Insurance Placement Facility.

Data for 2002 indicates that demand for FAIR Plan coverage has increased considerably in this "hard" market. For the first nine months of 2002, the number of applications for new policies increased from 1,858 in 2001 (nine months) to 3,230, or 74 percent. Nevertheless, the FAIR Plan only issued 1,560 policies to new applicants, or a 54 percent jump.

The FAIR Plan, based in St. Louis, does not provide a true market of "last resort" - i.e., it underwrites applicants and rejects homes and owners who do not meet its criteria. But in more critical areas, the FAIR Plan falls short of meeting minimum standards in the coverage it offers and the protections it provides to consumers, including:

1. The FAIR Plan does not offer coverage suitable for most homes in either of Missouri's two largest metropolitan areas - or even the state as a whole. The plan only offers maximum coverage of $100,000 for structure and contents. In St. Louis in 2000, the average home has a market value of $132,000 while the mean in Kansas City reaches $112,000, without any consideration of a family's personal effects. Statewide, the average home has a value of $111,000. In the current hard (or any) market, Missouri's last-resort insurer should have the capacity to provide coverage for the vast majority of homes.
2. The FAIR Plan does not offer true homeowners coverage with a liability component. It does not offer an earthquake endorsement, which is critical for many homes in southeast Missouri, St. Louis and the Mississippi River valley. Illinois' FAIR Plan, for example, does offer standard homeowners policies.
3. FAIR Plan policyholders do not have the consumer protections afforded homeowners in the regular market. The FAIR Plan management maintains it does not have to abide by Missouri's unfair claims and unfair trade practices acts, which govern how companies market their product and pay claims. The FAIR Plan, for example, has notified MDI that it will not replace damaged siding and roofs, such as occurred in St. Louis, using the same criteria the state requires of all insurers.
4. The FAIR Plan does not act quickly enough so that homeowners can maintain continuous coverage of their properties. Current law provides 30 days notice of nonrenewals. Consumers immediately should contact other companies for possible policies. Only then should consumers apply for the market of last resort. However, the FAIR Plan has had difficulty processing applications within 60 days of receipt, not counting the time consumers shop elsewhere after receiving notices of nonrenewals.
5. Although established to meet a public purpose, the FAIR Plan operates under the virtually total control of the homeowners insurance industry. The MDI director's ability to influence and/or control operations is murky at best, and the current management has refused to comply with MDI directives to the regulated market. The consuming public - homeowners - has no representation on the 13-member governing committee.

Other homeowners insurance inequities

An increasing number of consumer complaints involve claims that do not result in payments by the insurer. In some cases, insurers may determine that the value of the loss is less than the deductible, and carriers do incur costs inspecting and valuing the loss.

Others, however, are not "claims" as anyone understands the term. Our complaint investigations determined that these "claims" were simply inquiries by policyholders about their coverage after a loss, and they never asked for payment; in some cases, no actual damage had occurred. These inquiries do not meet current MDI regulations on what constitutes a "claim," which must include a request or demand for payment.[2]

These instances often occurred when a homeowner does not have a local agent and purchased coverage as part of the mortgage transaction. When a loss occurs, the homeowner calls the corporate office to inquire about policy coverage ‐ e.g., deductibles and insured damage. Policyholders are immediately logged as filing a claim/suffering a loss, whether or not payment is requested. They, of course, do not learn about these "claims" until they are denied renewal and question the company.

MDI, for many years, has advised policyholders to contact their agents or companies with questions about policy coverage and steps to take in the event of a loss. The agency recently has been chastised by consumers who believe they suffered by following this advice. Classifying inquiries as "claims" and then nonrenewing on that basis has a chilling effect on the policyholder's ability to find out what he/she has purchased. If policyholders fear calling with questions, they also may fail to take necessary steps to prevent further damage, for example, after a severe storm, and the company likely will refuse to make full payment.

Proposed changes in the law ‐ HB 532 and SB 539

Summary of changes

MDI supports HB 532 (Zweifel) and SB 539 (Bray) because they provide assurances that homeowners will not suffer penalties for damages accruing from "acts of God," over which they have no control. These bills also strengthen Missouri's market of last resort, so that it can provide adequate coverage for virtually all homes in the state, if need be.

