Since January 2003, lawmakers or insurance regulators in 31 states have questioned insurers' use of loss history databases. During the same period, at least 14 states and the District of Columbia have enacted provisions dealing with use of this information.

The growing interest on the part of legislatures has made it difficult for homeowner insurance companies seeking to preserve the freedom to use such loss history information to help them make intelligent underwriting decisions, according to the Property Casualty Insurers Association of America. “Despite this intense scrutiny from legislators and regulators, insurers have been able to defeat measures that would impose outright bans on the use of loss histories,” said Rey Becker, PCI's vice president of personal lines. “Public policy makers understand the predictive nature of past losses and realize that loss histories are a valuable underwriting factor.”

Last year, legislation was enacted in Arizona, Texas, and Virginia, and regulatory action was taken in California and the District of Columbia. In the first half of 2004, bills have been enacted in Arizona (amending last year's enactment), Colorado, Florida, Georgia, Oklahoma, Utah, and Wyoming. At press time, bills were awaiting the governors' signatures in Louisiana and North Carolina. Regulatory action also has been taken in Arkansas and Delaware.

“The biggest concern that has been expressed by lawmakers and regulators deals with the fact that loss history reports may include not only filed claims for damages, but also include as 'claims' virtually any call or coverage inquiry to an insurance company, whether or not a claim is filed,” said Lynn Knauf, policy manager in PCI's personal lines and research division. “Policyholders and insurers often have different views of whether or not a claim has been filed or initiated. For example, some insurer's publicly reported practice is to begin a claim investigation upon any initial report of loss or damage, while many consumers do not believe that a 'claim' has occurred unless, or until, a payment for damages has been made.”

Complaints against the industry's use of the databases are the number one reason that California consumers phone the state insurance department's hotline, according to department statistics. In all of 2001, the California Department of Insurance received 318 formal complaints regarding homeowner insurance. Currently, formal complaints regarding homeowner non-renewal and the CLUE database exceed 100 per month.

“Consumers are at a serious information disadvantage because they do not know the database exists, may not be told by insurers that their denial of coverage is due to a CLUE report, and do not know how to obtain a copy of their report to review it and dispute errors,” according to a department statement. “Another issue involves the reliability of the information in the database. CDI has a number of cases in which consumers were unfairly denied a renewal or new policy based on inaccurate CLUE data.”

The department cited two cases in which policyholder information had been incorrectly included in the database. A homeowner in San Francisco was denied coverage due to CLUE data that reported a water claim she had filed with another insurer. In fact, she had never filed such a claim, but rather had phoned her agent to see if a clogged pipe would be covered by her policy. The information was entered into the CLUE database as a claim, according to the department, which intervened on the homeowner's behalf.

In another example, a first-time home buyer was denied coverage due to a water damage claim at his previous address. The man had not owned the house where the damage had occurred, however; it belonged to his brother. Because he had stayed there before purchasing his new house, he had listed it as his last address.

Insurers insist on their need for complete information regarding prospective customers. “Loss history database products aren't new underwriting tools,” said Knauf. “The most commonly used product, CLUE, has been in use for auto underwriting for 15 years, and 10 years for homeowners. Yet, because of a number of factors affecting the marketplace at the same time, loss history databases have received a great deal of negative attention as some sort of new, secret underwriting tool.”

In a recent Insurance Services Office poll, 46 percent of U.S. insurance organizations cited the lack of historical databases as a major cause of poor claim management and incorrect claim payments. Other factors included lack of medical knowledge, according to 20 percent; inadequate negotiation skills, 16 percent; and adjuster inexperience, 13 percent.

“Empowering claim handlers with more information about similar claims and injuries is the most important step insurers can take to achieve accurate claim assessments,” said Lee Fogle, ISO vice president of claims services.

In addition to the predictive value of prior losses, PCI has expressed concern that ignoring closed-without-payment claims may aid unscrupulous policyholders who withdraw fraudulent claims when investigators get too close. PCI also pointed out that insurers are bound to various unfair claim practice laws, and could face violations of those laws if reports of damage or loss are not pursued in a timely manner.

Reports from such databases provide claim information provided by participating insurers, including any losses within the last seven years. Typically, loss history reports also include general information about the insured, such as name, birth date, and current and previous addresses.

Companies use loss history reports for evaluating potential customers, generally upon receipt of a new business application, according to PCI. Only insurance companies that report information on claims made by their current policyholders are allowed access to the databases that contain the claim information from all other participating providers. Currently, approximately 90 percent of U.S. insurance companies participate by forwarding claim information to one or another database vendor.

Special Reports /

States Ponder Loss History Databases

Related Stories

Recommended For You