Property Insurance

Over the past couple years, significant premium increases and difficulty obtaining property insurance has become a topic of heated discussion. At the heart of many discussions is how CLUE reports are affecting the ability to obtain insurance. So where are we on this issue? Is the REALTOR® organization addressing this problem? Is the insurance industry looking at it? Is there light at the end of this tunnel? The fact is – the jury is still out. But, within this article, we’ll share with you what information we have been able to gather as well as suggestions for what you can do.

What is the problem?
Hit by a number of forces over the course of the past few years, the insurance industry in 2002 was in the midst of a particularly difficult period as insurers experienced a surge in the number and size of property casualty claims. Wildfire, flood, storm-related damage, lead paint, mold and terrorism claims all contributed to generate a negative net income after taxes for property casualty companies.

In reaction to rising claims and losses, insurers took somewhat predictable steps to limit their risk. These steps included limiting the number of new policies written, increasing premiums, instituting new policy exclusions for some hazard claims and tightening their underwriting criteria for both borrowers and properties.

On average, premiums increased 6.3 percent in 2001, 16.2 percent in 2002, seven percent in 2003 and eight percent in 2004 (estimated).

Bans on wood shake roofs, requirements for circuit breakers rather than fuses, field inspections, and mandatory repair requirements are examples of insurers’ increased attention to property condition. Examples of exclusions might include liability for dog bites and boats. These types of coverages have been removed from many standard policies and sold as riders to those who actually need it.

What is the REALTOR® organization doing?
NAR leadership created an Task Force in September, 2002. During their six month extensive study, the group found that…

Members reported problems, delays as well as sales falling through due to insurance availability or affordability problems. In some cases, inspections by insurers resulted in repair requirements as a condition of insurance that also added to the cost of a transaction.
Typically, buyers have gotten coverage, although at higher rates. In order to reduce premiums, some buyers and owners are increasing deductibles from the $100-$500 range that has been most commonly used to $1000 or more as higher deductibles can lower premiums.
Prior water damage to the property and poor credit were sited as more serious problems. In these cases, consumers had to turn to surplus line carriers like a Lloyd’s of London who are not regulated by the insurance commissioner rate-setting process and are able to offer coverage at rates that are higher and, therefore, acceptable to the insurer or to state-managed FAIR Plans.
Still more troubling were reports that new homeowners were being informed, after the close of escrow but prior to the end of the time period for which a binder is effective, that the insurer will not offer the coverage indicated in the binder. This leaves new homebuyers in the lurch — without recourse to negotiate with the seller over repairs mandated by the insurer and and stuck trying to find coverage at any cost.

The task force made a number of recommendations too comprehensive to address in this article. Of particular note was the recommendation that state associations seek legislation/regulation would limit an insurer’s ability to refuse to provide insurance coverage after the issuance of an insurance binder and/or close of escrow and legislation/regulation that requires insurance companies to file their credit-based insurance scoring methodology and formulas with the state department of insurance; and To review the complete findings and recommendations, visit REALTOR®.org and search for ‘NAR Insurance Task Force’.

So what's on the horizon?
The higher premiums and tightened underwriting criteria are not going away as insurers need to get the homeowners insurance product to pay for itself. However, rumor has it that, by the end of 2004, rate increases and underwriting criteria should stabilize (i.e. annual rate increases more acceptable and no more surprise exemptions.)

Various legislation relating to insurance underwriting has been introduced or prefiled for introduction in as many as 24 states.

The predominant underwriting issue is the use of credit ratings, or credit scores, in making underwriting decisions. Seventy-five bills introduced in 2003 related to the use of credit history. Of those bills, 29 contained outright prohibitions on using credit history in making underwriting decisions. The remaining bills either limited the types of credit information that may be used; required disclosures if credit history is used; or provided that credit history could not be the “sole” or “primary” factor in an underwriting decision.

Other underwriting bills dealt with limiting or prohibiting the use of claims made as an underwriting factor, or with administrative agency approval of premium rates or underwriting criteria.

Did you know…

At the turn of the century, insurers were only writing policies for fire insurance. Later hail, windstorm, vandalism and malicious mischief were added. In the 1950s, there arose a need for liability insurance. Back then, only 1/3 of the policies written were for liability. In the 1980s, the percentage of insurance written for liability grew to 2/3.

We have 289 licensed insurers in Ohio. Only three states (Florida, Pennsylvania and Illinois) have more carriers.

The average homeowners insurance premium in Ohio ranks 48th lowest in the country (study includes Washington D.C.) Only three states (Delaware, Idaho and Wisconsin) have lower average homeowners premiums than Ohio. The average annual homeowners premium in Ohio is $334, one-third lower than the national average of $508.

In the last ten years, insurers have had to pay out $1.14 for every dollar received in premiums. The national average is $1.06. That number jumped to $1.19 in 2002.

Although Ohio doesn’t have hurricanes, volcanoes and earthquakes, we are significantly impacted by other weather related problems.

April 2002 - tornadoes - $40 million in claims
November 2002 tornadoes - $100 million in claims
2003 winter (snow/ice) - $17.5 million in claims
April 2003 hailstorm - $150 million in claims

Home prices have actually grown faster than insurance premiums. Last year, Americans spent $130 million in renovations. Many, if not most, homeowners do not report the increase in value to their insurers. Yet when a claim is filed, they expect to be reimbursed based on the current value.

