Effective July 23, 2003, the California Department of Insurance adopted a new regulation, on an “emergency” basis, restricting the extent to which insurers can rely upon current losses or coverage inquiries in making decisions concerning the underwriting, renewal or non-renewal of homeowners insurance policies. The new regulation, which is codified as section 2361 of Title 10 of the California Code of Regulations, declares, consistent with prior law, that insurers may only make underwriting decisions
based upon conditions of the individual risk which present an increased risk of loss and which present an increased risk of loss when compared to other risks eligible for coverage under the insurer’s underwriting guidelines.10 Cal.Code.Regs. 2361(c), italics added.
The regulation goes on to require, in essence, an individually articulable reason for any underwriting decision, traceable to specific circumstances that can be shown to present an unacceptable increase in risk, and does not permit reliance on collective information or claims history databases as the sole reason for any under writing decision. Subsection (e) of the new regulation provides:
An insurer shall gather adequate information to determine that an increased risk of loss exists before a loss, loss exposure, or an inquiry with respect to coverage can be used as grounds for an adverse underwriting decision. . . .
[A]n insurer cannot rely solely on information obtained from an insurance-support organization. If the information is from an insurance-support organization, the insurer shall obtain further relevant information in addition to the material obtained from the insurance-support organization. Sources for this information may include the insurance application or supplemental application, telephone inquiry, written inquiry, and physical inspection.
Full text of the regulation can be found in PDF format here. The Commissioner’s factual findings, much of it based on media reports, in support of the emergency regulation are available in PDF format here.
Comment on the new regulation, and on its place in Commissioner Garamendi’s publicly stated agenda, is found in the extended version of this post, to which you can click through immediately below.
Continuation:
The relationship between insurer and insured is often a difficult one. At the risk of over-generalizing, we could say that as a group insurance companies want to have as much control as they can over the exposures they agree to cover, the prices that they charge for those coverages, and the terms on which benefits will or will not be paid. Insurance consumers, on the other hand (and again wee are speaking in very general terms), tend to want their premiums to be as low as possible while benefits payable in the event of a loss are as high as possible, to be paid without any questions asked and without regard to “technicalities” in the language of the insurance contract. Neither side of the equation actually gets its way on a consistent basis in reality, but in a perfect world (or a perfect market) the two sides’ interests would not be irreconcilable.
Insurance regulators daily face the question of whether to favor one of the other of these competing constituencies in their approach to overseeing and regulating this complex product. Historically, regulators until the late 1960s and early 1970s tended to be concerned primarily with keeping the insurance industry on an even financial keel, largely through requirements concerning size of reserves, the nature of assets insurers could hold on their balance sheets, adequacy of premium, etc. In more recent decades, however, there has been a strong shift toward the view that an insurance regulatory agency is principally concerned not so much with insurance industry stability as it is with “consumer protection” broadly defined. California Insurance Commissioner John Garamendi falls squarely in the second category.
When he took office again in January, Insurance Commissioner John Garamendi identified a number of priorities for his current term, among them making the California Department of Insurance “the best consumer protection agency in the nation.” (You can read the text of his inaugural speech here.) Heading the list is the need to find a solution to California’s untenable workers’ compensation situation, in which employers in many industries are facing premium obligations that in some cases are enough to place their businesses’ very survival in question. The Commissioner has engaged in ongoing courtroom battles with the State Compensation Insurance Fund, which has experienced underwriting results so poor that it was threatening to abandon its mandatory duty to take all comers and to serve as the compensation insurer of last resort.
Another of the priorities to which the Commissioner has attached himself is what he characterizes as a crisis in California’s homeowners insurance market. Here is the relevant passage from the inaugural address:
A growing uproar can be heard from suburbia and main street California, as homeowner policies are cancelled, as State Farm, the largest insurance company, refuses to write new policies on homes, as premiums escalate, and unexplainable systems such as credit scoring and CLUE are used to determine if a consumer will get a policy and at what price. CLUE is no parlor game - it’s a database. "Use it and lose it" is no joke. It’s real and it’s wrong. We will aggressively investigate this dysfunctional market and I will use my full power to address every legitimate concern. The housing industry, every homeowner, potential homeowner, and the California economy need our help and they will get it.The Commissioner has taken his first steps toward implementing this portion of his agenda with the adoption on an emergency basis of a new regulation restricting the extent to which insurers can consider current losses or coverage inquiries in their underwriting, renewal and non-renewal decisions on homeowners policies. That regulation is described in the previous portion of this post.
Commissioner Garamendi’s other priorities, as set out in his inaugural speech, are health care -- he seems to see workers’ compensation reform as to first step toward a future, single “24-hour health coverage” program, details of which are sketchy at best -- and privacy. Privacy issues are working their way through the Legislature, and will be the subject of future reports to the extent they specifically impact on insurance.
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