CHICAGO – Homeowners who are already wincing from double-digit increases in their insurance rates might want to brace themselves for the next wave of get-tougher attitudes from insurers, which is arriving in the form of “rap sheets” for their homes.

The “rap sheets,” known as CLUE reports, are being used increasingly by insurers to determine which homeowner customers to take on – and which to turn away. The reports are records of insurance claims filed in recent years. “Too many” claims (there’s no consensus on what that number is) and homeowners may find themselves dropped at renewal time – or nearly shut out of the market altogether.

A leading real estate trade group is complaining that CLUE reports, an acronym for Comprehensive Loss Underwriting Exchange, a huge database in Georgia, are threatening to stop real estate deals in their tracks. In home buying, no insurance usually means no mortgage, which usually means no deal.

CLUE reports started to become deal-breakers last fall, as the insurance industry, stung by massive losses, began to cut back on new coverage, according to the National Association of Realtors. Increasing numbers of buyers started to hear at the 11th hour that coverage would be much more expensive than expected, or even that the houses were relatively uninsurable, because of black marks in the buildings’ pasts. In a few cases, the buyers learned they were being canceled just days after the closing.

Richard and Valerie Corless, for example, made an offer on a house in Carlsbad, Calif., and were well into the mortgage process when their insurance company said it wouldn’t cover the house because of water damage three years earlier. The insurers were fearful of the potential for mold, even though the house had undergone extensive repairs, Richard Corless said. Several other insurers turned them down, too, and others offered them rates the Corlesses deemed unacceptably high. They backed out of the deal.

Then they bought another house in Carlsbad, only to be notified just a few weeks after the closing that their insurance company, with whom they had been doing business for 25 years, was canceling the policy because it deemed their neighborhood to be a fire risk, a condition that Richard Corless disputes. The couple scrambled for yet another round of coverage and finally found it, though with a $2,000 deductible.

“Homeowners insurance used to be one of those things you assumed you would find and would wait until the last minute before the closing to look for. But you can’t do that any more,” said Marcia Salkin, senior policy representative for the Realtors group in Washington.

Salkin, who is leading an insurance task force the organization formed late last year to study the issue, is recommending to real estate agents that their buyers begin searching for insurance at the same time they search for financing – even before they’ve found the house. She said she expects obtaining insurance to become a buyers’ contingency that’s routinely included in sales contracts, and that sellers will be required to produce CLUE reports as a matter of disclosure.

The big picture can be glimpsed most readily in Texas, where homeowner casualty claims for mold damage have skyrocketed in the last couple of years, with the most publicized mold claim resulting in a $32.1 million judgment against an insurance company. That award was recently reduced to $4 million, but the insurance companies reacted with a wave of announcements that they would discontinue writing new homeowners coverage in Texas.

There followed a series of stormy hearings in the state legislature, and in February Republican Gov. Rick Perry signed legislation that requires Texas’ largest homeowners insurance companies to turn over to state regulators the data they use in setting premiums. The move is intended to be the first step toward reforming the way the insurance market is regulated in Texas.

“There are some states that are more hard-hit – California, Texas, Florida and the coastal states,” said Salkin, who says she has fielded complaints about homeowners insurance issues from NAR members from 49 states.

California Insurance Commissioner John Garamendi has pronounced the homeowners insurance market there to be “dysfunctional” and specifically criticized the industry for utilizing CLUE reports in a relatively secretive way, suggesting that they should be provided routinely to home buyers and sellers just as credit reports are.

The Comprehensive Loss Underwriting Exchange is an 11-year-old database maintained by ChoicePoint Inc. in the Atlanta suburb of Alpharetta, Ga. About 600 insurers, 90 percent of all insurers in the United States, report claims to the database, which was created as a tool for detecting insurance fraud. Insurers now consult it routinely to check the claims records for homes that need new coverage.

“It’s not used for renewal, only for new business,” explains ChoicePoint spokesman Chuck Jones. He says the database contains information on about 40 million claims made on 30 percent to 40 percent of the homes in the country, and retains the data for five years. Jones says insurers use the information at their own discretion, that there’s no magic number of claims that make a home an undesirable risk.

“Of all the CLUE reports that are pulled, 65 to 70 percent come back with no claims,” Jones said. “You’re only dealing with a minority of the CLUE reports out there.”

