Texas Widens Probe of Insurers

7/20/02

Dallas, TX – Texas Insurance Commissioner Jose Montemayor broadened his investigation Friday of how the major insurers use claims histories in writing new business to include Allstate Insurance Co.

Insurance department officials subpoenaed Allstate’s underwriting guidelines, Allstate officials said, and specifically requested any data referring to the age of houses and their plumbing.

On Thursday, Montemayor subpoenaed similar records from Farmers Insurance Group, Texas’ second-largest insurer. Late Friday, Farmers backed off a policy that would have denied new business to houses with water-damage claims within the past three years, or for houses older than 30 years without plumbing updated in the past decade.

Instead, Farmers said it would offer only its basic homeowner’s insurance policy, which excludes all water claims not related to weather.

In explaining the reversal, Farmers’ spokesman Mark Toohey said: “Part of this is to satisfy questions by our 2,000 agents, customers, the commissioner, and real-estate agents.”

Allstate stopped issuing policies June 3 to new customers who had filed water-damage claims in the past three years, and won’t insure properties that suffered water damage in the same time period.

Both companies claim the changes were necessary if they were going to continue accepting new customers, given mold claims that grew almost 600 percent last year.

“This comes down to being able to limit our growth rather than shutting off completely,” Allstate spokeswoman Kim Whitaker said.

But Thursday, Montemayor attacked the practice, saying Farmers Insurance Group appeared to have broken laws against “unfair trade practices.”

Although they broadened the investigation to include Allstate – the state’s third-largest insurance company – department officials declined Friday to say what laws possibly were broken.

Industry experts said they were surprised by the subpoenas, since claims history always has been a factor in writing and renewing business.

“Every company has to decide how to attract new customers and whether they want to continue to grow,” said State Farm spokesman Keith Androff. “They ought to be free to decide for themselves how to use claims.”

Androff said State Farm looks at the condition of the house, and that claim history alone doesn’t determine whether a house is insurable.

In the past, state officials have taken steps to stop the use of single factors in underwriting.

In 1991, the Legislature made it illegal to refuse to renew a policy if the property had fewer than three non-weather related claims within three years.

In the mid-1990’s, the insurance department told insurers they no longer could refuse to issue a policy due to the age of the property or the dollar value of the property.

But nationally, insurers rule out houses for single issues – including age, construction, lack of maintenance, fire department service, distance from a fire hydrant – on a regular basis.

“There’s nothing strange about using claims history or new about that,” said Robert Hartwig, chief economist of the Insurance Information Institute. “It’s no different from looking at an auto and giving more weight to the number of speeding violations you had in deciding whether to insure.”

The timing of Farmers’ announcement may be a factor in the subpoenas.

Farmers announced the change just after the recent wave of flooding that is likely to produce more water and mold claims. Farmers officials said the decision was made based on the continued rise in water-based claims.

“In 1999 we had 12 mold claims in the whole state of Texas,” Toohey of Farmers said. “In 2002, we have had almost 12,700. We’ve paid out $600 million. That’s more than any natural disaster payment we’ve ever made in the state.”

Insurers are required by law to submit rates and policy forms showing what data they collect from applicants. Allstate also had voluntarily submitted its underwriting guidelines.

These subpoenas provide the department with a chance to see exactly how each insurance company uses the data collected, Hartwig said.

“They may be using it to compare underwriting practices in the industry,” he said.