The Office of General Counsel issued the following informal opinion on November 14, 2002, representing the position of the New York State Insurance Department.
Terrorism exclusions in inland marine jewelers block insurance policies
1. Must a jewelers block insurance policy comply with the requirements of N.Y. Ins. Law § 3404 (McKinney 2000), in respect to the perils of fire and lightning?
2. May a terrorism exclusion be included in a jewelers block insurance policy?
1. No, N.Y. Ins. Law § 3404 does not apply to a jewelers block insurance policy.
2. An exclusion that is misleading or violative of public policy is not permissible.
This was a general inquiry and no specific facts were provided. The inquirer stated that the inquirers company is the only one in the United States dedicated to protecting the jewelry industry. The inquirer also stated that the inquirers primary product is the jewelers block policy, which is written as inland marine insurance.
N.Y. Ins. Law § 2305(g) (McKinney Supp. 2002) 1 provides that rates for inland marine risks that by general custom of the business are not written according to annual rates or rating plans are not required to be filed unless the Superintendent directs they be filed. Rates for jewelers block insurance that covers stocks of merchandise for retailers with average inventories up to $250,000 is considered a filed class of business, which the inquirer stated corresponds to Division Eight, Section VIII Rule 117C of the Insurance Services Organization (ISO) commercial lines manual whereas insurance covering retailers with average inventories of $250,000 or over is considered to be an unfiled class of business.
The inquirer wishes to develop a policy form endorsement that provides an exclusion for terrorism and the fire following, or provides a specific sub-limit applicable to a defined terrorism coverage and the fire following.
N.Y. Ins. Law § 3404 (McKinney 2000) provides that no insurance policy may provide coverage with respect to the peril of fire that is not at least as favorable to the insured as that provided for in the standard fire policy, which is contained in § 3404. No insurer may issue a fire insurance policy on any property in this state containing an exclusion not specifically permitted under § 3404. Since a terrorism exclusion is not one of the permissible exclusions that are specified in the standard fire policy and the addition of such exclusion would have the effect of narrowing the coverage otherwise provided under the standard fire policy, this Department has previously concluded that no policy of fire insurance made, issued or delivered on any property in this state may contain a terrorism exclusion with respect to the peril of fire. 2
Jewelers block insurance is an all-risk coverage and one of the perils insured against is the peril of fire. Notwithstanding the fire exposure, you contend that jewelers block coverage does not have to comply with § 3404, and you cite as authority a 1959 New York Court of Appeals decision, Woods Patchogue Corp. v. Franklin National Insurance Company of New York, 5 N.Y.2d 479, 158 N.E.2d 710, 186 N.Y.S.2d 42 (1959).
In Woods Patchogue, the Court concluded that the provisions of the standard fire insurance policy are not incorporated into the jewelers block policy. The Court reasoned that under then § 46, now § 1113, fire insurance and marine insurance are two different types of insurance. The Court observed, quoting the Superintendent, that before jewelers block coverage was added to § 46, " a jeweler insuring property in specific locations must get a standard form of policy against fire from a fire company, and also a second policy from a fire company which will include those coverages not contained in the standard form. He must obtain a policy from a casualty company, also a policy from a surety company, and a policy from a marine company if the property is to be transported, and then he is not covered as fully as he would be under the Lloyds [jewelers block] policy." 65th Annual Report of the Superintendent, N.Y. Leg. Doc. 1924, No. 21, p. 15. The Court concluded that a block policy was not a combination of various risks united in one policy for convenience but was actually a new and totally different kind of insurance that was not authorized prior to the passage of the permissive legislation. 5 N.Y.2d at 483.
The Court further noted that an insured could exclude the fire coverage, although as a practical matter, insureds opted for it; that the rates for jewelers block coverage may be substantially less than ordinary fire insurance because it was based upon the amount of inventory in unprotected areas; and the standard fire policy insured against direct loss by fire of property at the location named in the policy whereas the block policy coverage was more extensive, providing coverage for both direct and indirect loss by fire and was not confined to loss in a particular location.
A 1962 amendment to then section 168 (now § 3404) further integrated the different kinds of insurance that may be written in a single policy, but appears to continue the nonapplicability of the standard fire policy to jewelers block coverage that the Court recognized in that § 3404(f)(2) provides that policies of automobile or aircraft physical damage insurance or policies of inland marine insurance "may be issued as heretofore without reference to the limitations" contained in paragraph (1), including the provision requiring terms no less favorable to the insured than those contained in the standard fire policy.
Accordingly, § 3404 does not apply to a jewelers block insurance policy and there is nothing in the Insurance Law that specifically restricts or otherwise limits the exclusions that may be contained in a jewelers block insurance policy in this regard or that would otherwise require such a policy to provide coverage for damage or loss resulting from acts of terrorism. However, N.Y. Ins. Law § 2307(b) (McKinney 2000) states that a policy may not be misleading or violative of public policy.
Pursuant to Article 23, the Superintendent has rejected all proposed filings containing terrorism exclusions on the grounds that the policy forms are misleading and against public policy. Most notably, the Superintendent rejected the Insurance Services Office (ISO) terrorism form filings pursuant to § 2307(b), stating that, among other considerations, the definition of terrorism was overly broad and may result in exclusion of losses from destructive acts that fall well outside the publics perception of what constitutes an act of terrorism.
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  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.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.
1 Prior to August 3, 2001, N.Y. Ins. Law § 2310(b) and (c) (McKinney Supp. 2002) governed inland marine rate filings, but with the expiration of the file and use provisions of Insurance Law Article 23, § 2305(g) became applicable. The sections are the same, though. 2 In all respects in which a provision of an insurance policy violates the requirements or prohibitions of the Insurance Law, the policy is enforceable as if it conformed to such requirements or prohibitions. See N.Y. Ins. Law § 3103 (McKinney 2000); Bersani v. General Accident Fire & Life Assurance Corp., 36 N.Y.2d 457, N.Y.S.2d 108 (1975).