Dam Deductible Endorsement Iced By Division Of Insurance

Insurers lost almost a billion dollars in 2015 through ice dams caused by winter storms

Ice dams, roof collapses, and frozen pipes cost the Massachusetts insurance industry almost a billion dollars last winter. In particular, ice dams, resulting from the record snow levels that covered homeowners’ roofs, became the main loss driver by a very wide margin.

Severe CAT 2015 loss spurs request for ice dam deductible

Catastrophic homeowner losses that Massachusetts insurance companies suffered, in 2015, quickly had carriers considering policy changes to protect their bottom line from future ice dam CAT losses. As a result, this past July, two of the state’s largest homeowner insurers, Commerce Insurance and Citation Insurance, both subsidiaries of MAPFRE U.S.A. Corp., filed a proposed “Ice Dam Deductible” endorsement with the Division of Insurance.

New policy definition and separate deductible

The proposed endorsement would have added a new definition to the homeowner policy for the term: “Ice Dam.”

Under the proposed endorsement, “Ice Dam” would have meant:

…the accumulation of snow or ice on a roof, wall, soffit or gutter which prevents melting snow or ice from draining off the structure, resulting in water build-up which leaks into a structure.

If approved, the revised policy would then have applied this new definition to a separate deductible potentially involving any loss “arising from an ‘ice dam.’”

The proposed “Ice Dam” endorsement would have been mandatory for policyholders with multiple ice dam claims

The proposed endorsement that would have been “required for a specific segment of the book per underwriting guidelines” and optionally available for most other policyholders. The segment of Commerce’s book that the insurer would only have written with an ice dam deductible were apparently those insureds that had had multiple ice dam claims.

Endorsement would have deductibles for ice dams up to $10,000, but also would have generated less premium

The schedule of the ice dam deductibles filed by Commerce with the Division of Insurance showed the proposed ice dam deductible ranging between $1,000 and $10,000 and with premium credits ranging from 0.5% to 8.5% according to the following table:

Interestingly, the deductible credits were projected to have “an overall estimated rate effect on [Mapfre’s] existing Homeowners book of [negative] -0.4%.”

Division of Insurance reject proposed endorsement citing three reasons

In Commerce’s original filing, it stated that: “This revision will take effect December 1, 2015, for all new and renewal business.”  On December 1, 2015, however, the Division of Insurance disapproved Commerce’s ice dam deductible endorsement. The stated reasons for the disapproval were the following:

• The criteria that the company proposes to use to identify policies for which it will require a higher ice dam deductible are not clear and unambiguous.

• The determination that ice dams are the proximate cause of water damage to the home, and thus, whether or not the higher deductible applies, is at the discretion of the company unlike special windstorm/hurricane deductibles which are triggered based on the measurements of an independent third party.

• The filing contains no evidence that a homeowner is less likely to attempt to avoid/mitigate water damage caused by ice dams than from any other causes to which insurance applies that might support the need for a higher ice dam deductible.

Proof of mitigation could have removed the deductible endorsement

The rationale of the Commerce filing was to impose the deductible on insureds who had multiple ice dam losses. In the Division of Insurance’s view (Reason 3), however, a deductible would not necessarily induce insureds with multiple losses to take money out of their pocket to mitigate future water damage from ice dams.

The Division of Insurance may be right. Commerce’s proposed underwriting rules, however, provided that the deductible would only apply “until the company receives acceptable proof of mitigation to prevent future ice dam losses.” In effect, an insured, whose loss history justified having an ice dam deductible, could remove the deductible by taking prudent steps to protect their property from further damage by avoiding a known risk.

There is always the Fair Plan

Commerce has publicly stated that it would accept the Division of Insurance’s disapproval of an ice dam deductible. However, the problem that this endorsement sought to mitigate will not disappear.

The likely result of the denial of the ice dam deductible will be that Commerce’s insureds who have had a history of multiple ice dam losses, with no evidence of mitigation efforts, will likely receive non-renewal notices and eventually have to seek their coverage in the residual market.

A better decision might have been to allow the free market to determine the advisability of ice dam deductibles. The lesson of auto insurance being priced to the lowest common denominator should not be forgotten. When direct or indirect regulatory ceilings on rates subsidize the worst risks, responsible insureds ultimately have to make up the difference one way or another.