As mentioned earlier, Missouri and many other states have not enacted such consumer safeguards before ‐ because they were not needed, particularly during the late 1990s when companies were aggressively competing on price for virtually all accounts. Several states prone to tornado and other wind damage, however, have taken action, including:

• Arkansas, which prohibits non-renewal because of acts of God or nature.
• Georgia, where insurance companies cannot nonrenew coverage for two or fewer claims within 36 months.
• New Hampshire, which prohibits nonrenewals because of a single valid claim in one year.
• Oklahoma, which prohibits nonrenewals for the first weather-related claim.
• Pennsylvania, which prohibits any nonrenewals based on claims.
• Texas, which prohibits companies from nonrenewing unless more than three claims are filed in three years. Companies must notify policyholders of their status after two claims.
• Utah, which prohibits insurers from nonrenewing based on inquiries.
• Virginia, which does not allow insurers to base nonrenewals solely on claims.
• West Virginia, which limits the grounds for insurers to nonrenew after the first four years of coverage ‐ a type of "loyalty" clause.

Among the changes MDI favors in state law here:

Nonrenewal and cancellation

1. Insurers could no longer non-renew or surcharge homeowners based on the filing of a weather-related claim (Sections 375.004.3 and .5) Missouri already prohibits higher rates for automobiles that have comprehensive or "act of God" coverage.
2. Insurers could no longer non-renew or surcharge a homeowner based upon an inquiry about coverage that did not result in a demand for payment of damage. (Sections 375.004.4 and .6)
3. Insurers would have to notify policyholders at least 60 days in advance for nonrenewals and cancellations (except for nonpayment of premium, which needs 10 days notice). (Sections 375.003.1 and 375.004.1)
4. Insurers could cancel a policy for physical changes in the property only if the alterations "significantly" increased the hazards insured. (Section 375.002 (4))
5. Simply citing "poor credit history, poor credit rating (or) poor insurance score" would not satisfy state law requiring "clear and specific" reasons for cancelling or nonrenewing a policy. (Sections 375.003.1 and 375.004.1)

Missouri FAIR Plan

1. The FAIR Plan's scope is expanded from only basic residential and commercial fire (plus builders' risk and vandalism) policies to the regular coverage offered by Missouri property insurers, including full-scale homeowners, commercial fire and dwelling fire with earthquake endorsements for residences and other available options. (Section 379.815 (2))
2. The maximum value insured is increased from $100,000 for residential property to $300,000 and from $1 million for commercial property to $3 million. (Section 379.825.4)
3. The FAIR Plan would have to issue an acceptance or declination within three business days after an application and inspection report are filed and issue a policy effective immediately on the date when the premium is received. (Section 379.830)
4. The FAIR Plan must make available a list of its policyholders to insurers (among others) that may have an interest in offering regular coverage. (Section 379.830.7)
5. The Department of Insurance would have 60 days to review all forms and rates before the FAIR Plan could use them. (379.840.1)
6. The FAIR Plan would abide by the state's unfair claims and unfair trade practices acts, which provide basic consumer protections for all policyholders. (Section 379.840.2)
7. The FAIR Plan would need to submit a report on the uninsurability of a property to the MDI director at least 10 days before a policy is cancelled. (Section 379.845.1(4))
8. The FAIR Plan would have to provide the policyholder with a "clear and specific" reason for cancelling or nonrenewing coverage. (Section 379.845.2)
9. The FAIR Plan governing board would expand from 13 to 15 members with the addition of two consumer members for the first time. (Section 379.860.1)
10. Rather than just insurers, the MDI director and governing board would have authority over the FAIR Plan's operations, including appointment and removal of the program's director. (Sections 379.865 and 379.870)

[1] Standards for new business typically are higher than for renewals.

[2] Division 100, Chapter 1, Improper or Unfair Claims Settlement Practices

20 CSR 100-1.010 Definitions

(1) Definitions (B) "Claim" means:

1. A request or demand for payment of a loss which may be included within the terms of coverage of an insurance policy; or

2. A request or demand for any other payment under the policy, such as for the return of unearned premium or nonforfeiture benefits.