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Florida Consumer Advocate Hits Use of Past Credit History to Deny Claims

11/2/2012
By: Michael Adams
Insurance Journal

Florida’s consumer advocate is calling for an investigation into insurers using homeowners’ past credit history to deny claims and cancel policies even though the homeowners have paid premiums for years.

Florida Consumer Advocate Robin Westcott said some property insurers are using a policyholder’s past credit history to retroactively cancel a policy and deny a claim. That credit history may include bankruptcies, liens or home foreclosures that may have occurred years before they purchased a policy.

Westcott said the practice violates Florida law that only allows insurers to void a policy and cancel it from its inception and that is if the initial premium check is not backed by funds.

“I believe that the practice described to void coverage and/or deny claims for misstatements relative to credit history is an abusive practice that should be consider an unfair trade practice,” said Westcott in a letter to Insurance Commission Kevin McCarty.

“This activity threatens not only homeowners’ financial stability but also the state’s economic recovery,” Westcott wrote.

Westcott’s said her office has received 10 complaints, although her letter cites only three cases, all involving Universal Property and Casualty Insurance Co. Her agency is unsure how widespread the practice is but Universal is one of the state’s largest insurers.

Universal did not respond to a request for comment.

According to Westcott, insurers may use credit reports to verify the information provided by consumers when they apply for coverage. Their underwriting criteria may also contain policy exclusions for bankruptcy, liens or foreclosures prior to applying for coverage.

However she said what is happening in these cases is that the policyholder purchases a policy and pays the premium and only after the policyholder submits a claim does the insurer run the insured’s credit history to see if the information provided on the original application is correct.

If there is any inconsistency between the credit report and the policyholder’s application, the insurer then cancels the policy from the date it was purchased, leaving the consumer on the hook for any damage.

In the three Universal cases, homeowners had coverage through the insurer from between 18 months and four years, according to the state. After the homeowners filed claims, they had their policies canceled retroactive to the date of issue for misrepresenting information on their initial application. In each case that information involved financial issues such as a bankruptcy or a lien that occurred up to four years before they applied for coverage from Universal.

Two other cases involved individuals who were issued HO-6 policies, which were similarly canceled despite the fact that Universal’s HO-3 financial underwriting guidelines did not apply to HO-6 policies.

Upon being contacted by Westcott’s office Universal reinstated one policy and paid the homeowner’s claim. Universal, however, refused to reinstate the other policy, according to the state official.

Westcott said that consumers should be required to give accurate information when applying for policies. However, she said, insurers have plenty of time to check the information when deciding whether to issue the policy and if they don’t they are being irresponsible for lulling policyholders into a false sense of security and leaving them at risk.

“The practice of ignoring readily available information to your potential advantage (collecting premium) and using it only when convenient (denying the claim) reeks of the same business practice we have seen recently for the use of the death rolls,” said Westcott.

She said policyholders who have seen their claims denied or policies cancel are left with few options when it comes to obtaining coverage. Since their coverage was void for misrepresentation, no private insurer or Citizens Property Insurance Corp. will accept their application. As a result, they may have to secure coverage through their mortgage holder at a high cost.

Given Florida’s still struggling homeowners market, Westcott said that insurers’ underwriting criteria should take into account all of the factors of a homeowner’s policy, especially if they have paid premiums for years.

“If the private sector intends to meet the needs of Florida insurance consumers, they must be ready to respond with underwriting criteria that provide a true understanding of their risk and provide the consumers of our state access to their products,” said Westcott.