Home insurance underwriting rule

Issued and entered September 29, 1980 by Nancy A. Baerwaldt, Commissioner of Insurance

Section 2119(1) of Public Act 145 of 1979 (Act) provides that an insurer shall put in writing all underwriting rules used in transacting private passenger auto insurance and homeowners and dwelling fire insurance. This bulletin explains the provisions of the Act with respect to the underwriting of homeowners and dwelling fire insurance and provides guidelines for the filing of underwriting rules with the Commissioner of Insurance (Commissioner).

PROVISIONS OF THE ACT

Definition of Underwriting Rules

All underwriting rules used by an insurer in transacting home insurance must be in writing and phrased in terms understandable to a person of ordinary intelligence. Underwriting rules means all statements, guidelines or criteria of an insurer which describe the standards under which the insurer issues, refuses to issue, renews, refuses to renew, or limits coverage for home insurance to persons within Michigan (Sections 2119(1) and 2104(6)).

Requirement to file

All insurers must file their underwriting rules for home insurance with the Commissioner, for informational purposes, before they may put them into use. The filed rules become public information. Insurers using inspections of dwellings to determine whether an insured or applicant is an eligible person for home insurance must also file their criteria for selecting dwellings.

The Commissioner shall prohibit use of an underwriting rule or inspection criterion found to be inconsistent with the provisions of Chapter 21 of P.A. 145, after a hearing held pursuant to Act No. 306 of the Public Acts of 1969. (Sections 2119(6) and 2121(3)).

/PBX/Content of Underwriting Rules for Home Insurance (Section 2117)

Underwriting rules for both new and renewal home insurance policies, except where otherwise specified, may be based only on the following:

1. The criteria used in Section 2103(2)(a) - (1) to define an eligible person for home insurance provided they are expressed so that an ordinary consumer could determine exactly what characteristics or actions make him or her ineligible.

2. Specific physical conditions of the property insured or to be insured, if such condition is

a) directly related to the perils insured against AND

b) chosen without regard to the age of the structure AND

c) based upon specific provisions of a housing or safety code, a manufacturer's specification, or standards of similar specificity.

If an insured or applicant obtains a certificate of compliance or habitation from the proper agency certifying that the building is in substantial compliance with local housing and safety codes, the insurer must accept the dwelling as complying with its physical condition underwriting standards, unless it can show otherwise.

3. For renewal policies only, the liability claim history of the insured, if

a) the claims were reported during the 3 year period immediately preceding renewal of the policy AND

b) it was proven that the claim or claims arose out of the insured's negligence.

4. For renewal policies only, an insured's failure to correct a specific physical condition if

a) the insured had been given written notice from the insurer to correct the condition AND

b) the condition is directly related to a paid liability claim or it presents a clear risk of significant loss under the liability portion of a homeowners policy.

5. For new policies only, specified physical conditions which clearly present an extreme likelihood of a significant loss under the liability coverages of a home insurance policy.

6. For renewal policies only, three paid claims, other than liability claims, reported during the 36 months preceding renewal if

a) the claims totaled at least $750, exclusive of weather related claims or at least $1,000, inclusive of weather related claims AND

b) all of the claims involving on-premises losses were incurred in connection with the residence presently insured by the policy up for renewal. Off-premises losses under policies on residences other than the one presently insured may all be counted toward the 3 claim total.

7. The number of residences in the dwelling is inconsistent with the policy forms approved by the Commissioner for the insurer.

8. The unoccupancy of a dwelling for more than 60 days, only if there is evidence that the applicant or insured intends to vacate permanently
or to keep the premises indefinitely vacant or unoccupied.

9. The existence of an adjacent physical hazard, if all of the following are true:

a) the hazard presents a significant risk of loss directly related to the perils insured against AND there is no rate surcharge applicable to that hazard.

b) non-renewals on the basis of adjacent physical hazard are due to a change in the hazard from that which existed at the original date of policy issuance.

c) adjacent residential property or traffic patterns are not considered to cause significant risk of loss.

10. For replacement cost policies only, the relationship between market value and replacement cost of a dwelling insured or to be insured, if all of the following are true:

a) the insurer offers for sale a repair cost policy approved by the Commissioner as meeting the requirements of Section 2103(3).

b) the rates for the repair cost policy meet the constraints in Section 2103(3)(c).

c) the insurer does not underwrite repair cost policies on the relationship between market value and replacement cost.

11. For replacement cost policies only, the failure of an insured or applicant to purchase an amount of insurance greater than 80% of the replacement cost of the property only if both of the following conditions are met:

a) the purchase of insurance in excess of 80% of replacement cost is a condition of sale of the policy AND

b) the insurer sells at least one form of replacement cost policy which requires only minimum coverage amount equal to 80% of the replacement cost of the dwelling as a condition of purchase.

Use of Underwriting Rules

1. All underwriting rules meeting the requirements of Section 2117 of the Code must be applied in the same manner throughout the entire state,
so that every applicant or insured who meets a company's written standards will be accepted or renewed, and every applicant or insured who fails to meet the standards will be rejected or non-renewed. (Section 2119(2)).

