Having Insurance Doesn't Mean You're Covered

Tennessee, Jackson Sun, May 2, 2004
By Jamie Page

Since last year's tornadoes, some policies have been canceled, some have considerably higher premiums and some people have filed lawsuits. Others still haven't made repairs to their homes or businesses because they haven't settled with their insurer. Why?

Lynn Bomar of Jackson had more than $30,000 in damages from the November 2002 tornado in Jackson, and nearly $13,000 from the May 2003 tornado. Then late last year, a water pipe burst, causing nearly $7,000 in damages.

Homeowners insurance covered it all, but when his renewal date rolled around in March, Bomar was dropped by Allied Insurance for having too many claims, he said.

''I could understand if you had several small claims, but when you have tornado damage or a bursted water pipe, your average working Joe can't cough up that kind of money,'' Bomar said. ''And I don't have any control over the weather.''

Mike Palmer, a spokesman for Allied, said he couldn't comment on Bomar's claim history. But some factors insurers look at when considering renewals are claim history, type of loss, frequency of claims and length of time as a policyholder, Palmer said.

''And acts of God are not exempt,'' said Paula Wade, director of communications for the Tennessee Department of Commerce and Insurance. ''It doesn't make any logical sense to a consumer because just because a tornado hits a home, it's not any more likely that house will be hit again than any other home. It's no more likely to happen a second time. But insurance companies do it.''

Bomar, 48, was paying about $570 a year through Allied, and now pays nearly $1,100 a year through a secondary company, he said. Secondary insurers specialize in ''high risk'' homeowners coverage, usually those who have recently been dropped. His deductible is now $2,500, compared to $500 with Allied.

Bomar's story is one of hundreds of similar insurance-related experiences in West Tennessee since F4 tornadic winds hit a year ago. Some policyholders have been canceled, some have considerably higher premiums, some have filed lawsuits, while others still haven't made repairs to their homes or businesses because they haven't settled with their insurer. Why?

Most insurance companies won't comment on disputed claims. And since each policyholder complaint is unique, reasons for disputes vary. But some insurance industry experts say priorities have changed for insurers over the years that have directly affected premiums and payment of claims. Many insurers contend that selling insurance is just like any other business. The goal is to make money, and if certain policyholders are too high risk or aren't profitable enough, then they'll generally be dropped.

Getting dropped

Any one of these three things can prompt your insurer to cancel your policy.

1.) Making a claim

2.) A bad credit score

3.) Not paying your bill properly

The Arkansas legislature passed a law several years ago that says policyholders must have at least two of the three criteria to justify a non-renewal in the state of Arkansas.

''It is an economic reality that insurance companies cannot afford to carry customers that have multiple claims,'' said Bill Page, a former insurance agent who is now a local claims adjuster. ''They gauge a customer's insurability on a lot of factors, and one is the number of claims. They will go by frequency more than severity.''

Three small claims would typically count against you more than one large claim that totals more than the three together, Page said.

''It's because it sets up a pattern that the person could be a high risk,'' Page said. ''Homeowners should understand that policies aren't maintenance contracts. They should absorb some costs themselves.''

Bill Lindsey of Jackson was hit by two tornadoes within five years. He lived in the Orchard Hills subdivision when a massive tornado hit in 1999 and destroyed his home. After losing everything, he moved to North Jackson where, in November 2002, a tornado did about $37,000 worth of damage. Fortunately, the May tornadoes passed him by.

But a few months later, in August 2003, a water pipe burst, causing nearly $7,000 in damages. His insurer, State Farm Insurance Co., covered the loss, but he was dropped when it came time to renew in February 2004, he said.

Brian Maze, a spokesman for State Farm's Mid-America Zone, which includes Tennessee, said he couldn't comment on Lindsey's claim history.

''State Farm does not have a set number of claims before someone is canceled,'' Maze said. ''We renew based on loss history. We are going to look individually at each claim. There's not much you can do about a tornado that hits you. But we are going to look at all of them. We are going to pay what we owe from a claim standpoint. While it's (a catastrophe is) a difficult situation, it's part of the underwriting picture we're looking at.''

Lindsey is now with a new insurer. He now pays premiums of $1,250 a year compared to $715 with State Farm. He is required to go 12 months under the company before he can go back to a prime insurer.

''It's not unusual for premiums to be two to three times what you would get with a standard market,'' said Wade, the state Department of Commerce and Insurance spokeswoman. ''But there are really no restrictions on companies not renewing policies, as long as they notify the customer in the proper amount of time.''

Lindsey contends that natural disasters should not be counted as a strike against you.

''That's something you have no control over,'' he said. ''And why would they want to take advantage of an area that's already under that kind of pressure?''

Insurance is difficult to compare to most products. It's available to protect most assets against most any unexpected occurrence, including your life. It's paid for long before it's delivered, often over much of a person's lifetime, yet in hopes of never having to use it. And that's what insurers are hoping as well.

