IT STARTED innocently enough. While I was braving the cold to retrieve a Christmas package delivered to the front stoop, our next-door neighbor pulled into her driveway. "Hey, neighbor!" she called. "If you and your lovely wife don't have any plans for later, why not drop by our place sometime between six and nine? We're having some friends over for snacks and holiday cheer!" Of course, I said we'd be there. Little did I know (although I should have suspected) the turn this tale would soon take. No, not into the Twilight Zone but someplace far more sinister: the dark, nether regions of insurance underwriting. We were entering The Insurance Zone!

So early that evening, as I was warmly ensconced in our neighbors' kitchen, sipping a Diet Coke and munching a few of those ubiquitous meatballs found at all such gatherings, the husband leaned against the counter and innocently asked the question that would change everything: "Hey, you work with insurance stuff, right?"

Oh, sweet muse. If only I had taken the biblical Peter's route and, seeing there were no cocks about to crow and reveal my duplicity, denied all. Or if only I had pleaded the gaiety of the holiday season as an excuse to refrain from talking about business, or succumbed to a fit of intentional coughing and begged my leave. But alas, all too easily I succumbed. "Sure," I simply responded, "Got something I can help you with?"

Thus began his spinning of a tale of woe. In essence, it involved a water leak near his kitchen sink, later traced to a pipe running under the flooring, which resulted in roughly $1,700 worth of damage to his basement ceiling. At the suggestion of the contractor who diagnosed the problem, my neighbor contacted his insurance carrier. Said carrier then did all of us in the industry proud by stepping forward and handling the transaction to the satisfaction of all parties. Our neighbor even considered his need to pay the deductible to be a fair part to play in this highly appreciated episode of insurance coverage at its finest.

Our neighbor's initial glow of satisfaction dimmed significantly, however, several months later when his homeowners policy renewal came in at a highly increased cost. Although I didn't think the blame for this increase should be laid solely at the feet of the water-damage claim, our neighbor immediately jumped to that conclusion. Evidently his agent concurred, or at least gave him no reason to assume this conclusion was wrong, since after contacting said agent to discuss the increase, our friendly neighbor decided maybe his homeowners insurance would be better placed elsewhere. But much to his surprise, every agent or carrier our neighbor contacted told him in no uncertain terms that they were not interested in writing a new homeowners policy for someone who recently had incurred water-damage claims. What truly floored our friend was the carriers' insistence that it made no difference if the source of the damage had been eliminated. "Call back in three years and we may reconsider," he was told.

After he finished this sad tale, his questions began. Why is there such a problem with water-damage claims and homeowners insurance? What does three years have to do with it? And then the real killer: Would it have made a difference had he not turned in the claim and just paid for the repairs himself?

Let's consider our friend's plight, and its effect on our daily lives and image as insurance folks. First, unfortunately, we must recognize he is far from alone in discovering this latest burning issue in insurance underwriting. As if credit scoring and construction defects aren't causing enough confusion and dismay among consumers, we now can add water damage to the list. And considering how incredibly popular the insurance industry already finds itself, isn't it a joy to have more wood thrown on the fire?

Perhaps it's time to face the reality that the damage allegedly caused by folks like Spitzer really amounts to the public unveiling of largely self-inflicted wounds. Note particularly the third question. Our neighbor, who to this point never had any reason to suspect or doubt his insurance protection and promises, now finds himself seriously considering just how afraid he should be to seek coverage under his own policy! Multiply that man by the thousands of such claims situations occurring daily, and you can see the PR death spiral taking shape.

But what can we do about carrier underwriting, you may ask? What does this have to do with policy coverages? Nothing and everything. Nothing if you think insurance is sold and claims are adjusted in a vacuum. Everything if you spend much time with consumers and realize they don't differentiate underwriting from claims and sales. Consider the thought process behind our neighbor's three questions.

1) Why is there such a problem with water-damage claims and homeowners insurance?
After giving him a brief update on how seemingly minor water-damage claims, when filtered through insurance-carrier mentality, emerge as potentially massive mold claims, my neighbor shook his head and muttered darkly about lawyers. But just in case I thought victory was mine and he was now on our side, he added: "But we don't have much mold around here, do we? And why didn't anyone from my insurance company or any of those others say something about this to me?"

So once again, what we have here is a clear example of "Cool Hand Luke Syndrome"-a failure to communicate. Yes, amazing as it may seem, our neighbor was unaware that mold was such a big issue in insurance. Could it be because, even though he's a highly paid professional, he-believe it or not-has never visited an insurance trade show, read an insurance publication or "Googled" mold claims?

2) What does three years have to do with it?
Indeed, if water damage, even though fully repaired and its source fixed, is an issue, what changes after three years to make the property insurable? Regardless of the answer (which may vary by carrier), someone needs to explain such seemingly arbitrary decisions to consumers. With some obvious exceptions, the vast majority of adult consumers are not stupid. Given a reasonable explanation, most will accept it.

3) Would it have made a difference if I had not turned in the claim and just paid for the repairs myself?
For me, the third question hurts the most. When fear begins to replace assurance, danger follows. Those of you who have raised children know the drill. Priority No. 1 may be to get your children to obey you, to avoid harm to them. At times fear of punishment is an effective motivator to achieve this objective. But if you begin to sense that they continue to obey you out of fear and do not start to understand why you want them to refrain from certain actions, you risk creating children who learn to play the game rather than live the life. If all my kids learn from me is how to avoid punishment, what have they learned about proper behavior? What I want them to learn is, "It's wise not to do this." What I may be teaching them is, "Don't get caught."

Do we really want our insureds to think the lesson to be learned from underwriting is to not be straight with us? In commercial lines, the amount of money on the table seems to generate a steady stream of schemes to pay as little as possible in workers compensation or liability premiums. In personal auto, it's an age-old scenario for folks to pay minor accident claims on the side, rather than risk a large rate increase or cancellation. In homeowners, there have been relatively few schemes to avoid paying the proper premium, nor has it been customary for insureds to eat small losses to avoid rate hikes. That could be for any number of reasons, possibly including relatively lower premiums and simpler underwriting.

But now all of that may be changing, thanks to water damage. That bond of trust that says losses are to be expected-"After all, that's why we buy insurance!"-is fraying with each scenario endured by someone like my neighbor. Once that bond is gone, insurance will be well down the road to becoming largely an adversarial relationship-us against them. Their goal will be to get away with everything they can in pursuit of lower premiums and broader coverage, while the carriers will seek ever more information to try to cherry-pick the marketplace. What will happen when underwriting gets access to so much information that the computers one day spit out the conclusion that there's no one left who qualifies for coverage?

Oh, Law of Large Numbers, wherefore art thou?

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Policy Issues: Response to water-damage claims alienates insureds

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