Mr. and Mrs. Middle America had several couples over to celebrate the Fourth of July. Just before the fireworks display, someone set off a cherry bomb in the downstairs bathroom sink.
Result: a shattered sink, two burst water pipes, water damage to rugs, floor and basement ceiling, and a $1,300 insurance claim.
Two weeks later their 5-year-old plugged the upstairs tub to play with his sailboat. A neighborhood pal called him out to play and he went, leaving the tub faucets on. By the time his mother, who was in the basement doing the laundry, was aware of what had happened, the tub had overflowed and a portion of the dining room ceiling had collapsed.
Result: a $900 claim for water damage and plaster repairs. And an insurance policy that was not renewed.
"There are a number of things that trigger insurance termination," says Bob Hunter, "and some of them can be very legitimate reasons."
Hunter, president of the National Insurance Consumers Organization (NICO), says two valid reasons for policy termination are frequent claims by the insured, and a change or increase in the risk originally underwritten by the insurer. "The situation is grayer as you drop toward one or two claims," he says. "If you're really putting in lots of claims, you have to understand why the insurance company has to get off the risk: They're getting a couple of hundred dollars in premiums and they're paying thousands year after year."
Experts in and out of the industry agree on the frequency-of-claims issue. "The insurance companies are in business to make money," says one executive. "One or two claims, especially ones that aren't related to your own activity, aren't likely to cause problems."
"In my estimation," says Hunter, "a company should not even consider cancellation in that situation, although some will.
"When I say cancellation, I'm including nonrenewal, because that's really more typical. Probably for every cancellation there are 50 nonrenewals."
Some companies are more likely to not renew, or to cancel policies, than others. "That," says the insurance industry executive, "is because the companies with very competitive, favorable rates are most likely to look carefully at the type of claims the homeowner makes ." Their rates are based on a carefully considered, specific profile, and when the insured falls outside that profile, termination is likely.
One reason there are comparatively few policy cancellations is that regulations in many states make it hard to justify. "The primary reason for cancellation during the term of the policy," says Hunter, "is nonpayment of premium."
But regulations concerning policy nonrenewal tend to be less stringent.
Jane Avery, supervisor of property and casualty consumer services of the Virginia Bureau of Insurance, Richmond, says companies terminating policies in that state must:
* Provide 30 days' written notice, giving the reason for termination;
* Advise consumers that the Bureau of Insurance can be asked to review the case;
* Inform consumers that they may contact another agent and, if unsuccessful, secure FAIR (Fair Access to Insurance Requirements) plan coverage, a federally mandated program administered by the states to provide insurance coverage for people who can't get it through normal channels;
* Give evidence of having mailed the notice to the consumers' last known address.
Cancellation is justified for, among other things, failure to pay premium on time, fraud or misrepresentation, and any change in the property that would change its safety rating or likelihood for damage.
As with nonrenewal, companies canceling a policy must give 30 days' notice and consumers have the right to appeal to the insurance bureau. But the odds of reversing a decision to cancel are not good, Avery points out.
The function of the insurance bureau, says Avery, "is very technical in nature. We can only see that all requirements have been met" when a consumer appeals a policy cancellation or nonrenewal. On the other hand, she says that in Virginia "a company cannot refuse to write insurance because you've been denied coverage before."
In Maryland, J. Frank Nayden, chief of the property and casualty bureau of the state insurance division, says his office works actively -- and successfully -- to mediate company/consumer disputes.
Companies terminating policies in Maryland, other than for nonpayment of premiums, must:
* Provide at least 45 days' notice. (In almost all cases, says Nayden, this is done at renewal time.)
* State the reason for cancellation or nonrenewal in the notice or provide a written explanation if the customer requests one within 10 days. (The company also must send the Maryland Insurance Division a copy of the notice, including reason for termination.)
The companies, says Nayden, "cannot terminate a policy for arbitrary, capricious or unfairly discriminatory reasons. The burden is on the insurance company to show that termination has a relationship to their business and economic purposes."
Should a company decide it has underwritten insurance on too many homes, for example, Nayden says it couldn't be selective about which policies it would terminate within the state. "They would have to terminate all of them."
Legally valid reasons for terminating individual policies include "filing too many claims and failure to continue to meet the company's underwriting standards." While a company might not terminate for one $25,000 claim, it might very well not renew a policy where a homeowner had filed five $500 claims, for example.
The District of Columbia's municipal regulations basically hold that homeowners' insurance policies may not be canceled or not renewed unless: the insured fails to pay a premium under terms of the policy; the insured makes willful misstatement or omission of fact with regard to application or claims against the insurer; or the property or its use change "with respect to its insurability."
Requirements for termination in the District include:
* At least 30 days' notice, by mail "or delivered in a manner reasonably designed to assure delivery to the last known address of the insured."
* In cases of cancellation, a copy of the notice must be provided to the superintendent of insurance 30 days ahead of time. This action isn't necessary in cases of nonrenewal or cancellation for nonpayment of premium.
* At least 5 days before sending notice of termination, the insurer must notify the insurance agent involved of the coming action.
* Notice must include "a reasonable explanation of the ground or grounds" used as a basis for termination.
* The notice must tell the insured of his "possible eligibility for insurance under the D.C. Insurance Placement Act" or other similar plans, as well as how to find out if he's eligible, and "shall advise him of his appeal rights and the appeal procedures."
Policies, excluding renewals, in force for 30 days or less are not covered by those restrictions.
Homeowners disputing termination of their policies may, before the effective date of cancellation or nonrenewal, appeal, in writing, to the insurance superintendent, explaining why they consider termination unjustified.
If the company and homeowner haven't worked out their differences, the superintendent then decides whether termination is "authorized under the terms of this regulation."
Either party may appeal the superintendent's ruling.
Maryland's Nayden says insurers in his state stand a pretty good chance of coming to some sort of satisfaction regarding problems with their homeowners' insurance. He cites one instance where he received a complaint from a citizen's group in the Olney area.
Several homeowners had suffered damage to the aluminum siding of their houses during a hail storm. "Several companies," says Nayden, "took the approach that they only would replace the damaged portion of the siding." Many of the houses had suffered damage only to one of their sides.
When contractors were unable to come up with new siding that matched the undamaged sides of the houses, the homeowners demanded that the insurance underwriters pay for replacement of all the siding on their houses, saying that the mismatched siding would result in "diminution of value" of their property.
The companies refused the consumers' demands. The consumers took their complaint to the insurance division, which ruled in their favor. "The companies," says Nayden, "initially refused to budge. We held a hearing, presided over by the commissioner. As a result of that hearing, the commissioner decided they had to replace all the siding. Within 10 to 15 days, all the companies had decided to pay on the basis of replacing all four sides."
Had any of the companies refused, Nayden says, they could have been fined up to $50,000 "for violation of a code: improper denial of a claim."
His main frustration, says Nayden, is that many people seem to be unaware of the purpose of the property and casualty bureau. "If more people called us, I think we'd be able to help them, too."