OGC Opinion No. 04-03-29: Mold Exclusions in New York Umbrella and Excess Liability Free Trade Zone Policies

OGC Op. No. 04-03-29

The Office of General Counsel issued the following opinion on March 31, 2004, representing the position of the New York State Insurance Department.

Re: Mold Exclusions in New York Umbrella and Excess Liability Free Trade Zone Policies

Questions Presented:

1) May a mold exclusion be included in an umbrella or excess liability insurance policy that is written on a special risk insurance basis where the underlying policy contains such an exclusion?

2) May a mold exclusion be included in an umbrella or excess liability insurance policy that is written on a special risk insurance basis where the underlying policy does not contain such an exclusion?

3) May a filed umbrella or excess liability insurance policy include an unfiled endorsement excluding coverage for exposures that are excluded by the underlying general liability insurer?

Conclusions:

1 and 2) A special risk insurer is subject to all of the requirements applicable to any other authorized insurer in regard to terms and conditions of policies. There is no specific prohibition in the Insurance Law against a mold exclusion. However, an exclusion that is misleading or violative of public policy is not permissible. The Superintendent has not approved any mold-related exclusions in liability insurance policies.

3) A filed umbrella or excess liability insurance policy may not include an unfiled endorsement excluding coverage for exposures that are excluded by the underlying general liability insurer.

Facts:

The inquiry was general in nature and no specific facts were provided.

Analysis:

Questions 1 and 2:

Mold exclusions in excess liability and umbrella special risk insurance policies

Under N.Y. Ins. Law Article 63 (McKinney 2000), the Superintendent may permit exemption from filing requirements only with respect to rates and policy forms, in regard to special risks. The Superintendent implemented Article 63 in promulgating N.Y. Comp. Codes R. & Regs. tit. 11, Part 16 (1998) (Regulation 86). "Special risk" is defined in § 16.1 of Regulation 86, and establishes two classes of special risks. A Class 1 risk is one that has a premium of a size specified in § 16.1(f)(1) and a Class 2 risk is one that is included on the list contained in § 16.12(e) or added by the Superintendent pursuant to § 16.8(f). An insurer must be issued a special risk insurance license by the Superintendent under § 6302 in order for the insurer to utilize such exemption. Special risk insurance is commonly referred to as "Free Trade Zone."

The Article 63 exemption relates only to rate and form filing requirements and an insurer must comply with all other requirements of the Insurance Law including, among other things, minimum standard policy provisions, which are specifically emphasized in § 16.4 of Regulation 86. Section 16.10 affirmatively provides that a special risk insurer shall be subject to all other provisions of the Insurance Law and regulations thereunder that are not inconsistent with Insurance Law Article 63 or Regulation 86.

There is nothing in the Insurance Law or regulations promulgated thereunder that specifically restricts or otherwise limits the exclusions that may be contained in an excess liability or umbrella insurance policy in this regard, or that would otherwise require a special risk insurer to provide coverage for damage or loss resulting from mold. This would be the case whether or not the underlying policy contained an exclusion. The Superintendent has not approved any liability insurance policy containing such an exclusion.

Please note, however, that there are certain statutorily mandated coverages, such as certain types of motor vehicle insurance (including statutory automobile liability, no-fault insurance and uninsured motorist coverage) and workers compensation insurance¹, where a mold exclusion is not permitted because such an exclusion is not specifically authorized.

In addition, N.Y. Ins. Law § 2307(b) (McKinney 2000) states that a policy may not be misleading or violative of public policy and, although a special risk insurer is exempt from filing policy forms for approval by the Superintendent, these standards are nonetheless applicable since, as noted, Article 63 exempts special risk insurers from filing requirements only, not compliance and standards requirements as expressed in the Insurance Law and regulations promulgated thereunder.

While Articles 23 and 63 do not contain a specific administrative procedure for the Superintendent to require a special risk insurer to withdraw a policy form, the Superintendent, pursuant to N.Y. Ins. Law Art. 24 (McKinney 2000) may conclude, after a hearing, that an insurer is engaged in a "determined violation", which is defined in N.Y. Ins. Law § 2402(c) (McKinney 2000) to be "any unfair method of competition or any unfair or deceptive act or practice, which is not a defined violation but is determined by the superintendent pursuant to section [2405] of this article to be such method, act or practice." The use of a policy form that is misleading or against public policy would clearly come within the scope of such article. In addition, the Superintendent may penalize an insurer under N.Y. Ins. Law § 109 (McKinney 2000) for any violation of Article 23 or 63, or of Regulation 86.

This opinion should not be construed to limit the Superintendent's authority to determine that a mold exclusion would be misleading or against public policy or otherwise be prohibited.

Question 3:

Unfiled endorsement with a filed policy

The third topic inquired of was whether an insurer issuing a policy that was written on a filed policy form may include an unfiled endorsement with the policy. Specifically, it was asked whether an excess liability or umbrella policy, which has been filed with the Superintendent in accordance with N.Y. Ins. Law Art. 23 (McKinney 2000 & Supp. 2003), may be endorsed to include an exclusion that is contained in the underlying policy even though the excess liability or umbrella insurer does not have a filed endorsement for such an exclusion. In the examples provided, the endorsements excluded a specific product, location, or designated operation.

Pursuant to § 2307(b), property/casualty insurance policy forms, including excess liability and umbrella policies generally must be filed with and approved by the Superintendent. In addition, rates for excess liability or umbrella policies are also generally subject to filing requirements, either on a prior approval, file and use, or flexible rating basis.

Where the policy form is required to be, and has been, filed with the Superintendent, endorsements used with the policy are also generally required to be filed and approved. There are some exceptions. For example, where separate coverage under the endorsement is eligible to be placed as special risk insurance, an insurer may use an unfiled endorsement for such coverage even though the policy for the primary coverage must be filed. However, the endorsement may not delete coverage provided for under the policy or otherwise modify it because it would then be modifying the terms of the filed policy. Similarly, if the rates for the policy had been filed with the Superintendent, the use of an endorsement excluding certain coverages would modify the rates for the policy, thereby resulting in the insurer using an unfiled rate.

For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.