New policy in home insurance - Use it. Lose it

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http://www.siliconvalley.com/mld/siliconvalley/4534300.htm

Mon, Nov. 18, 2002

New policy in home insurance

Customers discovering if they use it, they lose it. Companies dump those

with water-damage claims

By and Fleishman

Washington Post

Andy and Robin Schneider had an unhappy surprise last Thanksgiving Day when

a pipe burst in their Washington home while Robin was preparing their turkey

dinner. But the Schneiders got a worse surprise two months ago: State Farm

Insurance, which had paid out $3,643 to repair the water damage to their

$650,000 brick Colonial, informed the Schneiders it would not be renewing

their homeowners insurance.

The reason: The Thanksgiving debacle was their second damage claim in two

years. And in the 25 years they had been State Farm customers, the

Schneiders had filed a total of three claims, one for a leak for which they

were paid $278.

There was worse to come: When they applied to other insurers, they were

turned down repeatedly, with insurers citing their claim history. In the

end, they paid $900, the annual premium on a government-mandated ``last

resort'' policy that doesn't include theft or liability insurance.

``When you find yourself in this situation out of the blue, you feel like a

pariah,'' said Robin Schneider, a 49-year-old lawyer and mother of three.

``In fact, we didn't do anything wrong. It's very depressing.''

As homeowners and insurance regulators across the country are discovering,

property and casualty insurers have declared a whole new ballgame when it

comes to whom they will insure and for how much. It's a game in which

tapping into the insurance protection they think they've paid for may toss

the insured out of the game, and many homeowners are finding out about the

new rules the hard way.

Some, like the Schneiders, expecting to routinely sign up for another year

of coverage, are being told their policy will not be renewed. Some house

hunters who have been covered for years are startled to find themselves

turned down for the routine ``insurance binder'' required to get a mortgage

on their new house. Or, perhaps worse, they get the binder but learn just

before settlement that the insurer won't continue them. And homeowners who

are kept on by their insurance company are seeing their premiums suddenly

spike.

But it's not a game: It's what industry observers are calling the worst

insurance environment in decades.

Insurance companies have never been thought of as cuddly, but the recent

scramble to dump customers based on their claim history -- in particular

their history of water-damage claims, for reasons that will become clear --

has made them seem tighter-fisted and less lovable than Ebenezer Scrooge

himself.

In many cases, insurers are shedding customers wholesale. Farmers Insurance

will not renew any policies in Texas, where it has about 700,000

policyholders. State Farm, the country's largest property and casualty

insurer, with 20 percent to 25 percent of the pot, has stopped taking on new

customers in 30 states.

Behind the hyperactivity is what insurers are calling a ``perfect storm'' of

events that led the industry to post a $7.9 billion net loss in 2001, its

first-ever net loss, according to the Insurance Services Office Inc. and the

National Association of Independent Insurers. The industry contends that

claims stemming from the events of Sept. 11, 2001, played a role, and so did

recent natural disasters and the tumbling stock market, which is where,

after all, insurance companies invest premiums and hope to earn money to pay

claims.

Although there's some debate about this, the biggest culprit seems to be

what has been called the ``new asbestos of litigation'': mold.

If ``mold hysteria,'' as the Alliance of American Insurers has dubbed it, is

triggering insurer hysteria, it's in part because of a Texas jury award of

$32.1 million to a family after their house was infested with mold. In

California, celebrities Ed McMahon and Brockovich have also been

involved in well-reportedmultimillion-dollar mold claims.

Texas, says the alliance, is where 70 percent of the country's mold claims

are being filed. But the claims are growing elsewhere, as is the cost. The

American Insurance Association said that one insurer paid a total of six

claims on commercial-property mold losses in land from 1993 to 2000. In

2001 alone, the association said, the same insurer paid 57 commercial mold

claims. The average remediation cost of the earlier claims was $9,812; the

average cost of the 2001 claims was $215,764, it said.

Another group worried about what-if scenarios is real estate agents -- for

the simple reason that if a buyer is denied insurance, for whatever reason,

the bank will deny the mortgage, without which in most cases the agent has

lost that sale. In fact, as of October, the California Association of

Realtors' statewide purchase agreement advised prospective buyers to make

obtaining homeowners insurance a condition of the sale.

The National Association of Realtors outlined a particularly apocalyptic

outcome of the monitoring of past water claims, in a statement last month:

It foresees houses whose water-claim histories make them difficult to

insure, and even whole neighborhoods lined with ``uninsurable and,

therefore, unsaleable properties.''

Is the mold problem growing, a byproduct of tighter houses and innovative

building materials, or perhaps of energetic lawyers? Do mold-induced

illnesses have any scientific backing? When it comes to insurance, the

answers don't matter: All homeowners now have a ``mold problem'' in that

they are being handled and scrutinized in ways they weren't in the past and

being held to very different standards than even a few years ago.

Take the cost of premiums. In the free-flowing 1990s, when insurers'

investments were making them fat and happy, the companies had the luxury of

setting artificially low rates to attract customers. Once the Wall Street

bubble burst, and interest rates fell, premiums began to rise. Add damage

from a few hurricanes, a tornado and the Sept. 11 terrorist attacks and a

shellshocked insurance industry suddenly decided their policyholders weren't

paying for their keep.

Insurance companies are now routinely subjecting homes and customers to

extensive background checks, using resources such as a decade-old database

called the Comprehensive Loss Underwriting Exchange, or CLUE, which contains

information on 90 percent of U.S. insurance claims, such as reports of water

leaks and burglaries.

Some unsuspecting homeowners, such as the Schneiders, say they had no idea

they could be penalized for filing claims.

``I feel sucker-punched,'' said Andy Schneider, 54, a health-care

consultant. ``If we had been told, `Don't file two claims within three

years,' we wouldn't have. We never saw it coming.''