Insurers Challenge Delaware Curb on Use of Claims History in Renewals

Insurers are challenging a Delaware regulation that limits their ability to base homeowners insurance underwriting decisions on insureds’ past claims history.

The American Insurance Association and the Property Casualty Insurers Association of America jointly filed a complaint for declaratory relief in New Castle County Superior Court against the Delaware Department of Insurance. The complaint states that the department did not have statutory authority to adopt Regulation 703, and asks the court to find that the regulation is null and void without force or effect.

The insurers maintain that Regulation 703 “violates a very fundamental principle of administrative law: a regulatory agency cannot adopt statutes under the guise of administrative agency rulemaking. This privilege is reserved for the legislature.”

Regulation 703, which was published in the Register of Regulations on Oct. 1, 2005, limits the ability of an insurer to non-renew homeowners insurance issued in Delaware based on claims history.

“The Insurance Department is attempting to impose new underwriting and nonrenewal restrictions on homeowners insurers, and to create new unfair trade practices by regulation, despite the lack of any specific statute in support of these restrictions,” claimed Eric Goldberg, AIA assistant general counsel.

“Promulgating a regulation is not the same as enacting legislation, nor is it intended to be; Regulation 703 tackles matters that are more properly reserved for the Delaware General Assembly,” he added.

He said the insurance industry offered to work with the department prior to filing the complaint. Both AIA and PCI submitted written comments and testified in opposition to Proposed Regulation 703 at a public hearing on Sept. 1, 2005, but none of the suggested comments were included in the final regulation.

“We alerted the department that there was no statutory basis for the proposal, and offered to work with it on a regulation that was within the scope of its authority,” said Richard Stokes, regional vice president for PCI. “Frankly, we were quite surprised when the regulation was adopted almost exactly as it was proposed.”

To date, 27 other states and the District of Columbia have enacted legislation or adopted regulations addressing insurer use of claims and inquiries for underwriting purposes. The industry maintains that Delaware’s rule is more restrictive than the laws and regulations of any of these other jurisdictions.

Insurers have fought to retain the right to use claims history, arguing that it is a reliable predictor of future losses. Some regulators have expressed concern over when and what type of claim history insurers use to deny coverage.

Insurance Commissioner Matthew Denn defended his action in issuing the regulation in a statement.

“It’s appropriate that this suit was filed on Halloween, because it should scare Delaware homeowners,” he quipped. He said that prior to Regulation 703, the state had no protections for homeowners against the use of claims history by insurers.

“Regulation 703 changed that, providing some basic protections to ensure that homeowners are treated fairly while still allowing the insurance carriers to earn a profit. For example, my regulation prevents insurance carriers from canceling policyholders when they come up for renewal just because they had one or two weather-related claims due to storms that were completely beyond their control,” he maintained.

Denn maintained that he was within his authority to issue the rules and vowed to “fight to protect this regulation as part of our fight to protect homeowners.”

But insurers insist that claims history is an acceptable and reliable underwriting tool and that restricting its use as Denn seeks to do will harm consumers more than help them.

“It is important to keep in mind that the very foundation of homeowners insurance underwriting is based on an insurer’s ability to distinguish among properties based on their risk characteristics,” claimed PCI’s Stokes. “Loss and claims activity are excellent indicators of the propensity for future loss. Insurers do not use loss and claims activity to punish customers. Rather, insurers want to attract new customers and retain good customers for a long time, just like any business. Adoption of this regulation will hurt those homeowners who work to maintain their homes and benefit those who make no effort to maintain their property.”