Ask Tim

Ask Tim, Episode #31 -- Conditional Renewal Notices

In today's episode of the Ask Tim podcast, I take a look at the requirements in New York Insurance Law Section 3426 regarding when insurance carriers have to send conditional renewal notices on commercial lines policies. Also, a generous IIABNY colleague buys me lunch. Here are the highlights:

Carriers must send conditional renewal notices on some commercial lines policies to the first-named insured, at the address shown on the policy, and to the insured's authorized agent or broker. They must send a notice if they are conditioning renewal upon:

• Change of limits
• Change in type of coverage
• Reduction of coverage
• Increased deductible
• Addition of exclusion
• Some premium increases in excess of 10 percent

Future episodes will explore Section 3426 in more detail. 

Download Episode 31 of Ask Tim

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Coordinating Flood Insurance Deductibles

Last winter, I got a call from an IIABNY member who had a commercial client with flood damage from Tropical Storm Irene. This client, despite not being in a flood zone, had purchased both private flood insurance (an endorsement to a Package policy) and coverage from the National Flood Insurance Program. This turned out to be a very good decision. However, the Package carrier was claiming that the client should pay "stacked" deductibles; that is, the private insurance deductible should be added to the NFIP deductible. Since both of these deductibles were quite large, the member wanted to know if this was true. The following is the text of my email back to him.

Answer: Following up on our phone conversation yesterday, I disagree with the Package carrier’s contention that two deductibles should apply to your client’s flood loss.

The NFIP General Property Form states:

C. Other Insurance 

1. If a loss covered by this policy is also covered by other insurance that includes flood coverage not issued under the Act, we will not pay more than the amount of insurance that you are entitled to for lost, damaged, or destroyed property insured under this policy subject to the following: 

a. We will pay only the proportion of the loss that the amount of insurance that applies under this policy bears to the total amount of insurance covering the loss, unless C.1.b. or c. immediately below applies. 

b. If the other policy has a provision stating that it is excess insurance, this policy will be primary. 

c. This policy will be primary (but subject to its own deductible) up to the deductible in the other flood policy (except another policy as described in C.1.b. above). When the other deductible amount is reached, this policy will participate in the same proportion that the amount of insurance under this policy bears to the total amount of both policies, for the remainder of the loss. 

The ISO Commercial Property Conditions endorsement (CP 00 90 07 88) states:

G. OTHER INSURANCE

1. You may have other insurance subject to the same plan, terms, conditions and provisions as the insurance under this Coverage Part. If you do, we will pay our share of the covered loss or damage. Our share is the proportion that the applicable Limit of Insurance under this Coverage Part bears to the Limits of Insurance of all insurance covering on the same basis.

2. If there is other insurance covering the same loss or damage, other than that described in 1. above, we will pay only for the amount of covered loss or damage in excess of the amount due from that other insurance, whether you can collect on it or not. But we will not pay more than the applicable Limit of Insurance.

The Deductible provision in the ISO Building and Personal Property Coverage Form (CP 00 10 06 07) states:

D. Deductible

In any one occurrence of loss or damage (hereinafter referred to as loss), we will first reduce the amount of loss if required by the Coinsurance Condition or the Agreed Value Optional Coverage. If the adjusted amount of loss is less than or equal to the Deductible, we will not pay for that loss. If the adjusted amount of loss exceeds the Deductible, we will then subtract the Deductible from the adjusted amount of loss, and will pay the resulting amount or the Limit of Insurance, whichever is less.

