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|HOMEOWNERS REPORTING COVERAGE DENIAL
Byline: By Barbara Deters, The Arizona Republic
As a result, the department has launched an investigation into whether insurance companies are treating Arizona consumers fairly and legally.
Until a couple of months ago, the department had not received complaints about the credit issue, said Gay Ann Williams, deputy director of the state Insurance Department.
However, over the past couple of months, the department has received five to seven calls weekly from Arizonans who have been denied coverage because of their credit histories, she said.
''For five to seven calls a week to come in on an issue like this, it's of concern. It's a big number,'' Williams said.
The department thinks that the true number of homeowners affected by the issue is much larger than just those who are willing to pick up the phone to call, Williams said.
Williams cited an instance last week where a Paradise Valley man who had a home valued at $400,000 called to complain that he had been denied coverage on his residence because he had a foreclosure several years ago. The department was able to help him find an insurance company to cover him, but at a much higher rate than what he would have paid if he hadn't had the bad credit history.
Williams said the department has asked the state's top 25 insurers of homes, who write about 80 percent of the homeowner policies in Arizona, to report on whether they use credit as a criterion in approving homeowner and auto coverage. The insurance companies have until Dec. 1 to respond.
''The law says they can't unfairly discriminate,'' Williams said. ''Our belief is, if they are using credit as a basis to unfairly discriminate against policyholders and applicants, that is illegal.''
The insurance companies must report to the state how they use credit as a criterion and provide statistical support to prove how their actions do not unfairly discriminate against consumers with bad credit histories.
The department hopes to complete the investigation and provide solutions, if needed, by the start of the legislative session in January.
''If legislation is needed, it would be drafted and ready to go,'' Williams said.
State Farm Fire and Casualty Co. does not use credit as a factor in determining whether it will insure a homeowner or a driver, said Mark Brandt, spokesman for the company.
''It has become a practice that has come under such criticism because it tends to affect certain areas of a community and certain ethnic groups and because of the concerns about that, we don't use it,'' Brandt said.
Farmers Insurance Co. of Arizona, Allstate Insurance Co. and American Family Insurance, three of the state's largest insurance companies, all use credit to some extent in determining whether to cover a homeowner.
None of the three runs credit reports on all customers. However, as a general policy, Allstate verbally asks all applicants about their credit histories as a way of pre-qualifying applicants, said Mike McKinney, Allstate's regional underwriting manager.
The practice is justified, McKinney said.
''If we know a particular group of people is going to cause higher losses than the rest of our policyholders, then we have an obligation to our policyholders to protect their rate,'' McKinney said.
A spokesman for American Family Insurance said there are few instances in which applicants are denied coverage because of their credit history.
''The reason credit is even brought into it is fraud and arson,'' said Rick Fetherston, an American Family spokesman.
''There are a few people who, when they find themselves in financial stress, will want to create a loss to help them out of their financial dilemma,'' he said. ''Most arsons are created for financial reasons.''
Fetherston said the company will run a credit report on an applicant if that person has had prior thefts or losses, or if there are unusual circumstances. But he said that that information is used only as a reason for denial if the credit history is really bad.
''It has to be something serious, like a bankruptcy, or a repossession or foreclosure. Not just an unpaid bill,'' he said.
American Family, which had 45,640 Arizona policies at the end of September, denied home coverage to 3,018 applicants through the third quarter of this year. Of those, 85, or 2.8 percent, were rejected because of their credit histories, Fetherston said.
Although that may sound like a low number, the Insurance Department's Williams warned that insurance companies all have their own underwriting standards and that other companies may have tougher standards and may be denying applicants at a higher rate.
At Farmers Insurance, credit reports are sought on applicants with unusual requests for coverage, such as seeking to insure a single item of jewelry, something Farmers doesn't normally do, said Craig Graham, regional underwriting manager.
Or in the case of someone who has an $80,000 home but wants an exorbitantly high amount of coverage, say $300,000 worth, he said.
''We use them very sparingly,'' Graham said of credit reports. ''We think it's important if we're going to provide some unusual coverage.''
Graham said Farmers, which had 362,248 policies in the region of Arizona, New Mexico and Nevada, at the end of September, had canceled or rejected 4,653 applicants. Of those canceled or rejected, the company had pulled credit reports on 397, or 8.5 percent.
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