28 TAC §21.1007
The Commissioner of Insurance adopts §21.1007 concerning prohibition of the use of underwriting guidelines based on a water damage claim. The section is adopted with changes to the proposed text as published in the September 20, 2002, issue of the Texas Register (27 TexReg 8893).
The adopted section addresses prohibiting the use of underwriting guidelines based solely upon a single prior claim for water damage. It is necessary to promote the availability and affordability of residential property insurance through the application of fair and reasonable underwriting principles. The prohibition of the use of an unfair underwriting guideline based solely upon a single claim for water damage will promote availability and affordability of residential property insurance by allowing the class of applicants who have one water damage claim access to the standard insurance market. Currently, a segment of the insurers that comprise the standard residential property insurance market are declining to write residential property insurance based solely on the existence of a single prior water damage claim. Therefore, adoption of this rule will prohibit this unfair practice and allow this currently excluded group of consumers access to the standard insurance market. The department proposed §21.1007 when it became aware that certain insurance companies were rating and declining to write residential property insurance policies based on the existence of a prior water damage claim. The department questioned the need for insurers to use such a stringent guideline when water damage exposure to insurers has been significantly reduced through the offering of newly adopted policies that limit or reduce coverage for water, and the department had not been presented with data justifying the assumptions that a previous water damage claim resulted in improper repair of the damaged property or was predictive of claims in the future. The department felt that an insurer´s decision to decline to write a policy based on a previous claim for water damage rather than ascertaining the condition of the property through an inspection was unfair and should be prohibited. Declining to write residential property insurance based solely on a single previous claim for water damage is unfair to consumers because it unfairly denies the right to obtain residential property insurance to a broad class of homes and consumers. The department previously prohibited underwriting guidelines based on the age and value of homes because of the unfair nature of guidelines that broadly deny coverage to a class of homes instead of underwriting each home based on the actual condition of the property, so pursuant to the department´s statutory authority over trade practices, the department sought to prohibit the use of underwriting guidelines or rating based on a water damage claim. As a result of the department´s proposal to prohibit the use of a prior water damage claim as an underwriting guideline unless the insurer had inspected the property, data has now been presented to the department showing a relationship between the filing of prior water damage claims by an insured and the likelihood of claims in the future. However, the department contends that the use of an underwriting guideline based solely on the existence of a single prior water damage claim is unfair and constitutes an unfair trade practice. First, declining to write residential property insurance based solely upon a single claim for water damage is unfair to consumers who may be offered policies that have greatly reduced water damage coverage from that contained in the HO-B and HO-C (or in some cases limited or no water damage coverage if the policy is an HO-A). These policies with the reduced water damage coverage no longer expose insurers to the broad water damage coverage that they were previously required to offer under the promulgated policies. Since the insurers´ water damage exposure may be significantly reduced, it is unfair for insurers to continue to use a water damage claim underwriting guideline to limit access to the standard market when they have little or no water damage exposure. Second, declining to write residential property insurance based solely on a single prior claim for water damage, regardless of the type of policy being offer ed, is unfair to consumers because, instead of underwriting each home based on the actual condition of the property, this practice denies coverage to a broad class of homes and applicants. While one water damage claim may be an indication to an insurer that further underwriting investigation is needed, the use of this factor by itself to decline to write a risk is unfair to consumers because many good risks may be excluded by use of such an overly broad underwriting guideline without considering other underwriting factors. The department has also received many comments which have been helpful in assessing the use of underwriting guidelines based on a water claim. Accordingly, the department has determined that the comments and additional data justify certain changes to the text of the rule to achieve the balance of an insurer´s need to underwrite and rate adequately to reduce future exposure to water damage losses with a consumer´s need for available and affordable homeowners´ insurance. The department has revised subsection (a) of the rule by stating that the use of an unfair underwriting guideline based solely upon a single prior claim for water damage either by the consumer or on the property sought to be insured in making a decision regarding the writing of residential property insurance is prohibited and by clarifying that the purpose of the rule is to prohibit the use of an unfair underwriting guideline rather than to address unfair competition and unfair discrimination. The clause regarding inspection in subsection (a) has been deleted. The department has revised the definition of "residential property insurance" in subsection (b) to clarify the types of policies that are considered residential property insurance. The department has also revised subsection (c) to prohibit use of an underwriting guideline based solely upon a single prior claim for water damage either by the consumer or on the property sought to be insured in making a decision regarding the writing of residential property insurance. The department has correspondingly deleted the text of subsection (d) and has substituted conforming language so as not to preclude the surcharge and renewal provisions of Insurance Code Article 21.49-2B, Sec. 7. The revisions to the rule based on the comments and additional data do not introduce new subject matter or affect new persons; therefore, the department has determined that the revisions are necessary to adopt a rule that will aid in eliminating the use of an unfair underwriting guideline while promoting availability and affordability of residential property insurance.
