CLUE Claims Databases

THE TOPIC
APRIL 2006

When a person applies for insurance, insurers need to be able to assess the risk of loss. One way to do this is to look at the applicant’s claim history. Insurers have been using loss histories as a primary underwriting and rating factor for decades. Before computers were used to store data, insurers had to rely information from the applicant for insurance, his or her current insurers and on laborious searches of local records. Now they can have information almost instantaneously, saving time and money.

There are two major property claim databases, CLUE (Comprehensive Loss Underwriting Exchange) and A-PLUS (Automated Property Loss Underwriting System). Most people refer to the reports generated by either system as CLUE reports. Property claim databases enable insurers to check the claim history of both the homeowner and the property that the homeowner is purchasing. Homeowners in the housing market benefit from the fact that the claim record is available to buyers.

RECENT DEVELOPMENTS

• State Legislation: Legislation related to property claim databases has been passed in about one third of states and considered in more than 30. One concern centered on whether inquiries are counted as claims. Generally, insurers say, questions about coverage are not recorded in the database. However, if a policyholder reports damage, even if ultimately no payment is made, the insurer is obligated to open a claim file and that would show up in the database. Claims may be closed without payment for many reasons. The loss that led to the claim may not be covered under the policy, the claim may be fraudulent or the cost of repair may be less than the deductible.
   
• In California, the Department of Insurance is proposing regulations that would restrict a homeowners insurance company’s ability to use information on past claims to develop insurance rates. Under the proposal, rates could not be calculated based on claims related to damage due to weather or other natural phenomena or on losses that do not have a substantial relationship to the risk of loss or on unpaid or minor claims. The proposed regulations would also require an insurer to disclose how it uses claims history when it decides whether to renew or surcharge policies.
   
• The department has tried to limit insurers’ use of claims information before, but in relation to underwriting. In February 2005, the California Court of Appeals ruled that the Insurance Department’s 2003 emergency regulation restricting insurers’ use of claim histories for underwriting was invalid. Under current regulations, insurance underwriters in California are required to supplement information from such sources as CLUE with information from the policyholder and may not base any adverse action on inquiries to CLUE that did not result in the filing of a claim. The California Insurance Department emergency regulation went further, barring conditions that have been corrected, such as those that caused a claim in the past, from being considered when assessing the increased risk of loss due to information included in a CLUE or an A- PLUS report. The court found that under existing law, the insurance commissioner has only limited power to regulate the underwriting practices of homeowners insurers and that power does not extend to the use of claim histories.
   
• The National Conference of Insurance Legislators (NCOIL) developed a model bill on CLUE in 2005. The model act prohibits an insurer from basing homeowners underwriting decisions solely on the claims history of the previous owner; requires an insurer to act within 30 days of issuing a binder for an insurance policy that includes information in a CLUE report; and allows an insurer to base underwriting decisions and establish rates on the known condition or use of the premises as determined by an inspection of the premises. Information contained in the claims history report may not be more than five years old. In addition, the model act bars the use of inquiries made by a consumer to an insurer as a basis for denying, canceling or nonrenewing a homeowners policy and the use of claims closed without payment unless more than one occurred in the previous three years or the claim closed is predictive of future loss. The use of claims history must be disclosed.

BACKGROUND

CLUE Reports and the Consumer: Consumers can get a copy of their own CLUE report for a small fee from ChoicePoint. Since the average homeowner files a claim only once in 10 years and the data is only kept for five years, most people have no CLUE record. (Auto insurance claim data are retained for seven years in California.) Consumers who suspect errors — disputes over CLUE reports arise in only three out of every 10,000 cases or three hundredths of 1 percent — may contact ChoicePoint which must follow certain procedures. The vast majority of disputes are resolved within two weeks. Consumers can also add information to their report that lowers their risk profile such as the replacement of a leaky roof or the installation of dead bolt locks on outside doors.

CLUE reports are playing an increasingly important role in real estate transactions. Many buyers now stipulate that a CLUE report on the new home must be included with the real estate contract and some state legislatures are considering making this a requirement for any real estate transaction.

Most state insurance laws allow insurers 60 days after issuing a policy to thoroughly review all the underwriting information, including CLUE reports and to cancel a policy if new information comes to light that makes the risk unacceptable. However, a homeowners policy must be in place at the real estate transaction closing and since many home buyers leave buying a homeowners policy to the last minute, the insurer may not have checked all the underwriting material by the time the closing takes place. Realtors are now encouraging buyers to start shopping for coverage early in the real estate transaction process.

How Insurers Use CLUE Reports: CLUE reports are almost always used to underwrite and rate new policies rather than rerate existing business. At renewal time underwriters can look to their own databases to find out about recent claims. Each insurer decides how to use CLUE reports based on its own underwriting and rating criteria. In some companies, a home with two water damage claims in the last five years or several thefts will qualify for a standard policy, in others for a high risk pricing tier. Some insurers will refuse to insure it altogether.

In California, where the use of CLUE has been controversial, almost 60 percent of the claims in the database are for water damage. Water damage claims include claims for mold-related damage, which are costly and have been increasing. Overall, nationally, less than 40 percent are for water damage. Insurers are very cautious about insuring homes with recent water damage because mold eradication is so costly.

CLUE reports became an issue in several states including California and Utah after realtors complained that deals were falling through because insurers were canceling new policies after examining claims information. However, according to a leading homeowners insurer, more than 99 percent of all homebuyer applications were approved in 2002 and only 1,000 homes sales nationwide were cancelled because of insurance problems.
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