OGC Opinion No. 07-09-10

The Office of General Counsel issued the following opinion on September 12, 2007, representing the position of the New York State Insurance Department.

Re: State Inconsistency or Amendatory Endorsements

Questions Presented:

1. Would an endorsement to a property/casualty insurance policy form be approved by the Insurance Department pursuant to Insurance Law § 2307(b), if the endorsement provided that “in the event [of] a difference in conditions between a state amendatory attached to [a] policy, and any term or condition of the policy, it is understood and agreed that, where permitted by law, the Company shall apply those terms and conditions of either the state amendatory,¹ or the policy which are more favorable to the Insured?”

2. Would such an endorsement be permissible in a special risk insurance policy under Article 63 of the Insurance Law, which governs the so-called “Free Trade Zone”?²

Conclusions:

1. No. It is likely that the endorsement set forth above would not be approved by the Insurance Department because its language could be misleading or against public policy pursuant to Insurance Law § 2307(b).

2. The endorsement presented above would not be permissible under the Free Trade Zone provisions because Article 63, which governs the special risks filing exemption, exempts special risk insurers only from filing requirements, and not from compliance and standards requirements as expressed in the Insurance Law. Specifically, the use of a policy form that is misleading or against public policy would constitute a “determined violation,” which is defined in Insurance Law 2402(c) as “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 2405.”

Facts:

The inquirer asked about the practice of using a state “inconsistency” endorsement to amend a property/casualty insurance policy. Specifically, he asked whether the Insurance Department would approve an endorsement providing that, where a difference in conditions exists between a state amendatory endorsement attached to a property/casualty insurance policy, and any term of the general policy, the insurer shall apply the terms that are more favorable to the insured.

He further reported that insurers in various states recently have been using these “inconsistency” endorsements. He suggested that such an endorsement is ambiguous and therefore misleading and violative of public policy. Three examples of such endorsements are as follows:

1. “State Amendatory Difference in Conditions Endorsement”

“In consideration of the premium charged, it is agreed that in the event that there is a difference in conditions between a state amendatory attached to this policy and any term or condition of this policy, it is understood and agreed that, where permitted by law, the Company shall apply those terms and conditions of either the state amendatory or the policy which are more favorable to the Insured.”

2. “Favorability Endorsement”

“In consideration of the premium charged, it is agreed that where permitted by law, the Company shall apply those terms and conditions of either that state amendatory or the policy which are more favorable to the Insured.”

3. “State Amendatory Inconsistent”

“In consideration of the premium charged, it is hereby understood and agreed that in the event that there is an inconsistency between a state amendatory attached to this policy and any term or condition of this policy, then it is understood and agreed that, where permitted by law, the Insurer shall apply those terms and conditions of either the amendatory or the policy which are more favorable to the Insured.”

Analysis:

Insurance Law § 2307(b) is relevant to the inquiry. That statute, which sets the standard for the Department to approve or disapprove most property/casualty insurance policy forms, reads as follows:

(b) Except as otherwise provided herein, no policy form shall be delivered or issued for delivery unless it has been filed with the superintendent and either he has approved it, or thirty days have elapsed and he has not disapproved it as misleading or violative of public policy. After notice and hearing to the insurer or rate service organization which submitted a policy form for approval, the superintendent may withdraw approval of such form on finding that the use of such form is contrary to the legal requirements applicable at the time of withdrawal. The effective date of the withdrawal of approval shall be prescribed by the superintendent but shall be not less than ninety days after notice of withdrawal. (Emphasis added.)

An endorsement is a "policy form". Thus, the plain meaning of the text of Insurance Law § 2307(b) , an endorsement will not be approved by the Superintendent if it is found to be misleading or violative of public policy. The Department likely would find the language presented in the aforementioned “inconsistency” endorsement to be unacceptable, because it could be misleading or violative of public policy.

The “inconsistency” endorsement provides that “in the event of a difference in conditions between a state amendatory attached to a policy, and any term or condition of the policy, where permitted by law, the insurer shall apply those terms and conditions which are more favorable to the insured.” This language is both overly broad and ambiguous.

First, even though the endorsement is conditioned with the language “where permitted by law,” it is unclear whether the “law” refers to New York law or the laws of another state. It is also uncertain whether the “law” refers to statutory law, regulation, ruling of the state’s highest court, or the Department’s interpretation of the law.

Furthermore, because of the ambiguity with respect to the “where permitted by law” language, the “inconsistency” endorsement could be construed to permit coverage not allowed in the state of New York. For example, although New York does not permit the insurability of punitive damages, the endorsement may provide for the insurability of punitive damages if a conflict arises between a New York state amendatory and a standard policy.

In addition, the “inconsistency” endorsement is confusing on its face, as it undercuts the primary purpose of a state amendatory endorsement. Because a state amendatory endorsement typically is utilized to modify the terms of a standard policy, to include language in the amendatory that provides for the future reversal of such modifications can be contradictory and therefore misleading.

Finally, please note that the Insurance Dept. has not heretofore approved or acknowledged an endorsement such as the “inconsistency” endorsement discussed herein. Nor has the Department issued an opinion on the use of state inconsistency endorsements in the Free Trade Zone. However, as noted in Office of General Counsel Opinion No. 04-03-29 dated March 31, 2004, Article 63, which governs the Special Risks Filing Exemption, exempts special risks insurers only from filing requirements, and not from the compliance and standards requirements of the Insurance Law. Indeed, the use of a policy form (such as the “inconsistency” endorsement at issue here) that is misleading or against public policy can constitute a “determined violation” within the meaning of Insurance Law § 2402(c). See OGC Opinion No. 04-03-29.

For further information you may contact Assistant Deputy Superintendent & Counsel Paul A. Zuckerman at the New York City Office.

¹ A state amendatory typically is an endorsement that conforms the policy to minimum requirements set forth in state law.

² The "Free Trade Zone" filing exemption exempts an insurer from rate and form filing requirements with respect to certain risks that are of an unusual nature, that have a high loss hazard or that are difficult to place or of a certain premium size. See § 16.1 of 11 NYCRR 16 (Regulation 86).