2. All underwriting rules (excluding those authorized by Sections 2117(2)(c) and (f)), must apply equally to new and renewal business except in the case of applicants or insureds who are not eligible persons. Underwriting rules governing renewals of existing insureds who are not eligible persons may be based on a contractual obligation of the insurer not to cancel or non-renew. (Section 2119(5)).

3. The Commissioner shall not consider underwriting rules which provide for certain applications to be reviewed on a submission basis to be acceptable under Chapter 21, unless the factors on which the decision will be made to offer, refuse to offer, or limit coverage to the applicant are specifically stated.

4. An insurer may not establish underwriting rules for home insurance for contracts providing identical coverages that differ from those of any affiliate of the insurer. (Section 2117(1)).

5. An insurer may use inspections of dwellings in order to determine whether the insured or applicant is an eligible person for home insurance provided that:

a) the criteria for selecting dwellings for inspection are filed with the Commissioner for informational purposes

b) the criteria for selecting dwellings for inspection are not based on any of the following:

1. Location, whether by political subdivision, census tract, zip code, neighborhood, or area which may be described as a block, set of blocks, or by street coordinates.

2. The age of the dwelling or the age of its plumbing, heating, electrical, or structural components, or of any other components which form a part of the dwelling.

3. The market value of a dwelling, unless the value is used as a minimum value above which all dwellings will be inspected.

4. The amount of insurance, unless the amount is used as a minimum above which all dwellings will be inspected.

5. Race, color, creed, marital status, sex, national origin, residence, age, handicap, or lawful occupation. (Section 2121).

6. Unless a termination of insurance is due to reasons which conform to an insurer's filed underwriting rules, the termination is not effective (Section 2123(4)).

INTERPRETIVE GUIDELINES

1. In creating written underwriting rules it is not sufficient simply to quote statutory language from P.A. 145. All underwriting standards must refer to specific conditions or actions and be expressed so that an applicant or policyholder could determine exactly how he or she does not meet an insurer's underwriting standards.

2. All underwriting rules must be applied uniformly among all applicants and policyholders of an insurer throughout the state. Insurers may establish different underwriting standards for new applicants and renewals only if:

a. it is required by Section 2117 or

b. the applicants or existing insureds are not eligible persons.

3. Underwriting rules using the physical condition of a property must be based on objective standards such as specific housing or safety code
provisions or a manufacturer's specification, be without regard to the age of the structure and be directly related to the perils insured against. Insurers should also include a rule in their underwriting manuals informing underwriters that if an applicant or insured obtains a certificate of compliance or habitation issued by an appropriate governmental unit or agency, certifying that a building is in substantial compliance with local housing and safety codes, the certificate creates a rebuttable presumption that the dwelling meets the insurer's underwriting rules relating to physical condition.

4. Section 2117(2)(c)(i) allows underwriting of renewal business on liability claim experience arising out of an insured's negligence. This means claims paid under the liability portion of a home insurance policy where negligence was a factor in paying the claim. It does not automatically include claims paid under the medical payments or voluntary property damage coverages of a home insurance policy unless negligence by an insured was involved.

FILING GUIDELINES

To aid in the Commissioner's review of the initial rate filings made under Chapter 21 of the Act, an insurer should file its home insurance underwriting rules with the Commissioner on or before September 1, 1980. Home insurance underwriting rules filed pursuant to Section 2119(6) shall become effective no later than January 1, 1981. THESE UNDERWRITING RULES SHALL APPLY TO ALL NEW APPLICANTS AND RENEWAL BUSINESS WHICH TAKES EFFECT ON OR AFTER SUCH EFFECTIVE DATE REGARDLESS OF WHEN THE RENEWAL NOTICE WAS ISSUED.

Each insurer shall attach to its underwriting rules an index which identifies and locates the following:

a. underwriting rules based on criteria set forth in section 2103(2).

b. underwriting rules based on physical condition of property.

c. underwriting rules based on claim history.

d. underwriting rules which differ from the rules of any affiliated insurer and which would affect the offer of insurance to eligible and/or noneligible persons.

e. underwriting rules which apply only to noneligible insureds at renewal.

f. criteria for selecting dwellings for inspection.

Any additions to or changes in an insurers home insurance underwriting rules shall be filed with the Commissioner prior to their use in Michigan. Appropriate changes in the index shall also be made.

Home insurance underwriting rules filings should be mailed to:

Commissioner of Insurance
Michigan Insurance Bureau
Department of Commerce
Post Office Box 30220

Lansing, Michigan 48909

Attention: William Magee
Market Standards Division

RIGHTS AND PROCEDURES

The guidelines in this bulletin are effective immediately. In conformity with Section 3(6) of the Administrative Procedures Act of 1969, MCLA 24.203(6); MSA 3.560(103)(6), these guidelines are a statement of policy which the agency intends to follow, which does not have the force or effect of law, and which binds the agency, but does not bind any other person.

The Bureau shall use these guidelines in reviewing all filings of home insurance underwriting rules made pursuant to Section 2119(6) of the Act and in determining whether an underwriting rule is inconsistent with the provisions of Chapter 21 of the Act. The operation of this bulletin does not suspend operation of any guidelines currently in effect.