2003 Eligibility Guidelines and the Use of Loss Information —by Residential Property Insurers (4/24/2003)

STATE OF CALIFORNIA

JOHN GARAMENDI, Insurance Commissioner

DEPARTMENT OF INSURANCE

300 Capitol Mall, 17th Floor

Sacramento, CA 95814

www.insurance.ca.gov

ADVISORY NOTICE:

ELIGIBILITY GUIDELINES AND THE

USE OF LOSS INFORMATION BY

RESIDENTIAL PROPERTY INSURERS

DATE:

APRIL 24, 2003

TO:

ALL RESIDENTIAL PROPERTY INSURERS

The purpose of this advisory notice is to direct your attention to those laws concerning the

appropriate use of loss history information in the rating and underwriting of residential property

insurance in California. The Department of Insurance (CDI) has received numerous complaints

from homeowners and tenants who have been treated unfairly by insurance companies, particularly

in the gathering and use of loss information in the underwriting process.

Residential property insurers, among others, are required to maintain eligibility guidelines in

accordance with California Code of Regulations (CCR), Title 10, §2360.2 - Eligibility Guidelines/

Qualification for Insurance and Rating Plan, which states:

An insurer shall maintain eligibility guidelines for every line of insurance offered for sale to

the public. The Eligibility Guidelines shall be sufficiently detailed to determine the

appropriate rating plan for the insured. An insured or applicant who meets the eligibility

guidelines shall qualify to purchase the insurance.

Further, eligibility guidelines are defined, in CCR §2360.0(b), as “specific, objective factors” that

“have a substantial relationship to an insured's loss exposure.”

The application of eligibility guidelines that are not specific and objective, and that do not have a

substantial relationship to an insured's loss exposure, result in adverse underwriting decisions that

are unfairly discriminatory, in violation of California Insurance Code (CIC) §1861.05(a)

as “specific, objective factors” that

“have a substantial relationship to an insured's loss exposure.”

The application of eligibility guidelines that are not specific and objective, and that do not have a

substantial relationship to an insured's loss exposure, result in adverse underwriting decisions that

are unfairly discriminatory, in violation of California Insurance Code (CIC) §1861.05(a). Actions

that can be considered unfairly adverse when based upon noncompliant eligibility guidelines

include the insurer or its agent failing or refusing to offer a policy, declining, non-renewing, or

restricting coverage, surcharging the rate, or placing the risk in a higher rate tier or program.

Evaluation of Losses

Not every loss is related to the current loss exposure. An insurer choosing to include losses as an

eligibility criterion must be able to demonstrate that each loss utilized bears a substantial

relationship to risk of future loss. A loss at a particular property, or by a particular consumer, must

be evaluated to determine if the loss is evidence of increased risk of future loss. Losses that have

been fully remedied or otherwise resolved so that they no longer present an increased risk of loss do

not have a substantial relationship to the insured’s loss exposure.

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Inquiries regarding coverage, coverage discussions, or hypothetical discussions between the insured

and the insurer or its agents are not relevant for underwriting consideration, unless an actual loss or

exposure to loss is identified and determined to have a substantial relationship to the consumer’s

loss exposure

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Inquiries regarding coverage, coverage discussions, or hypothetical discussions between the insured

and the insurer or its agents are not relevant for underwriting consideration, unless an actual loss or

exposure to loss is identified and determined to have a substantial relationship to the consumer’s

loss exposure.

Insurance Information and Privacy Protection

As described in CIC §791.12(b), personal information, such as loss history data, obtained from

insurance-support organizations, such as claims database vendors, may not be the basis, in whole or

in part, for an adverse underwriting decision; however, an insurance institution or agent may base

an adverse underwriting decision on further personal information obtained as the result of

information received from such insurance-support organization.

Currently, much of the data used to determine residential loss history comes from insurance-support

organizations that compile loss history records of consumers and of property locations. These

records do not distinguish between losses or claims that do bear a substantial relationship to an

insured's loss exposure and those that do not. Loss information, whether from a claims database,

the application, or another source, must be evaluated by the insurer using the information. If

necessary, further information must be gathered by the insurer to determine if an increased exposure

to future loss exists before the loss information can be used as grounds for an adverse underwriting

decision

s loss exposure and those that do not. Loss information, whether from a claims database,

the application, or another source, must be evaluated by the insurer using the information. If

necessary, further information must be gathered by the insurer to determine if an increased exposure

to future loss exists before the loss information can be used as grounds for an adverse underwriting

decision.

Additionally, when an insurer makes an adverse underwriting decision based on information from a

consumer report, the insurer is required to provide notice and advise the consumer of his or her

rights, as required by CIC §791.10 and the Fair Credit Reporting Act (15 USC §§1681 et seq.)

Summary

Residential property insurers are advised to review their eligibility guidelines and practices with

respect to the use of loss history to ensure that they comply with all applicable laws. Insurers that

do not comply with all applicable laws are subject to administrative action and penalties. CDI will

not approve a rate application that does not contain all data necessary to determine whether the

requested rate complies with the law, including eligibility guidelines that are specific, objective and

that have a substantial relationship to an insured's loss exposure.

Complaints regarding these provisions will receive priority in consumer services activities and

market conduct examinations, and throughout the enforcement process.

Any questions regarding this notice can be addressed (via e-mail with attachment, if possible) to:

Donald Hilla, Senior Staff Counsel -- hillad@insurance.ca.gov

California Department of Insurance

45 Fremont Street, 21st Floor

San Francisco, CA 94105

John Garamendi

Insurance Commissioner

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Note: Authority: CIC §791.12, 1861.05(a), and CCR §2360.2

References:

CIC

§791.02(a)(1),

791.10(a), and 1857, and CCR §2360.0(b), 2360.3, and 2360.6, 2648.4(b) and USC §1681.

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