Insurance company, state reach a deal

7/20/02

Dallas-TX – On the heels of threats from the state, Farmers Insurance Co. backed away Friday from new homeowners policy restrictions tied to water and mold claims.

The conciliatory move by the state’s second-largest home insurer came as the state allowed insurance companies to begin selling homeowners insurance policies commonly used in other states, which eliminate claims for slow leaks.

These moves may signal a truce of sorts in the long-standing battle between the state, which tried to keep language in the standard insurance policy forms covering slow leaks, and insurers, who said they were facing big losses because of surging claims for water damage.

Slow leaks became a flashpoint because of the wave of claims to clean up “toxic mold.”

The policy forms are ones used nationally by insurance companies and essentially bring Texas more in line with other states, particularly when it comes to water claims.

This will allow insurers to give six policies to choose from with varying coverages. Policies with more restrictive terms are supposed to cost less. Coverage of mold claims will be sold separately.

The new forms require homeowners to be more alert to what their individual needs are, said Jim Davis, a spokesman for the Texas Department of Insurance.

“It is not just one size fits all anymore,” he said. “People have to decide what they want, what they need and what they want to pay for.”

The battle over water damage claims comes at a time when premiums are surging.

Insurers have been forced to pay out on an enormous number of claims in Texas during the past several years because of natural disasters, along with a large amount of mold and water claims.

For every dollar in premiums it has taken in, Farmers has had to pay out $2.58 in claims, spokesman Mark Toohey said.

In 1999, the company had just 12 mold claims but so far this year, there have been 10,700, “with no end in sight,” Toohey said.

Controversy erupted anew earlier this week when Farmers enacted the policy that it would not issue new homeowners coverage if there had been a water or mold claim made on the house in question during the past three years.

The insurance company also had said it would not cover homes older than 30 years unless the plumbing had been renovated.

It dropped both of those restrictions a day after Insurance Commissioner Jose Montemayor had threatened to subpoena Farmers to obtain all the company’s underwriting guidelines. He said the changes the company had made appeared to constitute unfair trade practices in violation of Texas law.

Farmers now will issue policies without coverage for slow leaks, which are known as HO-A policies, Toohey said. That coverage is acceptable to mortgage companies, he noted.

The standard policy used in Texas, which offered more extensive coverage for water damage, is known as an HO-B policy.

Toohey said the changes made Friday by the insurance company were an attempt to address concerns raised by the state, consumers and the real estate community.

“We have had a lot of calls from agents and customers and have had some discussions with the commissioner of insurance,” Toohey said.

Realtors have complained that homeowners are effectively being blocked from selling homes in some cases because prospective buyers cannot obtain insurance coverage.

Montemayor said the new policy forms developed by the Insurance Service Office also will give consumers more choices in coverage and rates. These standard forms will allow smaller insurance companies to quickly change the policies they sell.

An insurer wanting to use one of the new forms must file for approval and show it is reducing rates to reflect coverage differences between the new forms and the Texas standard policies the company has sold in the past.

Montemayor approved the ISO’s applications for six different residential property policy forms, plus 93 endorsements. Insurers that do not have their own national forms commonly use policies from the ISOs in other states.

The commissioner’s approval is predicated on information provided by the ISO that policyholders buying the new basic policy forms and endorsement can reduce their premiums from 8 percent to 39 percent compared with the cost of HO-B coverage.

Rates vary depending on the location of the home and the exact coverage offered.

This new policy does not cover losses caused by constant or repeated seepage or leakage from plumbing or appliances or by a sewer or drain backup.

The surge in homeowners rates and moves by some carriers to limit coverage in Texas has made this a hot political issue.

Gov. Rick Perry said Friday the choices approved by the Insurance Department will allow homeowners to customize coverage to meet their needs.

“Currently, Texans have the choice between very basic and very comprehensive coverage, but nothing in between,” Perry said last month in a speech previewing the new policy forms.

Perry has declined to call a special session of the Legislature to deal with the insurance crisis. According to the Texas Department of Insurance, 1.4 million homeowners policies will expire in the next five months before lawmakers reconvene in January.

In regard to the new policy forms, a spokesman for Republican attorney general candidate Greg Abbott said the Insurance Department should make sure they are written in clear language.

Abbot spokesman Jason Johnson said he had not seen the policy forms but said “if homeowners are going to pay more, they should know what they are paying for.”

Democrat Kirk Watson said the new policy forms need more scrutiny.

“We really need to be careful that we are offering real solutions to the insurance crisis facing Texas homeowners and not just lowering the bar for insurance companies,” Watson said.

The Alliance of American Insurers welcomed Montemayor’s decision to approve the new forms. Rita Nowak, assistant vice president of property/casualty, said it showed his dedication to providing affordable insurance coverage while eliminating the danger of open-ended losses.