The NFIP’s coverage is directly dependent on the private flood coverage. If the Package policy says that its flood coverage is excess, then NFIP is primary, but only up to the amount of the Package policy’s deductible. Once it meets that deductible, coverage switches to pro-rata. To illustrate, assume an NFIP policy with a $100,000 limit and a $10,000 deductible, and a commercial package policy that covers flood with a $500,000 limit and a $25,000 deductible. The insured suffers a loss valued at $250,000. Based on the terms in the NFIP policy, here’s how the two carriers should share the loss: The insured pays the first $10,000 (the NFIP deductible) and NFIP pays the next $25,000 (the Package policy deductible). The remaining amount of the loss is $215,000 ($250,000 minus $35,000.) The combined flood limit equals $600,000 ($100,000 NFIP, $500,000 Package), so NFIP pays 1/6 of the balance and the Package pays 5/6. Using this formula, the final loss sharing looks like this:

Insured’s deductible	$10,000
NFIP	$60,833 ($25,000 plus [$215,000 multiplied by 1/6])
Package	$179,167 ($215,000 multiplied by 5/6)
TOTAL	$250,000

In this example, the Package carrier pays only $179,167, whereas it would have paid $225,000 if there was no NFIP policy. I forget the dollar amounts of your claim situation, but the math is the same. In any case, I believe that only one deductible applies – the NFIP policy deductible. As an aside, it seems to me that the neatest solution to this is to make the Package deductible equal to the NFIP limit, assuming that the Package carrier will offer that.

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Should Private Insurers Dip Their Toes in the Flood Waters?

There is a growing consensus that the NFIP needs reforms. The Federal Emergency Management Agency (FEMA), which is responsible for the NFIP, has recently proposed several reform options, including privatization of flood insurance. Many believe, though, that private flood insurance will always be more costly than what the NFIP currently charges.

However, an innovative study by the Wharton Risk Center with state-of-the-art probabilistic catastrophe flood modeling conducted by CoreLogic®, suggests otherwise.

The Risk Center analyzed the likelihood of future catastrophic flooding – and the potential cost of providing private flood insurance–in a pilot study focusing on two flood-prone counties in Texas. The study found that prices charged by private insurers could potentially be lower than current prices charged by the NFIP in some parts of those counties.

The analysis calculated the “actuarially fair” flood insurance premium, based on the probabilistic risk models, for more than 300,000 residences in Galveston and Travis Counties. The Wharton study then compared these rates to the rates currently charged by the NFIP.

Based on those estimates, the report shows in the regions analyzed that there are certain areas where NFIP premiums, are, on average, “too high” (and other areas where premiums on average are “too low”).

via www.wharton.upenn.edu

This study, released by the Wharton School of the University of Pennsylvania in December, is a real eye-opener. Can private insurers make money writing flood insurance outside the National Flood Insurance Program? The study suggests that the answer may be "yes."

Given Congress's apparent inability to move NFIP reform higher up on its agenda, perhaps it's time that the insurance industry as a whole start to discuss the potential merits of insuring flood privately. What do you think? Will it work? Make matters worse? Have no effect because no one will buy it anyway? Let's have a "tidal wave" of comments.*

* Yes, I know it was a terrible joke, but I'm unable to help myself.

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Ask Tim, Episode #29 -- Watercraft Insurance

This episode of the Ask Tim podcast shows our insurance geek struggling to stay warm while he talks about something that's no laughing matter -- the capsizing of the cruise ship Costa Concordia off the coast of Italy earlier this month. While very few of us will handle the insurance program for a multi-million dollar ocean liner, some main street agents might be asked to place coverage for the types of commercial watercraft found in Long Island Sound, the Hudson River, or the Great Lakes. In this episode, I discuss exposures to:

• Bodily injury, property damage and pollution liability
• Physical damage to the craft itself

I then look at the types of insurance needed for watercraft, including:

• Protection and indemnity coverage, which, unlike other forms of liability insurance, might not obligate the insurance company to provide the insured with defense
• Hull insurance

Other items noted in this episode:

• Look for more information about watercraft coverage in the Technical Guidance and Research section of the IIABNY Web site soon
• It gets cold in the Geek Cave in January
• J.B. survived the trauma of episode #28 and an amicable legal settlement has been reached

Download Ask Tim Episode #29- Watercraft Insurance

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Video: III's Robert Hartwig Reviews 2011 Hurricane Season

In this short video courtesy of A.M. Best, former IIABNY director Robert Hartwig, CEO of the Insurance Information Institute, says that the property-casualty insurance industry got off relatively easy during the active 2011 hurricane season.