New §21.1007 addresses the use of an unfair underwriting guideline and promotes the affordability and availability of residential property insurance by prohibiting insurers from the use of an unfair underwriting guideline based solely upon a single prior claim for water damage either by the consumer or on the property sought to be insured in making a decision regarding the writing of residential property insurance. The rule provides that failure to comply constitutes a violation of Insurance Code Article 21.21 and shall be subject to the provisions thereof. The rule also allows conformity with the surcharge and renewal provisions of Insurance Code Article 21.49-2B, Sec. 7.
Comment: Some commenters objected to the rule proposal on the grounds that the provisions of the rule exceed the commissioner´s statutory authority in that there is no specific statutory authorization for the underwriting and rating provisions of the rule. The commenters state that Article 21.21 does not authorize the commissioner to define any act to come within the statute and that its purpose is not to regulate underwriting but to prevent practices of the kind the legislature has defined in the statute, such as misrepresentation and false advertising of policy contracts, false information and advertising, defamation, boycott, coercion and intimidation, false financial statements, unfair discrimination in rates charged for life insurance, rebates, deceptive name, word, symbol, device, or slogan, and unfair claim settlement practices. The commenters also challenged the department´s authority under Article 5.33B claiming that the "Voluntary Inspection Program" has not been established by the commissioner, thus also challenging the authority under Article 5.98 which allows adoption of reasonable rules to accomplish the purposes of Chapter 5. The commenters further challenged the general rulemaking authority pursuant to §36.001 by claiming this is a restriction on the authority of the commissioner to adopt a rule "only as authorized by statute."
Agency Response: The department disagrees. Article 21.21 mandates a broad reading of the commissioner´s authority to promulgate rules, even if the particular practice has not been declared illegal by statute. Article 21.21 §1(b) states that Article 21.21 "shall be liberally construed and applied." The clear intent is to give the commissioner broad authority. Therefore, the commissioner has the authority to declare practices such as using a single water claim to decline and rate a risk to be unfair under his rulemaking authority even if the specific practice is not prohibited by statute. One of the purposes of Article 21.21 is to provide for the determination and prohibition of unfair practices in the business of insurance. If the commissioner´s rulemaking authority were limited to only those practices already prohibited by statute, the rulemaking authority would be meaningless. The department notes that based on comments and additional data presented, the department has limited the rule to underwriting only. Although the reference to an inspection has been deleted from the rule, it should be noted that Article 5.98 likewise enables the commissioner to adopt reasonable rules to accomplish the purposes of Chapter 5, which includes matters related to the Voluntary Inspection Program for which the commissioner has previously promulgated rules in 28 TAC §5.3800. The commissioner´s authority pursuant to §36.001 is the general rulemaking authority for the entire Insurance Code. Section 36.001 provides the agency with general rulemaking authority to implement, interpret or prescribe law or policy to carry out the provisions of the Insurance Code. Each article of the Insurance Code over which the department has regulatory and enforcement jurisdiction need not explicitly state that "the Commissioner has authority to adopt rules under this article." Insurance Code Article 21.21 and §36.001 together provide statutory authority to adopt these rules. Section 36.001 does not itself authorize substantive rules to be adopted by the Commissioner without a specific authorizing statute independent of §36.001. In this case, the specific authorizing statute independent of §36.001 is Article 21.21.
Comment: Commenters presented data that tended to show that a person´s prior water damage claims indicate higher future loss propensity. The analysis concerned paid claim count data from 1998 to 2001 and used the years 1998 to 2000 as a baseline. Commenters also presented statistics from loss data for the three periods ending in September 2002 that of the insureds who have incurred a single water loss during this time period, nearly 50% also had one or more additional non-water losses and of those with two or more water losses, nearly 60% had one or more non-water losses. Commenters submitted the data to show that prior water claims are an indicator of an increased propensity for future claims and therefore are appropriate for use in both underwriting and rating. The commenters suggested revisions to the rule to limit it to underwriting only and not rating, thus allowing insurance companies to rate appropriately for the risk that they are assuming. Commenters also stated that the rule´s prohibition against basing an underwriting guideline or rate on a prior water claim is too restrictive because there are many other factors that may have application to an underwriting decision to decline a risk based upon water damage claims and that insurers should be able to consider these other underwriting factors along with the water claim. Further, commenters stated that the proposed rule will require insurers to group policyholders who have filed water claims with policyholders who have not filed any water claims and that those insureds who have not had any claims will be subsidizing the rates of those who have had water claims.