But state officials in California say they’ve been inundated with complaints about CLUE errors. Insurance commissioner Garamendi said complaints about non-renewal issues had quadrupled in one year, most of them related to CLUE reports. He has announced his intention to implement a “homeowners bill of rights,” which would include the right to review past claims on properties for which they are seeking coverage.

“As much as anything else, (California officials) want to establish clear rules by which CLUE is used and insure that homeowners are aware of CLUE,” Jones said. “ChoicePoint has no problem with that. (The more) information provided to the homeowner and potential buyer, the better.”

But much of the criticism of the reports is that consumers don’t even have to file a claim to end up in the database. They merely need to inquire with their insurance agents about their coverage. And, they can run into roadblocks because of homes that they don’t even own any more.

For example, after Christine Cento-Ownby and her husband, Terry Ownby, transferred from Madison, Wis., to the Denver area last year, they found a house to buy and were quoted an insurance rate they found acceptable.

“We thought everything was fine,” Cento-Ownby says. “We were down to two days before the closing and the insurance company calls and says, “You had a claim on your house (in Wisconsin) and we want to know all about it.’ “

She says they were mystified. “We didn’t remember any claim. Then my husband remembered that we had ice buildup in the gutters a few years ago. There was a little bit of leakage in the attic, and we asked our insurance company if we were covered. They said to call them in the spring when it melted and tell them if there was any damage.

“Well, we called back in the spring, and told them don’t worry about it, there was no damage,” Christine Cento-Ownby said, adding that the insurance company had recorded the inquiry in CLUE as a claim anyway.

The new insurance company said that even so, the couple were on record as having made a water-damage claim, and so it didn’t want to cover them in the new house.

“It went right up to the night before the closing,” she said. “I had my insurance agent in Wisconsin send them a letter stating there was no outstanding claim. But the new company also wanted something from the claims adjuster” confirming the non-claim. The second faxed letter came just hours before the closing, and the couple got their insurance.

“This is crazy,” she said. “People shouldn’t have to go through this.”

The insurance industry regards such cases as unusual.

“Going to a real estate closing and finding out that the property is uninsurable, that’s something that we are not seeing happening very often in Illinois. I would say it happens very rarely,” said Joe Johnson, a spokesman for State Farm Insurance in Bloomington, Ill.

Johnson says that higher rates and tighter underwriting standards, industry-wide, have come from sharply rising claims costs and a series of devastating storms and natural catastrophes. In addition, the insurance industry has suffered severe investment losses.

“CLUE is an underwriting tool, one of several that we use,” said Phil Supple, another State Farm spokesman. “It helps us assess the risk of the property, which is what we are in business for. If you take on too much risk or unreasonable risk, that doesn’t help anybody.

“There are certain claims that have a lingering effect to them, primarily water claims,” he continued. “It’s good to know if a property has something that might predict future losses. But we look at every property on a case-by-case basis.”

With the industry’s cumulative losses in homeowners lines, it is only good business sense to tighten underwriting guidelines, which has made CLUE reports increasingly useful, said Jeanne Salvatore, vice president for consumer affairs at the Insurance Information Institute, a trade group.

“In the past, if you went to apply for insurance for your home or your car, (the company) would look at how many claims you have filed – but it would look at you as an insurance risk,” Salvatore said. “What insurance companies are also doing now is also looking at the claims history of the house itself” through CLUE reports.

Salvatore says there’s no indication that the reports are being used to punish consumers for making claims – the use-it-and-lose-it syndrome, as it’s starting to be called. “The insurance industry has so many companies, they’re all going to look at things differently,” she said. “What is true is that they are really looking very closely at risk before insuring properties.”

But NAR’s Salkin says the potential domino effect could have broader consequences, given the current role of the housing industry in keeping the economy afloat. She said the changes could push out buyers who are just on the edge of being able to afford to buy a home.

“The insurance industry has always gone through so-called “hard markets,’ where conditions deteriorate and they pull back, they don’t write as many policies,” she said. “The thing that is different is that in the past, that has been localized. This time, this one has hit everywhere, as far as we can tell.

“One of the insurance representatives we talked to said if you wait a year, everything will be fine,” Salkin continued. “Well, that may be fine from their perspective, but from the home buyer’s perspective, that is not comforting. Not comforting at all.”

AP-NY-04-03-03 0615EST