The Office of General Counsel issued the following informal opinion on July 23, 2002, representing the position of the New York State Insurance Department.
Re: Mold Exclusions in Free Trade Zone Policies
May a mold exclusion be included in an insurance policy written on a special risk insurance basis?
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 New York 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.
The inquiry received was a general one and no specific facts were provided. The inquirer did not indicate whether the inquiry related to property or liability exposures but this opinion will address both.
Coverage for property damage resulting from mold is generally excluded under property insurance coverage unless it is a consequence of a covered loss, such as a burst water pipe, or wind-driven rain. Only where there is a causal link between the mold and the covered peril would a policy provide coverage. Liability insurance policies do not contain any exclusions for mold-related loss.
Under N.Y. Ins. Law Art. 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 N.Y. Ins. Law § 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 is 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 New York Insurance Law, and regulations thereunder that are not inconsistent with New York 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 either a property or liability insurance policy in this regard, or that would otherwise require a special risk insurer to provide coverage for damage or loss resulting from mold. However, 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 insurance 1, 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. 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 only from filing requirements, and not from compliance and standards requirements as expressed in the New York Insurance Law and regulations promulgated thereunder.
While the Insurance Department has received over one hundred filings restricting mold coverage, the Department has not approved any of them. As the Superintendent stated on May 3, 2002, in testimony before the Joint Senate Committees on Health and Environmental Conservation Regarding the Issue of Toxic Mold, in light of the scientific uncertainty concerning mold-related damages, the Department has not yet formulated a policy position but will proceed in such a manner as to ensure that New Yorkers continue to have access to affordable and meaningful insurance coverage. In the meantime, the Superintendent has stated that the Department will not approve any limitations or exclusions for mold-related coverages until it receives information sufficient to warrant such exclusions or limitations.
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  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.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.
1 Workers compensation may not be written as a special risk.