Concern Over New Calif. 'Use & Lose' Rule

The announcement Thursday, setting regulations aimed at discouraging "use it and lose it" practices, brings up a regulation which the insurance industry has previously beaten in court by arguing that the commissioner does not have the authority to make such rules.

Mr. Garamendi, in announcing he was promulgating a new regulation said, "We all pay insurance companies to cover losses in our homes are damaged or destroyed. So, why are insurers penalizing us for using the very coverage we bought? It is a reprehensible practice, and I will see that these costly and discriminatory claims games are stopped."

Although the final language of Commissioner Garamendi's new regulations has not been released, Nicole Mahrt, a spokesperson for the American Insurance Association in Sacramento, said that the announcement did raise some concerns that the commissioner "is re-approaching the issue after the courts have decided he does not have the authority."

In late February, the California Third Appellate District Court of Appeal upheld a Superior Court ruling that knocked down emergency regulations by the commissioner that would have restricted the consideration of prior loss histories in underwriting and rating homeowners' insurance.

Specifically, the new regulations would require an insurer to detail any information from a claims database report that is used to reject an application for coverage. It would require informing potential policyholders of all exclusions and take steps to verify claims database information used to rate policies.

Additionally, insurers would have to notify policyholders of any changes to their rating or underwriting guidelines that could have a negative effect on the policyholder if they file a claim, and file an annual report to the state Department of Insurance with the details of any instance in which they apply "use it and lose it" underwriting or deny eligibility where the potential policyholder has filed a claim in the past.

Ms. Mahrt said the concern for insurers is that the new regulations would require an insurer to effectively disclose its underwriting criteria to policyholders, which she noted is proprietary data.

While announcing the new regulations, Commissioner Garamendi acknowledged that he was returning to the issue, arguing that the disclosure would consumers protect themselves from "use it and lose it" practices.

"The insurance industry has challenged the department on whether it can regulate an insurer's use of use it and lose it practices," he said. "We may not be able to issue an outright ban, but I will make sure that homeowners know what the risks are before they become victims of a use it and lose it insurer."