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Ask Tim, Episode #24 -- Flood Exclusion/Flood Insurance

Water, water everywhere...or at least, that's what it's felt like in New York State for the last month or so. Hurricane/Tropical Storm Irene put a hurt on New York City, Long Island, the Hudson Valley and the area around Schoharie, New York. Not to be outdone, Tropical Storm Lee dumped excessive rainfuall on the Southern Tier, leaving parts of Binghamton and the rural counties around it flooded. Unfortunately, a lot of businesses in these areas have found out that their insurance policies will not reimburse them for flood damage.

This episode of the Ask Tim podcast looks at the water exclusion in the ISO Causes of Loss — Special Form, the coverage that the National Flood Insurance Program's General Property Policy provides, some potential remaining coverage gaps, and an option for clients who need to close the gaps.

If you need help from IIABNY because of the flooding, email or call 1-800-851-8853 extension 212.

Web sites I mention in the show:

• FloodSmart.gov, the official site of the NFIP
• Federal Emergency Management Agency: NFIP Information for Insurance Professionals

 

 

Download Ask Tim Episode #24

 

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URGENT: IIABNY Members Should Get Ready For Hurricane Irene

IIABNY strongly encourages members in the New York City metro area, including Westchester County and the two counties of Long Island, to make serious preparations today for the possibility that Hurricane Irene will strike the area. As of 8 a.m. today, the National Weather Service was predicting:

“The outer bands from Irene (are likely to begin) to impact the area late Saturday into Saturday evening. Conditions are then likely to rapidly deteriorate in torrential rain and strengthening winds late Saturday night. The worst conditions are likely late Saturday night into Sunday afternoon with increasing potential for damaging winds...flooding rains...and significant coastal flooding across much of the region. Depending on the exact track...intensity and timing of hurricane Irene...there is potential for moderate to major coastal flooding damage if the greatest surge coincides with the times of high tides Sunday morning and/or Sunday evening. This surge will be exacerbated by battering surf.”

Given the grimness of this forecast, IIABNY urges all members in the affected areas to take the following steps suggested by the New York City Office of Emergency Management (Note: Due to heavy Internet traffic, this link is not working consistently today):

• Assess the potential hazards (i.e., wind and water damage).
• If you don’t already have a plan for continuing operations, make plans now. To do so:
  • Identify critical business operations;
  • Create a management chain to include at least one person on-site and one off-site;
  • If possible, contact your clients before the storm and let them know how they will be able to contact you afterward;
  • Make sure that appropriate staff members have laptop computers or smart phones so that can retrieve and distribute information as needed;
  • Make back-up copies of your electronic records and store at least one copy off-site;
  • Store back-up paper copies of important documents off-site;
  • Determine how you will operate if your building and/or utilities are unavailable after the storm.
  • Keep handy claim reporting contact information for the carriers that insure your business.
• Discuss the situation with your staff. Collect landline and cell phone numbers so you can keep in touch. Make sure every employee understands what his or her role and responsibilities will be during and after the storm. Encourage them to take immediate steps to prepare themselves and their families for the storm. Be prepared for the likelihood that your employees will be experiencing their own personal emergencies because of the storm and will probably be distracted and anxious.
• To the extent possible and feasible, secure your facilities, building, equipment and records.
• Lastly, don’t be a hero. If authorities order you and your staff to evacuate, do so immediately. Unlike property, people can’t be replaced.

IIABNY is prepared to assist affected members during this emergency. If you have phone service, call (800) 962-7950, dial extension 212 and let us know how we can help.

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Is It a Flood Or Just a Plugged Drain?

Question from an IIABNY member: I insure a small retail store that bought the insurance carrier's extended property coverage endorsement. The endorsement provides coverage for damage resulting from water that backs up from a sewer or drain. The insured recently suffered $20,000 in damage when water backed up, but the carrier issued a reservation of rights letter, indicating that they might deny coverage based on the flood exclusion. They sent an engineer out to examine the property. Now they are hinting that, even if the loss wasn't caused by flood, there may be no coverage because the reservation of rights letter told the insured to save damaged and undamaged property for their inspection. The insured apparently did not save a damaged pipe from the drain.

