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The Homeowner's Insurance Crisis By K. Michelle Lind Posted: April 2003 ~ Reviewed March 2006 |
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The Problem Homeowner's insurance is generally required to obtain a loan and close escrow on a home purchase. Most loan documents require homeowners to maintain homeowner's insurance for the term of the loan. However, homeowner's insurance in Arizona, as in other states, is less available and more expensive than in years past. The Consumer Federation of America reports that homeowner's insurance rates in Arizona rose 13.25 percent in 2001 and 14.82 percent in 2002. Some homes may be virtually uninsurable. The Cause The insurance industry cites some of the following reasons for the increased cost and reduced availability of homeowner's insurance:
Those most likely to be affected are:
Reports from the Comprehensive Loss Underwriting Exchange ("CLUE") C.L.U.E. tracks both the person making an insurance claim and the property on which the claim was made. This repository of information purportedly contains 95 percent of all insurance claims or claim inquiries made in the United States for a five year period. The report includes information on the cause of loss and the amount paid by the insurance company on the claim, if any. The report also contains personal information on the homeowner, such as the owner's social security number and date of birth. Obtaining a claims history report A homeowner may be able to obtain a five-year claim history at no cost by simply requesting the report from their insurance agent. In the alternative homeowners may purchase a C.L.U.E. report on their own property. Buyers may request a copy of the C.L.U.E. or claims history report from the seller, but do not have the right to order a report on a home they do not own. The C.L.U.E. report is sold by a company called ChoicePoint and currently costs $19.50. The report may be obtained by calling 866/527-2600 or online at www.choicetrust.com. Individuals may also obtain their personal insurance history from the same company. Insurance cancellations after close of escrow Some insurance companies that use information from C.L.U.E. or other insurance reporting agencies in their underwriting practices obtain a report only after a binder (contract for temporary insurance) is issued or after escrow has closed and the policy is to be issued. Thus, there have been numerous reports of homebuyers having their homeowner's insurance cancelled after closing escrow on a home purchase. An insurer can generally cancel a homeowner's insurance policy for any reason in the first sixty days after issuance. See A.R.S. § 20-1652. And once a policy is cancelled, the cost of replacement coverage can be two to three times higher than the original cost, depending on the reason for the cancellation. Simply obtaining the C.L.U.E. report or claims history does not solve the problem The underwriting practices of individual insurance companies vary and not all insurance companies use C.L.U.E. reports on both the person and the property. The companies that do use C.L.U.E. or other claims history reports evaluate the information in different ways. Therefore, simply obtaining a copy of the report will not tell a buyer how an individual insurance company will evaluate the risk of insuring that particular buyer in that particular home. AAR's response to this concern The Arizona Association of REALTORS® ("AAR") has been proactive in responding to this homeowner's insurance crisis. AAR has undertaken to educate buyers about this issue and encourage them to apply for homeowner's insurance as soon as a purchase contract is executed. The AAR Residential Resale Purchase Contract advises buyers to make inquiries and consult insurance agents during the contract inspection period. AAR's Seller's Property Disclosure Statement ("SPDS") prompts the seller to disclose any known homeowner's insurance claims regarding the home. The Buyer Advisory informs buyers about how claims history may affect their homeowner's insurance. AAR also initiated a legislative response to address these problems. Senator Barbara Leff agreed to sponsor Senate Bills 1265 and 1266, both of which have been passed by the legislature. SB 1265 requires that if an insurer uses information from an insurance support organization, such as C.L.U.E., or information from a consumer reporting agency for underwriting purposes, the insurer must obtain that information as soon as practicable and before the issuance of a binder of insurance coverage. The failure of the insurer to timely obtain the information precludes the insurer from declining insurance coverage or terminating a binder of insurance coverage based on the information. Finally, thirty days after the application for insurance coverage, no declination or termination of insurance coverage may be based on information from an insurance support organization or consumer reporting agency. SB 1265 should reduce the possibility that the homebuyer's insurance policy will be cancelled after close of escrow. However, an insurer still may decline or terminate insurance coverage based on the condition of the premises as determined through a physical inspection of the premises. SB 1266 addresses premium increases when the insurance company has suffered no loss. Homeowners have complained that their premiums were increased based upon property damage or loss when the insurer made no payments under the policy. AAR believes that a claim that results in no payment by an insurance company should not result in increased premiums to the homeowner. However, in a compromise with the insurance industry, AAR accepted the following language: "[a]n insurer shall not charge more for homeowner's insurance coverage with a single below deductible claim, not exceeding five hundred dollars in the previous three years, than it would charge for like coverage on the same property if the property had no below deductible claims." "Below deductible claim" means a claim was closed without any payment because the amount of the loss was less than the amount of the deductible provided by the policy. This legislation will become effective 90 days after the end of the current legislative session. To obtain additional information on homeowner's insurance The Arizona Department of Insurance has developed a comparison of homeowner's insurance rates to encourage consumers to comparison shop for their insurance, which may be found at www.id.state.az.us/index.html. The Department also developed a Consumers Guide to Homeowner's Insurance, which is at www.id.state.az.us/publications/Home_Owners_Guide_2003_-_web.pdf . Advice to homebuyers AAR is considering other possible actions to address these concerns and further legislation may be necessary. In the meantime, buyers should educate themselves about their insurance company's underwriting practices and shop around for a company that will best suit the buyer's needs. Further, a buyer may want to request that the seller provide the buyer with a five year claims history of the home, so any claims issues are identified early in the transaction. Finally, buyers should apply for homeowner's insurance as soon as possible after entering a contract to purchase a home. K. Michelle Lind, Esq. Michelle is general counsel to the Arizona Association of REALTORS® (“AAR”) and a State Bar of Arizona board certified real estate specialist. She serves as the primary legal advisor to the association, provides legal direction in the development of standard forms, is involved in legislative advocacy, and assists in the association’s educational efforts. Please note that this article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel. |
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