TDI Plan Gets Cold Shoulder from Companies

Two of the three largest homeowners writers in Texas-Farmers Insurance Group and State Farm-are retaining their no-new-business strategy despite efforts by insurance regulators to use mold coverage restrictions to entice all major writers to reopen for new business. The reaction of smaller companies was not better for TDI-the Insurance Council of Texas issued a news release calling Montemayor's plan "too little, too late." Farmers and State Farm were involved, along with Allstate, in extensive negotiations during November with the Texas Department of Insurance and the staff of Gov. Rick Perry in attempting to achieve a solution to increasing mold claims that would result in companies agreeing to start accepting new homeowners customers. But the announcement by Commissioner José Montemayor Nov. 28 that he will restrict mold coverage in the all-risk homeowners form HO-B did not convince Farmers and State Farm to change their strategies. Farmers had taken the most dramatic step, by announcing Nov. 9 it will non-renew all of its approximately 600,000 HO-B customers beginning Dec. 30 and divert those customers to an expanded version of the named-perils HO-A policy. Farmers filed a proposal Nov. 16 with TDI to enhance the HO-A; the endorsements would be available for use Jan. 16, 2002 if Montemayor does not reject them. Farmers, the second-largest Texas homeowners insurance writer with 20 percent of the market, led the parade of carriers that shut off writing new HO-B policies, announcing its decision on Aug. 15. Within eight weeks, all but a handful of HO-B writers had closed their doors to new applicants, and the remaining companies placed tight restrictions on new business. But no other carriers had taken the more extreme step announced by Farmers of declining to renew existing policyholders. Farmers' action followed several unfavorable developments: On Oct. 30, an Austin district judge entered an order confirming the $32 million judgment awarded against Farmers in May in a lawsuit by Melinda Ballard of Dripping Springs resulting from a mold claim under an HO-B policy. Mediation ordered by the judge after the verdict failed to reduce the jury award. On Oct. 3, Insurance Commissioner José Montemayor rejected Farmers' attempt to secure approval of an endorsement to the HO-B policy excluding mold. Discussions by Farmers and other industry groups with Montemayor and TDI staff over the last several weeks regarding Montemayor's search for a solution to the mold coverage problem have produced no results that satisfied Farmers management they will be provided tools needed to slow increasing mold losses. September loss data showed Farmers had 1,500 mold claims in that month and almost 8,000 this year, compared to 12 in all of 1999 and 499 in all of 2000. Other carriers and regulators will be watching for signals from the other two largest writers that had joined Farmers in a moratorium on new HO-B policies, State Farm and Allstate. Together, the three account for 67 percent of written premium. Allstate, the third-largest writer with 16 percent of the market, announced its moratorium Aug. 28, along with plans to increase rates an average of 20 percent on Oct. 29. Allstate will continue to sell the limited coverage HO-A form. State Farm's moratorium on all new homeowners business came the same week its Texas Lloyds company's A- rating was placed under review by A.M. Best. Co. because its surplus had declined by almost 50 percent this year. On Oct. 8, Standard and Poor's placed its "AAA" counterparty credit and financial strength rating on State Farm Lloyds on CreditWatch with negative implications. State Farm said fivefold increases in mold claims during the first six months of 2001 had pushed its loss ratio to 177 percent and required a 15 percent rate increase Nov. 15. In related developments: SAFECO, the seventh largest writer with $61 million in premium in 2000, shut off new homeowners writings on September 26 and announced a 17.5 percent statewide average rate increase November 1 to offset mounting losses. Farm Bureau, the ninth largest writer with $46 million in premium in 2000, stopped accepting new HO-B business Oct. 1. Republic, the 12th largest writer with $29 million in 2000, closed to new HO-B policies Oct. 9. OneBeacon Insurance Group, formerly CGU, announced it would write no new Texas homeowners that weren't already in process starting on Aug. 13, 2001. OneBeacon has about 170 agents in Texas and was the 19th largest homeowners writer in 1999, but has reduced its agency plant and writings since its purchase by White Mountains Insurance Group earlier this year. Progressive issued a moratorium on new Texas homeowners business starting Aug. 1, 2001; a new player that just entered the market in March, it has only 2,000 policies. Several Texas surplus lines agencies are offering, through non-admitted carriers, an HO-B policy that excludes water-related damages; some provide coverage buy-back options. Other standard markets began implementing restrictions on new business through a variety of strategies, including: Rejection of any new applicant with prior water-related claims in the last several years; this strategy was abandoned by several carriers after Insurance Commissioner José Montemayor objected Capping at last year's total new policies, the number of new policies permitted in 2001 Maintaining a 1-to-1 ratio of HO to personal auto new business Assigning higher rates to homes built before 1981. Because about 95 percent of homeowners premium is written in Texas Lloyds companies that enjoy freedom from state rate regulation, any rate increases imposed by companies to counteract mold losses generally will not be reported to TDI. Farmers became the most high-profile example of insurers' mold problems when it was hit in June 2001 with a $32 million jury verdict arising from a homeowners mold claim in Austin. Farmers indicated the moratorium will remain in effect until the Texas Department of Insurance approves either a coverage exclusion, as proposed in an endorsement filed by Farmers with the department, or a combination of exclusion and coverage buy-back that Farmers is currently drafting for filing with TDI. Farmers has gained approval of the mold exclusion in 32 states, including California. In its testimony at Montemayor's June 26 hearing, Farmers said it had retained an independent expert to assess the factors associated with mold claims. For the year 2001 alone, this expert estimated Texas mold damage claims will account for $128.5 million in additional costs to insurers. The expert also advised Farmers that a 41 percent increase in homeowners rates would be needed to pay for mold claims. During the first six months of 2001, Farmers received more than 1,000 new mold claims in Texas. Along with the claims have come an explosion in litigation-Farmers cited as an example the city of McAllen, where 211 of 223 mold claims submitted during the first six months of 2001 were brought by attorneys.