Is this a legitimate claim denial?

Answer: After reading the claim representative's email, it’s still unclear to me whether she is intending to deny the claim. Her last message states only that the reservation of rights letter quoted the “Duties in the Event of a Loss” conditions in the policy and that the insured allegedly was asked to save the damaged property for the company’s inspection. It appears that the insured failed to do this, but that might not be sufficient grounds for the company to deny payment (assuming they are planning to do that).

The endorsement you sent me states:

We will pay for direct physical loss of or physical damage to Covered Property solely caused by water that backs up from a sewer or drain. This coverage is included within the Covered Property Limits of Insurance… We will not pay for water or other materials that back up from any sewer or drain when it is caused by any flood. This applies regardless of the proximity of the flood to Covered Property. Flood includes the accumulation of surface water, waves, tides, tidal waves, overflow of streams or other bodies of water, or their spray, all whether driven by wind or not that enters the sewer or drain system.

Therefore, with regard to this loss, the questions are:

• Was there direct physical loss of or physical damage to Covered Property?
• If yes, was water the sole cause of that loss or damage?
• If yes, did that water back up from a sewer or drain?
• If yes, did an accumulation of surface water cause the water to back up from the sewer or drain?

If the answer to the last question is “yes,” then the insurance does not apply. You mentioned that an engineer visited the scene of the loss. Did the engineer find evidence of an accumulation of surface water (i.e., a flood)? The endorsement uses the word “flood” in reference to a list of conditions (accumulation of surface water, tidal waves, overflow of streams, etc.), but does not limit the term to mean only those things. Assuming that the carrier's form uses the same language as that used in the ISO Causes of Loss Special Form, the word “flood” does not have a special definition. In situations like this, courts rely on the plain meaning of a term. Here are some definitions of the word “flood”:

• “A great flowing or overflowing of water, especially over land not usually submerged.” (Random House Dictionary)
• "The inundation of land that is normally dry through the overflowing of a body of water, esp. a river” (World English Dictionary)
• “A temporary rise of the water level, as in a river or lake or along a seacoast, resulting in its spilling over and out of its natural or artificial confines onto land that is normally dry.” (American Heritage Science Dictionary)
• “A general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or of two or more properties (at least one of which is [the insured’s] property) from: a. Overflow of inland or tidal waters; b. Unusual and rapid accumulation or runoff of surface waters from any source; c. Mudflow… “ (National Flood Insurance Program General Property Form Standard Flood Insurance Policy)

As I see it, the question becomes, did the water damage result from a condition that falls within these definitions of flood? Did the engineer see a “great overflowing of water,” an “inundation of land that is normally dry,” or a “partial or complete inundation of two or more acres of normally dry land area or of two or more properties,” one of which was your client’s? If the engineer did not see these things, then there was no flood; the third sentence of the coverage statement does not apply; and the water backup coverage should apply to the loss.

The presence or absence of a damaged pipe does not help or hurt the carrier’s ability to determine whether there was a flood. I therefore question whether the insured’s failure to retain the pipe so the carrier could examine it is sufficient grounds for denying payment. While it certainly would have been better if the insured had made sure that the piping was saved until the carrier had a chance to inspect, I don’t see pipe damage as being relevant to this claim. If the insured was asking the carrier to pay for replacing the pipe, the pipe’s condition would be very relevant. However, as I understand it, that is not what the insured is seeking.

To summarize, I believe the question of coverage hinges on whether or not a flood caused the water to back up. If the carrier can reasonably show that a flood caused the back up, then it should rightfully deny coverage. Otherwise, I believe that coverage applies.

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Mich. Congresswoman: Get the Government Out of the Flood Ins. Business

I have serious reservations about this proposal. While it is always a good thing to review and evaluate how any government program is working, looking at in isolation is not. The National Flood Insurane Program has many problems, but what is the alternative? Are private insurers clamoring for the chance to write flood coverage? If they are, no IIABNY members have told me about it.

