Insurers Win Court Fight over Delaware Home Insurance Renewals

In a victory for the insurance industry, a Delaware Superior Court has ruled that the state’s insurance regulator overstepped his authority when he prohibited property insurers from refusing to renew a homeowner policy based solely on whether the insured had filed a recent claim or made an inquiry.

The court found that Insurance Commissioner Matthew Denn erred when he essentially tried to do by regulation what the Legislature would not do by passing a pending bill.

The victory may be short-lived, however, as Denn has vowed to appeal the ruling and lawmakers have said they will try again to pass legislation to accomplish the same end.

In June 2005, the Delaware Senate passed a measure (SB 173) that would have prohibited insurance companies writing homeowners insurance policies from canceling or non-renewing those policies “based on the claims history of an insured for weather-related claims, unless there were three or more weather-related claims within the preceding three year period.” SB 173 also prohibited an insurer from counting inquiries, minor claims, and unpaid claims as claims.

However, the bill never became law because it failed to pass the Delaware House of Representatives; it never got out of the House Economic Development, Banking and Insurance Committee.

On August 1, 2005, only weeks after the close of the General Assembly’s session, Denn proposed a regulation to largely accomplish what the legislation would have done. His regulation established two new unfair trade practices: the consideration of any non-claim contact by an insured as a claim for underwriting purposes; and the non-renewal of homeowners insurance policies based solely on the claims filed against that policy.

After a Sept. 1 public hearing at which insurers opposed the move, Denn issued a final regulation effective Oct. 11.

The final regulation established as a “predicate unfair trade practice” any instance when an insurer considers an inquiry regarding either a homeowners policy or a loss under that policy to be a claim for purposes of underwriting. It defined an “inquiry” as “any contact initiated by insured that is not the filing or reporting of a claim to an insurer.” The stated purpose of the regulation was to protect consumers from cancellation or non-renewal “due solely to the fact that the consumer had made a non-claim inquiry about any matter relating to the policy . . . ”

The regulation also established as a “predicate unfair trade practice” the non-renewal of a homeowners policy “solely on the basis of claims asserted against that policy” within the past two years.

Two trade groups, the American Insurance Association and the Property Casualty Insurers of America whose member companies write about 45 percent of the homeowners market in the state, sued to block the rule, arguing that Denn had no authority to issue it.

Insurers maintained that by creating a new category of “unfair trade practice,” Denn impermissibly extended and enlarged upon existing insurance statutes.

The court agreed with the insurers, noting that the Senate bill even included language pointing out that “Delaware currently has no laws protecting homeowners from having their homeowners insurance terminated at the end of its annual term simply because they made a weather-related claim with their insurance carrier.”

The decision criticizes Denn for stretching his authority beyond existing statutory provisions to accomplish his regulatory purpose.
The court said Denn took a category of deceptive practices related to claim settlement and “offered it as authority to adopt a regulation related to inquiries and nonrenewal of homeowners insurance policies.” However, the court noted, state’s insurance code does not have a provision related to inquiries or nonrenewal of homeowners policies.

“Cobbling together the language of several disparate statutory provisions is not a permissible way to supplement a statute the Commissioner finds to be inadequate. That goal is best achieved by completing the process that was initially undertaken: legislative change,” Judge Susan C. Del Pesco wrote for the court.

While insurers may have won in Del Pesco’s court, they face a continuing challenge.

Denn announced that he would appeal the Superior Court’s decision to the Delaware Supreme Court and that while the appeal is pending, he and legislative leaders will seek to enact legislation to provide the same protection afforded by the disputed regulation.

“We will fight on every available front to protect homeowners from abusive practices by the insurance industry,” Denn said.

Denn and members of the Senate and House Insurance Committees said that they will pursue a new law in the wake of a Delaware court ruling that would allow insurance companies to refuse to renew homeowner insurance for policyholders who make claims against their policies, or even ask questions about doing so.

State Sen. David Sokola, a member of the Senate Insurance Committee, said he will be the chief sponsor of legislation to be introduced on Jan. 8.

“It is completely unfair for insurance companies to punish homeowners for making routine claims against their homeowners insurance,” Sen. Sokola said. “I am disappointed that the court has prevented the Insurance Department from prohibiting this practice, and I hope the General Assembly will work with Commissioner Denn to pass this legislation promptly so homeowners can once again be protected.”

State Rep. Valerie Longhurst, a member of the House Economic Development, Banking and Insurance Committee, said she will sponsor the House bill similar to what the House failed to pass in 2005..

“The last time the House of Representatives was given a bill to address this problem, it did not act,” she said. “Now that the legislature may be the only body that can protect homeowners from these unfair practices, I hope the House will take this issue more seriously.”

The case is C.A. No. 05C-10-309 SCD, American Insurance Association and Property and Casualty Insurers Association of America vs. Delaware Department of Insurance.