At that time, ChoicePoint, Inc. provider of the Comprehensive Loss Underwriting Exchange (CLUE), issued a letter to participating insurers clarifying that “claim information should be reported to CLUE when there has been a request from an insured or claimant for payment as result of a loss.

“Claims information should not be reported when a customer asks questions about their coverage or deductible.”

CLUE is the oldest and largest database of information provided by insurers on insurance claims. Loss history reports in general are frequently referred to as “CLUE reports,” although a similar database, the Automobile-Property Loss Underwriting Service (A-PLUS) is maintained by the Insurance Services Office, Jersey City, N.J.

When someone applies for homeowners insurance, an underwriter will routinely request a report of past claims for both the individual(s) seeking coverage and the residence to be insured. The information, along with other information in the application, can be used to reject coverage, or to move an applicant to a different pricing tier.

The ChoicePoint letter quoted above sought to address a concern that inquiries from policyholders about coverage under their policies were being reported as claims and shared with other insurers, even though the policyholder did not intend to pursue a claim.

It is debatable whether such inquires were reported as claims very often. But it is clear that computerized records of insurance claims, however defined, have had a big impact in the latest hard market.

Although CLUE had been in use for more than a decade, it was only after 2001 that there were widespread reports of coverage being denied or substantially re-priced on the basis of information reported in loss history databases.

Starting in 2002, the National Association of Realtors (NAR) sounded the alarm about a “homeowners insurance crisis” arising, in part, from the use of loss history reports.

“Traditionally, our members have been concerned about home buyers qualifying for mortgages,” said Marcia Salkin, NAR senior policy representative, at a 2004 meeting of the National Council of Insurance Legislators (NCOIL).

“Now we’re more concerned about them qualifying for insurance.”

“We’re getting more and more calls from consumers due to database reports,” said James Poolman, North Dakota insurance commissioner, at the same meeting.

Floodgates opened

Protests over the use of claims history databases have “opened the floodgates” to a series of state initiatives to restrict insurers’ right to cancel or non-renew policies, according to Lynn Knauf, policy manager for the Property Casualty Insurers Association of America (PCI).

“The majority of legislative activity has centered on proposals to prohibit insurers from reporting policy ‘inquiries’ as claims,” Knauf wrote in a 2004 bulletin to PCI members. “Unfortunately, however, the issue has also served to open the floodgates to attacks against underwriting.”

More than 30 states have considered bills or regulations related to loss history reports. NCOIL is preparing to deliberate on a draft model law on the matter at a March meeting in South Carolina.

The most common restriction, adopted by at least seven states, prohibits insurers from reporting general inquiries to national databases. Similarly, several states have restricted insurers from considering claims “closed without payment” when underwriting coverage.

Claims closed without payment include losses where payment was requested, but the amount of the loss did not meet a deductible requirement or was determined not to be covered under policy provisions.

Knauf says that there is a legitimate reason for insurers to record information related to known losses, even if coverage is not sought or provided.

“If an insurance company knows that a loss has occurred, then it knows that the risk may have changed, and it has a legitimate reason to record that information,” she says. “The problem only arises when it is reported to a national database.”

Still, if the new laws stopped with a ban on consideration of “no pay” claims, most insurers could live with them. But, deliberations over an NCOIL model could become a “nightmare,” says Knauf, if they range into underwriting concerns apart from claims history databases.

“Any model only represents a starting point,” she notes.

Whose fault?

Indeed, what started out as attempts to regulate the sharing of claim information appears to have sparked a wider discussion about what is “fair” in personal lines underwriting.

Measures enacted by certain states suggest that there is sentiment for restricting insurers from taking underwriting action for any claim some believe is not the fault of the insured.

Consider the following measures that have been enacted in response to complaints over the use of loss history reports:

• A 2004 Delaware regulatory bulletin prohibits homeowners non-renewals or surcharges due to claims

• arising from natural causes and third-party acts committed by a non-resident of the insured premises, as well as claims that do not meet the applicable deductible.

• A 2003 Texas law prohibits insurers from considering appliance-related claims where damages have been repaired and/or remedied, unless there are more than three appliance-related claims filed over the previous three years.

• 2004 legislation in Utah prohibits insurers from making an “adverse eligibility or rate decision” due to a loss to a property when owned by someone other than the person seeking insurance.

• A 2003 Virginia law bans underwriting action based solely on the loss history of the previous owner of a residence.

• 2004 legislation in Wyoming restricts insurers from canceling or non-renewing policies due to losses arising from natural causes.

As NCOIL prepares to deliberate over a model law governing loss history databases, it is “certainly possible” that the model could go beyond addressing the use of databases and seek to define what constitutes a claim for underwriting purposes, says Candace Thorson, NCOIL director of legislative affairs and education.

In the spotlight

It’s clear that the debate over the use of computerized loss history databases can touch upon more fundamental--and sensitive--issues in personal lines underwriting.

Companies contacted by Viewpoint for comments on how they use loss histories in homeowners underwriting were not apologetic about their approach, but most preferred not to be identified, either.

None of the six companies contacted reported inquiries as claims, but several thought it was justified to report claims closed without payment in cases where a loss had occurred and a claim file opened. Furthermore, most thought it was appropriate to consider such claims when underwriting an account.

In general, the companies responding to Viewpoint say they take a flexible approach to how they use the information reported by CLUE and/or A-PLUS. None of them indicated they took automatic action on the basis of a reported claim; most said that a report of a past claim was a reason for further inquiry.

“We might change rating tiers, increase deductibles, change coverages or limits,” one responded. “It depends on the frequency and severity of the losses.”

“We do not always do the same thing in similar situations for a variety of reasons,” said another.

If the unexpected turns in the debate over claims history databases are any indication, insurers may find the process of underwriting homeowners accounts subject to more public scrutiny and regulation.