I've received a few e-mails from IIABNY members in the last week about my Sept. 28 blog post (which also appeared in the Sept. 29 IIABNY Insider) about recent New York Insurance Department advisory legal opinions. The inquiries focused on an opinion issued on Sept. 7 in which attorney Brenda Gibbs concluded:
The ABC insurer’s requirement that an insured insure her primary home with the insurer as a condition of covering her second home runs afoul of N.Y. Ins. Law § 2324 (McKinney 2006), because it is an inducement not specified in the policy for the primary home.
Just to cite two of the e-mails I got in response to this:
There are many companies that will only quote on an account basis. It is part of their underwriting guidelines. Are they all in violation?
And:
What are carriers going to do about the Dept decision that a carrier can not require that they insure the primary in order to insure the secondary. Just about all my carriers have that rule.
These questions got me thinking about the department's wisdom in publishing this opinion. Before I get into my thought process, let me make one thing clear: I am not criticizing Brenda Gibbs's conclusion, her logic, nor her qualifications. Over the years, I have requested several opinions from the Office of General Counsel, and Ms. Gibbs has handled many of them. In every case, I have found her to be eminently professional, reasonable, and pleasant to work with. When she has asked follow-up questions, they have been well thought out and aimed at providing a logical answer to my inquiry. I know that some insurance practitioners in New York have a stereotype of an Insurance Department bureaucrat fishing for reasons to deliver smackdowns to well-meaning companies and producers. I can assure you, Ms. Gibbs is not remotely close to that stereotype.
That said, I worry that opinions like this one actually hurt the department's credibilty with those it regulates. This is not the first opinion the department has issued that reached this same conclusion; off the top of my head, I can think of one issued in 1988 saying virtually the same thing that Ms. Gibbs said. The issue is not consistency; the issue is marketplace reality. As my e-mailers aptly stated, the reality is that insurance companies (and agencies) routinely decline to offer certain coverages unless the insured purchases other coverages (aka "supporting lines") as well. They do not do this insidiously; it's part of their underwriting guidelines, the rules by which they attempt to operate profitably.
In my prior life, I was a commercial lines underwriter for a major carrier, and I vividly recall the early 1990's when my employer's underwriting brain trust concluded that the workers' compensation line in New York was beginning to inflict some serious damage to the bottom line. The company launched a "profit improvement program," restricting the use of certain pricing tools and forbidding the underwriters from writing any workers' compensation policy without also writing the supporting property, liability and auto coverages. The company's belief, one with which I agreed, was that the relatively better profit potential from the supporting lines would balance out the money-losing proposition that the workers' comp presented. We didn't see the program as an unethical inducement to an insured; we saw it as a way to provide the coverage while still protecting the company's stockholders. In other words, it was a balance of responsibilities.
Here's the problem as I see it: The department has very seldom enforced the anti-rebating law cited in the opinion as the State Legislature wrote it, at least when it comes to requiring supporting lines. New York Insurance Law Sect. 2324, titled Rebating and discrimination, addresses the prospect of insurers and producers essentially "bribing" customers to buy from them. The idea is that everyone should have a level playing field -- large, wealthy companies and agencies shouldn't be able to give cash bonuses (rebates) to insureds when their smaller competitors don't have those same means. The law addresses supporting business requirements only indirectly and implicitly. By and large, as I understand it from my own experience and conversations with others, the department rarely enforces the policy against supporting business requirements. This is because A) it would do little else if it chose to enforce the policy; and B) like all state agencies, the department has very finite resources. It doesn't have enough examiners to audit every insurer and agency for this practice.
Consequently, the insurance community may tend to shrug off opinions like this, and in the long term that can only undermine the department's credibility. Rightly or wrongly, those subject to the department's regulation may come to doubt the seriousness of a particular pronouncement. That's not good for the insurance community in New York, for the department, or for the consumers that both purport to serve.
While department attorneys must interpret the law as written, I wonder if there might have been some wiggle room for Ms. Gibbs to cite an "underwriting guidelines" exception to the general rule here. It would have shown that the department means what it says and that it understands market realities. What do you think? Leave your thoughts in the comments.
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