|
|
|
|
| The Basics | Homeowners, demand your (insurance) rights
|
Homeowners insurance is essential, but many insurers abuse their power. Here are 6 reforms we need now.
By Liz Pulliam Weston
Homeowners insurance, like electricity or phone service, is an essential in a modern society. You cant get a mortgage without coverage, and even if you could, most people couldnt afford to rebuild their homes or replace their possessions without it.
Yet insurers arent subject to the same strict regulation and universal service requirements that mark the utility industry. Homeowners are subject to the whims of changing corporate strategies or widespread industry trends over which they have no control. As a result, we can find ourselves without adequate coverage, or even with no coverage at all, virtually overnight.
It shouldnt be that way. While insurers need to be able to make a profit, responsible homeowners need to have adequate access to coverage. Here, then, are a few proposals for reform:
Insurers should be responsible for recommending adequate policy limits.
The quartet of hurricanes that hit Florida this year damaged one out of five homes in the state, while nearly 4,000 homes in California were destroyed by wildfires. That means thousands of homeowners have recently discovered, to their dismay, that their insurance wont pay the full cost of rebuilding their homes and restoring their possessions.
The insurance industry has all but phased out true guaranteed replacement cost coverage, which promises to rebuild a home regardless of the cost. Today, the vast majority of homeowners have policies that cap payouts at 100% to 125% of the amount for which the home is insured.
And typically, that amount isnt enough, as I wrote in Why 2 out of 3 homes are underinsured. But consumers are often unaware of how tragically inadequate their coverage might be, and they typically dont have the skills or resources to figure out how much they really need.
Some consumer advocates, such as Doug Heller of the Foundation for Taxpayer & Consumer Rights, have called for a return of guaranteed policies as a solution. A more realistic approach might be to insist that insurers be on the hook for full replacement cost if they dont recommend adequate coverage. The consumer can always refuse the recommendation, but they should be told in clear, conspicuous language about the dangers of underinsurance.
Policyholders shouldnt be penalized for inquiring about their coverage.
Most insurers report the claims their policyholders file to central databases, such as the Comprehensive Loss Underwriting Exchange (CLUE) or the Insurance Services Offices A-PLUS system. These databases were originally set up to detect and discourage fraud.
Unfortunately, these days the databases are being used to deny coverage or raise premiums when homeowners file too many claims. The definition of too many can be as little as one, especially if its a mold- or water-related claim, as I discussed in Insurers keep a secret history of your home.
Whats worse, some folks, like Jan and Kevin Garder of Bremerton, Wash., are being denied coverage for simply reporting damage or asking their agents if they should file a claim. The Garders say they were dropped by State Farm and had trouble finding other coverage because they told the insurer about some minor water damage -- even though they never filed a claim.
Last year, the company that maintains the CLUE database, ChoicePoint, sent a letter to insurers asking them not to enter inquiries into the database if theres no claim. But ChoicePoint hasnt banned such entries, and insurers can still use them to determine coverage. Consumer advocates say thats not right.
A database which was meant to tackle fraud (has become) a really slippery slope, said consumer advocate Heller.
Policyholders shouldnt be dropped for one or two claims.
As noted above, some insurers have resorted to a use it and lose it policy where coverage is cancelled -- or, more likely, nonrenewed -- after one or two claims.
Obviously, insurers need to be able to pull the plug on truly risky homeowners, particularly ones who file multiple claims that are due to their own bad behavior or neglect of their homes. And homeowners should be smart enough to carry reasonably high deductibles and pay for small losses out of pocket.
But an insurers ability to drop a homeowner should be based on a realistic assessment of future losses, said attorney and consumer advocate Amy Bach of United Policyholders, not on the simple fact that the policyholder made a claim, or even a few claims, if the damage wasnt their fault.
Rozanne Johnson of Portland, Ore., lost her coverage after two incidents a year apart: A neighbors tree fell on her home, and later someone broke into the familys cars. (Personal property stolen from cars is often covered by a homeowners policy.)
I only found out (the policy had been dropped) when I called the agent's office with a question and they said our home was not insured, Johnson said. I was amazed and angry, and it caused a lot of problems with our mortgage company.
Johnsons coverage was briefly reinstated because the insurer had failed to notify her, but at the end of the year she was dropped again. Today, she pays three times as much for coverage from a different company.
Homeowners should have access to affordable, comprehensive disaster insurance.
The state of disaster insurance is, frankly, a mess. The homeowners who need it most often face huge premiums for bare-bones policies with big deductibles. (See Do you really need disaster insurance?) That leads many to simply go bare, with calamitous results when catastrophes finally hit.
Insurers argue, with some merit, that catastrophes are by definition so big and so unpredictable that the industry cant set aside adequate reserves or even figure out how to price policies appropriately. The obvious solution: a federal backstop, much like the one that protects insurers from excessive terrorism-related losses. Insurers would cover losses to a certain amount, and then Uncle Sam would step in.
Some would object that the rest of the country shouldnt have to subsidize the people who live in high-risk areas. But the reality is that most of the United States is a high-risk area. Severe earthquakes can strike anywhere west or just east of the Rockies, or along the New Madrid fault in the Midwest. Hurricanes can strike from Texas to Maine, and floods can happen almost anywhere.
Just ask Ronald Forrester of Houston. The home he bought in 1976 rode out rainstorms and even Hurricane Alicia in 1983 with aplomb. Then more housing was built in his area.
Before the new developments went in, we didnt even get water up to our curbs, he said. Yet since 1998, we have been flooded out three times.
Insurers should emphasize the importance of adequate liability protection.
Some people try to cut their insurance costs in exactly the wrong way: by trimming their liability coverage, which protects them in case theyre sued. In reality, many homeowners should opt for the maximum coverage their policy offers and consider adding an additional personal or umbrella liability policy. (See Umbrella policies plug holes in your coverage.)
Its frightening how underinsured most people are, said Steve Vidmar, an insurance defense attorney in Albuquerque, N.M., who represents policyholders who have been sued. People shake their heads when they read about the huge verdicts that juries are rendering these days, but very few people imagine that they might be on the paying end of one of those verdicts someday.
Insurers dont tend to push this coverage, consumer advocates contend, because its relatively inexpensive and exposes the companies to more risk. But anyone who opts for less than full coverage should be warned -- again, explicitly and conspicuously -- that they could be risking everything they own.
Credit history shouldnt govern who gets coverage or how much they pay.
Insurers have discovered a powerful link between peoples credit files and their propensity to file claims. (See How bad credit costs you with insurers.) But at this point, we dont know if using credit information may discriminate against minorities and the poor, who may (or may not) have more credit problems than whites or higher-income people.
Until more comprehensive studies on the issue are completed, insurers shouldnt have free rein. At the very least, insurers should have at least one other indicator of risk before being allowed to deny someone coverage or raise premiums.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
|
|
|
|