Mold Decision Today Desperately Misses the Mark For Consumers

(AUSTIN) An insurance industry trade group said today they applaud commissioner Montemayor for his careful consideration of the mold issue in Texas but hastened to point out that the decision could raise homeowners rates as much as 60-80 percent or more for those who choose to purchase mold coverage. "We commend the Texas Department of Insurance for its diligence and perseverance but the decision today will do nothing to solve the lingering problem of how insurers will address water-related mold claims in the future," according to Jerry Johns, president of Southwestern Insurance Information Service. "Mold claims in Texas are only a symptom of a much larger illness which needs to be confronted quickly," he said. "The core of the homeowners insurance crisis is Texas mandates that consumers buy a single policy with the most expansive coverage of all the states for water damage." "The next step the commissioner should take is to immediately examine the underlying problem which placed consumers and insurers in the center of the mold public policy debate," he said. "Most of this debate could have been avoided had the commissioner followed the intent of the Legislature and approved a more competitive system for insurance regulation." "In 1997 the Texas Legislature enacted legislation which called for more choices and less governmental control of insurance products," he charged. "The Texas Department of Insurance has yet to consider what our elected officials asked them to do over four years ago." "Home insurance in Texas has become more of a maintenance agreement between insurers and their customers," he pointed out. "The commissioner's decision promotes an adverse selection process where those who take the time to maintain their homes will decide not to purchase mold coverage while many who do not maintain their homes will decide to buy mold coverage." "What that amounts to is a demand that all consumers pay for the maintenance of a few," he said. "That type of logic redefines the word "fairness." "The homeowners policy in Texas is unlike those available in 49 other states where consumers are offered a variety of choices which better help them manage their everyday needs through selection of coverages and policy contracts," he said. "The commissioner today did not move any closer to improving one of the most unfriendly consumer insurance environments in the country." "The commissioner should move immediately and allow insurers the option to offer more products and empower consumers with the ability to make choices tailored to their specific needs," he said. "Texas has the highest homeowners rates in the country which are 93 percent above the countrywide average." "By ignoring consumer choice the commissioner has sent a message that homeowners are unable to select from a menu of coverages so a government bureaucracy will choose for them," he said. "It is high time that officials at the Texas Department of Insurance face the issue confronting homeowners and that is a more competitive environment where competition, not the heavy hand of regulation, determines prices and products," he said. "Despite Texas having the country's highest rates, insurers have sustained $3 billion in underwriting losses since 1998," he noted. "Overall the decision today desperately fails to face the problem of insurance affordability and availability," Johns said. "A better decision would have been not to abandon consumers, offer more choices in the insurance products they buy and understand that most people believe in less government influence and more competition based solutions." Johns declined to comment about how individual insurers would react but he did say the decision would not inspire much confidence in the Texas marketplace.

Kinnaird, Rossander and Perry Agency, Inc.  |  104 North Lamar  Suite Box 351 |  Eastland, TX 76448  |  254-629-3933