The Office of General Counsel issued the following informal opinion on November 14, 2002 representing the position of the New York State Insurance Department.
Re: Terrorism Exclusions for Event Cancellation and Non-appearance Insurance Coverages.
1. Must an event cancellation insurance policy comply with the requirements of N.Y. Ins. Law § 3404 (McKinney 2000)?
2. Must a nonappearance insurance policy comply with the requirements of N.Y. Ins. Law § 3404 (McKinney 2000)?
3. May a terrorism exclusion be included in either an event cancellation or non-appearance insurance policy, whether written by (a) an authorized insurer on a special risk insurance or other basis; or (b) on an excess line basis?
1. No, N.Y. Ins. Law § 3404 does not apply to an event cancellation insurance policy.
2. No, N.Y. Ins. Law § 3404 does not apply to a nonappearance insurance policy.
3(a). 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. An exclusion that is misleading or violative of public policy is not permissible.
(b). There is no general prohibition against a terrorism exclusion in a policy written on an excess line basis.
This was a general inquiry and no specific facts were provided. The inquiry related to nonappearance and event cancellation insurance coverages, including when they are sold through the excess line market or as special risk insurance (also known as "Free Trade Zone"). The inquirer wanted to know whether an insurer may attach a terrorism exclusion or a limited terrorism exclusion (or "terrorism buyback") to such policies. The terrorism exclusion would be an absolute exclusion for any act of terrorism, as defined in such endorsement. The buyback provision would permit coverage where there was actual physical loss or damage or actual bodily injury or death to the covered person or spectators or occurs within a stated distance of the covered event, and within a stated period of time of the starting time of the event.
Historically in New York, nonappearance insurance covering an insured for its economic loss, including loss of investment and earnings, resulting from the nonappearance of a person under contract with the insured, due to the sickness, injury or death of that person (for example, an athlete or a performer) was considered to be substantially similar to surety insurance (N.Y. Ins. Law § 1113(a)(16) and (30) (McKinney 2000 & Supp. 2002). However, the Legislature added a new subparagraph (E) to § 1113(a)(17) in 1997, specifically recognizing such insurance as credit insurance, where it relates to a sport participants, entertainers or business executives death, personal injury by accident, sickness, ailment or bodily injury that causes disability, where such indemnification is for the amount of financial loss that is sustained by the insured party or parties due to the inability of such person to fulfill the terms of a contract with the insured.
In regard to event cancellation insurance, from the inquirers description, it covers economic loss as the result of the cancellation of a specific covered event. Except in regard to catered affairs (which comes within subparagraph (A) of § 1113(a)(17) as credit insurance), such coverage does not come within a specific kind of insurance authorized under § 1113 of the New York Insurance Law. However, under § 1113(a), the power to insure against loss of or damage to property also includes the power to insure all lawful interests in the property and to insure against loss of use and occupancy, rents and profits resulting therefrom. Accordingly, event cancellation insurance may be written in New York to the extent that the economic loss covered under such coverage relates to an underlying permissible kind of insurance, such as the case where the event is cancelled because of fire or windstorm damage.
Subject to the above conditions, nonappearance insurance may be written in the excess line market since it is credit insurance and event cancellation insurance may also be written therein so long as the underlying kind of insurance is one that excess line insurers may place. As for the Free Trade Zone, the exemptions from rate and form filing requirements contained in N.Y. Ins. Law Article 63 (McKinney 2000) apply only where the risk qualifies as a Class 1 risk (that is, where the policy premium is $100,000 for one kind of insurance or $200,000 for more than one kind where the premium for any one kind of insurance does not exceed $100,000) or a Class 2 risk, which is a list of specified insurance coverages determined by the Superintendent to be of an unusual nature, a high loss hazard or difficult to place. N.Y. Comp. Codes R. & Regs. tit. 11 § 16.1(f) (1995) (Regulation 86). Neither nonappearance or event cancellation insurance is listed as a specific Class 2 risk. However, there is a code for special events insurance (code 2-14141) under N.Y. Comp. Codes R. & Regs. tit. 11 § 16.12(e) (1998), and to the extent that the coverage under such a policy comes within that definition or meets the minimum premium requirements for Class 1, the policy may be written as a Free Trade Zone risk.
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.
However, nonappearance insurance is not subject to § 3404 since it is credit insurance and does not provide fire insurance coverage. Event cancellation insurance is also not subject to § 3404, even if the event is cancelled because of a fire. The reason for this is because § 3404 applies to the physical loss to the property and does not apply to economic business interruption losses that may result from a fire. 1
Accordingly, there is nothing in the Insurance Law that specifically restricts or otherwise limits the exclusions that may be contained in a nonappearance or event cancellation 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, in regard to authorized insurers, 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.
Although a special risk insurance policy does not have to be filed with or approved by the Superintendent under Article 23, such a policy remains subject to the Article 23 standards that it may not be misleading or against public policy. 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.
In regard to policies placed on an excess line basis, there is nothing in the Insurance Law that specifically restricts or otherwise limits the exclusions that may be contained in a property insurance policy in this regard or that would otherwise require an excess line insurer to provide coverage for damage or loss resulting from acts of terrorism.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.
1 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).