Agency Response: The department acknowledges that the paid claim count data from 1998 to 2001 as presented purports to show that prior water claims tend to be predictive of the relative likelihood of future claims, and additional data received showed the likelihood of additional losses in the same time period. The department has revised the rule accordingly while at the same time preserving consumer protections regarding prohibited practices. The department´s adopted rule represents a reasonable compromise without unduly restricting an insurer´s ability to underwrite. Further, the rule is written in conformity with the surcharge and renewal provisions of Insurance Code Article 21.49-2B, Sec. 7.
Comment: One commenter presented statistics from loss data from the time period 1994-2000 that show there is a relationship between the number of claims incurred by an insured and the likelihood of claims in the future. This information was presented to substantiate the commenter´s assertion that an insured who has filed one water claim has an increased propensity for filing additional water claims in the future.
Agency Response: The department notes that the statistics and conclusions presented were based on data for claims in general and not specifically water claims. The department believes that this information is not entirely applicable to the rule since the rule specifically applies to water claims; however, the department requested and has been presented with additional data relating to water claims, which the department has considered, and has revised the adopted rule accordingly.
Comment: One commenter suggested that the costs associated with the post water damage repair inspection and the question of who is going to bear the costs of such inspections should be considered and addressed in the rule. Some commenters challenged the inspection process in general and alleged that there was not an effort to estimate the costs of compliance.
Agency Response: The department disagrees. The department notes that while the inspection part of the rule has been obviated by the revisions to the rule based on the comments and data presented, the department maintains that the costs of compliance were adequately addressed based on the rule as proposed.
Comment: One commenter stated that under current market conditions there is not enough market capacity to adequately spread the risk.
Agency Response: The department disagrees. Currently, the insurers who continue to write residential property insurance in Texas have sufficient capacity to write the homeowners policies that are needed by Texas homeowners. However, because of restricted underwriting guidelines and other limitations, the homeowners insurance that is needed may not be available. Therefore, the market problem is a lack of availability and not a lack of capacity. Additionally, the rule does not directly relate to market capacity.
Comment: One commenter stated that the rule proposal if adopted could cause additional insurers to leave the state because the restriction on the insurers´ ability to underwrite will result in poorly underwritten business.
Agency Response: The rule as adopted does not place any unreasonable restrictions on an insurer´s ability to underwrite. Under the revised rule, the insurer still has the ability to underwrite the risk, deny coverage based on reasonable justification, and surcharge policies based on actuarial analysis and justification.
Comment: One commenter stated that the rule would slow down homeowner real estate transactions because an underwriting inspection to obtain coverage would increase the time needed to complete the transaction, and further asserted that insurers do not have the staff with the specialized training that is needed to perform the underwriting inspections.
Agency Response: The department notes that a real estate transaction typically takes several weeks to complete. If insurance is sought early in the process, there would be ample time to complete the insurance underwriting inspection. Insurers typically contract out the underwriting inspections if they do not have the staff with the necessary training. The insured can contract with an outside inspector or obtain an inspection through the Voluntary Inspection Program.
Comment: One commenter stated that the real issue is not how the insurers use prior water damage to underwrite their policies but instead that the Texas policies have water damage coverage that is too broad. The commenter listed several suggestions for restricting the water damage coverage in Texas policies. The commenter also stated that Texas building codes are substandard and that mold testing and remediation firms need to be regulated.
Agency Response: The department acknowledges the suggestions, but the rule does not relate to the water damage coverage in the policy, to building codes or mold testing and remediation, but instead is concerned with insurers´ underwriting practices.
Comment: One commenter suggested that if an insurer is willing to write a policy for an applicant who has a prior water loss, the department should allow the insurer to exclude water damage coverage from the policy. The commenter also stated that if an insurer is willing to write a policy for an applicant who has a prior water loss, the insurer should be able to impose significant percentage deductibles and annual aggregate limits on water damage related losses as a condition of writing the policy.
Agency Response: The department believes that any increased risk that the class of applicants with one water damage claim represents can be adequately addressed through rating. The department has also previously approved several new homeowner policy options for the market and acknowledges the suggested options in responding to the problem of lack of availability of homeowners insurance.
