LOANS BLOG

Sometimes life just is not fair. You think you have done everything absolutely right and then circumstances show you everything is turning out wrong. So it is that you get to see the end of hope played out in court cases. You know it should never come to this but, when it comes to people’s lives, there are few real choices if you feel you want justice. You do your best to be reasonable. You offer to settle. But the other side just fights on. It all comes down to willpower. Whoever is strongest will be left standing.

We need to go back to a time before the recession. This was a time of great optimism. People were getting married and planning their families around the idea of buying a new home. The first home would be the perfect nest for their first child. Property values would continue to rise and, as the family grew, they would keep trading up and cashing in their positive housing equities. This one family found a new estate just starting to build. They signed a contract in which the builder said it would deliver a residence in “a perfect condition”. There was also a set of minimum warranties imposed through the New Home Warranty Act of 1986 in Louisiana. As a third string to their bow, there was a cheap home insurance policy. During a tropical storm, the roof leaked and the carpets were soaked. What the couple did not realize is that the water triggered the growth of a toxic mold behind the leaking walls. Their newborn baby’s health was permanently damaged by this mold and, during the resulting stresses and strains of medical treatment and disputes with the builders and the insurance company, their marriage collapsed.

In court, the three members of the family now claim for their losses. The parents claim for the loss of value in the property and the failed marriage. Their daughter claims for personal injuries. Midway through, the builder’s insurance company agrees to pay out on the loss in value of the house caused by the defective workmanship. In the end, the parent’s claim for failed marriage is dismissed because it was caused by the poor construction of their home and that claim was settled. The first moral to this story is that you can only make two claims when they are independent of each other. If one claims flows naturally from another, settling one means losing the other. But the daughter can claim because she was not a party to any of the contracts. Her remedy is in negligence for personal injuries. The builder and insurers are therefore looking at third party liability and that falls within the scope of the home insurance policy.

Unintentionally, the court has done the right thing. It has protected the interests of a baby whose life was wrecked by defective workmanship. It has approved the payment to the parents for the loss in value when the property became uninhabitable. But dismissed their claim because the marriage collapsed. These things happen and, unless in exceptional circumstances, they are not covered by homeowners insurance policies. The only problem is that, in arriving at this result, the parents are liable to pay the builder’s and the insurers’ costs. In effect, therefore, they get nothing out of all the stress of events and their legal consequences. Supposedly, they will be wiser for this experience.

Tough times for the Commissioner

One of the most important lessons of the last two years is that having regulators in place does not mean having consumer safety. Wherever you look from the failure of the SEC to police the banking industry, to the failure of the FDA to keep food and drugs safe, to the failure of the Minerals Management Service to prevent the oil disaster in the Gulf of Mexico, it’s clear the regulators have been asleep at the wheel of a Toyota car speeding out of control thanks to the National Highway Traffic Safety Administration. It does not matter who you want to blame: the politicians who take the money of business and industry to pay for their expensive election campaigns, the leaders of business and industry who want the maximum profit with no accountability, or the regulators who sit in the middle and hope no one will notice they do nothing. The result has been a catastrophic series of failures. And who gets to pick up the bill? Why taxpayers and consumers, of course. Tax revenues are used to bail out the companies too big to be allowed to fail, and everyone who buys goods and services gets to pay a little more every year in prices to keep the wheels well greased.

Why are we thinking about this right now? Well, every US state has a department or office of insurance run by a Commissioner who is supposed to protect our interests. In some states where the political wind blows more to the left, the Commissioners can be crusaders who protect our interests. But in states where the political wind blows to the right, the lawmakers pass weak regulations and fail to back-up the regulators who might want to “do something”. A classic example of the problem can be seen in Texas where the Commissioner has been fighting a losing battle with the insurance industry in general and State Farm in particular.

State Farm submitted rate plans announcing its intention to raise premium rates by 13%. The reality has proved rather different with some ZIP codes seeing hikes of up to 39%. Not surprisingly, the Commissioner is angry and has posted a lot of the correspondence on the state website. It seems State Farm thought the 13% increase was justified because of rising costs in the building industry for both materials and labor. It was also concerned this year might see more hurricanes, tornadoes and hailstorms. The Commissioner is also telling State Farm policy holders where to find cheaper coverage. He is fighting what he terms the insurer’s deceptions and misstatements. Even the lawmakers have become concerned as Texas now has the second highest average rates in the US for homeowners insurance cover. They are actually talking about giving the Commissioner the power to refuse premium increases!

Let’s be clear. There is nothing wrong with an insurance company increasing its rates to cover rising costs. If it believes there will be more losses in the next year, it can raise rates. But State Farm has crossed a line in Texas and even a GOP state can fight back when the electorate starts to complain. As it stands, if you live in Texas, you should check out the Commissioner’s website at Texas Department of Insurance for the latest information on the State Farm situation. You should also get the maximum possible number of homeowners insurance quotes to find cheaper alternatives to the State Farm policies.