- Report Published -
|Insurance Coverage for Damage to Foundations and Other Home Structural Components|
|State Corporation Commission; Bureau of Insurance|
|HJR 644 (Regular Session, 1993)|
|Purpose of Study|
House Joint Resolution No. 644 was passed by the 1993 General Assembly requesting the State Corporation Commission to conduct a full investigation and study of (i) insurer claims adjustment and settlement practices concerning foundation and other structural damage under homeowners insurance and home protection insurance contracts, and (ii) policy exclusions and for damage to foundations and other home structural components. This study was requested because many homeowners have suffered financial losses from structural damage to their homes as a result of shrink-swell soil conditions in Chesterfield County, and insurance policies often exclude or provide little coverage for this type of damage.
The State Corporation Commission's Bureau of Insurance (Bureau) conducted a survey of the top twenty-five writers of homeowners insurance in Virginia, all five home protection insurance companies licensed in Virginia and three risk retention groups that write liability policies for builders in Virginia. The Bureau also conducted an investigation into the claims adjustment and settlement practices of three of the companies that were surveyed; an investigation was conducted on the one risk detention group chartered in Virginia and on the two home protection companies that indicated in the surveys that they provide coverage for structural damage. Several real estate firms were also contacted as well as the Richmond Association of Realtors and the Home Builders Association of Richmond. The findings contained in this report reflect data gathered as of October 1, 1993. The following summarizes the findings contained in this report.
1. Homeowners insurance policies are not required by statute to provide coverage for damage to foundations or other home structural components resulting from shrink-well soils. Homeowners' policies provide coverage for structural damage if such damage is caused by a peril the policy covers. Coverage for earth movement is generally excluded. Some companies allow their insured's to buy back certain coverage that is otherwise excluded under the policy. This coverage may be purchased for an additional premium. Of the twenty-five homeowners insurance companies surveyed, only one indicated that, for an additional premium, it would provide coverage for structural damage resulting from shrink-swell soils.
2. Home protection insurance companies are not required by statute to provide coverage for damage to foundations or other home structural components. One home protection company actively markets a product in Virginia that provides coverage for structural damage. Another home protection company continues to provide such coverage for existing insureds but not longer actively markets policies providing coverage for structural damage to new customers. Two other home protection companies are licensed in Virginia but do not offer coverage for structural damage. An additional company has had its license suspended in Virginia and is no longer permitted to write new business.
3. Three risk retention groups write liability policies in Virginia for builders. These policies indemnify builders against their liability arising from non-performance under the warranties they give on new homes. Structural damage caused by shrink-swell soil conditions may be covered by such home warranties. Warranties are not regulated by the Bureau of Insurance because they are not insurance products. The extent to which risk retention groups are regulated by the Bureau depends on whether they are chartered in Virginia or outside of Virginia. The federal Liability Risk Retention Act of 1986 gives state insurance departments limited authority over the regulation of risk retention groups that are not chartered in their state. Only one of the three risk retention groups surveyed for this report is chartered in Virginia. Those chartered outside of Virginia do not have to seek approval by the Bureau for policies issued in Virginia. Virginia has, with certain exceptions, been temporarily enjoined from issuing new policies in Virginia.
4. Title 38.2 of the Code of Virginia allows real estate agents and homebuilders to sell home protection insurance contracts without being licensed as insurance agents. None of the real estate firms contacted for this study sell home protection insurance contracts that provide coverage for structural damage. According to the Richmond Association of Realtors and the Home Builders Association of Richmond, home warranties provided by builders and the "back up" liability insurance policies for these warranties are generally not marketed through real estate agents but are marketed by the builders themselves. Some site agents may be marketing warranties on behalf of the builders they represent.
5. Transactions involving real property are governed under Title 55 of the Code of Virginia. Several legislative changes to this title have been enacted overt he past two years. Effective July 1, 1993, § 55-518 was amended to require the builder of a new dwelling to disclose in writing to the purchaser all known material defects which would constitute a violation of any applicable building code. Section 55-70.1, which pertains to implied warranties on new homes, was amended in 1992. Subsection B of this section requires a vendor, who is in the business of building or selling dwellings, to warrant to the vendee in every contract for the sale of a new dwelling, that the dwelling with all its fixtures is sufficiently (i) free from structural defects so as to pass without objection in the trade; (ii) constructed in a workmanlike manner so as to pass without objection in the trade, and (iii) fit for habitation. The 1992 amendment extended the required one-year warranty to a period of five years for structural defects in the foundation of new dwellings. The term "structural defects," as used in this section, means a defect or defects which reduce the stability or safety of the structure below accepted standards or which restrict the normal use thereof.
6. An investigation of the two home protection companies that provide coverage for structural damage and the one risk retention group chartered in Virginia revealed that claims were generally handled in accordance with contract language. Specific instances of violations of the standards set forth in Virginia's unfair claims settlement practices laws will be addressed in market conduct examination re ports issued by the Bureau.
Generally, coverage for damage to foundations and other home structural components resulting from shrink-swell soil conditions is excluded under homeowners' insurance policies. In addition, coverage for this type of damage is provided in some home protection contracts but is excluded in others. The Bureau found that, generally, the three companies investigated for this study are paying claims in accordance with their policy provisions. Any instances of claim settlement practices which are not in compliance with policy provisions on file with the Bureau or which are not in compliance with the standards set forth in the unfair claim settlement practices laws of Title 38.2 of the Code of Virginia will be cited in the Bureau's market conduct reports.