The Office of General Counsel issued the following opinion on June 26, 2003, representing the position of the New York State Insurance Department.
Re: Commercial property insurance terrorism limitation for fire following
May a commercial property insurance policy limit coverage to actual cash value for fire losses following an act of terrorism, when in all other circumstances, the coverage will not be so limited?
No, under N.Y. Ins. Law § 3404 (McKinney 2000), a commercial property insurance policy may not limit coverage to actual cash value for fire losses following an act of terrorism, when in all other circumstances, the coverage will not be so limited.
An insurer, pursuant to Circular Letter No. 25 (2002) submitted various policy forms to the Department for use with commercial property policies. These forms would provide for a terrorism exclusion where the loss or damage is caused by a certified act of terrorism, within the meaning of the Terrorism Risk Insurance Act of 2002 (Pub. L. 107-297) (the Act). The exclusions do not apply to ensuing loss or damage caused by or resulting from fire. However, they each contain a provision entitled "Ensuing Fire Loss Payment Basis Exception", which states that the covered property "which suffers direct physical loss or damage caused by or resulting from fire which ensues from a certified act of terrorism is valued on an actual cash value basis, subject to all other exceptions described under Loss Payment Basis Exceptions." The Department disapproved the filing and the company requested an explanation.
The standard fire insurance policy has been in use in New York for well over a hundred years. Prior to 1942, the standard fire form was not contained in the statute. Pursuant to § 121 of the Laws of 1909 (which derived from Chapter 488 of the Laws of 1886), the standard fire policy was based upon the form adopted by the New York Board of Fire Underwriters and which was filed first with the Secretary of State and later with the Superintendent. In 1917, former § 121 was repealed and replaced with a new § 121, which provided for the filing of a form adopted in 1916 by the National Convention of Insurance Commissioners (now the National Association of Insurance Commissioners), subject to such later amendments that the Superintendent approved. As part of the recodification of the Insurance Law in 1939, § 121 was succeeded by § 168, which was repealed in 1942 by a new § 168 that incorporated the standard fire form into the statute for the first time. This section was in turn repealed in 1943 and replaced by another § 168, amending the war exclusion provision. In amended form, § 168 was succeeded by the current § 3404.
N.Y. Ins. Law § 3404(b)(1) (McKinney 2000) provides that no policy or contract of fire insurance shall be made, issued, or delivered on any property in this state unless "it shall conform as to all provisions, stipulations, agreements and conditions with such form of policy " as specified in subsection (e) of such section, which contains the form of the standard fire insurance policy of the State of New York. However, an insurance policy that insures solely against the peril of fire or that insures against the peril of fire in combination with other kinds of insurance, subject to the approval of the Superintendent, need not comply with the provisions of subsection (e), and a policy subject to N.Y. Ins. Law § 3102 (McKinney 2000) shall not comply with the provisions of subsection (e), provided that the policy complies with subsection (f), including the requirement that the policy contains, with respect to the peril of fire, terms and conditions no less favorable to the insured as that provided in the standard fire policy.
This means that no insurer may issue a fire insurance policy on any property in this state containing an exclusion or other limitation not specifically permitted under § 3404. A terrorism exclusion or limitation would have the effect of narrowing the coverage otherwise provided under the standard fire policy.
The proposed endorsement would limit the fire insurance coverage in regard to a fire depending upon the cause of the fire so that if the fire is caused by a certified act of terrorism, the limitation would apply. However, the standard fire policy does not permit the application of exclusions or limitations based upon the cause of the fire. It covers fire losses irrespective of causation except for specifically permitted cause causes, such as war, etc. This reasoning led the to Office of General Counsels opinion rejecting sublimits or exclusions for fire losses caused by acts of terrorism. (See, for example, opinions dated May 17, 2002, and November 14, 2002, which may be found on the Departments webpage at http://www.ins.state.ny.us/ropi2002.htm.) The proposed endorsement would have the same effect as a sublimit in that it would thereby provide coverage for losses resulting from a fire following a certified act of terrorism on a basis less favorable than when the fire followed other circumstances. In essence, the endorsement would be adding a condition to the policy that is not contained in § 3404: that the extent of coverage would be determined by the cause of the fire and not by the peril of fire itself.
It is argued that the proposed endorsement does not provide coverage less favorable than that required by § 3404 because the section only requires that coverage be provided on an actual cash value basis. This argument is based upon the insurers reading of the first page of the standard fire policy, as contained in subsection (e), which provides:
In Consideration of the Provisions and Stipulations herein or added hereto and of .......................................... Dollars Premium this Company, for the term of ........, from the ........ day of ........, 19.. to the ........ day of ........, 19.. at noon, Standard Time, at location of property involved does insure ......................... and legal representatives, TO THE LESSER AMOUNT OF EITHER:
1) THE ACTUAL CASH VALUE OF THE PROPERTY AT THE TIME OF THE LOSS, OR
2) THE AMOUNT WHICH IT WOULD COST TO REPAIR OR REPLACE THE PROPERTY WITH MATERIAL OF LIKE KIND AND QUALITY WITHIN A REASONABLE TIME AFTER SUCH LOSS, WITHOUT ALLOWANCE FOR ANY INCREASED COST OF REPAIR OR RECONSTRUCTION BY REASON OF ANY ORDINANCE OR LAW REGULATING CONSTRUCTION OR REPAIR, AND WITHOUT COMPENSATION FOR LOSS RESULTING FROM INTERRUPTION OF BUSINESS OR MANUFACTURE, OR
3) TO AN AMOUNT NOT EXCEEDING ................ DOLLARS, BUT IN ANY EVENT FOR NO MORE THAN THE INTEREST OF THE INSURED, AGAINST ALL DIRECT LOSS BY FIRE, LIGHTNING AND BY REMOVAL FROM PREMISES ENDANGERED BY THE PERILS INSURED AGAINST IN THIS POLICY, EXCEPT AS HEREINAFTER PROVIDED, [emphasis in original]
However, the purpose of the above language is to establish the method of valuation of a fire loss under the policy once a fire occurs. There is no legislative history that indicates that the language was intended to permit different methods of valuation in a single policy for the peril of fire based upon different causes.
It has also been argued that the Legislature, in enacting N.Y. Ins. Law § 3405 (McKinney 2000), has sanctioned additional exclusions not contained in § 3404. However, § 3405 supports the conclusion reached here. Section 3405 provides that a fire insurance policy does not have to cover loss or damage caused by nuclear reaction, nuclear radiation, or radioactive contamination. However, it does not exclude coverage for a fire following a nuclear event. The legislative history for the predecessor section to § 3405, § 168-a of the Laws of 1939, which was added by Chapter 457 of the Laws of 1960, states that the section was intended solely as a clarification and does not exclude a fire that originates in a reactor or elsewhere. Thus, under § 3405, even where a nuclear event causes fire and losses from the nuclear event are excluded, the statute maintains coverage for losses arising from the fire resulting from the nuclear event, thereby evidencing the Legislatures intent not to erode the fire coverage provided under § 3404 depending upon the cause of the fire.
Accordingly, the proposed endorsement, in regard to the property policy, is not permissible. This does not mean that an insurer may not limit coverage under the policy to actual cash value in all circumstances. An insurer is not required to write replacement coverage. However, it may not establish different criteria within the policy for when a loss resulting from fire will be paid on a replacement cost or actual cash value basis, based upon the cause of the fire.
For further information you may contact Deputy Superintendent and General Counsel Audrey M. Samers at the New York City Office.