Circular Letter No. 1 (1995)

January 23, 1995


All Homeowners Insurers In New York State
And Insurance Producer Organizations


Termination Moratorium In The Event Of Declared Disaster;
Homeowner Windstorm Deductibles And Wrap-Around Endorsements

Recent catastrophes, such as Hurricane Andrew in Florida, have raised concerns that some property/casualty insurers may be overconcentrated in certain areas, especially along the coast. Because of solvency concerns, insurance companies are reviewing their books of business in these areas and, in some cases, reducing their writings. The purpose of this Circular Letter is to inform the insurance community of recent relevant developments.

A. Moratorium Authority. To help provide market stability in future disaster situations, legislation was enacted and signed into law, effective August 2, 1994, authorizing the Superintendent to suspend or modify, for up to three months (subject to another three-month extension), the cancellation and nonrenewal provisions of Section 3425 of the Insurance Law, for private passenger motor vehicle coverage and other personal lines insurance (including homeowners) in any area of the state that has been declared by the President or the Governor to be in a state of emergency due to a disaster or catastrophe.

Questions have been raised about the intended effect of a moratorium, if imposed, regarding:

(a) an insurer's right to cancel a policy mid-term for certain reasons set forth in Section 3425(c), e.g., discovery of fraud; and

(b) the three-year period of policyholder protection for homeowners insurance.

The legislation, initially proposed by the Department, is designed to provide safeguards for insureds during catastrophic events when, for example, normal lines of communication are disrupted; delivery of cancellation or nonrenewal notices may be delayed; or premium payments during such periods may be impossible, thus making it difficult for insureds as well as insurers to take normal action. Although nonpayment of premium might be within the moratorium's scope, an insurer should not be precluded from cancelling a policy due to fraud or material misrepresentation in obtaining the policy or in the presentation of a claim. Nor should the moratorium create a new three-year period of policyholder protection. Instead, the intention is that any moratorium would do no more than extend that period for the duration of the moratorium.

B. Windstorm Deductibles. One measure the Department has taken to facilitate insurer ability to write business in shore areas and to ease availability problems for coastal homeowners has been the issuance of guidelines permitting balanced windstorm deductibles. These guidelines address windstorm deductibles in optional and mandatory terms and on a catastrophic and non-catastrophic basis.

The rationale for permitting windstorm deductibles is not simply to increase capacity and reduce the maximum possible loss a company might suffer if a severe hurricane occurs, but, of fundamental importance, to also emphasize to coastal homeowners that prudent risk management applied to their homes can reduce potential losses and, at the same time, elevate insurability, safety, marketability, and property values. Currently, most companies have adopted the ISO optional windstorm deductibles, while independent windstorm deductible programs have been approved for a number of other insurers.

C. Wrap-Around. Another measure has been the development of a wrap-around policy concept. Under the wrap-around approach, the New York Property Insurance Underwriting Association provides the property-related coverages (including windstorm) and, with the purchase of a wrap-around policy endorsement from a voluntary insurer, the insured essentially enjoys basically the same coverages that a stand-alone homeowners policy would provide. Thus far, the Department has approved the following wrap-around filings of various types:

  • Providence Washington Ins. Co. -- issues a voluntary Tenant/Renters policy as a wrap-around.
  • Paramount Ins. Co. --issues a voluntary HO-3 policy in conjunction with NYPIUA's DP-1 policy endorsed with replacement cost coverage.
  • State Farm Ins. Co. -- issues a voluntary Tenant/Renters policy as wrap-around.
  • Aetna C&S Ins. Co. -- issues a voluntary Tenant/Renters policy as wrap-around.
  • N.Y. Central Mutual Ins. Co. -- issues a voluntary HO-3 policy in conjunction with NYPIUA's DP-1 policy endorsed with replacement cost coverage.

Additional wrap-around filings by other companies are pending, and approval is expected in the near future.

The Supplement to Circular Letter #11, dated October 27, 1993, details the types of windstorm deductibles permitted and wrap-around policies that may be written by insurers. The Supplement also discusses the guidelines for their use. For example, whenever a wrap-around policy is issued, no windstorm deductible may be applied to that policy.

The primary purpose of this Circular is to encourage insurers and producers to apply windstorm deductibles and utilize wrap-around policies in appropriate situations. Insurers that have not yet done so are reminded of the opportunity to file for approval of windstorm deductibles as well as wrap-around policies. Insurers can review approved programs to help determine the range of approaches that may be acceptable to the Department. With this information, insurers and producers may better serve coastal insureds.

If you should have any questions regarding the foregoing contact:

Gerald Scattaglia Supervising
Insurance Examiner
Property & Casualty Ins. Bureau
160 West Broadway
New York, N.Y. 10013
(212) 602-0374