Comment: One commenter questioned why the department proposed a rule to prohibit underwriting based upon past losses. The commenter further asserted that a prior water loss is indicative of the entire plumbing system being defective and thus underwriting based on a past loss is a logical underwriting process. The commenter also stated that a home with 30 year old plumbing, heating, and electrical systems is twice as great a risk for an insurer and suggests that insurers should be allowed to surcharge homes as they age. Another commenter stated that underwriting based on past losses is a logical underwriting process because people who fail to maintain their homes before a loss generally continue to fail to maintain their homes after one loss.
Agency Response: The department proposed a rule because it had come to the department's attention that certain insurers were declining to write new policies based on the existence of a prior water claim. The department was concerned that the practice of declining to write a new policy based on a water damage claim rather than ascertaining the condition of the property through an inspection would be unfair and should be prohibited. The department does not agree with the commenter´s statement that a water loss is indicative of the entire plumbing system being defective. Many types of water losses such as a water heater rupture are one time events and do not indicate a generally defective plumbing system. To make that generalization without doing an inspection of the property or without the data and actuarial analysis to support it is unfair to consumers which is exactly the reason that the rule was proposed. Regarding the commenter´s comment about the age of homes, ninety-five percent of the homeowners market is written in companies that are not rate regulated, therefore, those companies have the ability to rate based on certain factors including the age of the home and provide discounts for newer homes as long as their rates for older homes are based upon sound underwriting or actuarial principles reasonably related to actual or anticipated loss experience. Rate regulated insurers may provide premium credits based on the age of the risk pursuant to the Personal Lines Manual. The rule as adopted does not preclude an insurer´s ability to underwrite individual risks. The underwriting process should be based on sound actuarial principles related to actual or anticipated loss experience.
Comment: One commenter stated that plumbing, heating and electrical systems should be inspected by professionals licensed in each of these trades as part of the underwriting process.
Agency Response: While inspections are not required under the adopted rule, the department believes that it may be prudent to conduct an inspection of the property to ascertain the condition of the premises but not necessarily that it must be conducted only by professionals licensed in those trades. The department also believes that an adequate inspection of these systems can be done by the inspectors who are licensed through the Voluntary Inspection Program as provided under Article 5.33B of the Texas Insurance Code. In the course of an inspection conducted by a Voluntary Inspection Program inspector the plumbing, heating, and electrical systems are part of the inspection process and are listed on the residential property condition evaluation report.
Comment: Many commenters stated support of the adoption of the rule proposal. In particular, the commenters stated that a rule is needed to prevent insurers from canceling, nonrenewing, or refusing to write homeowners policies on homes that have water damage claims against the property. The commenters felt that there is no reason that water damage claims should be treated separately and that largely as a result of more limited policy forms and efforts to promote better claims practices, losses from water damage are decreasing both in frequency and severity. Several commenters also gave accounts of personal experience with denials of insurance based on water damage claims.
Agency Response: The department appreciates the support and maintains that insurers should not be allowed to use a single prior water claim to deny coverage without individually underwriting the risk. The department believes that the rule as adopted is an acceptable balancing of the interests involved.
Comment: One commenter recommended that an insurer be prohibited from using two or fewer water losses in a three year time period in making an underwriting decision. The commenter recommended that insurers be permitted to rate based on two or fewer water losses and that for new applicants or renewals that have had three or more water claims in a three year period, the insurer should have an alternative to insure the property but exclude the water damage and mold coverage for a specified period of time. The commenter also said that all underwriting decisions should be based on the property that is the subject of the insurance and not the applicant. The commenter suggested improving the Voluntary Inspection Program by making more inspectors available and allowing them to charge more than the current $50.00 fee for inspections to provide more incentive for these inspectors, and further that the homeowner should pay for the inspection and not the insurer.
Agency Response: The department acknowledges the validity of the comments and believes that the rule as adopted is an acceptable solution in this regard. The department will take into consideration the suggestions regarding improving the Voluntary Inspection Program.
Comment: One commenter supported the rule and found it to be consistent with the department´s Voluntary Inspection Program (VIP). The commenter stated that in some cases, insurers ignored the spirit and intent of the VIP by claiming to deny coverage on the basis of claims history and were not evaluating the property´s condition.
Agency Response: The department appreciates the support and believes that the rule as adopted achieves a reasonable compromise. Even though the reference to inspections has been obviated by the revisions to the rule, the department agrees with the commenter´s statements regarding the VIP as a useful tool in the property inspection and insurance process.
Comment: One commenter opposed the rule stating that it discourages the offering of broad coverage and is unfair to policyholders with no claims. The commenter further stated that the rule as proposed would significantly increase insurers´ loss experience, and there are other mechanisms to address the availability problem such as the expansion of the Market Assistance Program, the implementation of HelpInsure.com and a FAIR plan, and the planned expansion of the Texas Windstorm Insurance Association. The commenter further suggested an alternative that the rule be limited only to those writing HO-A or HO-A Plus coverage.