Usually, insurance on your home is infrequently used. And if it is frequently used, chances are, your policy won't be renewed, industry experts say.

''Some companies pulled out of Jackson altogether (after the May storm) É they said they wouldn't renew any new policies,'' Wade said.

Sen. Don McLeary, D-Jackson, and Rep. Johnny Shaw, D-Bolivar, held town hall meetings after the May storms to hear the concerns of local victims.

''We heard a lot of horror stories about companies walking away and saying we aren't going to insure you anymore,'' McLeary said. ''And I didn't think that was fair.''

That's when McLeary decided to propose legislation to create an insurance pool, which passed in April. The bill calls on the state insurance commissioner to create an insurance pool to provide full coverage to residential and commercial property owners unable to get insurance because of widespread cancellation following a natural disaster.

''People are responsible for what they buy ... they sign a contract, but it seems like it's too complicated for even the most educated people to understand what they're getting,'' McLeary said. ''It could be the agent's fault, or maybe the customer didn't understand it, that's hard to decide. Maybe insurers should have a questionnaire to determine the needs of a particular person.''

If insurers informed clients at the point of sale that their home is in too bad of condition to insure for full replacement cost, or that making frequent claims can get you dropped, then agents could lose a sale.

''I usually waited until the time when they might have made their first claim, but I didn't generally tell them on the front end,'' Page said. ''You don't want to necessarily bring up something negative. An agent isn't making money unless they're selling.''

Inquiries can hurt

Simply inquiring about a claim to your insurer can count against you.

Insurers increasingly are using a massive industry-wide database, called the Comprehensive Loss Underwriting Exchange, better known as CLUE, to follow a home's history of claims or damage reports. They stay in the database for up to five years.

''Some companies require that when a customer makes an inquiry that they make a claim, so people need to be very careful about how they talk with their agent,'' Page said. ''A lot of companies require agents to report that as a claim. Be careful about informational calls. You might want to talk in hypothetical situations.''

Page said he would never file a claim unless a customer requested it. As an agent, he would ask customers on the front end to speak to him in hypothetical scenarios if they ever had a potential claim.

''For instance, your lawn mower was stolen and you tell them it was stolen and ask what you should do, then they are supposed to file it,'' Page said. ''There's a reason for it. It could be an indicator of that person's future likelihood of filing a claim.''

State Farm spokesman Brian Maze said State Farm doesn't put inquiries into the database. However, State Farm gave the CLUE database a Bremerton, Wash., couple's inquiry that was never filed as a claim, according to an MSN Money report called ''Insurers keep a secret history of your home.''

Maze recommends that customers ask about their insurer's policy on using CLUE before inquiring about a claim.

Actual coverage shocked some

When financing a new home, getting enough insurance isn't usually a problem. Most mortgage companies require full replacement coverage. But many of the East Jackson homes hit by the May tornado don't fit into that category.

Many were older homes in poor condition in an area that has long seen property values dropping, not rising. So companies won't typically insure homes in this category for much more than their appraised value.

''When you say it's covered for its value, that sounds reasonable to most people if you don't know any difference,'' McLeary said. However, in this category, if it's covered for its appraised value, it's actually far under-insured.

For example, a home is appraised at $27,000 and is insured for that amount, but it would take $90,000 at today's construction costs to replace it. If the home is destroyed, the insurer agrees to pay the limits of the policy, $27,000, while full replacement cost for this home may have been $90,000.

Page said this type of policyholder accounts for some 'bad-faith' insurance allegations that have been aired since the storm, simply from not understanding their coverage.

''It could be part due to the agent not explaining what the policy covers, or maybe the customer didn't understand,'' Page said. ''There's a lot that goes on at the time of sale. Some people only want to know if it meets what the mortgage company requires of them. So the customer has an obligation to ask questions and make sure it meets their needs, while an agent has a responsibility to their customer to at least attempt to explain it to them.''

Residents and business owners are often complacent about natural disasters until it happens to them, said Loretta Worters, a spokeswoman for the Insurance Information Institute. The institute is a 40-year-old New York City-based nonprofit organization that represents the property/casualty industry and has a mission to improve the public's understanding of insurance. It's when the property owner has gone through a disaster that a disaster plan, including getting the proper insurance, is usually considered, Worters said.

''One of the problems we have had in the industry that can be very frustrating is people not understanding their policies well,'' Worters said. ''Many people don't review their homeowners policy annually to discuss additions and changes with their agent. If the policy is confusing, then that's where the consumer needs to ask questions.''