Homeowners insurance has always been a lost leader. (A loss leader is a feature product sold at a loss in order to draw customers.) Insurers were making up the loss through other lines, one of the most significant being auto insurance. However, recently new insurance companies have begun to write auto insurance only. As these companies do not need to offset other insurance products (i.e. homeowners), they can offer the auto insurance at a much reduced rate. This is one more factor which is hurting traditional insurers as the practice is taking their ‘leaders’ away, thus further reducing profitability.

What is a CLUE report?

The Comprehensive Loss Underwriting Exchange (CLUE) database records 90 percent of all insurance claims made in the U.S. The CLUE database is a service of the Choice Point. ChoicePoint is part of the Equifax credit-reporting agency. The database contains name, address, telephone number, credit report, claims history and motor vehicle report for the last five years. The company uses the information for credit scoring, claims history reporting and driving-record reporting.

The CLUE reports are not new. Insurers have been using this service for years. It’s only been in recent months/years, as insurance has been denied and premiums increased, that the CLUE reports have been attacked as a problem.

The reports should be considered a positive in the sale process as they can be used to either support or negate a property’s or individual’s position in the sale. For instance, a buyer with a high insurance score is a better risk for the seller. A property with a low claims record is a better risk for the buyer.This additional information can be useful to real estate professionals.

C.L.U.E.® reports are consumer reports, as defined by the FCRA. Only businesses or individuals with permissible purpose can access consumer reports. The FCRA requires that access to a consumer’s file be limited to those with permissible purpose (an insurance agent/underwriter) and also to the consumer (the owner of the property). Any person accessing a C.L.U.E. Personal Property report that does not have permissible purpose is in violation of the FCRA. Therefore, real estate agents may not access a report for either their buyer or seller. However, you can request a report from the property owner via their Share Online feature.

What is the Ohio FAIR Plan?

The State of Ohio created the Ohio Fair Plan program in 1968 as a way to insure property that insurance companies will not cover. However, the plan does not guarantee coverage. Properties must still meet established underwriting guidelines. The Ohio FAIR Plan is supported by all insurance companies licensed to transact fire insurance business within the state. At year-end 2001, the Ohio FAIR Plan was insuring 30,500 homes. You can apply to the FAIR Plan through any insurance agent who sells property insurance or contact FAIR Plan directly at 1-800-282-1772.

Here in Ohio...
In May of 2003, the Joint Committee on Agency Rule Review (JCARR) approved a rule which prohibits insurance companies from using a consumer’s credit score as the sole criterion for rating or underwriting personal auto and homeowners insurance policies. The new rule also requires that certain disclosures be made to consumers by insurers, including an explanation of credit report findings that can contribute to a higher rate or rejection of coverage.

What should REALTORS® do?
Get your clients involved in the insurance process early on. You are now aware that securing property insurance is not a given – it can cause serious problems, delays and even kill a transaction. Get buyers to apply for insurance immediately and follow up to ensure this is done.

Buyers Agents
consider recommending that your buyer request a CLUE report from the property owner. As the report details all claims made on the property in the last five years, not only is this information just plain informative, but it may provide the buyer with a head’s up on whether they might incur problems getting the property insured. In addition, request that the buyer provide you with a credit score report. Not only does this information help you to help them, if the buyer has a ‘good’ score, you can provide this information to the seller with a purchase contract as further proof your buyer can perform.

Sellers Agents
Consider recommending that your seller request the buyer provide a report documenting their homeowner insurance score. (See fig. 1) A ‘below average’ or ‘less desirable’ score might foretell a better than average possibility the buyer will be declined for coverage. This is critical information especially when faced with a dual offer. In addition, request that the seller provide you with a CLUE report on the property. Not only is this good information for you to have, but, if the report is positive, you can use it as a selling point in your marketing.

These suggestions are helpful if the reports are positive. Negative reports present a problem as, having gained this knowledge, you have an obligation to disclose it. Still, would you rather know or not know?

And finally, get vocal. If we ask you to contact your legislators down the road on an insurance related issue, get on the phone or keyboard and contact them.

Right now, we need you to share your insurance problems with us. We are particularly interested in any property sales transaction that was impacted by a CLUE report. Let us know by sending an email to Insurance@ColumbusRealtors.com with your name, company, contact information, date of the occurrence and details about the experience. We’ll be sure to share this with the OAR, also.

Recently, the Ohio Department of Insurance (ODI) began gathering information about how CLUE reports are being used by insurers to ascertain risk by those requesting property insurance. Their interest lies in making certain that CLUE reports are being used in accordance with Ohio law.

Should they find evidence that the reports are not being used fairly, the ODI does have the right to pursue regulatory and legislative measures which would ensure that the reports are used in keeping with Ohio law.

It was at the request of the ODI that the Ohio Association of REALTORS® request that its members share any experience you might have had where the purchase of a home was impacted by CLUE.

In January (prior to the above request from ODI and OAR), CBR posted a request on the MLS Welcome Screen asking members to email us with details of any experience where a sale transaction was stopped or impaired due to insurance. We’ll be forwarding your input to the OAR who will be sharing it with the ODI.