According to another article, Rep. Miller asked rhetorically, "What in the world is the federal government doing in the flood insurance business?" The answer to that question, of course, is that private insurers found the flood insurance business to be a losing proposition. Congress created the NFIP in the 1960's to fill the void left by private insurers who were losing their collective shirts in it. Have market conditions changed since then to the point where property owners no longer need a government program? I will be curious to hear testimony on that question if and when the relevant congressional committee holds hearings on this bill.

Rep. Miller has done us a favor by opening the debate. She's laid down her cards -- the NFIP should go. Let's have an open, intelligent discussion about how this country should protect property owners from the risk of flood loss.

As always, I'd like to hear your thoughts on this bill and the flood insurance situation in general. So, flood me with your opinions ("flood me" -- get it?) in the comments.

 

Legislation Introduced To Phase Out NFIP

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February 8, 2011 By Arthur D. Postal, PropertyCasualty360.com

The legislation to phase out the National Flood Insurance Program, H.R. 435, was introduced by Rep. Candice Miller, R-Mich. (File Photo: AP)

NU Online News Service, Feb. 8, 3:10 p.m. EST

WASHINGTON—Legislation has been introduced in Congress that would phase out the National Flood Insurance Program by the end of 2013.

The legislation, H.R. 435, was introduced by Rep. Candice Miller, R-Mich.

The bill would also immediately end all remapping of the program mandated by prior reauthorizations of the program, thereby ending the agency’s authority to charge more to current customers based on new maps mandated by the 2003 law that remains in effect.

Earlier this month, Rep. Miller had asked colleagues to support the measure.

That Congress may take a long look at the program was also acknowledged earlier this week by Rep. Scott Garrett, R-N.J., chairman of the Capital Markets Subcommittee of the House Financial Services Committee, which has prime jurisdiction over the program.

During an appearance at a housing conference Monday, Rep. Garrett said, “The government's history in pricing risk is extremely poor,” citing the Federal Deposit Insurance Corporation, the National Flood Insurance Program, and the Pension Benefit Guaranty Corp. as three entities with “terrible records of properly pricing for risk.”

The current program expires Sept. 30, the end of the current fiscal year. The program has been extended five times, with several lapses, since the origin

via www.propertycasualty360.com

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N.Y. Insurance Dept. Announces ’11 Regulatory Agenda: Trust Accounts, No-Fault, Photo Inspections, and Advertising

Rule changes affecting advertising, producer premium accounts, auto photo inspections, personal lines cancellation notices, and No Fault highlight the New York Insurance Department’s January 2011 regulatory agenda. The agenda appeared on the department’s Web site on Dec. 23. The rule changes the department is working on include:

• An amendment “to permit the use of internet and out-of-state banks for producer premium accounts.”
• An amendment adding and revising the list of risks eligible for the Free Trade Zone and reducing the minimum premium requirements and net premium written limitations for other risks to qualify.
• An amendment to add coverages to the excess line export list (the list of risks for which a broker need not do a diligent search of the admitted market.)
• Amendments to the No-Fault regulations, including changes to the endorsements and requirements for insurer claim practices; changes in the administration of arbitration programs; and changes to comply with a recent change in state law mandating coverage for necessary emergency health services provided to intoxicated drivers. 
• A new regulation “to provide clarification and rules regarding inland and ocean marine insurance.”
• An amendment providing notice and time frame requirements for handling of third party claims.
• An amendment “to include additional circumstances under which an insurer may voluntarily waive mandatory inspection of a motor vehicle for physical damage coverage, and to clarify that the use of digital photography and electronic access to inspection report data are permitted.” The department proposed this change once before but did not adopt it before it expired.
• A new regulation to provide requirements for policies covering wrap-ups.
• A new regulation “to provide that cancellation notices subject to section 3425 of the Insurance Law should include the date and hour of cancellation, the date of the notice, and, for nonpayment of premium cancellations, a statement informing the consumer that cancellation will not take place if the consumer makes timely payment of the premium.”
• A new regulation “to provide rules and guidelines to assure full disclosure of all relevant information within advertisements which describe or solicit the purchase of property and casualty insurance coverage that are published, issued or distributed through various advertising media.”

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