But what happens to those homeowners who didn't have enough coverage to rebuild? The Federal Emergency Management Agency temporarily put some of them up in motel rooms and provided money for food, until they could get back on their feet. Others are getting aid through groups such as Disaster Recovery Services, which is helping storm victims rebuild with all volunteer labor and funds collected through fund-raising for materials. But some of those homeowners, not having the means to rebuild, may go buy a new car with the settlement money or use it to start renting an apartment or move away.

Then the city is left with a house that will most likely be demolished. If the city has it demolished, the city will file a lien against the property for the demolition cost amount, said Jim Campbell, city of Jackson building official. With most East Jackson homes, the average demolition cost would be $1,600 to $1,800, Campbell said. Until the lien is paid off by either the homeowner or someone interested in buying the property, the land must sit unused. When it's paid, then someone must be willing to build there.

Why are claims still unpaid?

Jackson attorney Joe Byrd suffered millions of dollars in losses to his downtown business from the May storm. He's now preparing to sue. His insurer, Zurich, hasn't actually turned down his settlement demands but refuses to settle the claim, Byrd said. Zurich spokesman Steve McKay refused to comment on the claim.

Zurich has already agreed to pay a policy minimum of approximately $2.25 million on the physical losses, of which about $1.36 million has been paid, Byrd said. But he is also claiming at least another $1 million is owed that hasn't been agreed upon by the insurer, he said.

Byrd wonders why his insurer won't at least pay the undisputed amount of $2.25 million, instead of $1.36 million.

Richard E. Stewart and Barbara D. Stewart said in their 2001 report called ''The Loss of the Certainty Effect,'' that ''recent changes in the commercial property-liability insurance business have made it unlikely that large claims will be paid promptly and willingly.''

The Stewarts are industry experts who have studied changes in the industry over the last three decades that may factor into complaints of delayed settlements, unpaid claims or bad-faith insurance practices in general.

Richard is chairman of Stewart Economics Inc., a consulting firm based in Chapel Hill, N.C., that specializes in insurance. Stewart has a unique perspective as a former superintendent of insurance for the state of New York, president of the National Association of Insurance Commissioners, and CFO of the Chubb Group of insurance companies. Barbara Stewart is president of Stewart Economics and a former corporate economist for the Chubb Group.

''The buyer's assumption that claims will be paid is the key to the value of what insurers sell,'' the Stewarts say in their study. ''Recent changes in the insurance business have placed a cloud over this assumption.''

For one thing, insurers have shifted from a devotion toward policyholders to an obligation to stockholders, the study says.

''Through dividends and appreciation, stockholders get the benefit of what is not paid out for claims,'' the study says. This sentence also refers to a footnote: ''The policyholder-stockholder tension is apparent in a statement by a spokesman for the Chubb Group two days after the terrorist attack on the World Trade Center: 'We'd be sued by our shareholders if we paid and no one else did.'''

Herb Denenberg, a leading consumer reporter, said in his May 20, 2002, Denenberg Report, that ''the (insurance) industry always seems to push the hardest to sell products that best serve the bottom line, but rarely fit with the needs of policyholders.'' Denenberg's insight comes from being a former Pennsylvania state insurance commissioner.

But insurers say they don't make money by collecting homeowner premiums.

''Homeowner policies have been losing money for several years, but most companies make up for it by selling other types of insurance like auto, life and commercial,'' said Page, the local agent turned adjuster. ''They basically write homeowners as an accommodation in hopes of gaining customers on other types of insurance.''

Insurance groups invest premiums into the market, mutual funds and even real estate, including banks, allowing them to double as financial institutions. Likewise, many banks are now able to sell insurance.

Sen. McLeary, who works for Union Planters Bank in Humboldt, is licensed to sell insurance.

''Everyone is getting into so many types of investments these days, like banks, and I work for a bank, but it can be a big problem,'' McLeary said.

When interest rates are high, that's what guarantees the product is going to be solvent. However, interest rates are currently at a 30-year low. A sum of an insurer's money goes into various investments to cover what's on the books. Writing more insurance against equity is now a priority for insurers to get a higher return on their assets, Stewart says. So money, normally reserved to pay claims, is tied up in investments. When a catastrophe hits, it's difficult to free it up quickly. And having to reinvest often means losing money. So more must be borrowed in some cases to pay large claims, and still keep the capital at a reputable level.

''The stock is driven by the stockholders,'' McLeary said. ''They can dump it if it's not good. Earnings Per Share is what drives your stock and if you get a bad report, people bail out. That eats into capital, so it's a hard thing to balance in tough financial times. It's a double-edged sword. Maybe insurance companies just need to be insurance companies and banks need to be banks.''

The laws changed

What could cause a shift in obligation to stockholders, instead of those who pay the premiums?

Up to 1945, property-liability rates were, in most states, dictated by a cartel reinforced by government. The cartel was a group or trust of insurers formed to regulate prices and output in the business. And it was legal, because insurance was thought to be outside the antitrust laws. But after a number of judicial and congressional acts through 1975, it all changed.