Agency Response: The department appreciates the comment and believes that the rule as adopted should alleviate the commenter´s concerns.
Comment: One commenter stated that the rule as proposed did not provide an explanation of how an underwriting guideline based solely on a previous claim for water damage promoted unfair competition, unfair discrimination, or was deceptive.
Agency Response: At the time that the department proposed the rule, insurers had not provided any data to support that the use of an underwriting guideline based on water damage claims history was based on sound actuarial principles. During the comment period, insurers provided data that tended to show that prior water damage claims appear to be predictive of the relative likelihood of future losses and for this reason the department no longer contends that such an underwriting guideline promotes unfair competition or unfair discrimination and further it should be noted that the department did not contend in the proposal that the targeted underwriting guideline was deceptive.
Comment: One commenter stated that the department did not provide an explanation of how the prohibition of an underwriting guideline based solely on a previous claim for water damage promoted the availability and affordability of residential property insurance.
Agency Response: The prohibition of the use of an unfair underwriting guideline based solely upon a single claim for water damage will promote availability and affordability by allowing the class of applicants who have one water damage claim access to the standard insurance market. Currently, a segment of the insurers that comprise the standard insurance market are declining to write residential property insurance based solely on the existence of a prior water damage claim. The adoption of this rule will prohibit this unfair practice and allow this currently excluded group of consumers access to the standard insurance market.
For:Office of Public Insurance Counsel; Texas Association of Realtors; Consumers Union; consumers; realtors; real estate agents.
Against with changes: National Association of Independent Insurers; State Farm Insurance Companies; Nationwide; Independent Insurance Agents of Texas; United Services Automobile Association, USAA Casualty Insurance Company and USAA Texas Lloyds Company.
Against: Allstate Insurance Company; American Insurance Association; Texas Farm Bureau Insurance Companies; Insurance Council of Texas; Travelers; FMW Insurance Agency; Chubb & Son; Alliance of American Insurers.
The section is adopted pursuant to the Insurance Code Article 21.21 and §36.001. Insurance Code Article 21.21 §13(a) provides that the Commissioner of Insurance may promulgate and enforce reasonable rules and may order such provision as necessary to accomplish the purposes of Article 21.21. The purpose of Article 21.21 is to regulate trade practices in the business of insurance by defining, or providing for the determination of, all such practices in this state which constitute unfair methods of competition or unfair or deceptive acts or practices and by prohibiting the trade practices so defined or determined. Article 21.21 §1(b) provides that Article 21.21 shall be liberally construed and applied to promote its underlying purposes as set forth in §1 of Article 21.21. Article 21.21 §3 provides that no person shall engage in this state in any trade practice which is defined in Article 21.21 as, or determined pursuant to Article 21.21 to be, an unfair method of competition or an unfair or deceptive act or practice in the business of insurance. Insurance Code §36.001 authorizes the Commissioner of Insurance to adopt rules for the conduct and execution of the duties and functions of the Texas Department of Insurance only as authorized by statute.
§21.1007. Prohibition of the Use of Underwriting Guidelines Based On A Water Damage Claim.
(a) Purpose. The purpose of this section is to prohibit the use of an unfair underwriting guideline based solely on a single prior claim for water damage either by the consumer or on the property sought to be insured in making a decision regarding the writing of residential property insurance and through this prohibition to promote the availability and affordability of residential property insurance.
(b) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.
(1) Residential property insurance--Insurance against loss to real or tangible personal property at a fixed location provided in a homeowners policy, a tenant policy, a condominium owners policy, or a residential fire and allied lines policy.
(2) Underwriting guideline--A rule, standard, marketing decision, guideline, or practice; whether written, oral, or electronic; used by an insurer or its agent to bind, accept, reject, cancel, or limit coverages made available to classes of consumers.
(3) Consumer--The person making the application to insure a property and includes both existing insureds and applicants for insurance.
(c) Prohibition.
(1) An insurer shall not use an underwriting guideline based solely upon a single prior claim for water damage either by the consumer or on the property sought to be insured in making a decision regarding the writing of residential property insurance.
(2) The failure to comply with this subsection constitutes an unfair trade practice in the business of insurance in violation of the Texas Insurance Code Article 21.21, and shall be subject to the provisions thereof.
(d) Nothing contained herein shall preclude an insurer from the surcharge and renewal provisions of Insurance Code Article 21.49-2B, Sec. 7.