Judge denies California's 'use it and lose it' regulation appeal.

A 3rd District Court of Appeal upheld an earlier California court decision that found Insurance Commissioner John Garamendi lacked the authority to issue an emergency regulation restricting the use of electronic claims databases in underwriting homeowners policies.

Garamendi and the California Department of Insurance, in their appeal to the original August 2003 decision, contended the regulation was within the commissioner's authority and "consistent with various provisions of the insurance code."

"Unlike automobile insurance, homeowners insurance is subject only to a few restrictions, all clearly set forth in the insurance code," the appeals court decision read.

Garamendi vowed to continue to fight to regulate homeowners underwriting and said the court decision is being reviewed by department attorneys. Of concern to the industry is pending legislation there that would grant the Department of Insurance the authority to regulate underwriting.

The American Insurance Association, which filed the original lawsuit challenging the emergency regulation along with the Personal Insurance Federation of California and the Association of California Insurance Companies, praised the court's decision.

Garamendi issued the emergency regulation in 2003 after a similar advisory was challenged by the Association. The commissioner claims the regulation is needed to combat what he calls the "use it and lose it" crisis in California. Garamendi, according to court documents, said homeowners are being denied insurance coverage based on past claims, including legitimate claims, resulting in a lack-of-coverage crisis.

Garamendi also targeted industry use of data brokers such as ChoicePoint Inc. to get loss history information. The Insurance Department reported a 71% increase in consumer complaints about database inaccuracies between July 2002 and July 2003.

"They have provided strong evidence that insurers, when pricing their policies, too often rely on flawed computer databases with inaccurate and incomplete information," Garamendi said.

Janine Gibford, assistant vice president of the Association, said while inaccurate information in these databases is rare, there is a system In place to correct and challenge any contested information. If it is wrong, she said, it will be removed.

Gibford also claimed the emergency regulation did not address inaccuracies, but only sought to limit the use of the databases.

The emergency regulation, according to court documents, required insurers to "demonstrate that each loss bears a substantial relationship to risk of future loss" when underwriting and restricted the use of databases as the sole criterion for determining risk.

"What the regulation did was say unless you could prove there would be another claim, you couldn't deny coverage," Gibford said. "That's just not possible. And what he's saying is that when someone comes in as a new customer, you can't run a loss history on them. Insurance companies are in the business of managing risk. To tell them they can't manage risk is just irresponsible."

Homeowners, California,
Top Writers--2003

Market share based on direct
premiums written

State Farm      22%
Farmers         18%
Allstate        14%
CA State Auto   5.5%
USAA            4%

Source: A.M. Best State/Line data

Note: Table made from bar graph.