''The legal and regulatory framework for insurance switched to favoring competition,'' the Stewarts' paper says. With the competition came an emphasis on controlling the costs that go into rates. One way to control the cost of catastrophes is to spread payment of claims out over time to make it a smaller loss.

So, for example, only paying Joe Byrd $1.3 million of the $2.2 million he says his insurer has already agreed to gives Byrd just enough to stay afloat and roughly $950,000 for the insurer to keep invested. As for the other portion of the claim he feels is owed for lost income and other physical damages, Byrd feels it's an attempt to hold up the process and force him to accept the settlement being offered.

And though he refuses to give up until he gets what he feels is owed, he is now willing to give a large cut of his settlement to a third party to make it happen. Byrd has hired A.J. Vice, a Houston-based public adjuster, who has already helped a number of Jackson businessmen to recover their losses. A public adjuster represents the policyholder as a go-between with their insurer, just as a stockbroker would for his investing client. Vice offers the expertise of being able to read deeper into the details of a policy and get a better settlement for the policyholder.

''At this point, we're basically down so low on money that we have to find a stopping point for the construction being done on our building right now, and get the claim settled,'' Byrd said. ''Zurich is starving us out, and we just can't wait them out anymore.''

It's been nearly a year that Byrd has been negotiating his claim. Now he's ready to pay the public adjuster 8 percent of his settlement to get it over with. So, for instance, if the difference in what's left to pay on the claim is $2 million, then the adjuster would get a $160,000 commission.

''I understand that's an enormous amount of money, and that we shouldn't have to hire someone like this, but short of a lawsuit we can't make them pay,'' Byrd said.

Homeowners have also faced such battles.

After filing an insurance claim from the 1999 tornado that hit Madison County, Bill Lindsey sat down with his insurer for a final discussion on a settlement for content damages that was disputed. Lindsey said State Farm agreed to pay about $17,000 for contents, compared to the $63,000 Lindsey said was owed. At the time, The Jackson Sun had been following the progress of the Lindsey family after the 1999 storm, and Bill had an interview with the newspaper within 15 minutes of his meeting with State Farm. Lindsey told his agent about his next appointment, and recalls telling the agent, ''I'll just tell my story to the newspaper. You do what you have to do, and I'll do what I have to do.

''I didn't get down the road good and he called and said, 'come back and get your check,''' Lindsey said.

State Farm spokesman Brian Maze couldn't comment on Lindsey's claim history.

Claims adjuster Page said the expediency of settling claims is more important after a catastrophe than with an ordinary claim. In his experience, insurers want to settle claims as quick as possible and move on.

''A lot of it has to do with the volume of claims, the severity, and the necessity to move things along,'' Page said. ''I can't speak to any of these particular claims, but sometimes the people that complain the loudest are those attempting to get more than they deserve. Those situations will slow the process down more than anything. I don't think you will find a reputable, legitimate company trying to slow anything down, and they will try to do things to the customer's satisfaction as much as possible.

''When people begin to put unrealistic demands on the company or adjuster, that's going to slow the process down,'' Page said. ''And they have a responsibility to the company to only pay what the policy covers.''

Insurer complaints are private

Only 19 U.S. state departments of insurance publish consumer complaints made on homeowner insurance companies. Tennessee isn't one of them.

Only four states rank insurers according to those complaints to assist home buyers in choosing an insurer. Tennessee isn't one of those either.

The Tennessee Department of Commerce and Insurance not only doesn't publish consumer complaints on their Web site, but considers the complaints confidential.

''We could talk in general terms about the kinds of complaints that have come in for a given area, but the actual complaints are not public record,'' said Wade, the department spokeswoman.

State Sen. Don McLeary, D-Jackson, wasn't aware that in-state complaints are not open record.

''That's really a public record,'' said McLeary, who helped passed legislation earlier this year that will create an insurance pool to assist residents impacted by natural disasters. ''That department is funded by the state, so it seems to me it should be public knowledge. I wouldn't have any problem voting for that. That's something we could do as a legislature. Anything we as legislators do, like e-mail, is all public knowledge.''

The number of complaints logged by the state from the Madison County area were not available. ''Most people aren't aware that they can file a complaint against an insurance company,'' Wade said.

The Web site www.badfaithinsurance.org publishes consumer complaints on insurers and ranks insurance groups accordingly. The site FBIC (Fight Bad-faith Insurance Companies), has a sole mission of informing the public about the inside workings of insurers, which ones to watch out for and a collection of investigative media projects that expose insurance fraud and/or bad-faith practices.

''This site ranks insurers. Why don't most of the state departments do that?'' asks Paul Cohen, a FBIC spokesman. ''Tax dollars pay their salaries.''

- Jamie Page

Copyright The Jackson Sun, 245 W. Lafayette Street, Jackson, Tennessee

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