Publication Date: Wednesday, October 8, 2003

Use it and lose it?
Talk of blacklisting has homeowners thinking twice about insurance claims

by Martin Nobida

What's the point of getting homeowner's insurance if you can't use it?

Homeowners, mortgage brokers and Realtors are beginning to think that a home doesn't have to be sitting atop an ancient Indian burial ground for it to be cursed. If their house had even one claim taken out on its insurance policy, they say, it can be denied further coverage, rendering the property un-sellable.

Realtor Keri Nicholas has dealt with potential homebuyers who were stymied by their inability to get homeowner's insurance because of previous claims on the property.

"The situation is pretty awful," said Keri Nicholas, a Menlo Park-based Coldwell Banker agent. "It's almost like 'once you've used it, you're dead.'"

Nicholas, who's been doing business on the Peninsula for 14 years, said she had two cases in the last three years where buyers couldn't find anyone to provide insurance because of claims. Other local Realtors talk of similar experiences in the last year. "Insurance is an issue with almost every deal we do," Nicholas said. "Everyone's been affected by it."

According to figures from the California Department of Insurance, the number of formal complaints by homeowners who were denied insurance, had their policies canceled or could not renew their coverage has risen dramatically.

In 2001, it received only 318 complaints. In 2002 and 2003, the figures were 1,891 and 3,230, respectively.

There are even cases where a customer claims he'd simply phoned in a question to inquire about insurance coverage, and found much later he'd been blacklisted simply for asking the question.

Much of the criticism has been levied against loss-history databases such as the Comprehensive Loss Underwriting Exchange, or CLUE. These databases track the number of claims people make on their policies.

According to ChoicePoint, the company that runs CLUE, 90 percent of all insurers in the United States use information in the CLUE database when considering someone for new coverage.

Critics contend that the database often contains incorrect information, which can unfairly hamper a person's chance of renewing an existing policy or getting a new one.

"The information contained in them (the databases) may have no relationship to future risk of loss," says a press release from the Department of Insurance.

"Many consumers have had applications denied, policies canceled and premiums skyrocket after just one claim."

Chuck Jones, director of external communications at ChoicePoint, said the database isn't used, as many believe, for determining whether or not a policy should be renewed.

Individual insurance companies have their own databases that keep track of their clients' loss histories, he said. Because they know full well the loss history of their own clients, they don't need CLUE's services when considering renewal, he added.

"CLUE is important when a house is to change hands," he explained. "If Party A is selling to Party B, Party B doesn't know the seller's loss history, so it goes to CLUE for that information."

As for the accuracy, Jones insists the information is 99.9 percent accurate.

"We get approximately six complaints a year for every 10,000 records," he said."And only a very small fraction of those complaints warrant any change."

Whatever information shows up on the CLUE reports, local Realtors are finding the going rough.

"It is a problem," said Elyse Barca, a real estate agent with Coldwell Banker in Menlo Park.

Her firm, like many other real estate agencies in the region, recently adopted the practice of requiring sellers to fill out a disclosure form that details all claims they've made in the past five years.

"We're particularly interested in water damage," she added.

Many Realtors say they need to know as early as possible in the selling process if there's a chance a deal will go down the drain as a result of an insurer not wanting to provide necessary coverage.

And water is a hot topic these days.

"A claim that involves water intrusion in the home can be a death sentence for your ability to get insurance," said Peter Brewer, a real estate attorney based in Palo Alto.

Usually with water damage comes mold. A spate of recent mold-related lawsuits in Texas and California has served as a catalyst for fear.

Johnny Carson's sidekick, Ed McMahon, was involved in one of these suits. He made a claim under his home insurance policy to fix the damage caused by a burst pipe that flooded his den.

In April 2002, McMahon filed a $20 million lawsuit against his insurance company and other entities. The suit alleged the contractors botched the repair, resulting in the death of McMahon's dog through exposure to a deadly mold. In July this year, he settled for $7 million.

The publicity surrounding cases like this engendered what has been called mold hysteria.

"Water claims saw a 100 percent increase in four years," said Jerry Davies, director of communications at the Personal Insurance Federation of California, which represents the insurance industry to legislators.

Because of what they see as excessive financial risk, most major carriers in California are now loath to insure homes that have any history of water damage, as they fear a mold problem will arise.

"I understand the Realtors' frustration," said Bill Cohen, an agent with State Farm Insurance in Menlo Park. "They're trying to close on escrow, but their deals are all contingent upon the buyer getting homeowner's insurance."

And that insurance is harder to come by.

Many insurance companies have pulled out of writing any new homeowner's policies in California. Safeco, the state's 11th largest provider of homeowner's insurance, for example, exited the market for new policies in July, citing low rates and a hostile political climate for providers.

State Farm did so in early 2002.

"We're not overjoyed we had to pull out of the homeowner's insurance market," said Lonny Haskins, State Farm public affairs specialist. "It was a move of responsibility."

He said his company determined that it had expanded to such a point where it might be unable to pay for possible big contingencies -- like, say, an earthquake the size of Loma Prieta.

The problem, many in the industry say, may not be blacklisting at all.

"When times are hard, the evaluation process becomes much more stringent," said Omar Morales, communications specialist at the Insurance Information Network, an industry association. "And there are companies that look at people who have a claim or two on their report and will decide not to renew."

"But that's not blacklisting," he continued. "The correct term for that is 'non-renewal.' "

Blacklisting or not, if you are buying or selling a home, there are a few things you can do to keep from seeing your sale fall through unexpectedly.

"As a seller," said Brewer, "you can consider obtaining your own CLUE report."
CLUE reports are available upon request for a nominal fee.

"As a buyer," he said, "start shopping as soon as the contract is signed, and make sure you contact more than one insurance company. You might consider asking the seller to provide the CLUE report as a condition of the sale."

But most experts agree that the best policy to avoid negative marks unnecessarily showing up on your record would be to hold off on using homeowner's insurance unless absolutely necessary.

"In a hard market, you want to save your insurance claim for a big loss," Morales said, "one that you can't recover from financially if you paid for it yourself."

" A claim that involves water intrusion in the home can be a death sentence for your ability to get insurance," -- Peter Brewer, Palo Alto-based real estate attorney